Why the most-recent selloff was just the beginning

On October 19, 1987, the Dow experienced its biggest one-day percentage loss in history – plunging 22.6%.

It was “Black Monday.” The selloff was so fast and so severe, nothing else even comes close.

The second worst percentage loss for the Dow was October 28, 1929 (also Black Monday) when the exchange fell 12.82%. It fell another 11.73% the next day (you guessed it… “Black Tuesday”). Then the Great Depression hit.

A lot of people blame portfolio insurance for the market drop in 1987.

Portfolio insurance was a popular product for large, institutional investors. It would “hedge” portfolios by selling short S&P 500 futures (which profit when the market falls) when stocks fall… the idea was, gains from selling the S&P futures would offset losses from falling stock prices.

If stocks fell more, the big investors would sell more futures.

The problem with portfolio insurance is it was programmatic. And when the losses inevitably came, it created a feedback loop. Selling begot selling.

But what initially ignited that selling back in 1987?

Matt Maley is a former Salomon Brothers executive who was on the trading floor for Black Monday. He shared his thoughts with CNBC last year to mark the 30th anniversary of the event.

Maley reminded us of the popularity of another strategy in those days – merger arbitrage. This was the time of Gordon Gekko, when corporate raiders would borrow tons of money – typically via high-yield bonds – to buy other firms.

Merger arbitrage is simply buying shares of the takeover candidate and shorting shares of the acquiring firm. It’s a speculative strategy that tries to capture the spread between the time the deal is announced and when it (hopefully) closes.

The merger arb guys were already on edge because interest rates had been rising, making risky takeover deals even harder to complete.

Then, out of nowhere, the House Ways and Means Committee introduced a takeover-tax bill on the evening of October 13 that, simply put, would repeal lots of tax breaks related to M&A activity.

The next day, Wednesday, shares of the takeover stocks plummeted and caught the already edgy traders off guard. The selling continued through Friday. Margin calls were triggered, forcing investors to sell even more.

Then came Black Monday.

After a turbulent week, mutual funds were facing massive redemptions. They were forced to start selling stock along with the merger arb guys… only in much larger size.

The plummeting stock market triggered portfolio insurance to step in and start selling tons of futures short, which only worsened the selloff.

That scared individual investors, who redeemed even more mutual fund shares.

It was the feedback loop from hell.

The point is… an unexpected bill from congress helped to push an already nervous market over the edge.

And that brings us to today…

Earlier this month, the market dropped a very speedy 10% from its all-time high.

The selloff occurred because higher-than-expected wage growth stoked inflation fears. Higher inflation means the Fed may have to raise interest rates sooner than expected. All else equal, higher interest rates mean lower stock prices.

And this panicked selling was based only on the fear of higher interest rates.

To be fair, this market has gone nowhere but up since 2010. And volatility has scraped along the bottom that entire time. People have been lulled into this false sense of security that the stock market is a safe place that guarantees healthy returns.

In short, the market doesn’t know what to do with negative inputs today… much less some really bad news.

And, just like in 1987, there is a massive amount of programmatic trading taking place. Only today, brokers don’t have to pick up the phone to place a sell order when a certain price level is breached.

Instead, we have supercomputers that trade at lightning fast speeds and process market information almost instantaneously. The automatic selling – or buying, for that matter – happens quickly. The feedback loop has sped up exponentially.

That’s paired with more and more money that has flowed into backward-looking strategies that only work during times of low to no volatility. But, as we saw earlier this month, these strategies are utterly useless when the environment changes.

Take volatility targeting for example… it’s when portfolio managers change allocations based on volatility. Coming into the recent shock, with volatility near record lows, these funds were as long as they could possibly be.

That strategy had worked great for years as the market steadily rose higher.

But when the selloff started on February 5, the VIX jumped 116% in one day (the largest move ever). And the volatility targeting crowd ran for cover, selling potentially hundreds of billions of dollars in equities.

People have also been betting outright against volatility, which again, has been a profitable strategy for years. The VelocityShares Daily Inverse VIX Short-Term ETN (XIV), which moves inversely to the VIX, was one of the most popular tools for this.

But, when the VIX jumped 116% in a day, that fund lost about 95% of its value. Then XIV announced it would liquidate (the fund had $1.8 billion at its peak). Investors were wiped out.

And it wasn’t just individual investors using this strategy… Even pension funds and sovereign wealth funds were getting in on the action as a way to generate income, which is totally absurd. These are supposed to be the safest and most conservative investors around.

In addition to all of this money chasing volatility-linked strategies, we’ve also seen a massive amount of money flow into passive strategies (which buy indexes regardless of price or value)… a lot of that money has been in the form of exchange-traded funds (ETFs).

But trillions of dollars are now deployed in this value-agnostic strategy, which means people are allocating capital simply because the trend is up. More than that, it’s in the form of highly liquid ETFs… so these investors, who don’t have high conviction in the first place, can quickly dump their position when the tides turn.

Finally, there’s more than $300 billion managed by trend-following hedge funds. And their computers sell furiously on the way down.

So all of this money has been invested on the premise that volatility won’t return to the market. The Volatility Index (VIX) had its biggest one-day move ever this month and investors panicked.

But that’s just a taste of what’s to come. Imagine the selling we’ll see when there’s actually bad news.

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South Africa’s brand new president wants to confiscate land from white farmers

If you’ve been following much international news, you’ve probably heard that, after literally years of scandal, abuse, and incompetence, South Africa’s president Jacob Zuma was finally forced to resign last week.

This is a big deal for South Africa.

The country has been suffering for nearly a decade under Zuma’s corruption.

And people are certainly hoping that the new President, Cyril Ramaphosa, will represent a positive, new chapter for South Africa.

Yesterday Ramaphosa addressed the nation’s parliament in Cape Town and made clear that his priority is to heal the divisions and injustice of the past, going all the way back to the original European colonists in the 1600s taking land from the indigenous tribes.

Ramaphosa called this “original sin”, and stated that he wants to see “the return of the land to the people from whom it was taken… to heal the divisions of the past.”

How does he plan on doing that?

Confiscation. Specifically– confiscation without compensation.

The expropriation of land without compensation is envisaged as one of the measures that we will use to accelerate redistribution of land to black South Africans.

Ramaphosa minced no words: he’s talking about taking land from white farmers and giving it to black South Africans.

Astonishingly, he followed up that statement by saying, “We will handle it in a way that is not going to damage our economy. . .”

Wow, what a relief. For a minute it sounded like South Africa wants to do what Zimbabwe did several years ago.

Oh wait a minute.

That’s exactly what Zimbabwe did.

Seeking to correct similar colonial and Apartheid-era injustices in his country, Zimbabwe’s president Robert Mugabe initiated a land redistribution program in 1999-2000.

Thousands of white-owned farms were confiscated by the government, and the farmers were forced out.

Bear in mind that Zimbabwe used to be known as the breadbasket of southern Africa. Zimbabwe’s world-class farmers were major food exporters to the rest of the region.

But within a few years of Mugabe’s land distribution, food production plummeted.

Without its professional, experienced farmers, the nation went from being an agricultural export powerhouse to having to rely on handouts from the United Nations’ World Food Programme.

Hyperinflation and a multi-decade depression followed.

If there’s an economic model in the world that you DON’T want to follow, it’s Zimbabwe.

And you’d think that the politicians in neighboring South Africa would know that.

They had a front-row seat to the effects of Mugabe’s land redistribution, not to mention they had to absorb millions of starving Zimbabwean refugees who came across their borders.

Yet this is precisely the policy that they want to adopt.

However you might feel about social justice, it seems pretty clear that copying Zimbabwe is a pretty stupid idea… and will only end up hurting the people they claim to be helping.

Yet the president claims that they want to initiate a land redistribution program that won’t impact the economy or South Africa’s food security.

Yeah sure. And I want to be the starting quarterback of the Dallas Cowboys next season.

But sadly you won’t see Simon Black throwing any touchdown passes anytime soon.

That’s because we have to live in a world with certain realities and limitations.

One of those realities is that land distribution, even if you believe the intentions to be noble, never works.

And of course, the most important reality is that anyone who willfully chooses to copy Zimbabwe’s economic model deserves to suffer the consequences of their stupidity.

[You can watch his remarks yourself here: the fun starts around 30:45]

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Meet the Italian government’s Orwellian new automated tax snitch

By the end of the 3rd century AD, the finances of ancient Rome were in terminal crisis.

Years and years of debasing the currency had resulted in severe hyperinflation– a period of Roman history known as the Crisis of the Third Century (from AD 235 through AD 284).

During the time of Julius Caesar, for example, the Roman silver denarius coin was nearly 98% pure silver.

Two centuries later in the mid-100s AD, the silver content had fallen to 83.5%.

And by the late 200s AD, the silver content in the denarius was just 5%.

As the money continued to be devalued, prices across the Empire skyrocketed.

Wheat, for example, rose in price by over 4,000% during the first three decades of the third century.

Rome was on the brink of collapse. And when Emperor Diocletian came to power at the end of the third century, he tried to stabilize the economy with his ill-fated Edict on Wages and Prices.

Diocletian’s infamous decree fixed the price of everything in the Empire. Food. Lumber. Salaries. Everything.

And anyone caught violating the prices set forth in his edict would be put to death.

Another one of Diocletian’s major policies was reforming the Roman tax system.

He mandated widespread census reports to determine precisely how much wealth and property each citizen had.

They counted every parcel of land, every piece of livestock, every bushel of wheat, and demanded from the population increasing amounts of tribute.

And anyone found violating this debilitating tax policy was punished with– you guessed it– the death penalty.

Needless to say, Diocletian’s reforms didn’t work.

Every high school economics student knows that wage and price controls don’t work… and that excessive taxation bankrupts the population.

But that doesn’t stop governments from trying the same tactics over and over again.

Fast forward about seventeen centuries and Italy is once again in the same boat.

The Italian government is one of the most bankrupt in the world; its debt level is an unbelievable 132% of GDP– and rising.

In other words, the Italian government’s debt is substantially larger than the value of the entire Italian economy.

It’s almost as bad as Greece, and it grows worse each year as the national government routinely runs budget deficits.

Their only solution, of course, is hiking taxes and increasing regulation… exactly the opposite of what they should be doing.

And, just like the ancient Romans, the government is on a witch hunt for anyone they think (in their sole discretion) might be dodging taxes.

They already have a system in place called the redditometro, an automated tool for the tax authorities to comb through income and expense records of Italian residents.

The algorithm finds anyone whose expenses were higher than his/her income and presumes that s/he has been evading taxes.

The irony here is pretty profound given that the Italian government itself has expenses that are higher than its income.

After all, that’s how it ended up with such a prodigious debt level.

Earlier this month, however, the Italian tax authorities rolled out a brand new tool called risparmiometro. And this one is really insidious.

Risparmiometro goes through ALL financial records– credit card transactions, bank accounts, investment accounts, etc. to determine whether or not someone has too much savings relative to his/her occuption.

Think of the implication.

Under the redditometro system, if you spend too much money, they think you’re evading taxes.

But under the risparmiometro system, if you save too much money, they think you’re evading taxes.

Unbelievable.

But it gets better.

Risparmiometro (the new tool) also looks at bank activity to see how frequently you’re using the account.

And if you’re not using the account frequently enough, the government assumes that it’s because you’re dealing in cash… and evading taxes.

I have no doubt that there’s a substantial amount of tax evasion in Italy.

I spend several weeks in the country every summer, and I see how much people and businesses are suffering.

And they’re definitely coming up with creative ways to survive.

But rather than take the necessary steps to liberate the economy, the government continues to double down on more taxes and more regulation… and then invest their remaining energy to develop new tools to spy on their citizens.

Two key points here:

1) Nearly ALL bankrupt governments invariable resort to this tactic at some point.

2) It’s also a great way to engineer a banking crisis.

Think about it– Italy’s banks are already teetering on collapse. Some have already failed, others are almost there.

If Italians know that the government is spying on every transaction they make (or don’t make), who in his/her right mind would want to keep money in an Italian bank?

Anyone with half a brain will be moving funds to Switzerland or Austria.

Italy’s banks are so fragile, though, that they won’t be able to survive if even a small percentage of their depositors flee.

So as the Italian government rolls out this new tool in the latest campaign of its tax jihad, they’re all but guaranteeing widespread bank failure.

It’s genius.

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088: The dangerous, false logic of “Common Sense”

On the morning of May 18, 1927 in Bath Township, Michigan, a 55-year old municipal worker named Andrew Kehoe used a timed detonator to set off a bomb he had planted at the local school.

Kehoe was Treasurer of the School Board, so he had unfettered access to the school.

According to friends and neighbors, he was having personal issues with his wife (who he had murdered days prior) and extreme financial difficulties. He was also severely disgruntled about having lost a local election the previous autumn.

Whatever his reasons, Kehoe took out his rage on the 38 schoolchildren he killed that day.

It remains the deadliest attack on a school in US history.

Sadly, it wasn’t the first– there were numerous reports of school shootings throughout the 1800s and before.

And as we all know too well, it wouldn’t be the last.

Last week’s shooting in Florida is another tragic stain in the pages of US history. And it’s completely understandable that emotions are running high now.

People are demanding action. They want their government to “do something.”

The problem, of course, is what we’ve been talking about so far this year in our daily conversations: emotional decisions tend to be bad decisions– and that includes public policy.

We keep hearing the phrase “Common Sense Gun Laws,” for example.

And that certainly sounds reasonable. Who could possibly be against common sense?

[As an aside, I do wonder why “common sense” is only reserved for the gun control debate. Why doesn’t anyone demand common sense airport security? Or a common sense federal budget?]

But it’s never quite so simple.

Many of these “common sense” solutions are emotional reactions.

As an example, the Florida shooter in last week’s tragedy is only 19 years old. So now one of the proposals being tossed around is to have a minimum age limit to be able to purchase a firearm.

I suppose if the shooter happened to have been 70 years old, people would be talking about having a maximum age limit instead.

Yet neither of these “common sense solutions” really solves the problem.

A big part of this is because no one really knows what’s causing the problem to begin with.

We know that there are far too many people committing acts of violence in schools and other public places.

And, sure, a lot of the time they use firearms. But we’re also seeing murderous rampages with cement trucks, U-Hauls, and everyday appliances like pressure cookers.

Any of these can be turned into a weapon of mass destruction.

But the debate only focuses on firearms.

One side presupposes that more regulations and fewer guns will make everyone safer.

The other side of the debate, of course, argues that more guns and fewer regulations will make everyone safer.

The reality is that there’s no clear evidence that either side is correct.

Australia is often held up as an example of a nation that passed strict gun laws (including confiscation) in 1996 following several mass shootings.

And yes, gun violence dropped precipitously. Australia now has one of the lowest murder rates in the world.

But contrast that with Serbia, for example, which is the #2 country in the world in terms of guns per capita (the US is #1).

Serbia has a strong gun culture and fairly liberal laws. Yet its gun violence rate is incredibly low, on par with Australia’s.

There are plenty of examples in the world of places that passed strict gun laws, and violence decreased (Colombia).

Others where violence INCREASED after passing strict gun laws (Venezuela, Chicago).

Other examples of places which have LOW levels of gun violence, yet liberal laws (Serbia). And still others with LOW levels of gun violence and fairly strict laws (Chile).

The point is that you can look at the data 10,000 different ways and never really find a clear correlation. So there HAS to be something else going on.

Is it cultural? Perhaps.

Japan, for example, has extremely strict firearms laws. You can’t even own a sword without special permission.

And Japan, of course, has very limited gun violence. But this is not a violent culture to begin with.

You probably recall back in 2011 after the devastating earthquake and tsunami, Japanese people sat quietly outside of their collapsed homes and waited for authorities. No looting. No pillaging.

Contrast that with the city of Philadelphia earlier this month, where people were out rioting, looting, and setting property on fire… simply because their football team won the Super Bowl.

Perhaps there’s something about the US that has people so tightly wound they dive into violence at the first opportunity.

Maybe it’s all the medication people take. Or the crap in their food. Who knows. But it’s worth exploring the actual SOURCE of the problem rather than treating a symptom.

The larger issue, though, is that this “common sense” mantra is tied exclusively to LAWS.

Guess what? There are already laws, rules, regulations, and procedures on the books. They’re not working.

In the November 2017 mass shooting in Sutherland Springs, Texas, the shooter was able to purchase weapons because the Air Force erroneously failed to record his military court-martial.

And with the Florida shooting, the FBI had the suspect on a silver platter and did nothing.

It’s clear that the laws on the books aren’t being properly implemented. Yet the solution people want is MORE LAWS.

How about better execution? How about applying that all-important “common sense” to the way laws are carried out?

This is conspicuously missing from the debate.

There’s almost no conversation about what’s actually CAUSING the violence.

Instead, people are focused on a manifestation of that problem (guns) and demanding more laws to control that symptom even though the existing laws are being pitifully executed.

This is a pretty horrendous way to solve a problem.

[We discuss this more in today’s podcast, along with plenty of other extremely uncomfortable realities. Listen in here.]

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Bitcoin back above $10,000

Cryptocurrencies exist in dog years.

That’s how my colleague Tama Churchouse explained the rapid innovation and massive volatility in bitcoin and other cryptocurrencies.

The technology is advancing so quickly that one year in the crypto sector is like seven years anywhere else.

And the price action reflects this breakneck pace.

Bitcoin returned 1,318% in 2017. The S&P 500, for comparison, returned less than 19%.

But bitcoin’s rise comes with massive volatility…

After hitting its all-time high of nearly $20,000 on December 17, bitcoin plummeted 65% to $6,914 on February 5.

Yesterday, the price of bitcoin rose back above $10,000 – a 46% rally.

The crypto skeptics were calling for the end of bitcoin as the price plunged. The ideologues brushed it off as a natural correction.

The truth is, nothing goes up in a straight line. Bitcoin had gone beyond parabolic in 2017 – rising from $5,800 to nearly $20,000 in just over one month from November to December.

And the rise was largely driven by emotional, retail buyers. You probably heard the “reports” that bitcoin was all anyone discussed over Thanksgiving. Coinbase, the largest crypto brokerage, reportedly added 100,000 accounts over the holiday.

As you know, I don’t pay attention to bitcoin’s price.

I only pay attention to the supply/demand dynamics.

There will only ever be 21 million bitcoin in existence. So, ultimately, demand will drive the market.

And I believe demand for bitcoin and other cryptocurrencies will be higher in the future.

Going back to bitcoin existing in dog years… Who knows what technological advances we’ll see in the sector over the next decade.

Venture capitalist Marc Andreesen, the founder of the first, consumer web browser Netscape, says one of his biggest regrets was not building a native payment system into the web (instead, we just use our credit cards to buy goods online today).

Imagine the next time you saw a pair of shoes you liked online, you could simply click a button and seamlessly send a fraction of a bitcoin to pay for them (instead of going through the typical check out process and entering all of your personal and credit card info).

Andreesen tried to make that happen. The original hypertext transfer protocol (http) included a code for payments. For example, you’ve seen the 404 error code when a website isn’t found. But there’s also a code 10.4.4 402 designated as “payment required.” It never went live.

In 2015, Coinbase CEO Brian Armstrong said he’s working toward that goal…

“It would be a Chrome extension or a fork of Firefox or Chrome that would carry a balance of bitcoin inside the browser,” Armstrong told WIRED. “Then we would create some websites—or encourage the creation of them—that would bring back the 402 code.”

Armstrong gave the example of a news site that cuts off its content in the middle, then asks if you’d like to finish reading the article. With this payment system, you could simply click “OK” and it would automatically debit a small fee from your crypto wallet.

There’s also talk in the crypto world of “tokenizing everything.” It’s just a way of securitizing assets with digital tokens on the blockchain. You could own and trade portions of cash flowing real estate, art, businesses and anything else via a digital token.

It would open up markets in historically illiquid assets and assets that are difficult to title, transfer and/or divide.

Even though the technology is advancing at a rapid pace, and the implications are staggering, it’s still likely that most crypto assets will be worthless in the future.

It’s important to consider the utility of any crypto you own or are considering buying. And you must have a bias toward quality.

In my discussion with Tama, he said he believes 2018 will be the year when the crypto markets bifurcate. Participants will start paying much more attention to the quality of the assets they’re buying… the garbage will get thrown out.

I’d encourage you to listen to my full discussion with Tama. He believes now, after the pullback, is a good time to buy “blue chip” crypto assets.

You can tune in here.

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Terrified of Bitcoin, banks forced to innovate for the first time in 40+ years

Yesterday morning, several banks in Australia started rolling out a new payment system they’re calling NPP, or “New Payments Platform.”

Until now, sending a domestic funds transfer in Australia from one bank to another could take several days. It was slow and cumbersome.

With NPP, payments are nearly instantaneous.

And rather than funds transfers being restricted to the banks’ normal business hours, payments via NPP can be scheduled and sent 24/7.

You can also send money via NPP to mobile phones and email addresses. So it’s a pretty robust system.

Across the world in the United States, the domestic banking system has been working on something similar.

Domestic bank transfers in the Land of the Free typically transact through an electronic network known as ACH… another slow and cumbersome platform that often takes 2-5 days to transfer funds.

It’s pretty ridiculous that it takes more than a few minutes to transfer money. It’s 2018! It’s not like these guys have to load satchels full of cash onto horse-drawn wagons and cart them across the country.

(And even if they did, I suspect the money would reach its destination faster than with ACH…)

Starting late last year, though, US banks very slowly began to roll out something called the Real-time Payment system (RTP), which is similar to what Australian banks launched yesterday.

[That said, the banks themselves acknowledge that it could take several years to fully adopt RTP and integrate the new service with their existing online banking platforms.]

And beyond the US and Australia, there are other examples of banking systems around the world joining the 21st century and making major leaps forward in their payment system technologies.

It seems pretty clear they’re all playing catch-up with cryptocurrency.

The rapid rise of Bitcoin and other cryptocurrencies proved to the banking system that it’s possible to conduct real-time [or near-real-time] transactions, and not have to wait 2-5 days for a payment to clear.

Combined with other new technologies like Peer-to-Peer lending platforms, fundraising websites, etc., consumers are now able to perform nearly every financial transaction imaginable– deposits, loans, transfers, etc.– WITHOUT using a bank.

And it’s only getting better for consumers… which means it’s only getting worse for banks.

All of these threats from competing technologies have finally compelled the banks to innovate– literally for the FIRST TIME IN DECADES.

I’m serious.

When the CEO of the company launching RTP in the US announced the platform, he admitted that the “RTP system will be the first new payments system in the U.S. in more than 40 years.”

That’s utterly pathetic. The Internet has been around for 25 years. Even PayPal is nearly 20 years old.

Yet despite the enormous advances in technology over the past several decades, the last major innovation in bank payments was back when Saturday Night Fever was the #1 movie in America.

Banks have been sitting on their laurels for decades, enjoying their monopoly over our savings without the slightest incentive to improve.

Cryptocurrency has proven to be a major punch in the gut. The entire banking system keeled over in astonishment over Bitcoin’s rise, and they’ve been forced to come up with an answer.

And to be fair, the banks have reclaimed the advantage for now.

NPP, RTP, and all the other new protocols are faster and more efficient than most cryptocurrencies.

Bitcoin, for example, can only handle around 3-7 transactions per second. Ethereum Classic maxes at around 15 transactions per second. Litecoin isn’t much better.

By comparison, there were 25 BILLION funds transfers in 2016 using the ACH network in the US.

Based on the typical holiday schedule and the banks’ 8-hour working days, that’s an average “throughput” of roughly 3500 transactions per second.

So, now that banks have finally figured out how to conduct thousands of transactions per second in real-time, they clearly have superiority.

But that superiority is unlikely to last.

It takes banks decades to innovate. They have enormous bureaucratic hurdles to overcome. They have endless committees to appease, including the Federal Reserve’s “Faster Payments Task Force.”

And most importantly, given that most banks are still using absurdly antiquated software, any new systems they develop have to be carefully designed for backwards compatibility.

Cryptofinance and other financial technology companies have no such limitations.

As my colleague Tama mentioned in the podcast we released yesterday, the cryptocurrency space sort of exists in ‘dog years’.

Things move so quickly that one year in crypto is like 7 years for any other industry.

Right now there is almost a unified push across the crypto sector to solve the ‘scalability’ problem, i.e. to securely transact a near limitless number of transactions in real time.

Those solutions will almost undoubtedly come from technologies that you haven’t heard very much about yet.

Hashgraph and Radix, for example, are two such ventures working on extremely elegant payment solutions that break the mold of previous cryptos.

Rather than build upon standard cryptocurrency concepts like blockchain, Proof of Work, and Proof of Stake, both Hashgraph and Radix have created their own algorithms from scratch.

This is the bleeding edge of the bleeding edge of a massively disruptive sector that has existed for less than a decade.

And there are literally dozens of other companies and technologies aiming for similar heights.

Some of them will undoubtedly succeed. And still other ventures that won’t even be conceived for years will have yet more disruptive power in the future.

The banks don’t stand a chance. The future of finance absolutely belongs to crypto.

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You won’t want to miss this crypto podcast

As I write this, bitcoin is trading at $8,600.

That’s down more than 50% from the December highs of $20,000.

But is this selloff a natural correction, or something to be worried about?

That’s one of the questions I ask my guest Tama Churchouse in today’s podcast.

Tama was an investment banker for a decade, most recently with JPMorgan. Then he went on to manage a family office. And in 2013, he started buying and learning about bitcoin.

He started writing a small note to friends and family about the crypto market and it caught on. He decided to make it a full-time job.

And that’s led Tama to become one of the most connected writers/investors in the crypto space.

He actually just returned from one of the most exclusive crypto gatherings in the world… It’s called the Satoshi Roundtable. It’s invitation only and about 100 people make the cut.

The attendees are CEOs of major crypto firms and some of the core developers for major cryptos – it’s the who’s who of the industry.

Tama was invited because he serves on the board of one of the top blockchain firms in the world.

And during our discussion, he shares a few insights from what he heard in these closed-door meetings (and how these leaders in the field, many of whom are billionaires, feel about the crypto selloff).

Tama also explains why he thinks bitcoin is here to stay, but why 95% of all cryptos will ultimately be worth zero.

As you know, I’ve been writing a lot this year about avoiding big mistakes.

We discuss this in regard to crypto and Tama shares what he thinks is the easiest way to avoid making big mistakes in the sector.

And, of course, Tama and I share what we think 2018 holds for the crypto market (his view on this is great – it’s something I hadn’t heard before).

This is one of the best podcasts I’ve recorded in awhile. And I’d encourage you all to check it out.

I always tell people to learn as much as possible about crypto before buying even one cent of bitcoin. And I guarantee you’ll leave this podcast better-educated and more informed on the crypto space.

You can tune in here.

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087: You won’t want to miss this crypto podcast

As I write this, bitcoin is trading at $8,600.

That’s down more than 50% from the December highs of $20,000.

But is this selloff a natural correction, or something to be worried about?

That’s one of the questions I ask my guest Tama Churchouse in today’s podcast.

Tama was an investment banker for a decade, most recently with JPMorgan. Then he went on to manage a family office. And in 2013, he started buying and learning about bitcoin.

He started writing a small note to friends and family about the crypto market and it caught on. He decided to make it a full-time job.

And that’s led Tama to become one of the most connected writers/investors in the crypto space.

He actually just returned from one of the most exclusive crypto gatherings in the world… It’s called the Satoshi Roundtable. It’s invitation only and about 100 people make the cut.

The attendees are CEOs of major crypto firms and some of the core developers for major cryptos – it’s the who’s who of the industry.

Tama was invited because he serves on the board of one of the top blockchain firms in the world.

And during our discussion, he shares a few insights from what he heard in these closed-door meetings (and how these leaders in the field, many of whom are billionaires, feel about the crypto selloff).

Tama also explains why he thinks bitcoin is here to stay, but why 95% of all cryptos will ultimately be worth zero.

As you know, I’ve been writing a lot this year about avoiding big mistakes.

We discuss this in regard to crypto and Tama shares what he thinks is the easiest way to avoid making big mistakes in the sector.

And, of course, Tama and I share what we think 2018 holds for the crypto market (his view on this is great – it’s something I hadn’t heard before).

This is one of the best podcasts I’ve recorded in awhile. And I’d encourage you all to check it out.

I always tell people to learn as much as possible about crypto before buying even one cent of bitcoin. And I guarantee you’ll leave this podcast better-educated and more informed on the crypto space.

You can tune in here.

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This may be the beginning of the Great Financial Reckoning

Less than two weeks ago, the United States Department of Treasury very quietly released its own internal projections for the federal government’s budget deficits over the next several years.

And the numbers are pretty gruesome.

In order to plug the gaps from its soaring deficits, the Treasury Department expects to borrow nearly $1 trillion this fiscal year.

Then nearly $1.1 trillion next fiscal year.

And up to $1.3 trillion the year after that.

This means that the national debt will exceed $25 trillion by September 30, 2020.

Remember, this isn’t some wild conspiracy theory. These are official government projections published by the United States Department of Treasury.

This story alone is monumental– not only does the US owe, by far, the greatest amount of debt ever accumulated by a single nation in human history, but $25 trillion is larger than the debts of every other nation in the world combined.

But there are other themes at work here that are even more important.

For example– how is it remotely possible that the federal government can burn through $1 trillion?

Everything is supposedly totally awesome in the United States. The economy is strong, unemployment is low, tax revenue is at record levels.

It’s not like they had to fight a major two front war, save the financial system from an epic crisis, or battle a severe economic depression.

It’s just been business as usual. Nothing really out of the ordinary.

And yet they’re still losing trillions of dollars.

This is pretty scary when you think about it. What’s going to happen to the US federal deficit when there actually IS a financial crisis or major recession?

And none of those possibilities are factored into their projections.

The largest problem of all, though, is that the federal government is going to have a much more difficult time borrowing the money.

For the past several years, the government has always been able to rely on the usual suspects to loan them money and buy up all the debt, namely– the Federal Reserve, the Chinese, and the Japanese.

Those three alone have loaned trillions of dollars to the US government since the end of the financial crisis.

The Federal Reserve in particular, through its “Quantitative Easing” programs, was on an all-out binge, buying up every long-dated Treasury Bond it could find, like some sort of junkie debt addict.

And both Chinese and Japanese holdings of US government debt now exceed $1 trillion each, more than double what they were before the 2008 crisis.

But now each of those three lenders is out of the game.

The Federal Reserve has formally ended its Quantitative Easing program. In other words, the Fed has said it will no longer conjure money out of thin air to buy US government debt.

The Chinese government said point blank last month that they were ‘rethinking’ their position on US government debt.

And the Japanese have their own problems at home to deal with; they need to scrap together every penny they can find to dump into their own economy.

Official data from the US Treasury Department illustrates this point– both China and Japan have slightly reduced their holdings of US government debt since last summer.

Bottom line, all three of the US government’s biggest lenders are no longer buyers of US debt.

There’s a pretty obvious conclusion here: interest rates have to rise.

It’s a simple issue of supply and demand. The supply of debt is rising. Demand is falling.

This means that the ‘price’ of debt will decrease, ergo interest rates will rise.

(Think about it like this– with so much supply and lower demand for its debt, the US government will have to pay higher interest rates in order to attract new lenders.)

Make no mistake: higher interest rates will have an enormous impact on just about EVERYTHING.

Many major asset prices tend to fall when interest rates rise.

Rising rates mean that it costs more money for companies to borrow, reducing their leverage and overall profitability. So stock prices typically fall.

It’s also important to note that, over the last several years when interest rates were basically ZERO, companies borrowed vast sums of money at almost no cost to buy back their own stock.

They were essentially using record low interest rates to artificially inflate their share prices.

Those days are rapidly coming to an end.

Property prices also tend to do poorly when interest rates rise.

Here’s a simplistic example: if you can afford the monthly mortgage payment to buy a $500,000 house when interest rates are 3%, that same monthly payment will only buy a $250,000 house when rates rise to 6%.

Rising rates mean that people won’t be able to borrow as much money to buy a home, and this typically causes property prices to fall.

Of course, higher interest rates also mean that the US government will take a major hit.

Remember that the federal government already has to borrow money just to pay interest on the money they’ve already borrowed.

So as interest rates go up, they’ll be paying even more each year in interest payments… which means they’ll have to borrow even more money to make those payments, which means they’ll be paying even more in interest payments, which means they’ll have to borrow even more, etc. etc.

It’s a pretty nasty cycle.

Finally, the broader US economy will likely take a hit with rising interest rates.

As we’ve discussed many times before, the US economy is based on consumption, not production, and it depends heavily on cheap money (i.e. lower interest rates), and cheap oil, in order to keep growing.

We’re already seeing the end of both of those, at least for now.

Both oil prices and interest rates have more than doubled from their lows, and it stands to reason that, at a minimum, interest rates will keep climbing.

So this may very well be the start of the great financial reckoning.

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Meet the world’s next central banker: Mark Zuckerberg

Within the last week, Facebook announced a ban on all advertisements about bitcoin, initial coin offerings and other cryptocurrencies.

Facebook (along with Google) virtually controls Internet advertising. So their policies have enormous influence over consumer behavior.

Banning ICO advertisements on its platform, for example, will certainly have a negative impact on the amount of money flowing into new ICO’s.

Facebook said it instituted this ban to “protect its users” from financial scams in the cryptocurrency sector. At least, that’s the “official” reason.

And in fairness, there is a ridiculous amount of fraud out there — countless scammy ICO’s and appallingly stupid tokens and coins.

But it’s also possible that Facebook’s main driver in this move goes beyond its desire to protect the well-being of its nearly 2 billion users.

It was only a month ago that Mark Zuckerberg said Facebook would study encryption and the blockchain to “see how best to use them in our services.”

And one of the speakers at the crypto conference that one of our team members attended in New York City yesterday confirmed Facebook is investing a ton of capital into blockchain right now.

It stands to reason that Facebook’s decision to ban crypto advertisements may be rooted in eliminating its own competition, i.e. Facebook may be working on its own proprietary blockchain and cryprocurrency to deploy on its own platform.

One possibility is that Facebook could adopt a similar model to Steemit – a decentralized social network that operates on the blockchain.

It’s up to Steemit’s users to police the site, not a central authority. And the platform rewards its users for good content with small amounts of cryptocurrency and penalizes users for spam and “fake news.”

This would solve a huge problem for Facebook, which has already come under fire from governments across the world for not doing enough to moderate user content including “fake news,” “hate speech,” etc.

Facebook has already hired an army of content moderators, but this is barely been able to make a dent in solving the company’s problem.

So adopting a model like Steemit ,which rewards users with specialized crypto could certainly make sense.

This wouldn’t be the company’s first foray into the arena, either.

When social games like Farmville were popular (maybe they still are, who knows), gamers could pay for e-goods with an in-game currency. Then Facebook created its own currency for people to trade in and out of Farmville and other games.

A full-blown Facebook Token is the logical next step.

Given Facebook’s worldwide dominance, its tokens would have the potential to become enormously popular, practically overnight, and used in everyday transactions in the real world.

The big hope with Bitcoin is that it may one day disrupt conventional fiat currencies. Maybe so. But Bitcoin still has a steep adoption curve before it becomes truly disruptive.

Facebook Tokens, on the other hand, would be adopted by hundreds of millions of people right from the start.

You’d be able to buy and sell products in Facebook Tokens, send money and remittances, pay contract employees overseas, and engage in all sorts of cross-border transactions.

This would essentially make Mark Zuckerberg the world’s central banker… the one person with control over the first truly global currency.

Given that he already controls the #1 media source in the world and has substantial influence over consumer behavior, launching a Facebook Token would solidify his position as the most powerful person on the planet.

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