China's Belt and Road Initiative – the New Silk Road – will spark the country's development and turn the dream into reality…
It all starts with Hong Kong as a major BRI financing hub.
Now that President Xi Jinping has been duly elevated to the Chinese Communist Party pantheon in the rarified company of Mao Zedong Thought and Deng Xiaoping Theory, the world will have plenty of time to digest the meaning of “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.”
Xi himself, in his 3½-hour speech at the start of the 19th Party Congress, pointed to a rather simplified “socialist democracy” – extolling its virtues as the only counter-model to Western liberal democracy. Economically, the debate remains open on whether this walks and talks more like “neoliberalism with Chinese characteristics”.
All the milestones for China in the immediate future have been set.
- “Moderately prosperous society” by 2020.
- Basically modernized nation by 2035.
- Rich and powerful socialist nation by 2050.
Xi himself, since 2013, has encapsulated the process in one mantra; the “Chinese dream”. The dream must become reality in a little over three decades. The inexorable modernization drive unleashed by Deng’s reforms has lasted a little less than four decades. Recent history tell us there’s no reason to believe phase 2 of this seismic Sino-Renaissance won’t be fulfilled.
Xi emphasized, “the dreams of the Chinese people and those of other peoples around the world are closely linked. The realization of the Chinese dream will not be possible without a peaceful international environment and a stable international order.”
He mentioned only briefly the New Silk Roads, a.k.a. Belt and Road Initiative (BRI) as having “created a favorable environment for the country’s overall development”. He didn’t dwell on BRI’s ambition and extraordinary scope, as he does in every major international summit as well as in Davos earlier this year.
But still it was implicit that to arrive at what Xi defines as a “community of common destiny for mankind”, BRI is China’s ultimate tool. BRI, a geopolitical/geoeconomic game-changer, is in fact Xi’s – and China’s – organizing foreign policy concept and driver up to 2050.
Xi has clearly understood that global leadership implies being a top provider, mostly to the global South, of connectivity, infrastructure financing, comprehensive technical assistance, construction hardware and myriad other trappings of “modernization”.
It does not hurt that this trade/commerce/investment onslaught helps to internationalize the yuan.
It’s easy to forget that BRI, an unparalleled multinational connectivity drive set to economically link all points Asia to Europe and Africa, was announced only three years ago, in Astana (Central Asia) and Jakarta (Southeast Asia).
What was originally known as the Silk Road Economic Belt and the 21st Century Maritime Silk Road were endorsed by the Third Plenum of the 18th CCP Central Committee in November 2013. Only after the release of an official document, “Visions and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Roads”, in March 2015, the whole project was finally named BRI.
According to the official Chinese timeline, we’re only at the start of phase 2. Phase 1, from 2013 to 2016, was “mobilization”. “Planning”, from 2016 to 2021, is barely on (and that explains why few major projects are online). “Implementation” is supposed to start in 2021, one year before Xi’s new term expires, and go all the way to 2049.
The horizon thus is 2050, coinciding with Xi’s “rich and powerful socialist nation” dream. There’s simply no other comprehensive, inclusive, far-reaching, financially solid development program on the global market. Certainly not India’s Asia-Africa Growth Corridor (AAGC).
Have BRI, will travel
It starts with Hong Kong. When Xi said, “We will continue to support Hong Kong and Macau in integrating their own development into the overall development of the country”, he meant Hong Kong configured as a major BRI financing hub – its new role after a recent past of business facilitator between China and the West.
Hong Kong’s got what it takes; convertible currency; total capital mobility; rule of law; no tax on interest, dividends and capital gains; total access to China’s capital market/savings; and last but not least, Beijing’s support.
Enter the dream of myriad financing packages (public-private; equity-debt; short-long term bonds). Hong Kong’s BRI role will be of the Total Package international financial center (venture capital; private equity; flotation of stocks and bonds; investment banking; mergers and acquisitions; reinsurance) interlinked with the Greater Bay Area – the 11 cities (including Guangzhou and Shenzhen) of the Pearl River Delta (light/heavy manufacturing; hi-tech venture capitalists, start-ups, investors; top research universities).
That ties up with Xi’s emphasis on innovation; “We will strengthen basic research in applied sciences, launch major national science and technology projects, and prioritize innovation in key generic technologies, cutting-edge frontier technologies, modern engineering technologies, and disruptive technologies.”
The integration of the Greater Bay Area is bound to inspire, fuel, and in some cases even mould some of BRI’s key projects. The Eurasian Land Bridge from Xinjiang to Western Russia (China and Kazakhstan are actively turbo-charging their joint free trade zone at Khorgos). The China-Mongolia-Russia economic corridor. The connection of the Central Asian “stans” to West Asia – Iran and Turkey. The China-Pakistan Economic Corridor (CPEC) from Xinjiang all the way to Gwadar in the Arabian Sea – capable of sparking an “economic revolution” according to Islamabad. The China-Indochina corridor from Kunming to Singapore. The Bangladesh-China-India-Myanmar (BCIM) corridor (assuming India does not boycott it). The Maritime Silk Road from coastal southeast China all the way to the Mediterranean, from Piraeus to Venice.
Yiwu-London freight trains, Shanghai-Tehran freight trains, the Turkmenistan to Xinjiang gas pipeline – these are all facts on the ground. Along the way, the technologies and tools of infrastructure connectivity – applied to high-speed rail networks, power plants, solar farms, motorways, bridges, ports, pipelines – will be closely linked with financing by the Asia Infrastructure Investment Bank (AIIB) and the security-economic cooperation imperatives of the Shanghai Cooperation Organization (SCO) to build the new Eurasia from Shanghai to Rotterdam. Or, to evoke Vladimir Putin’s original vision, even before BRI was launched, “from Lisbon to Vladivostok”.
Xi did not spell it out, but Beijing will do everything to stay as independent as possible from the Western Central Bank system, with the Bank of International Settlements (BIS) to be avoided in as many trade deals as possible to the benefit of yuan-based transactions or outright barter. The petrodollar will be increasingly bypassed (it’s already happening between China and Iran, and Beijing sooner rather than later will demand it from Saudi Arabia.)
The end result, by 2050, will be, barring inevitable, complex glitches, an integrated market of 4.5 billion people mostly using local currencies for bilateral and multilateral trade, or a basket of currencies (yuan-ruble-rial-yen-rupee).
Xi has laid China’s cards – as well as the road map – on the table. As far as the Chinese Dream is concerned, it’s now clear; Have BRI, Will Travel.
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As Americans gear up to celebrate Halloween at the end of October, a recent survey has revealed the fears that really keep people up at night.
The Chapman University Survey of American Fears polled 1,207 U.S. adults on their levels of fear across 80 different categories.
As Statista's Niall McCarthy notes, like last year, corruption of government officials came top in 2017, with 74.5 percent of U.S. adults saying it makes them "afraid" or "very afraid".
You will find more statistics at Statista
The unrest and uncertainty of Donald Trump's presidency has had a significant influence on this year's ranking.
With the U.S. health system still engulfed by chaos, 55.3 percent of respondents are fearful of the American Healthcare Act/Trumpcare. The president's decision to withdraw from the Paris Climate Accords has also had an impact with 48 percent afraid of global warming and climate change and 44.9 percent fearful of air pollution.
The threat of war between the U.S. and North Korea is also starting to touch a nerve. 48.4 percent of Americans fear U.S. involvement in another world war while 47.5 percent are afraid the regime in Pyongyang will use nuclear weapons.
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Submitted by John Mauldin
My good friend Peter Boockvar recently shared a chart with me. The University of Michigan’s Surveys of Consumers have been tracking consumers and their expectations about the direction of the stock market over the next year. We are now at an all-time high in the expectation that the stock market will go up.
The Market Ignores Monetary Uncertainty
Bullish stock market sentiment has gotten extreme again, according to Investors Intelligence. Bulls rose 2.9 pts to 60.4 after being below 50 one month ago. Bears sunk to just 15.1 from 17 last week. That’s the least amount since May 2015. The spread between the two is the most since March, and II said, “The bull count reenters the ‘danger zone’ at 60% and higher. That calls for defensive measures.” What we’ve seen this year the last few times bulls got to 60+ was a period of stall and consolidation. When the bull/bear spread last peaked in March, stocks chopped around for 2 months. Stocks then resumed its rally when bulls got back around 50. Expect another repeat.
Only a few weeks ago the CNN Fear & Greed Index topped out at 98. It has since retreated from such extreme greed levels to merely high measures of greed. Understand, the CNN index is not a sentiment index; it uses seven market indicators that show how investors are actually investing. I actually find it quite useful to look at every now and then.
The chart below, which Doug Kass found on Zero Hedge, pretty much says it all. Economic policy uncertainty is at an all-time high, yet uncertainty about the future of the markets is at an all-time low.
Why This Is Happening Now
At the end of his email blitz, which had loaded me up on data, Dougie sent me this summary:
- At the root of my concern is that the Bull Market in Complacency has been stimulated by:
- the excess liquidity provided by the world’s central bankers,
- serving up a virtuous cycle of fund inflows into ever more popular ETFs (passive investors) that buy not when stocks are cheap but when inflows are readily flowing,
- the dominance of risk parity and volatility trending, who worship at the altar of price momentum brought on by those ETFs (and are also agnostic to “value,” balance sheets,” income statements),
- the reduced role of active investors like hedge funds – the slack is picked up by ETFs and Quant strategies,
- creating an almost systemic "buy the dip" mentality and conditioning.
- when coupled with precarious positioning by speculators and market participants:
- who have profited from shorting volatility and have gotten so one-sided (by shorting VIX and VXX futures) that any quick market sell off will likely be exacerbated, much like portfolio insurance’s role in a previous large drawdown,
- which in turn will force leveraged risk parity portfolios to de-risk (and reducing the chance of fast turn back up in the markets),
- and could lead to an end of the virtuous cycle – if ETFs start to sell, who is left to buy?
On the Brink of the Largest Policy Error
The chart above, which shows the growing uncertainty over the future direction of monetary policy, is both terrifying and enlightening. The Federal Reserve, and indeed the ECB and the Bank of Japan, went to great lengths to assure us that the massive amounts of QE that they pushed into the market would help turn the markets and the economy around.
Now they are telling us that as they take that money back off the table, they will have no effect on the markets. And all the data that I just presented above tells us that investors are simply shrugging their shoulders at what is roughly called “quantitative tightening,” or QT.
In the 1930s, the Federal Reserve grew its balance sheet significantly. Then they simply left it alone, the economy grew, and the balance sheet became a nonfactor in the following decades. I don’t know why today’s Fed couldn’t do the same thing.
There really is no inflation to speak of, except asset price inflation, and nobody really worries about that. We all want our stocks and home prices to go up, so there’s no real reason for the central bank to lean against inflationary fears; and raising rates and doing QT at the same time seems to me to be taking a little more risk than necessary.
And they’re doing it in the midst of the greatest bull market in complacency to emerge in my lifetime.
Do they think that taking literally trillions of dollars off their balance sheet over the next few years is not going to have a reverse effect on asset prices? Or at least some effect? Is it really worth the risk? Remember the TV show Hill Street Blues? Sergeant Phil Esterhaus would end his daily briefing, as he sent the policemen out on their patrols, with the words, “Let’s be careful out there.”
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Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.
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Back in March, we explained why the “fate of the world economy is in the hands of China’s housing bubble.” The answer was simple: for the Chinese population, and growing middle class, to keep spending vibrant and borrowing elevated, it had to feel comfortable and confident that its wealth will keep rising. However, unlike the US where the stock market is the ultimate barometer of the confidence boosting “wealth effect”, in China it has always been about housing: three quarters of Chinese household assets are parked in real estate, compared to only 28% in the US with the remainder invested financial assets.
Beijing knows this, of course, which is why China periodically and consistently reflates its housing bubble, hoping that the popping of the bubble, which happened in late 2011 and again in 2014, will be a controlled, “smooth landing” process.
The other reason why China is so eager to keep its housing sector inflated – and risk bursting bubbles – is that as shown in the chart below, in 2016 the rise of property prices boosted household wealth in 37 tier 1 and tier 2 cities by RMB24 trillion, almost twice the total local disposable income of RMB12.9 trillion. For any Fed readers out there, that’s how you create a wealth effect, fake as it may be.
Unfortunately for China, whose record credit creation in 2017, and certainly in the months leading up to the 19th Chinese Communist Party Congress which started last week, has been the primary catalyst for the “global coordinated growth”, the good times are now again over, and according to the latest real estate data released last week, property sales in China dropped for the first time since March 2015, or more than two-and-half years, in September and housing starts slowed sharply reinforcing concerns that robust growth in the world’s second-largest economy is starting to cool.
Property sales by floor area fell 1.5% in September from a year earlier, compared with a 4.3% increase in August and a 34% jump in September 2016, according to Reuters calculations based on official data released on Thursday. That marked the first annual decline since the start of 2015. Separately, new construction starts by floor area, a volatile but telling indicator of developers’ confidence, rose just 1.4% in September on-year, slowing from a 5.3% increase in August, according to Reuters calculations.
“The negative September sale number shows that, unequivocally, the property boom has peaked,” Rosealea Yao, a property analyst at Gavekal Dragonomics told Reuters. “We have seen some big rebounds at the end of the first and second quarter, but given how fast the sale numbers are declining, we expect no big rebound this time.”
Echoing our concerns above, Reuters writes that “real estate, which directly affects 40 other business sectors in China, is a crucial driver for the economy but also poses a major risk as Beijing looks to tame soaring home prices without triggering a crash or a sharp drop in construction activity.
The easing in property activity appeared to drag on broader growth in the third quarter, and as many economists predicted China’s GDP rose 6.8% in the third quarter from a year earlier, down from 6.9% in the second quarter. And while property investment did rise 9.2% in September, picking up pace from an expansion of 7.8 percent in August, analysts warned such investment usually lags sales trends by up to six months.
Still, as discussed here previously, while home prices have sharply softened in China’s biggest, Tier-1, cities in recent months in response to a flurry of government cooling measures, property bubbles are still a threat in other parts of the country.
Moreover, in addition to many buyers purchasing second houses on credit as Deutsche Bank pointed out last month, high prices are forcing many home buyers to take on more debt, weighing on future household consumption and leaving banks more exposed to any property downturn even as Beijing looks to rein in financial system risks. Household loans, mostly mortgages, rose to 734.9 billion yuan ($110.80 billion) in September from 663.5 billion yuan in August, despite rising mortgage rates, according to Reuters calculations. Short-term loans also soared in the third quarter, suggesting speculators may be trying to circumvent property cooling measures, economists said.
What is most concerning, however, is that the recent sharp decline takes place even as policymakers have made stabilizing the overheated property market a top priority ahead of a critical Communist Party Congress this week, reiterating the need to avoid dramatic price swings which they fear could threaten the financial system and harm social stability.
Adn while a downward inflection point in China’s housing market – which accounts for a third of China’s economic growth – is bad, what follows is far worse.
According to a fascinating new WSJ report, China’s housing downturn is likely far worse than meets the eye, as under Beijing’s direction more than 200 cities across China for the last three years have been buying surplus apartments from property developers and moving in families from condemned city blocks and nearby villages. China’s Housing Ministry, which is behind the purchases, said it plans to continue the program through 2020. The strategy, supported by central-government bank lending, has rescued housing developers and lifted the property market,
As the WSJ notes, this latest backdoor bailout “It is a sharp illustration of China’s economy under President Xi Jinping and the economic challenges he will face as he renews his 5-year term at a twice-a-decade Communist Party Congress that opens on Wednesday.”
Rosealea Yao from Gavekal Dragonomics, who was also quoted above, wrote that “the government’s creativity in coming up with new ways of supporting the housing market is impressive—but it’s also an indication that it still depends on housing for growth.“
While traditionally, China’s government used to build homes for families who lost theirs to development or decay, last year, local governments, from the northeast rust belt to the city of Bengbu with 3.7 million amid the croplands of central Anhui province, spent more than $100 billion to buy housing from developers or subsidize purchases, according to Gavekal Dragonomics.
In other words, the reason why China no longer has ghost cities is because the government is buying them in just as concerning, “ghostly” transcations.
The underlying structure is yet another typically-Chinese ponzi scheme:
Underpinning the strategy is a cycle of debt. Cities borrow from state banks for purchases and subsidies, then sell more land to developers to repay the loans. As developers build more housing, they, too, accrue more debt, setting up the state to bail them out again. The burden on the state rises, as does the risk of collapse.
What is astounring, is that while the government has tried other ways of filling apartments, such as offering cash subsidies to encourage rural migrants to buy in urban areas, the program is the first large-scale case of the government becoming a home buyer itself. In May, Lu Kehua, China’s deputy housing minister, said the program has “played a positive role in steady economic growth,” and called for a push to clear housing inventory as early as possible, according to an article by the official Xinhua News Agency.
Well, of course, it’s played a “positive role” – when the government itself is buying half the units it bought (see chart above), what can possibly go wrong? Well, pretty much everything if the housing market is once again headed lower and with the explicit backing and funding of the Chinese government.
Some more fascinating details on how China fooled the world into believing back in 2014 that its recently burst housing bubble had “smoothly landed” and was again recovering:
Three years ago, Bengbu’s housing prices were falling. Housing inventory in 2014 would have taken almost five years to fill at the pace of sales at the time, said Shanghai-based research firm E-House China R&D Institute. Around the same time, the Bengbu government began to gobble up homes, and it has continued to do so. The city said it bought nearly 6,000 apartments from developers last year.
Housing stock in Bengbu was down to four months in September, a city official overseeing the government program said in September. Home prices had increased by 15% in August from a year earlier. That exceeded the 8.2% growth across a benchmark of 70 cities compiled by the national statistics agency.
Beijing and Shanghai residents are used to such price surges, but it is unusual in a smaller Chinese city lacking any particular tourism or job-market appeal.
Naturally, China would rather not have details of its latest bailout program spread too far:
Bengbu officials are wary about publicizing its hand in the market for fear of driving up prices and speculative buying. “We don’t mention it as much now as in the past two years,” the city official in charge of the program said. “Prices have been fluctuating a lot, and it’s a little bit out of control.”
Since the launch of the program, which is an explicit subsidy to Chinese real-estate developers who are directly selling to the government, things have predictably normalized. In fact, the outcome has been a little too frothy:
In 2015, groups of families on government-organized apartment tours started showing up, said Ding Qian, a planner at the developer, Bengbu Mingyuan Real Estate Development. By October 2016, the developer had sold 20 blocks of finished apartments, about 10% of them paid for with government funds, Ms. Ding said.
“We have run out of apartments to sell,” she said. The developer has sped up construction of 42 new blocks, about 4,000 apartments, and has raised prices by 40%.
All thanks to the government, which is lending to local governments to avoid the impression it is directly involved in bailing out China’s “wealth effect”:
The Bengbu official in charge of the program declined to disclose details about the city’s apartment purchases, but said the city had borrowed 10 billion yuan ($1.5 billion) of the 19 billion yuan of available credit extended by China Development Bank for housing purchases and subsidies.
Local governments in 2016 borrowed 972.5 billion yuan from the bank, the government’s main housing lender, nine times the level three years earlier, according to E-House China R&D Institute, which compiled data from official bank and government websites. More than half of last year’s loans went to purchases or subsidized buying, according to the official Xinhua News Agency. The rest of the loans funded housing projects built by the government.
What is most firghtening, is that despite the decline in property sales, the government’s role in the housing market continues to grow according to the WSJ, and here is a stunning statistic: Of all the residential floor space sold in China last year, 18% was purchased by government entities or with state subsidies, E-House China determined from official government data. The share could reach 24% this year, the firm said.
To paraphrase: Beijing is now the (covert) marginal buyer of a quarter of all Chinese real estate. That, in itself, is a mindblowing statistic. What is scarier, is that despite this implicit backstop, property sales are once again declining after 30 months of increases. One can only imagine the epic crash that would ensure at this moment, if – for some reason – the government bid were to be pulled, and just how spectacular the ensuing global depression would be as the rug is pulled from below the middle class of the world’s fastest growing economy.
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Assaults on freedom speech can be found in many aspects of American life these days, but one specific area that isn’t getting the attention it deserves relates to boycotts against Israel.
Increasingly, we’re seeing various regional governments requiring citizens to agree to what essentially amounts to a loyalty pledge to a foreign government in order to participate in or receive government services.
I’m going to highlight two troubling examples of this, both covered by Israeli paper Haaretz. The first relates to Kansas.
From the article, In America, the Right to Boycott Israel Is Under Threat:
The First Amendment squarely protects the right to boycott. Lately, though, a legislative assault on that right has been spreading through the United States – designed to stamp out constitutionally protected boycotts of Israel…
Over the past several years, state and federal legislatures have considered dozens of bills, and in some cases passed laws, in direct violation of this important ruling. These bills and laws vary in numerous respects, but they share a common goal of scaring people away people from participating in boycotts meant to protest Israeli government policies, including what are known as Boycott, Divestment, and Sanctions (BDS) campaigns.
Today, the ACLU filed a lawsuit challenging one of those laws — a Kansas statute requiring state contractors to sign a statement certifying that they do not boycott Israel, including boycotts of companies profiting off settlements in the occupied Palestinian territories.
We are representing a veteran math teacher and trainer from Kansas who was told she would need to sign the certification statement in order to participate in a state program training other math teachers. Our client is a member of the Mennonite Church USA. In response to calls for boycott by the church and members of her congregation, she has decided not to buy consumer goods and services offered by Israeli companies and international companies operating in Israeli settlements in the occupied Palestinian territories. Our client is boycotting to protest the Israeli government’s treatment of Palestinians and to pressure the government to change its policies.
Earlier this year, our client was selected to participate as a contractor in a statewide training program run by the Kansas Department of Education. She was excited to use her skills to help train math teachers throughout the state, but when she was presented with a form requiring her to certify that she “is not currently engaged in a boycott of Israel,” she told the state that she could not sign the form in good conscience. As a result, the state refuses to let her participate in the program.
Kansas’s law, and others like it, violates the Constitution. The First Amendment prohibits the government from suppressing one side of a public debate. That means it cannot impose ideological litmus tests or loyalty oaths as a condition on hiring or contracting.
If this was the only example of such behavior, I suppose we could dismiss it as a one-off, misguided directive. Unfortunately, this sort of thing is far more common than any of us would like to admit.
Here’s another recent example, from the article, Houston Suburb Won’t Give Hurricane Relief to Anyone Who Boycotts Israel:
A Houston suburb will not approve grants to repair homes or businesses damaged in Hurricane Harvey if the applicant supports boycotting Israel.
The city of Dickinson’s application form for storm damage repair funding includes a clause stating that “By executing this Agreement below, the Applicant verifies that the Applicant: (1) does not boycott Israel; and (2) will not boycott Israel during the term of this Agreement.”
No other clauses about political affiliations or beliefs are included in the form.
The state of Texas passed a law in May banning state entities from contracting with businesses that boycott Israel. The law, one of 21 passed in states around the country in the past few years, has been criticized by the American Civil Liberties Union as unconstitutional.
This is totally insane. I don’t care what you think about Israel, the above is completely unacceptable in a free society and we should all be making a stink about it. Please share with friends and family.
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Bitcoin derivatives clearinghouse LedgerX has announced that the first bitcoin derivatives trades have taken place on its platform – an important milestone for the nascent digital currency market that could open the door to more institutional involvement and, some say, the creation of the first bitcoin-focused ETF.
LedgerX confirmed rumors that it had already started clearing bitcoin derivatives trades in a statement provided to CoinDesk and a handful of other media outlets. According to figures provided by the company, LedgerX facilitated trading in 176 swaps and options contracts in its first week, an amount with a notional values of more than $1 million, according to CEO Paul Chou.
"This week, a new standard is set for transparency, oversight and counter-party assurance. Institutional investors and traders can now rely on a guaranteed clearing and settlement process when transacting bitcoin contracts," Chou said.
As CoinDesk points out, while the initial LedgerX trades appear to be exclusively bitcoin focused, the details of the license granted to the company by the CFTC in July allow for the creation of derivatives for other digital currencies as well. The company is reportedly working with options trading shops, asset managers, hedge funds, bitcoin miners, family offices, investment banks and virtually anybody else interested in helping it create a market for the new contracts.
"Our regulated, institutional-grade platform enables participants who were sitting on the sidelines, to enter the digital currency market."
LedgerX is licensed as both a swap execution facility (SEF) and a derivatives clearing organization (DCO).
The CFTC gave its blessing to LedgerX back in July when it approved the creation of the first designed bitcoin SEF, or swap execution facility. Previously, bitcoin derivatives were traded exclusively OTC on exchanges like BitMEX. But now, trading in bitcoin options will be centrally cleared in the same manner as option contracts on equities.
Congress mandated the creation of SEFs as part of its Dodd-Frank Wall Street reform bill in a bid to bring greater transparency to derivatives trading after synthetic CDOs and other shady “hedging instruments” tied to the mortgage securities helped wreck the economy in 2008,
Dodd Frank, helped by a raft of CFTC rules, helped create a complex trade-reporting ecosystem in US markets, which RiskFocus has illustrated in the infographic below:
Bitcoin options trading has come a long way since late 2015, when the CFTC officially went after bitcoin company Coinflip for operating a platform for trading bitcoin options without the proper authorization – confirming in the process that bitcoin would be treated as a commodity for regulatory purposes.
We imagine LedgerX won’t have too difficult of a time moving inventory, considering bitcoin’s astounding run of new record highs persists unabated. In a market starved for volatility, giving the "big boys" the ability to trade with massive leverage on what is already the most volatile asset class in existence is just what some funds need to make their year as they swing for the fences with 20x (or more in) margin.
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Who President Trump ultimately picks as the next Federal Reserve Chairman doesn’t really matter. Unless he goes really far afield to someone totally unexpected, whoever that person will be will be largely more of the same. It won’t be a categorical change, a different philosophical direction that is badly needed.
Still, politically, it does matter to some significant degree. It’s just that the political division isn’t the usual R vs. D, left vs. right. That’s how many are making it out to be, and in doing so exposing what’s really going on.
As usual, the perfect example for these divisions is provided by Paul Krugman. The Nobel Prize Winner ceased being an economist a long time ago, and has become largely a partisan carnival barker. He opines about economic issues, but framed always from that perspective.
To the very idea of a next Fed Chair beyond Yellen, he wrote a few weeks ago, “we’re living in the age of Trump, which means that we should actually expect the worst.” Dr. Krugman wants more of the same, and Candidate Trump campaigned directly against that. As such, there is the non-trivial chance that President Trump lives up to that promise.
Again, it sounds like a left vs. right issue, but it isn’t. The political winds are changing, and the parties themselves are being realigned in different directions (which is not something new; there have been several re-alignments throughout American history even though the two major parties have been entrenched since the 1850’s when Republicans first appeared). Who the next Fed Chair is could tell us something about how far along we are in this evolution.
What Krugman wants, meaning, it is safe to assume, what all those like him want, is simple: success. He believes that the central bank has given us exactly that, therefore it is stupid to upset what works.
In particular, both Bernanke and Yellen responded effectively to a once-in-three-generations economic crisis despite constant heckling from back-seat drivers in Congress and on the political right in general. And their intellectual and moral courage has been completely vindicated by events.
This is right here is the very central point of political difference that is pulling the world slowly apart. Krugman offers no evidence for his assertion, that the Fed has performed admirably and successfully, he just states it as if it was so (a common tactic in the mainstream, the fallacy of authority). Whenever challenged on this contention, the argument will always go back to “jobs saved.”
A worse counterfactual downside is not a rational standard for evaluation in any discipline or context. The only benchmark that should matter is recovery, as any economy facing recession, even an unusually severe one, has to make it back to the prior condition. On that score the Fed has utterly and unambiguously failed.
One reason for it is the one thing Economists like Krugman never bring up; the 2008 panic. How can anyone claim the Fed under Yellen or Bernanke performed even minimally well? The very fact that the panic happened at all is a direct indictment on monetary policy and the people who were there during it (you had one job to do!).
That’s not really what is at issue here, only it has become one battle in what is a larger war. That struggle is betrayed in Krugman’s own words by which he means to raise up both Bernanke and Yellen as examples of what needs to continue.
For more than a decade the Fed chair has been a distinguished academic economist — first Ben Bernanke, then Janet Yellen. You might wonder how such people, who have never been in the business world, who have never met a payroll, would deal with real-world economic problems; the answer, in both cases: superbly…
Given this track record, you might expect to see either Yellen reappointed or an equally qualified technocrat take her place.
This is all really about Economics. It has failed and most publicly so in the form of its principle public adherents in the Federal Reserve piloted by Bernanke and Yellen. The technocratic stars of the faith have been dramatically dimmed by events. Economists are not scientists, clearly, and so they are desperately seeking to circle the wagons by rewriting history; the last ten years weren’t all that bad, and they really could have been worse if it wasn’t for Economics.
The irrational, emotional defense for the ideology is what is driving political upheaval, including Donald Trump’s occupying the White House.
To most people, Krugman’s ideas and assertions are nonsense. They don’t have to know anything about QE’s effect on the TBA market and dollar rolls, how exactly McDonald’s was borrowing from FRBNY, or what it was that AIG did that ultimately made the Federal Reserve profits. People know the Fed did a bunch of stuff that didn’t work because they can tell there is something very wrong with the economy.
And after ten years of being told not to worry about it, or that it was being expertly handled, the people are Fed up with the defense of ideology first at the expense of actual answers. That’s really where we are; Economics has no more solutions (more QE!), therefore Economists have been forced to re-evaluate everything but only along those lines. If Economics can’t solve the problem, then they believe this has to be as good as it gets. And everyone should just stop complaining and appreciate the heroic and inspired effort that “saved” so many “jobs.”
Trump’s candidacy, as Bernie Sanders’, as an ideal was a grave threat to the status quo because it started with the premise that, no, this isn’t as good as it can be and that we need to look for real solutions. Whether he forwards that ideal as President is and has been another matter, and who he picks as Fed Chair might be some small indication of where he currently stands consistent with that idea, or perhaps having second thoughts about it.
The technocracy doesn’t work because it isn’t technically competent (thus 2008).
That’s the real political debate in 2017 and going forward; technical incompetence where the defense of the technocracy refuses to even allow the suggestion that this might be true. I go back to Weimar Germany not because I expect a global hyperinflationary breakdown, but in how that one particular form of systemic breakdown exposed timeless flaws inherent in all economic and financial systems. They all run to some extent on trust and (good) faith:
In other words, German monetary officials, particularly Reichsbank head Rudolf von Havenstein and Minister of Finance Karl Helfferich, denied that Germany had an inflation problem at all – right up until the end. Minister Helfferich declared that Germany had better gold coverage after the war than before it, despite that more than quadrupling of currency volume. One economics professor, Julius Wolf, wrote in 1922 that, “in proportion to the need, less money circulates in Germany now than before the war.”
As much as the easy-to-see Versailles excuse played a part, there can be no doubt that beyond 1921 the German people themselves began to recognize that authorities had no idea what they were doing; worse, they came to see that even though policymakers were inept and incompetent, officials themselves would never admit as much and thus nothing would prevent Germany from its fate. That awakening meant an increase in danger that French occupation could never have unleashed on its own.
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Last week we offered the ultimate beginner's guide to WTF Blockchain is. However, for those with even shorter attention spans – squirrel – WIRED magazine has managed to explain why there is such fervor surrounding the blockchains in under two minutes.
Saving the planet, fixing healthcare, replacing conventional currency – there is apparently nothing that the shared-database technology known as blockchains can’t fix. At least, that’s the impression given by the horde of governments, banks, entrepreneurs, and tech companies working on the technology.
But what is a blockchain and why the excitement? If you’ve got 2 minutes, WIRED can explain…
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“Look Dave, I can see you’re really upset about this. I honestly think you ought to sit down calmly, take a stress pill and think things over.”
From Stanley Kubrick’s 2001: A Space Odyssey.
As if MiFID II wasn’t bad enough, now this “EquBot AI Technology with Watson has the ability to mimic an army of equity research analysts working around the clock, 365 days a year, while removing human error and bias from the process.” That is the claim of Chida Khatua, the ETF’s CEO. Unlike the existing algos used by quant funds, A.I. the ability to learn from its mistakes without further requiring programming.
This week, EquBot LLC, in partnership with ETF Managers Group (ETFMG) launched the world’s first ETF powered by artificial intelligence, the AI Powered Equity ETF (NYSE Arca: AIEQ). According to Business Wire, the new ETF uses “cognitive and big data processing abilities of IBM Watson™ to analyze U.S.-listed investment opportunities”.
For those in the dark as far as “Watson” is concerned, it’s Wiki entry notes “Watson is a question answering (QA) computing system that IBM built to apply advanced natural language processing, information retrieval, knowledge representation, automated reasoning, and machine learning technologies to the field of open domain question answering. Watson was named after IBM's first CEO, industrialist Thomas J. Watson. The computer system was specifically developed to answer questions on the quiz show Jeopardy! and, in 2011, the Watson computer system competed on Jeopardy! against former winners Brad Rutter and Ken Jennings winning the first place prize of $1 million. Watson had access to 200 million pages of structured and unstructured content consuming four terabytes of disk storage…but was not connected to the Internet during the game. For each clue, Watson's three most probable responses were displayed on the television screen. Watson consistently outperformed its human opponents on the game's signaling device, but had trouble in a few categories, notably those having short clues containing only a few words.”
Business Wire explained how EquBot makes investment decisions “EquBot’s approach ranks investment opportunities based on their probability of benefiting from current economic conditions, trends, and world- and company-specific events, and identifies those equities with the greatest potential for appreciation. EquBot and ETFMG expect the fund’s portfolio to typically consist of 30 to 70 of U.S. equities only and volatility comparable to the broader U.S. equity market…the fund’s underlying technology is constantly analyzing information for approximately 6,000 U.S.-listed equities, including company management and market sentiment, and processes more than one million regulatory filings, quarterly results releases, news articles, and social media posts every day.”
According to Chida Khatua, CEO and co-founder of EquBot LLC “Machine learning is one of the most powerful applications of artificial intelligence. As powerful as many algorithms underlying expensive quantitative hedge funds and other vehicles might be, unless they’re also built with AI and machine learning baked right in, mistakes can be propagated and opportunities for outperformance can be missed.”
Neither of the founders is lacking in confidence when discussing the potential for the new ETF. From Business Wire “With the launch of AIEQ, we’re not only bringing our new fund to market,’ said Art Amador, co-founder and COO of EquBot. ‘We believe we’re pioneering a whole new investment category; one that will soon have investors and advisors diversifying their portfolios among passive, active and AI approaches”
He added “Everyday, there is more information, not less. That information explosion has made the jobs of portfolio managers, equity analysts, quantitative investors and even index builders more challenging.”
He's not wrong there.
A.I. might be the future of investing, although there have been funds that were so good (LTCM), they didn’t need to post collateral. This is different, obviously as we’re not just talking about a bunch of really 'brainy' humans.
But how sad will it be if we go from this…
An end up with this…
The regulators are already doing their best to make the investment world less fun.
“Open the pod bays doors, HAL”
Writing about this, we were reminded of another life or death confrontation between humans and technology in Stanley’s Kubrick’s “2001: A Space Odyssey”, which also had an oblique reference to an IBM computer. In the movie, there is an argument as to whether the failure of an antenna is due to human error, as the HAL 9000 insists, or HAL, as Mission Control advises. In the ensuing conflict, HAL initially gains the upper hand, kills Poole and almost kills Bowman. Bowman manages to re-enter the ship and get to HAL’s processor core, regressing HAL to his first programmed memory.
“I know everything hasn’t been quite right with me, but I can assure you now, very confidently, that it’s going to be alright again. I feel much better now.”
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President Donald Trump's proposal for comprehensive tax reform was almost immediately dismissed as heartless and impractical by his political opponents.
But Campus Reform wondered what would some of those opponents think if they were told the same plan was being proposed by someone they adore – Senator Bernie Sanders?
To find out, we headed to George Washington University to ask students their opinions on Trump’s new tax plan. WIthout much explanation, the students immediately made clear their distaste for the plan.
“It’s not the most efficient, nor beneficial to the general populus,” said one student when asked her opinion of Trump’s plan.
“It’s better for the upper class than anyone else,” added another.
After watching student after student express their disapproval of the plan, we then asked those same students what they thought of Senator Bernie Sanders’ new tax plan.
Immediately, they expressed excitement and support after hearing the details of the plan.
The only problem for them? There was no tax plan for Senator Sanders. The plan they loved was actually President Trump’s.
How did they react?
Additionally as MishTalk's Mike Shedlock writes, unsurprisingly, Students Despise Obama Policies…When Credited to Trump.
In anticipation of the 100-day mark of Donald Trump's presidency, Campus Reform asked students at George Mason University to evaluate some of the president's accomplishments.
The students predictably blasted things like the "Apology Tour" and stimulus package, even comparing them to Nazi policies, at least until learning that they were actually accomplished during President Obama's first 100 days.
1. These students are so brainwashed by mainstream media they respond to the person, not the idea.
2. More fundamentally, the students know nothing of current events or they would not fall for these types of gotchas.
To be fair, we do not know the percentage of students who did not fall for the traps. However, I strongly suspect the vast majority of the students (and most likely the average person on the street, not just students) would tend react to the person, not the issue.
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