What happened right after the second direct U.S.-missiles invasion of Syria, which had occurred on the night of April 13th, could turn out to have momentous implications – far bigger than the attacks themselves…
The Organisation for the Prohibition of Chemical Weapons headlined on April 14th, in the wake of this U.S.-UK-France invasion of Syria that was allegedly punishing Syria’s Government for allegedly having used chemical weapons in its bombing in the town of Douma on April 7th, “OPCW Fact-Finding Mission Continues Deployment to Syria”, and reported that:
The Fact-Finding Mission (FFM) team of the Organisation for the Prohibition of Chemical Weapons (OPCW) will continue its deployment to the Syrian Arab Republic to establish facts around the allegations of chemical weapons use in Douma.
The OPCW has been working in close collaboration with the United Nations Department of Safety and Security to assess the situation and ensure the safety of the team.
The OPCW is not part of the U.N., nor of any country; it, instead (as introduced by Wikipedia):
is an intergovernmental organisation and the implementing body for the Chemical Weapons Convention, which entered into force on 29 April 1997. The OPCW, with its 192 member states, has its seat in The Hague, Netherlands, and oversees the global endeavour for the permanent and verifiable elimination of chemical weapons.
In conformity with the unchallenged international consensus that existed during the 1990s that there was no longer any basis for war between the world’s major powers, the Convention sought and achieved a U.N. imprimatur, but this was only in order to increase its respect throughout the world. The OPCW is based not on the U.N. Charter but on that specific treaty, the Chemical Weapons Convention, which was formally approved by the U.N.’s General Assembly on 30 November 1992 and was then opened for signatures in Paris on 13 January 1993. According to the Convention’s terms, it would enter into effect 180 days after 65 nations signed it, which turned out to be on 29 April 1997.
So, although the treaty itself received U.N. approval, the recent Russian-sponsored resolution at the U.N.’s Security Council to have the U.N. endorse the OPCW’s investigation of the 7 April 2018 Douma incident, did not receive U.N. approval. It was instead blocked by the U.S. and its allies. Nonetheless, though without a U.N. endorsement, the OPCW investigation into the incident will move forward, despite the invasion.
This fact is momentous, because a credible international inspection, by the world’s top investigatory agency for such matters, will continue to completion, notwithstanding the effort by the U.S. and its allies on the U.N. Security Council, to block it altogether. This decision was reached by the OPCW — not by the U.N.
Among the 192 signers of the Chemical Weapons Convention are U.S., Russia, and Syria, as well as China, Iran, and Iraq, but not Israel, nor North Korea and a very few other countries. So: all of the major powers have already, in advance, approved whatever the findings by the OPCW turn out to be. Those findings are expected to determine whether a chemical attack happened in Douma on 7 April 2018, and, if so, then perhaps what the specific banned chemical(s) was(were), but not necessarily who was responsible for it if it existed. For example, if the ‘rebels’ had stored some of their chemical weapons at that building and then Syria’s Government bombed that building, the OPCW might not be able to determine who is to blame, even if they do determine that there was a chemical attack and the chemical composition of it. In other words: science cannot necessarily answer all of the questions that might be legal-forensically necessary in order to determine guilt, if a crime did, in fact, occur, there.
If the investigation does find that a banned chemical was used and did cause injuries or fatalities, then there is the possibility that its findings will be consistent with the assertions by the U.S. and its allies who participated in the April 13th invasion. That would not necessarily justify the invasion, but it would prove the possibility that there had been no lying intent on the part of the U.S.-and-allied invaders on April 13th.
However, if the investigation does not find that a banned chemical was used in the Syrian Government’s bombing of that building, then incontrovertibly the U.S.-and-allied invasion was a criminal one under international laws, though there may be no international court that possesses the authority to try the case.
So: what is at stake here from the OPCW investigation is not only the international legitimacy of Syria’s Government, but the international legitimacy of the Governments that invaded it on April 13th. These are extremely high stakes, even if no court in the world will possess the authority to adjudicate the guilt — either if the U.S. and its allies lied, or if the Syrian Government lied.
For us historians, this is very important. And, for the general public, the significance goes much farther: to specific Governments, to their alleged news media, and to the question of: What does it even mean to say that a government is a “democracy” or a “dictatorship”? The findings from this investigation will reverberate far and wide, and long (if World War III doesn’t prevent any such findings at all).
From the latest Weekend Notes by One River Asset Management
“I got money managers asking what happens if we wake one day and he’s gone?” bellowed Biggie Too in baritone. “But my DC peeps say only Colonel Sanders can stop a 2nd term for Trump.”
You see, the secret service can’t stop the fried chicken assault, raining down by the bucket load, shock-and-artery-awe. “The world’s 500 greatest companies jump and dive on every contradictory tweet, exasperating anyone with a brain,” barked Biggie, chief global strategist for one of Wall Street’s too big to fail affairs.
“And my CEOs all quietly pray we just trade sideways for 2yrs, dodging stray bullets, compressing multiples,” whispered Too, breaking into a slow groove, smiling. “But nobody gets what they want. Not in this game.”
Overall
“Humans are underrated,” said Elon Musk, having overrated capital. “Excessive automation at Tesla was a mistake. To be precise, my mistake,” he admitted, owning it, then sped off in search of more humans. Lots more. Too bad for Elon that unemployment is just 4.1%. “We didn’t do enough to prevent these tools from being used for harm. That goes for fake news, foreign interference in elections and hate speech, as well as developers and data privacy,” admitted Mark Zuckerberg. “It was my mistake, and I’m sorry. I started Facebook, I run it, and I’m responsible for what happens here,” he said, promising to hire another 5,000 humans to review the data river flowing through Facebook servers.
That’ll take Zuckerberg’s bleary-eyed censor squad to 20,000, a first step in that thousand-mile march to higher costs and lower profit margins. Looks like we need humans after all. Is it because we’re legitimately needed? Or that we change regulations to make sure we’re needed? Or maybe humans have this mysterious ability to simultaneously make ourselves obsolete in the old and indispensable in the new? Could be a bit of all three.
But the future always seems to magically find a way to tackle today’s biggest problem. Take mass unemployment, which is often tackled by war. Or excessive debt, which leads to inflation/default. Or political desperation/division, which leads to both war and inflation.
But it’s not all grim, after all, war leads to peace. And debt default leads to economic renaissance. Of course, today’s greatest problem is inequality, which leads to populism. And populism can itself be a real problem, which eventually leads to greater equality, sometimes through war, or taxation.
But the best way to restore greater equality is through a peaceful re-division of the economic pie; lower profits for overrated capital, and higher wages for underrated workers.
* * *
Dead Greeks: “The US economy can’t grow more than 2% a year,” said the CIO. “Yet pensions need to compound at 7.5%.” I nodded. “There’s really only one way to do that.” Leverage. “You see it everywhere.” Share buybacks with borrowed money is leverage, and of course, that’s been the largest source of stock market buying for many years. Private equity funds are also simply leveraged equity portfolios. Tax cuts financed with treasury issuance is leverage. “Archimedes said, give me a lever long enough, and a place to stand, and I can move the world.”
Dead Greeks II: “Of course leverage requires borrowed money,” continued the same CIO. “And this is what makes it so difficult for the Fed to raise rates.” In a leveraged economy, asset prices are by definition elevated relative to where they would otherwise trade; higher interest rates lower their value, unless new buyers are willing to apply even more leverage. “Rate hikes tend to trash equity prices, and when the stock of a leveraged company falls they got problems.” So they shed workers. “That’s why interest rates have hit lower highs and lower lows for decades.”
Dead Greeks III: “But there’s another lever that few people recognize,” he continued. “States must run balanced budgets.” When the economy is good they can spend more, and when it’s bad, they spend less; that’s the definition of procyclical. “But they have deeply underfunded pensions (another form of leverage), and those pensions own equities.” So when the economy slows, States must reduce spending, but they must also commit more to their pensions. “This dynamic creates a huge fiscal tightening, and makes the economy that much more levered to asset prices.”
* * *
What’s Up: “We have this global synchronized recovery, massive tax cuts, rising budgets, hurricane rebuilding projects, and record corporate profits,” he said. “We have $70 oil, record low unemployment in the US, Germany and Japan.” I nodded. “We have the 2nd longest economic expansion and one of history’s greatest bull markets in US stocks.” Indeed, it’s true, if America avoids a recession for another year, it’ll be the longest expansion since before the Civil War. “Inflation is rising, core, headline.” Yup. “So why can’t 10yr bond yields surpass 3%?”
* * *
Anecdote: “Remember that bad oyster?” I asked. He groaned, it was years ago. “You know there’s no pretty way to deal with food poisoning. You got two options, both awful,” I continued. He agreed. We were talking politics, policy, our President.
My brother is a scientist, entrepreneur. The greatest threat his company faces is that the Chinese steal his technology. Because that’s what they do. Sounds ugly, but if there’s an American doing business in China who disagrees, then he’s the exception that proves the rule. And sure, it’s been good for humanity. Their intellectual property theft helped lift a billion hard-working Chinese out of poverty. But they’re now eclipsing us in numerous scientific pursuits. It’s an acute problem that needs to be solved. Even so, my buddy expressed deep angst over the way we’re confronting the Chinese.
“We should address intellectual property theft in a coordinated, dispassionate way alongside the rest of the developed world,” he said, pained, probably a stomach cramp. “And we obviously need deregulation, but his attack on the environment is a crime,” he cried, sweat appearing on his forehead.
“I even admit that Obamacare costs were skyrocketing, but to cut healthcare for 20mm people is disgusting.” He was turning green.
I asked about corporate tax rates? “They had to come down, but borrowing $1.5trln from our children to give the wealthy a tax cut was immoral,” he spewed, drooling slightly, revolted.
I smiled, “There’s no pretty way to deal with food poisoning. You want to die, then just like that you’re basically fine, as are all the oysters you’ll never eat again. After decades of political and economic mismanagement, maybe that’s what we’ve got. Food poisoning. And sure, we’d love to believe we can deal with it in a dignified way, but let’s just be honest, food poisoning robs us all of our dignity.”
The Trump administration will impose new sanctions against Russia on Monday for “enabling the Syrian government’s use of chemical weapons in civil war”, Nikki Haley revealed earlier on Sunday, and the New York Timesconfirmed later in the day.
The sanctions, coming shortly after American-led airstrikes against facilities linked to Syria’s chemical weapons, are meant to signal that the United States holds responsible not just the Damascus government of President Bashar al-Assad but also his patrons in Russia and Iran. President Trump has vowed that Syria’s allies will pay a “big price” for permitting his use of poison gas.
The Sanctions, first announced by UN ambassador Nikki Haley, “will go directly to any sort of companies that were dealing with equipment related to Assad and chemical weapons use,” said Haley on CBS’s Face the Nation Sunday morning.
“I think everyone is going to feel it at this point. I think everyone knows that we sent a strong message and our hope is that they listen to it,” said Haley.
The Monday sanctions will be the third round enacted by the Trump administration against Russia in the past month. In March, the administration imposed sanctions on a series of Russian organizations and individuals over 2016 election meddling and other “malicious cyberattacks.”
In late March, the U.S. State Department warned European corporations that they will likely face penalties if they participate in the construction of Russia’s Nord Stream 2 gas pipeline, on the grounds that “the project undermines energy security in Europe“, when in reality Russia has for decades been a quasi-monopolist on European energy supplies and thus has unprecedented leverage over European politics, at least behind the scenes.
“As many people know, we oppose the Nord Stream 2 project, the US government does,” said State Department spokeswoman, Heather Nauert at a Tuesday press briefing. “We believe that the Nord Stream 2 project would undermine Europe’s overall energy security and stability. It would provide Russia [with] another tool to pressure European countries, especially countries such as Ukraine.”
Last week, the Trump administration slapped sanctions on seven of Russia’s richest men and 17 top Kremlin officials over election interference and other Russian aggressions.
Effectively, the action prevents the oligarchs from traveling to the United States or doing business or even opening a bank account with any major company or bank in the West. It also restricts foreign individuals from facilitating transactions on their behalf. –NYT
Former Obama Admin sanctions official Elizabeth Rosenberg called the penalties as “fairly muscular,” and predicted more to come.
The list is an assault on one of the oligarchs’ favored tools for avoiding sanctions, which is to pass assets to their children.
It targeted the oil executive Igor Rotenberg, the son of Arkady Rotenberg, who is a former judo partner of Mr. Putin and whose companies have won a host of state contracts, including one for the construction of a bridge from the Russian mainland to Crimea, the Ukrainian Black Sea peninsula seized by Moscow in 2014.
Also on the list is Oleg V. Deripaska, who once had close ties to Mr. Trump’s former campaign manager, Paul Manafort. Altogether, the Trump administration targeted seven oligarchs, 12 companies they own or control, 17 Russian government officials and a state-owned arms export company. –NYT
The Trump administration also expelled 60 Russian diplomats and intelligence officers, closing the Russian consulate in Seattle after the poisoning of former Russian double-agent Sergei Skripal, in Salisbury UK (except, oh my, a Swiss lab says the “BZ toxin” used in the poisoningcame from the US or the UK).
Meanwhile, U.S. strikes against Syria in retaliation for a suspected chemical attack in the city of Douma were said to have been designed specifically to avoid striking Russian targets and provoking a response.
By hitting just three targets and limiting the attack to a single night, the Trump administration seemed to keep it limited enough not to compel Moscow to lash back.
But Ms. Haley said the administration was determined to make Moscow pay a price for supporting Mr. Assad, noting that it had vetoed six United Nations resolutions related to Syria and chemical weapons. –NYT
“Assad knew that Russia had its back,” she said on “Fox News Sunday.”“Assad knew that Russia would cover for him at the United Nations and Assad got reckless and he used it in a way that was far more aggressive.”
At the end of March, we showed that according to Bank of America, we are now witnessing the third biggest bubble in history created by a central bank. As bank CIO Michael Hartnett wrote, “the lowest interest rates in 5,000 years have guaranteed a melt-up trade in risk assets”, which Hartnett has called the Icarus Trade since late 2015, and points out that the latest, “e-Commerce” bubble, which consists of AMZN, NFLX, GOOG, TWTR, EBAY, FB, is up 617% since the financial crisis, making it the 3rd largest bubble of the past 40 years, and at this rate – assuming no major drop in the 6 constituent stocks – the e-Commerce bubble is set to become the largest bubble of all time over the next few months.”
The problem is that lasting even a few months until a “major drop” in the e-commerce bubble, may prove problematic, largely due to what Hartnett last week dubbed the “Occupy Silicon Valley” movement, which he explains as follows:
The economic & social disruption of technology is unlikely to stop. It has many beneficial economic & social impacts. But the sector’s growth, power & visibility make it extremely vulnerable to increased regulation & taxation, most especially if recession wrecks government finances.
Hartnett then went on list 10 specific reasons why BofA is now advising clients to sell tech stocks (reported below), but the single one, most pressing concern was the threat of regulation, especially in the aftermath of the Facebook Cambridge Analytics fiasco and last week’s congressional hearings.
To be sure, it would hardly be the first time that a government, hell bent on extracting its pound of flesh, burst a nascent bubble through regulation: it did the same with tobacco in 1992, finance in 2010, biotech in 2015 and now appears set to do it with e-commerce:
Which brings us to the latest “Weekly Kickstart” report by Goldman’s David Kostin, in which the Goldman strategist writes that – just like Citi earlier – “recent weakening in some indicators have prompted clients to question how long the current expansion will last” to which he responds optimistically, pointing out that Goldman economists forecast US GDP of 2.8%, 2.2%, and 1.5% in 2018, 2019, and 2020. Nevertheless – he adds – “a skeptical buy-side community focuses on downside risks.”
And of these, none is greater than the Tech Sector.
In the US, Information Technology is the sector most associated with growth. The sector is currently forecast to have among the fastest annual growth in sales and earnings during the next two years. Consensus forecasts sales growth of 15% and 7% for 2018 and 2019 vs. 6% and 5% for the balance of the S&P 500 ex. Energy. Consensus bottom-up EPS growth is also strong: 17% and 9% for Tech vs. 17% and 8% for S&P 500.
And this is where Goldman picks up where Bank of America left off, and notes that “two important forces are disrupting how investors view the Information Technology sector: Regulation and re-classification.” These are also the two core reasons investors should consider as they decide whether to sell their info-tech sector holdings. First…
Regulation
Just as Michael Hartnett has been warning over the past month with his “Occupy Silicon Valley” narrative, so Kostin writes that the risk of future regulation threatens the long-term growth prospects of some Tech companies, and explains:
This week’s Congressional testimony by Facebook (FB) CEO Mark Zuckerberg raised investor concerns about the potential for government regulation of the use of consumer data. Edward Snowden’s actions exposed the vast amounts of data that the US government had been secretly collecting on its citizens. The Zuckerberg hearing revealed to many government officials the scale of personal data that FB users had agreed to allow the firm to gather, raising regulatory risks.
Meanwhile, as Zuckerberg was testfying in DC, Goldman’s equity research analysts hosted discussions with policy experts regarding Technology regulations. Their conclusion: while comprehensive data privacy legislation in the US is viewed as unlikely this year, investors should expect regulation through other channels, such as State Attorneys General or self-regulation.
For an indication of what is coming, look no further than Europe, where the General Data Protection Regulation (GDPR) takes effect on May 25.
The GDPR is a new privacy legislation designed to provide more protection and control for EU citizens regarding their personal data, and to govern the collection and use of that data by companies. The scope of GDPR covers all companies who provide services targeted to people within the EU, regardless of where the firms are domiciled. FB has announced that controls and settings implemented in Europe will be made available to users globally.
In assessing the impact of Europe’s regulatory push via GDPR, Goldman evaluates the advertising revenue sensitivity to changes in pricing and impression trends, and finds the following:
FaceBook could potentially see revenue fall by up to 7%, although the impact could be negated if it obtains user consent for processing personal data.
GOOGL’s net ad sales could witness a -2% to 0% impact from GDPR given the view that Search is largely protected as it relies less on user data to generate advertisements.
Whether such regulation will be repeated in the US is unclear. Still, even a worst case revenue loss scenario does not appear fatal, and at worst may lead to a modest selloff. For context, GS forecasts FB will grow sales by 35% in 2018 (to $55 billion) with a 38% net margin while GOOGL will grow sales by 21% (to $134 billion) with a net margin of 23%. Of course, if the US government really wants to burst the second tech bubble, nothing would be able to stand in its way.
Which brings us to Goldman’s second key reason to sell tech stocks, namely…
Industry Reclassification
A few days ago, in response to Congressional questions to Mike Zuckerberg whether Facebook is a tech company, we answered with the following chart from Goldman, which shows how the upcoming S&P industry reclassification will impact companies such as Facebook and Google:
However, in addition to a useful metric for Congress on how to think about Facebook, the upcoming constituent re-classification in the S&P “represents the second major risk to the Tech sector” according to Goldman.
Some history: “in September, the major index providers MSCI and Standard & Poor’s will re-categorize components of the global equity markets. Using the S&P 500 index as an example, five current constituents (GOOGL, FB, EA, ATVI, TTWO) comprising nearly 20% of the existing Information Technology sector will be re-classified into Communication Services. Following the reclassification, the Information Technology sector weight in the S&P 500 will decline to 20% from 25%.”
The implications: “with two of the largest and fastest-growing companies transitioning out of Information Technology, the sector will lose some of its appeal to growth investors. The future “legacy” Tech (i.e., firms remaining in the sector) will have much slower expected sales and earnings growth and lower margins than both the current Tech sector and the new Communication Services sector, which will also include Telecom and select Consumer Discretionary stocks (DIS, NFLX, and others).”
Furthermore, Goldman calculates that the future “legacy Tech” sector has expected 2018 and 2019 sales growth of 9% and 5% and margins of 22% and 23%. However, the “legacy” Tech sector trades at a lower valuation (EV/sales of 3.9x and P/E of 17.5x) compared with existing Tech (4.0x, 18.4x), and the remaining stocks in the S&P 500 (1.8x, 16.4x).
The firms at the top of the Info Tech sector will also change. The largest stocks in the “legacy” Tech sector will be AAPL (19% of sector), MSFT (16%), and INTC (5%), each of which has lower earnings growth but lower valuations, a higher shareholder yield, and less regulatory risk than the departing firms.
What does this mean in a market context? Here’s Goldman:
Despite low regulatory risk, many of these “legacy” Tech firms have underperformed alongside FB as stock correlations have spiked. Our report this week identified Technology stocks that have experienced the largest increase in correlation with FB and have underperformed both the market and their sector, in part due to investor use of macro products such as ETFs and futures. Examples include firms with little regulatory risk such as Buy-rated CSCO, NVDA, and GPN.
The bottom line: once Facebook and Google break away from the legacy positions as sector leaders in the current InfoTech and enter the brand new Communication Services group, what is left over in Information Technology will be a far less glowing example of rapidly growing stocks, which in turn will prompt an unknown number of investors to dump the sector.
* * *
And now that we know Goldman’s two main reasons to sell the stocks, here again are Bank of America’s “10 reasons why global investors should reduce tech allocations in 2018“:
1. Excess returns & fancy valuations: US tech is best performing sector in QE era, up annualized 20%; ex tech the S&P500 would be 2000 not 2600 today
2. Bubbly prices: US internet commerce stocks (DJECOM) soared 624% in 7 years at their peak, 3rd largest bubble of past 40 years (see chart above)
3. Fat market caps: US tech market cap ($6.4tn) exceeds that of Eurozone ($5.0tn); FAAMG+BAT market cap of $4.9tn exceeds Emerging Markets ($4.6tn).
4. Earnings hubris: tech & eCom companies currently account for almost 1/4 of US EPS (Chart 6); this level that is rarely exceeded, and often associated with bubble peaks; note there are currently just 5 “sells” out of 250 FAAMG recommendations
5. Politics: privacy becoming policy issue as equivalent to entire global population searches Google every 2 days; last year 1579 “data breaches” exposed 179 million records of personal names plus financial or medical data; pending US & EU regulation threaten 4% of tech revenue.
6. Wage disruption: IMF says 50% of the decline in labor’s share of income is attributable to technology (25% due to globalization); number of global industrial robots by 2020 will be 3.1 million (was 1 million in 2010)
7. Tech is cash-rich, tax-light: sector has $740bn of cash overseas (larger than all other sectors put together ($510bn); effective rate of tax on US tech companies is 16.9%, lower than the 19.3% paid across the S&P500
8. Tech most lightly regulated sector: just 27K regulations (Chart 7) for tech; by comparison manufacturing regulated by 215K rules, financial sector by 128K.
9. Tech & trade: US tech has highest foreign sales exposure (58%) of all US sectors
10. Occupy Silicon Valley: tobacco (1992), financial (2010), biotech (2015) industries illustrate how waves of regulation can lead to investment underperformance.
Cointelegraph had a chance to talk to Tim Draper, American venture capital investor and businessman, founder of Draper University for entrepreneurs as well as Draper Associates, a VC firm that invested in Tesla, Skype, Baidu, and many other companies.
Tim Draper has been involved in different crypto projects, from the purchase of seized Bitcoins from the Silk Road marketplace website in 2014 to advocating Tezos in 2017.
He shared his thoughts with Cointelegraph on Blockchain adoption, regulations in the US and China, and why he wants to leave California.
Who needs Blockchain integration the most?
Government needs it the most. No question. Worst service, biggest industry, highest cost. Government is clearly people. The size of an industry tends to be the number of people involved. Government is affecting the most people and it is providing the worst service at the highest cost. And the Blockchain can remedy that by creating a whole virtual layer of governance.
That could be the beginning of where governments have to compete for us so that their services increase, improve and the costs go down. Your taxes will go down, and your education, and your health care and whatever – it will go up, it will be better.
But other industries that are going to benefit, anything that’s tied to data or the individual, so identity will be very important because anybody who’s affected by data is going to have a much improved situation because that data will be on the Blockchain, permanently there, tied to each individual. And once that’s the case that can help with all sorts of other industries: whether it’s healthcare, or commerce, or improve retail experience – it could be any number of different things that could be helped just because they will have better data on you.
How to push adoption further?
We, who are in the industry, are pushing as hard and fast as we possibly can. And it’s just that there are all these uncertainties, created by the governments that are run by the grandparents of the people who are creating this new industry. And they don’t get it. It is very frustrating for the people who are creating the industry.
So you have these regulators who are 70-80 years old and they are the ones telling these twenty-year olds what they should be doing. But they’re the same people who have given them huge education debt, poor education, not appropriate for their work life. And now they’re trying to tell them not to do something. That is actually creating a whole new economy.
I mean if I’m a millennial, I’m deeply in debt, I have an education that’s not appropriate to the jobs that I have to go find – I’m kind of lost. But there’s this big opportunity all of a sudden. There’s Bitcoin, there’s crypto, there’s a whole new world out there. That hasn’t been destroyed by the regulators. Now the regulators are coming in, they’re making it very difficult on people.
But any country that gets highly regulated gets poorer, more poverty. And any country that’s free – gets richer. And I think the US is trying to figure this out.
How do different countries handle crypto regulations?
I know Japan has figured out. Make it free – make us rich. Japan thinks I have to control and regulate. I mean, China says I’ve got to control and regulate and they’re going to create a bunch of poverty. And it usually takes twenty years by that time they have moved on. But they are ruining the lives of many people by putting in too many controls, or too many restrictions, or too many regulations.
So when you see the FDA or the SEC or FASB – any of these big institutional regulators come in heavy-handed. They are destroying the potential for growth and wealth in their country.
You ask the question about what is keeping this from happening. It’s the uncertainty created
by all of these regulators. That is slowing down progress; it is not allowing enough of creativity to flourish. And they’re in competition with all the other countries and regulators of the world. And so the lighter touch – the more likely you and I are to move to those countries, or to work with those countries, or to be a part of those countries.
On ICO regulation in the US
My advice to the SEC is go ahead – regulate them all. But make it a one-page document that anyone can fill out. Don’t make it so that these two girls and a dog have to go hire a million dollars worth of legal work to just get approved. It makes no sense. Just have them go ahead and register, so you have the data that you need. But then let them go and then if they start affecting too many people they become a problem then go ahead and come in and say: “Okay, now you have to go our next level of regulation” or something else.
But ease in. Let’s let these things flourish. Who knows, what creativity is going to come out of these ICOs.
When the Internet came along the governments were trying to shut it down. And all of a sudden think of what’s happened with the Internet: all our lives are so much fuller and more interesting, and more dynamic. And I remember I’d spend hours waiting for somebody to come pick me up when my car broke down. Now if your car breaks down – you leave it on the side of the road. You go boom, I got an Uber – it all happens so quickly, that never would have happened if the Internet hadn’t happened. So this is and if we hadn’t let the Internet go, let it be free, the freer – the richer. Freedom equals prosperity, regulation equals poverty.
On businesses moving away from the US
Everybody wants to leave California. Anybody in business wants to leave California. Because even though the weather’s awesome and their friends are probably here – all of the incentives are to leave.
That’s why I want to flee California. I want a fresh start. And also to leave the US but that’s different set of incentives.
The taxes are higher here, the services are worse, educations worse, the roads are poor. You go to Texas – they have no personal income tax, they have great roads, they have a free government encouraging innovation. You need that.
New York, they have the problem that California does. They are over regulated, they’re on top of each other, they don’t let anybody do anything without filling out forms to do it.
But it’s a good thing about the States because they have to now compete for us, used to be pretty much all the states were competing and felt that way and they worked hard to provide good service to you. When was the last time, a bureaucrat said to you “What can I do to make your life better? How can I improve your business environment? How can I improve?”
They used to do that 25 years ago, I walked into a government office with my father and they said, “How do I improve your business environment? How do I make your home life better? How can I improve your child’s education?” That was the attitude that government had and that’s why my father has such great feelings about the government. And why and the reason I don’t – is because I saw that switch. Like all of a sudden it went from ‘what can I do’ for you to ‘what are you going to do for me’.
It was about 20 years ago. 20 years ago all of a sudden it was like – “Have you filled out form 12 CB? I’m sorry, oh, and I think you have to talk to this regulator too. Because I don’t think we’re going to allow you to have a party there!”
On Chinese policy of “yes” Blockchain, “no” crypto
China’s old government under Wen Jiabao was free. They said: a few of you will get rich first – let’s create a harmonious environment, let’s grow, let’s have free markets. That was awesome and it created 40 years of prosperity. And China is like one of the most advanced countries in the world now.
Well now they have the opposite. They have a control freak government, or at least the guy at the top and that permeates the government. They’re not letting money out, they’re not letting people use crypto, they’re not letting people use Bitcoin to pay.
And what that does is – it pushes out all the best entrepreneurs, pushes them to wherever. And it creates more poverty there because all of those people then are constrained. If you’re constrained – you’re poorer. If they say you can’t move – you’re going to starve. And that’s pretty much what too much regulation will do for you. And so that’s China.
Well, it makes no sense. I mean if you’re going to run something on the Blockchain, you’re going to need Bitcoin to do it. If you’re going to do something in Bitcoin – it’s using the Blockchain. These are intertwined.
Now, there are some other Blockchains being created, which is great. Competitive Blockchains. I’m a believer. And, you know, having competition because I as a consumer end up with the better service. But somehow trying to separate those and say oh we’re gonna allow all the technology in, we’re just not going to let you use it. What are they thinking? They’re basically saying: yeah, go keep creating stuff – we’re not going to let you use it and we’re not going to let you have money leave our country.
So where’s the benefit for an entrepreneur there? That’s why they’re all buying houses in Palo Alto. All the Chinese are saying: well, let’s get out of there. Or they’re moving to Japan where they’re welcome. All the young people are moving to Japan. They’re saying: “Well, wow, this government accepts Bitcoin as a national currency! I want to be a part of that!”
On projects in Kazakhstan
I talked to the Prime Minister of Kazakhstan. And I told him about Estonia and all of these interesting virtual governance thing that can happen. And I said that Kazakh means free. It should be free country. You want this to be free because you’ll end up with a wealthier, more prosperous country.
And, why not have a certain number of Kazakhs, but then a billion virtual Kazakhs. And have them all be a part of your world and compete with all those virtual countries for them.
And he was all for it. So I thought that was going to happen. Now, some lower down regulator has now tried to heavily regulate crypto and that it’s a proposal. It’s not law. And hopefully he’ll just be slapped down and, you know, sent on his merry way. He’s like the old world regulator, who doesn’t get that you’ve got to have a very light touch when you’re regulating an ICO.
It should not be the equivalent of an IPO. An IPO affects hundreds of thousands of people. The companies are worth tens of billions of dollars. An ICO is usually, you know, two girls and a dog.
It’s not like we have to protect everybody from themselves. It’s just people getting going.
Who is listening to him? This guy just opened up! He opened up all that information, he made it dangerous. So, wait, this is totally counter what I thought would be his philosophy, which is: we’re open, transparent, this is the way the world should be, it’s open, and transparent, and decentralized, and whatever… Bitcoins perfect for that. So he’s, I don’t know, why you even listening to that guy?
Do we listen to the guy who runs the biggest bank in the world? When he says, we shouldn’t use Bitcoin – well why listen to that? Because the guy is realizing that people are taking pieces 1 percent, 2 percent, 5 percent of their money out of his bank and putting it into crypto. So he’s totally disinterested, and he is very nervous that he’s going to lose all those customers. And he will. Over time he will.
It just feels like crypto generally will replace all fiat. Because it’s just better currency and all the best engineers in the world are working on that. They’re not working on how to improve services for the dollar.
Crypto vs fiat
It is a hundred trillion dollar market. So that means, that we have a long way to go in a crypto market. We’re now in the hundreds of billions, it’s like it’s got a thousand times on what it is now to go.
Bitcoin vs other cryptocurrencies
I like competition. I think it’s great. I think Bitcoin is clearly the leader. And it will be the standard by which all the other currencies will have to compete. It’ll be the equivalent of Microsoft. But it could end up being Yahoo for search, you know, where Google came in and got a bigger share. So things can happen! But, when you have that front position and whenever there’s a new technology you add it to that currency.
It’s very likely that Bitcoin will be the largest and biggest currency because they have a network effect. It grows as the network grows.
On universal cryptocurrency and price volatility
I like the idea that they’ll all have to compete with each other. And I like the idea that they’ll all be tradable into each other. And, you know, and now they’re tradable into fiat too. But I think that’ll be less important over time, I think more important – more companies like you can get a Kentucky Fried Bitcoin bucket, which is only available to be paid for in Bitcoin in Canada. And then there are all these houses and yachts and whatever – that are all only available in Bitcoin,you can’t pay dollars for them. I think more and more that’ll happen. And we’ll be in a position where people laugh at you if you try to pay fiat currency for your coffee.
Whenever I hear this volatility question, I think, one Bitcoin is still just worth one Bitcoin. It is very stable. All these other currencies, these fiat currencies, there are volatile against it. Falling away. Over time.
And so, when they say volatility, I think they are panicking: they go up, they go down. One Bitcoin is still one Bitcoin and it will continue to be. And so I think, I am not really thinking that it is volatilizing, I am thinking that it is Bitcoin and it should be spent, as you need to spend it.
It appears – by the definition proscribed from America’s establishment – that Frank-Walter Steinmeier, the President of Germany, is a treasonous Russian troll.
What other explanation is there for his remarks today, warning the United States (and the rest of the Western establishment) against demonizing Russia; and added that Germany had a particular role to play in maintaining dialogue with Moscow, given the nations’ history.
In an interview published on Sunday, Reuters reports that Steinmeier spoke out over fears that this weekend’s airstrikes by The West had dramatically increased the serious risk of a direct conflict between Russian and US forces.
“We are at the next step of escalation in the Russian-American relationship,” Steinmeier, who twice served as Germany’s foreign minister, told the Bild am Sonntag newspaper.
While Steinmeier toed the party line that the evidence pointed clearly at Russia’s involvement – which was alarming – he warned that:
“The galloping alienation between Russia and the West must also concern us, with consequences that will go far beyond this case. There is practically no basis of trust any more.”
Steinmeier went on to urge diplomacy and for Western politicians to keep the door to dialog open:
“Regardless of (Russian President Vladimir) Putin, we cannot declare Russia as a whole, the country and its people, to be an enemy,” he said.
“Our history speaks against it, and there is too much at stake.”
As a reminder, Germany – who recently (and controversially) backed the Nord Stream 2 project against Washington’s wishes – relies on Russia for about a third of the gas it uses.
1 – Trade Wars Flashpoints, From China to Canada and Mexico
Wall Street has knee-jerk reactions to any trade war related headlines.
There are legitimate reasons to be concerned about trade wars. The world is increasingly more connected than ever. Many major American companies that are household names such as Starbucks (SBUX), Boeing (BA) and Apple (AAPL) rely on their exports (and imports) from China for a sizable portion of their overall sales and profits.
If China continues to retaliate against trade war policies from the U.S. with harsh measures of their own, it could hurt revenues of those firms.
But, here’s the latest revelation:
China wants to keep more of what it makes — in China — across a variety of sectors. Trade wars elevate the Chinese government’s desire to do that. The country has just recently launched a new $1.6 billion initiative called “Made in China 2025.”
The strategy entails an increase in research and development spending. That would cause Chinese companies to rely less on international technology and equipment. The more China buys internally, the less it will buy American products or need to export to the U.S.
What all of that could mean is that similar products in the U.S will become more expensive for consumers. That would hit directly at stock of those companies, making them more volatile.
While headlines from the White House continue to target China, our regional trading partners are undoubtedly some of the most important, and currently some of the most fragile.
To the north, Canada is playing up its optimism over NAFTA talks. Rhetoric is one thing, reality is another. It’s important to look at what institutions are doing, not what they’re saying.
Canada is currently enhancing its participation in several other trade agreements, including an updated Trans-Pacific Partnership that does not include the U.S. In the wake of Brexit, Canada has also made important trade links to both Europe and the U.K.
That means it could shift its trade focus away from the U.S., while purchasing fewer American goods. All of that could hurt manufacturers in both countries and increase volatility into the share prices of companies involved.
Southward, Mexico is taking the risks of NAFTA talks going wrong seriously. The threat of failed NAFTA negotiations is considered the greatest threat to the Mexico Peso in 2018, according to a survey conducted by Bloomberg of 100 foreign exchange professionals gathered for a recent event in Mexico City.
If financial anxiety builds, a trade war could ignite a currency war. That would cause central banks to protect or position their currencies in order to fight a trade war, inflicting a pattern that elevates volatility on the markets. Expect trade war headlines and related action to pump up and tear down the markets on any given day.
2 – Geopolitical Flashpoints
The U.S. could attack Syria any minute now in response to its alleged chemical attack against civilians last weekend. Russia has warned Washington that it would face “grave consequences” if Russian military personnel in Syria are harmed in any attack.
Needless to say, any armed conflict between two nuclear powers carries great potential risk. One single incident could trigger an escalating spiral. But it’s not just Syria.
Since President Trump took Washington by storm, the elephant in the room has been the nuclear threat on the Korean Peninsula. When North Korean leader Kim Jong-un took a heavily guarded train to Beijing for what Western media dubbed a “surprise visit,” the markets went into a rally, and then a correction.
The rally was based on the notion that the visit would forge a truce in favor of the U.S. and cause both parties to back down from aggressive saber-rattling.
The tailspin was based on the interpretation that it meant Kim Jong-Un was cozier with China than President Trump believed. Concerns built that this could cause more trade and other agreements between the two nations, excluding the U.S. even further.
Now that President Trump has John Bolton as his National Security Advisor, the geopolitical flashpoint has increased even further. On Feb. 28, Bolton published an op-ed in the Wall Street Journal supporting a pre-emptive nuclear strike against North Korea.
That gives us an insight into what policy recommendations President Trump might be provided with now.
Even the perceived threat of a diplomatic fallout and rumors of a military response can elevate volatility. War games between the U.S. and North Korea would be an expected recoil — and that would mean uncertainty over China’s response.
That would give greater rise to volatile conditions in trade, regional security and stability on the Peninsula. By isolating China — North Korea’s top economic partner and military alley — tensions would only escalate.
3 – Stock Buybacks Flashpoints
In order to have volatility, you need positive moves to counteract negative ones. Stock buybacks are on the positive side. When companies buy their own stock in huge amounts, it serves to push up the share prices, which in turn lifts investors’ confidence to also buy their stocks. As a result, these measures push prices up even higher.
In the U.S., the Dow Jones finished 2017 up 28.11% adjusted for dividends (compared to 16.47% adjusted for dividends in 2016.). Despite President Trump taking credit for this rally (as President Obama did for rallies during his presidency), stock markets were actually bolstered by $21 trillion injected from global quantitative easing policies.
Access to that money fueled a record amount of stock buybacks for major companies and banks. They could borrow money cheaply, pile on more debt, and use that debt to buy their own stock. Share buybacks in 2018 have averaged $4.8 billion per day, double the pace from the same period last year.
This had the effect of artificially inflating stock prices. In February, my former employer, Goldman Sachs, indicated that S&P 500 firms would return $1.2 trillion to shareholders via buybacks and dividends in 2018. We see this pattern continuing and acting as a positive counter balance to any of our negative volatility flashpoints.
4 – Washington Political Risk Flashpoints
Remember, it’s not volatility without both positive and negative factors. The most recent, CNN poll showed that 42% of those surveyed approved of Trump. That’s his highest approval level since his first 100-day mark.
Though, that remains comparatively below Trump’s modern-era predecessors, it’s still an indicator of added support for the president’s policies. The passage of the $1.3 trillion budget and tax cuts increases the deficit and U.S. debt burden while alleviating volatility, but the long-term repercussions could raise it further.
Why does that matter?
Because midterm elections are this November. The way in which the country views Trump can (and will) rise or fall by the time elections come. However, if Republicans were to lose both the House and Senate, the U.S would be caught up in more political instability and potentially, impeachment hearings.
That harms market stability. It would also mean even less would get accomplished in Washington.
I’m in D.C. often. Since President Trump took office, I have personally met with more Republicans than Democrats to discuss financial and economic policy — my expertise. One of my favorite Congressmen, from a Southern state, recently told me, “All this stuff — it just makes your head spin right off. Try getting anything done.”
That signals that markets are being left in the dark to guess what happens next. Uncertainty breeds contempt. That’s why volatility is here to stay, at least through the mid-term elections in November.
* * *
As any rollercoaster ride goes, fasten your seat belt and keep all arms and legs in the vehicle. With the first three months of 2018 behind us, it is clear that this year will be very different from the last.
Yesterday we observed that in a time when even the Fed admits CPI, and its measurement of inflation is no longer satisfactory, or as Yellen put it “a mystery”, Morgan Stanley took a page out of the gold bugs’ book, and said that “due to the many criticisms and changing methodologies of the consumer price index as a true measure of inflation, we use the price of gold as a very good proxy of the true value of a dollar over long periods of time.“
What Morgan Stanley, and specifically its chief equity strategist Michael Wilson, wanted to do, is show the S&P in real terms, i.e., the nominal value divided by the price of gold, to get to an inflation adjusted number. The result was the following:
It showed the relationship for the real S&P 500 going back to the 1920s, and explained as follows:
we think that this chart does an excellent job of illustrating the length and real price damage levied by the three secular bear markets noted above as well as the persistence of the two long and steady secular bull markets from 1942-66 and 1980-2000. We strongly believe that a third secular bull market began in 2011, not 2009.
And yet, the point of the exercise was not to give the impression to Morgan Stanley clients that all is well: quite the contrary, recall that only a few weeks ago, the same Michael Wilson said that this was it for the market for this year as “January marked the top for sentiment, if not prices, for the year.”
Instead, what Morgan Stanley hoped to show is that while a cyclical bear market (i.e., a 20% drop from recent highs) is imminent, it is taking place in the context of a still strong secular bull market. The reason for this attempt to goalseek the narrative, is that as the next chart shows, the worst cyclical bear markets all happened during these secular bear markets while the less damaging ones happened in the secular bull markets. Wilson explains further:
On average, the cyclical bear markets that occurred during secular bull markets were down only 25% whereas cyclical bear markets during secular bear markets were down almost 50%, on average.
This as Morgan Stanley warns, “is a massive difference that investors should consider when preparing for the next cyclical bear market”, which the investment bank thinks may have already begun with the topping in valuations and sentiment earlier this year, even though we have not yet made the price highs at the index level.
Here, Wilson also makes an interesting observation that even though there has not been a 20% correction in the
S&P 500 since the financial crisis, one can spot two distinct bear markets in recent history when using the MSCI All Country World Index, which reveals a 26% correction in 2011 when both Europe and Japan had a double-dip recession and a 21% correction in 2015-16 during the global recession led by China’s hard landing and the collapse in the commodity/industrial and manufacturing complex.
So could we be on the verge of another 20%+ cyclical bear market for the MSCI All Country World Index?
And here we go back to the “bad cop” part of the Morgan Stanley report, in which it writes that “we think the answer is yes, but only after we make one more price high later this year.”
More importantly, however, is the bank’s prediction that unlike previous occasions, “the S&P 500 is likely to be a more significant driver this time than it was during the 2011 and 2015-16 episodes.”
In other words, look for the US stock market to take the brunt of the coming bear market.
But first… another last minute meltup, because Wilson – who appears to have changed his mind – says that he first expects a higher high in most major equity markets later this year: “In the US, we think that the S&P 500 will top between 2950-3000.“
What happens then: “the greatest weakness will likely come from the former leaders which include tech, financials and consumer discretionary in the US. US markets should lead in this decline because the earnings comparisons are the most difficult and financial conditions are tightening the most. Therefore, international developed markets should outperform in US dollar terms.”
And here we go back to why Morgan Stanley believes it is still a secular bull market, because while a cyclical bear market is coming, it will be far less painful than if it took place in the context of a secular bear:
Finally, we think that this could end up being another unsatisfying bear market in the context of how most think about the end of the cycle. Whenever one invokes the words ‘late-cycle’ or ‘end of the cycle’, the natural response is to want to sell everything, especially since memories of the 2008-09 or 2000-02 corrections are still vivid. Instead, we envision a 1-2-year consolidation with 10-20% price swings and concentrated pain in certain sectors that are either overbought, expensive or fundamentally challenged.
Morgan Stanley’s conclusion:
“This will not be the wipe-out scenario that some of the perma-bears out there have been warning about for the past eight years.”
To this, the permabears have only one response: the only reason the market appears to be in a secular bull cycle, is because central banks have inflated not one, not two, but three consecutive asset bubbles, at a cost of some $250 trillion in global debt, and the only real variable is whether they will be willing – and able – to blow a fourth, and final, asset bubble. If not, no amount of rhetorical goal-seeking will prevent the crash that is coming and that will make the Great Depression seem like a dress rehearsal.
Former Reagan White House Budget Director David Stockman says look out for the “perfect storm” coming our way. Stockman explains,
“I think we are in peak crazy time, really, to launch an attack against Syria based on the flimsy evidence to date, and the likelihood it was another false flag operation…
Trump declared victory two weeks ago in Syria and said we are coming home, which is exactly the right thing to do and say.
Then, all of a sudden, you have a gas attack and the clamor from the war party to do something, respond and bomb Assad yet one more time, even though those air bases and military bases are populated with Russian military…”
Stockman summarizes the chaos…
“You have a hot war against Russia and the Iranians, which we have no business starting. You have a trade war brewing, I am afraid will get out of control with China, which is totally unnecessary. You have a fiscal calamity brewing right before your eyes, and you have a Fed populated by Keynesians, who think they miraculously cured the economy and everything is fixed. So, they are finally going to do what they should have done a long time ago and that is normalize interest rates…
The problem is they have waited so long…that by October, they will be shrinking their balance sheet by $50 billion a month… while the Treasury is attempting to sell $1.2 trillion a year of new debt…
You are going to have, and I am quite certain of it, you are going to have a yield shock like the world has not seen in a long time…
When yields hit 4%, the proverbial brown stuff is going to hit the fan. It is the proverbial perfect storm of upset, upheaval and really insane kind of developments. Finally, after kicking the can all these years, it is finally going to come together, and I don’t see what is really going to slow it down.”
How did the world get into record debt and trade wars? Stockman says,
“The point is a free market based on honest money would never produce this kind of imbalance.
Under the old system, when you start to run trade deficits this big…there would have been quick adjustment because we would have lost reserves.
Pre-1914, that was gold. When you lost financial reserves, gold, that caused the banking system to tighten up and caused interest rates to rise, credit to be curtailed, and the economy slowed down. Prices adjusted and slowly imports declined and exports recovered…
We don’t have that anymore. We basically have a bad money system, which allows these kinds of trade imbalances to grow.”
What Stockman sees is deflation, depression and financial Armageddon. Stockman says,
“In the bond market, I don’t know any other way to describe it… It’s uncharted territory, and we have never been here before…
The house of cards is so shaky and so fragile right now that there is the risk of the proverbial black swan event. We don’t see something coming. It shocks the system. It triggers a panic, and the panic soon envelops itself and descends into some sort of doom loop. That could very easily happen.”
Stockman says, “Gold and silver are the only safe investments to have . . . you can’t be safe in the stock market, and you can’t be safe in the bond market.”
Join Greg Hunter as he goes One-on-One with financial expert David Stockman.
Following Tim Draper’s excited “$250k by 2022” forecast, Bitcoin (and the rest of the crypto space) have extended last week’s gains as tax-driven selling pressure appears to have abated and Bob Shiller says Bitcoin ‘bubble’ “could be with us forever.”
Bitcoin is up over 20% in the last few days, testing up to its 50-day moving-average…
And Ripple is up over 35%…
FundStrat’s Tom Lee offers some perspective on the current trend in cryptos compared to the 2013-2015 Bitcoin bear market…
The 90% decline, which lasted 405 days, took prices back to Oct 2013, or 1 month prior to Nov 2013 peak. From Oct ’13->Nov ’13, BTC gained 621% in a month. That year-long decline was a rollback of 1 month of gains.
And the current slide…
Where was Bitcoin 1 month prior to ~$20,000 top? $5,900.
In other words, BTC this year rolled-back prices similar to what happened in 2014/15.
Could be same bottom as the 2014/15 bottom. Also, selling related to capital gains taxes in US should be lifting as tax day is 4/17?
And as CoinTelegraph reports, Nobel Prize laureate for economics Robert Shiller believes that while Bitcoin (BTC) might be a bubble, that doesn’t mean that it will burst and be gone forever, according to an interview on April 13 with CNBC’s Trading Nation.
Shiller, who is currently a professor of economics at Yale University, referred to BTC as “another example of faddish human behavior. It’s glamorous”:
“I’m interested in [B]itcoin as a sort of bubble. It doesn’t mean that it will disappear, that it’ll burst forever. It may be with us for a while.”
Shiller highlights that he knows that “smart people” have invested in cryptocurrencies, including many of his students, but adds that the attraction to crypto is “a story that I think goes way beyond the merit of the idea. It is more psychological than something that could be explained by the computer science department.”
According to Shiller, there is a “part” of the cryptocurrency “fad” or “bubble” that is political, as people that don’t trust their governments may be tempted to invest.
In September of last year, Shiller went on CNBC’s Fast Money with Brian Kelly to speak along the same lines about crypto, saying that “it’s the quality of the story that’s attracting all this interest.”
