Malkovich Holdem or Foldem Economy
Look, I don’t want to go without saying that the NFL had a terrible year, but the “teaser” promo before the Patriots-Jaguars game was just flat out awesome. John Malkovich was the usual master of theatrics, hell we even got a little fired up for the AFC Championship game, something that certainly doesn’t happen very often being domiciled in Chicago and considering the woeful play or our hometown Bears. Whoever pulled this teaser off deserves huge kudos because it was a knockout, for those that didn’t see it, well as always we gotcha covered here
Sticking with the John Malkovich theme and our never ending lust for great movies that transcend life in so many ways, reminded us of his antagonist role he played in the movie Rounders from 1998.
John played the character of Teddy KGB a Russian outfit guy who was infatuated with the highly skilled poker game known as Texas Hold-em. We have to admit the movie was well before its time and well before Texas Hold-em was a “main event” show on ESPN, with millions of viewers and thousands of players. Anyway Teddy was Mike McDermott’s (played by Matt Damon) main adversary, the guy in charge of teaching Mike, life’s hard lessons. In So many ways Teddy KGB was an allegory for much of what would transcend Mike’s character, meaning Teddy was both the yin and the yang in Mike’s life whether he understood it or not. He tested and tested Mike and made him adapt to whatever consequences resulted. We tend to think that Mike exhibited a lot of choices that many investors face when confronting their own abilities to make well thought out risk adjusted decisions. For those that don’t know Texas Hold-em, it is the purest of poker games that requires innate abilities to play not just the cards your dealt, but the player holding those cards as well. The version of the game that Teddy and Mike played was called “no limit” meaning at any point in time you could bet every dollar or chip in this case that you had in front of you on the table. Why is this so important you may ask, is because at any point in time, and this is truly the quintessential aspect of this game, you can force your opponent to make a decision to risk everything they have and thus the risk of losing it all.
The psychological effect upon a human being when confronted with such decisions is not natural. We tend to believe only a very few can perform optimally when such a formidable decision is at hand. We also know this is why so many investors fail to act accordingly or even rationally when it comes to investing, because risk has such a negative connotation that the majority of mankind inherently looks to simply avoid it. Most would rather avoid such an unenviable position of being put to the test, but therein lies the rub, in order to win it you have to get in it, cliché we know.
In Mike’s final test he is confronted with the decision to risk it all or play it safe and walk away with enough to satisfy some of his obligations, but he chooses, through much antagonist coercion, to risk all of his chips. Mike knows where that safe road leads and he knows that he will not be satisfied with such a trivial victory, so he presses on. Mike knows the game and we know in his mind what he is thinking, considering a narration he said earlier in the movie:
I've often seen these people, these squares at the table, short stack and long odds against them, all their outs gone, and one last card in the deck that can help them. I used to wonder how they could let themselves get into such bad shape, and how the hell they thought they could turn it around. (Mike McDermott- Rounders 1998)
David Levien and Brian Koppelman from our vantage point wrote a masterpiece that was well before its time. That is the thing with some visionaries, their work goes underappreciated because the world simply just doesn’t know or understand yet, what it is the writer is trying to convey. For those that have seen the movie you know how the ending goes and for those that didn’t well, as an investor and even as a mere student of life, it’s a must watch in our humble opinion. For those that want a lesson in how the games played or ever need a fill in give us a call we will oblige. We feel so much that goes into playing a game like Texas Hold-em offers one the chance to increase and hone their people observing skills, because if you watch people enough, you can certainly distinguish their habits, especially when confronted with a decision on whether or not they should risk it all or just walk away. Now for those that want to view the last card game of the movie, this will be a spoiler, but it pretty much sums up what we want to convey, found here
Just like investing, in Texas Hold-em there are truly only 3 choices one can make, Call, Raise, or Fold and those can be construed in the investment world as Hold, Buy more or Sell. So in so many ways the game reflects decisions that are also true of confronting any investment and it’s just one of the many reasons we like using analogies because we feel people better understand things if they are put into a contextual format. So give the movie a chance and we know you won’t be disappointed.
Before we get to the markets, we have to talk about something that bothers us. This week the government failed to gather enough senate votes to pass a budget resolution. We have been down this path before and it is just further testament to the ineptitude of those in congress to put the people first and their political agendas aside. We can’t say that we are the least bit surprised. What you may not know is the larger on going operation sweep to put to justice the bad actors responsible for the massive collusion of government agencies vs the then president nominee and now president elect Trump. Not only that, but there are massive implications for Hillary Clinton, the DNC and a firm called FusionGPS that compiled the so called “Trump Dossier.” We feel there will be more implicating memos in the coming days and weeks and that a massive cover up is going to blow wide open. We can’t opine as to the effects it will have on domestic markets, but we want our readers to know that the domestic political front, has yet to negatively influence equity markets but we would be remised if we didn’t forewarn our readers that things are beginning to heat up. It is hard to distinguish the facts and the fakes these days, but we will do our best to decipher the news feeds and bring you bonafide data. Anyway and another important and mostly overlooked by the media news outlets is the Senate passed the FISA Section 702 Reauthorization which allows the US government to collect communications. Some will ask why that is even a big deal. Well it basically is stating that anything digital that is out there and relayed through the internet, the cell phone etc, can and will be monitored. This is what Snowden unleashed to the public but the 702 specifically targets foreigners, but it has been well documented that US citizens are naturally caught in the net as well, and this has huge civil liberties conflicts, one we should all keep a lawful eye upon.
We had the honor of attending the Annual Chicago Economic Forum hosted by the Executives Club of Chicago. We were completely amazed by the massive attendance, wall to wall and as some were overheard saying they have never seen it more packed. Dr. Bob Froehlich, Dr. Art Laffer and the venerable Diane Swonk were the noted speakers and Terry Savage the host of the last 38 years rounded out the panel.
Mrs. Swonk took a more conservative approach to the outlook this year using Prince and party like its 1999 analogies, but with considerable more leverage now. She noted that we may not have the tools to deal with the next crisis; she was the lowest estimate of this year’s GDP, looking for a 2.7 print. She expected a 3.4% 10yr rate and 4 rate hikes for 2018.
Dr. Bob was purely more optimistic calling for a +4% GDP a 10yr rate of 2.7% and a Dow over 30k. He did shed some light on something we never heard of before, but will now put on our radar, that is DOTA. We were like what the hell is he talking about. Well we believe DOTA stands for “Defense of the Ancients.” It’s a multiplayer online battle arena mod for the video game Warcraft. The reason Dr. Bob brought this up is because a new blue ocean has been created. A whole new industry is rising and has the power of the millennials behind it. The prize purse for the 2017 tournament was near $25 million! We couldn’t believe it, but if you want to see the mania for yourself here is a good place to start here Now we know some of our readers are like WTF, but hey those of us with younger kids, this is truly a force to be reckoned with and not everyone is focused on traditional sports. This is the real deal and we are glad Dr. Bob brought this up.
As for Dr. Laffer, we truly enjoyed his down to earth yet forthright manner. He seemed to be in quite contrast with the more liberal Diane Swonk and his conservative yet abrasive approach was met with a kind and collegial manner one would expect at a high powered presentation like this. He did hit home on a few harsh comments about his old home town Chicago, stating things like you have to live with the choices when you elect certain people to office…What are you people thinking electing people like this and expecting anything to change, he said. One thing we liked was his quote saying, “Economics is about incentives, we don’t want to look at making the rich people poorer, but rather making poor people richer.” He seemed to really like JFK and he quoted him too saying “No American is made better off by pulling another American down.” We have never heard this quote before, but we will certainly put it in our arsenal as it truly hits at and resonates what it truly means to doing what is right.
We are all too often divided by a media that paints this parallels of black vs white, rich vs poor, that’s all BS, what it boils down to is that we need to realize that in a civil society we must not only be responsible for ourselves, but we must also have some responsibility to our fellow citizens. Dr. Laffer didn’t make any predictions, but he felt that America has a chance to truly prosper but it will take the right amount of fiscal policy with the right monetary policy, one we whole heartedly agree.
In other news:
Netflix explodes on slight earnings beat but really on the 8.4 million subscribers added in Q4. Despite the stock rising to nearly $260 all is not as rosy as free cash flow continues to fall as full year FCF was -$2.0 billion. Hey we like their content but it comes at heavy price of $17 billion in accrued content commitments. Their content is better than most and we can attest to the efficacy, with shows like Stranger Things, Orange is the New Black, Ozark, Master of None, Mindhunter and the list goes on.
Apple Inc. is going to pay a onetime tax of $38 billion on overseas cash holdings. Estimates are for Apple to to contribute nearly $350 billion to the U.S. economy over the next 5 years. We feel these are bold assumptions considering their reliance on the Iphone, their increasing debt issuance and overall economic prospects. What we have yet to really figure out with overseas repatriation is how much is really there? Can’t corps just use exotic swaps to transfer currency risk to other foreign corps doing business in the U.S.? We know most aren’t versed in this subject, but it certainly makes sense for these large companies to do such trades and circumvent all this repatriation and certainly avoid paying any tax whatsoever, perhaps that’s a topic for another day.
AmazonGois live after a year of beta testing in Seattle this week. We believe it’s taking the “grab and go” to a whole other level and will be interesting to see how it fares in the coming months and how aggressive Amazon is with the roll out. As the stock is priced for perfection we are very interested to see if rates continue to rise and if the economy does indeed slow how all this will shake out. We must say the other retailers are certainly on notice and we expect the Walmart/Amazon battle to continue. Obviously this type of store is not for the basic commoner and will certainly be situated in more upper class areas, so this limitation may hinder its long term prospects in our opinion.
We read an interesting piece in Chicago Crain’s magazine this week about Sam Zell’s REIT. Mr. Zell continues to sell off properties and build a considerable cash war chest. His portfolio of holdings are down to just 20 properties from 156 just three years ago. We aren’t sure if this should be taken as a loss in confidence, but considering Mr. Zell’s acumen for sniffing out things, we would bet that higher interest rates are part of his equation to relinquish the majority of his holdings and not to mention prospects of overheating cap rates. We respect the man, so we take this as more than just conservatism.
Chinareported its largest U.S. surplus last week which rose 10% to nearly $276 billion. Trump has vowed to take action, but in reality what can the U.S. truly do? You can’t have globalization without labor arbitrage and you can’t go full tariff and protectionist and risk isolationism. The strange things about tariffs is that U.S. based manufacturers will merely use it as an excuse to raise prices toward the tariff rate to increase margins, which is what’s being seen in the U.S. lumber markets with tariffs being put onto Canadian lumber as well.
Walmartwas touted in the news as it decided to move starting hourly pay to $11. However the flip side to that story is the fact that they plan to cut 10k jobs and close 10% of its Sam’s Club warehouse stores, so give a little, but takeaway just a little bit more.
Global banking fixed income trading revenues were hit across the board. We can’t say we are the least bit surprised given FDodd restrictions, passive investing and nascent volatility but all of the big 4 banks (JPM,CITI,GS,BofA) all reported substantial declines of 34%,18%,50% and 13% respectively in the 4thquarter. Perhaps the shrinking yield curve and higher rates will improve their trading gains in Q1 but we will continue to blame central banks for the lack of volatility and the near linear climb in equity overvaluations, which puts a hindrance in all if not everyone’s trading activity.
Considering fixed income trading is down, maybe it’s because everyone has finally drunk the kool-aid and realized the only game in town are equities:
Some will look at this chart from a purely fundamental perspective and think, wow this is so overbought it is an easy sale…yet in reality if you look at it from a prime, primped and pumped central bank fiat bonanza perspective from the last 9 years, one can simply make the case that we are merely above the prior peak and we have central banks continuing to print trillions each year. So with that crutch and support in mind, perhaps we should expand the chart a bit more and realize anything is possible.
On a more societal, humanities note, Betsy Morris of the WSJ had a nice piece on children and cell phone usage. We applaud any attempts to heed warning in this space not to just the psychological effects of these devices on young minds, but the RF health risks as well. We don’t think enough quantitative and qualitative study in order to produce hard evidence is being considered, but we like the coverage its beginning to get. To quote the dad in the article, “who the hell would give a junior-high school child a gaming platform to walk through the world with? It feels a little like trying to teach your kid how to use cocaine, but in a balanced way,” Which made us think of this picture we saw recently entitled, “is there a difference”
As far as the financial markets are concerned the trends are still intact. The global equity markets continue to rise as the U.S. markets were all up nearly 1% on the week. The U.S. bond market continues to fall as interest rates continue to rise with the U.S. 10yr rate ending the week at 2.64%. We feel and have stated before that 2.67% is our line in the sand there and we will expect it to be defended. This should also put the 30yr right near 2.95%. The 2yr yield is just above the 2.05% level the highest in some 10 years. We would expect rise in yields to attract some long term value players as comparison dividend yields on the SP500 are sub 2%. Something has to give we suspect, either the SP price falls and raises the yield above the 2yr rate or the Fed has overstepped here and will consider a slower paced path. We are a bit perplexed at their situation and we don’t see how they get themselves out of this tight rope scenario. With the yield curves near decade lows, we can’t help but notice the trade weighted dollar is near 2008 levels as well shown here:
We feel that the dollar can continue its slide and the move may usher in trend followers below that 89 level. The repercussions of a hawkish FED a flat yield curve and massive amounts of tax stimulus and Treasury debt will punish $$'s and will cause a hyperinflationary nominal asset price increase, i.e. SP500 well over 3000. Better hedge your $$ exposure though…
Japanese purchases of U.S. Treasuries have also slowed because of funding costs which have surged lately and where the pickup in yield doesn’t adequately compensate their domestic investor. Will this portend to a higher Yen/weaker dollar? Will yields begin to rise in Japan? Perhaps this is why the U.S. bond market has had a tough time lately, double the net Treasury issuance this year with waning foreign demand and we will need some domestic or European counterparts to do the heavy lifting. This is why the FED is truly in a tough position, they know the monster they have created, yet once Pandora’s Box was opened, there was never truly an exit plan.
We will now turn it over to the segment we know as:
{CryptoCorner}
China’s mining giant Bitmain Technologies is considering another expansion - this time in Canada’s Quebec province
Kraken, the fifth-largest cryptocurrency exchange, has resumed service after scheduled maintenance that was supposed to take two hours but instead took two days
Maersk and IBM are working toward applying blockchain technology to create a more efficient and secure platform for organizing global trade. The companies have already tested the platform and we expect wider adoption as time move on
Japan’s largest Bitcoin exchange BitFlyer launches in Europe, BitFlyer operates in Tokyo which houses 30% of the global bitcoin trading and will now be the only licensed European exchange offering cross-border trading with Japan
The Corbett Report put out a great piece and must see for our readers, called the “Bitcoin Psyop” it is really informative and can be found here
Nassim Taleb this week said Bitcoin may fail in its present form but the framework is now open and the future of decentralization is upon us. (As these govt’s continue to pound more debt down our throats, their system is failing but allowing for a very few to control the lives of everyone else. Point being, if the commoner was smart they would adhere to abandoning the current system and adopting a decentralized one where the stakeholders (users) control the fate not some (3rd party entity)
New Bitcoin addresses continue to average 2 million per week, this is the kind of massive migration that will slowly add to the stability of the Bitcoin core blockchain. Adoption continues to be steady and the people are continuing to advance and adhere
The largest Bitcoin wallet was steady and the next 2 in line both added over 6k BTC to their holdings putting their total BTC owned at 179203,150808 and 117170 respectively. As large hodlers continue to acquire BTC
South Korea continues its regulatory reach as it now is targeting taxing exchanges and mandating data collection including customer bank account data
South Korea seems to be following the Chinese authorities abilities to crack down on the Crypto space, but in reality the decentralized nature will continue unabated and the space will continue to move towards countries with a more proCrypto agenda -More than 100k South Korea residents have signed petitions asking the government there to step back from any plans to close the country's cryptocurrency exchanges
CFTC has recently created a Division of Enforcement Virtual Currency Task Force
SEC Division of Investment Management (the "Division") advised funds that are investing significantly in cryptocurrency not to seek to register their securities or otherwise to sell securities in a public offering
KodakCoin Will Trade On Overstock's New Cryptocurrency Exchange
The EpochTimes had a great must see interview with Trace Mayer, he paints a very realistic approach to Bitcoin and blockchain found Here
The ongoing government outreach has put a cap on further price appreciation, yet we aren’t too clear as to the effectiveness or the intelligence behind their rash and somewhat incomprehensible rationale. What it says to us is that the governments truly underestimated the sector and are now trying to play catch up and will no doubt continue to paint a nefarious claim unto any player in the space. The people will need to stand up and realize that the governments are purely overstepping their reach and will continue to do so unless the community of private investors changes their course. At what point do we say that we know what’s best for us and we don’t need a government to protect us from ourselves. It should be rather eye opening to the investor community that governments are so quick to make resolutions that they completely disregard any private stakeholder input. This is a sign of a wider global epidemic of government authoritarian style control, which seems to operate without bounds.Ok thank you and sorry for the longer than usual rant, we hope you have a good week and we hope you continue to stay the course with us. As always we leave you with the weekly settles below. The Crypto space continues to be hampered by government regulation as a pullback in most if not all Crypto currencies was seen. No doubt the sector has come a long way in a relative short time and lower probes and consolidation are a technical and fundamental nature of any market. Cheers!
