Bursting Biotech Bubbles And Calendar Concerns Club Stocks/Bonds

Quad-witching only added to an extremely volatile week as the entire bond, stock, FX complex pumped and dumped on the basis of whether a "considerable period" was really six months and whether "quite some time" was more or less than six months. The S&P hit record highs early on this morning thanks to a ramp in AUDJPY (but once again bonds didn't blink). All that ended when Europe closed and the Biotech sector's weakness spread, leaving the Nasdaq -1.4% post-FOMC (and all other indices in the red post-FOMC). The range of moves in bonds, FX, commodities, and vol this week were impressive as we noted below…

 

Year-to-date, gold remains the winner (and HY credit the loser)…

 

Year-to-date, the Dow is back in the red and Russell outperforming…

 

To summarise this week's carnage…

  • 2Y Yield +8bps – the worst week in 9 months
  • 5Y Yield +17bps – the worst week in 7 months
  • 30Y Yield unchanged
  • 5s30s -16bps – 2nd biggest flattening in 21 months
  • 2s10s unchanged
  • Silver -5.2% – the worst week in 6 months
  • Gold -3.3% – the worst week in 4 months
  • Copper ~unchanged (down 4 weeks in a row)
  • USD Index +0.83% – best week in 2 months
  • EUR -0.82% – broke 6-week win streak
  • VIX -2.8vols – 2nd biggest drop in 14 months
  • Nasdaq Biotech Index -2.8% – worst week in 5 months
  • Financials unchanged on the week

 

When the bottom fell out… as Europe closed…

 

Post-FOMC, all indices are now in the red…

 

With only financials holding any gains…

 

Notably, "most shorted" names have been very weak since the FOMC – even as the broad market is pumped on the heels of financials…

 

On the week 30Y is practically unchanged while 5Y is +17bps!

 

FX markets were also volatile with EUR and JPY weakness (but AUD relatively outperforming)…

 

Gold has been limping higher thelast 2 days but on the week PMs remain under pressure with oil and copper around unch…

 

Charts: Bloomberg

Bonus Chart: The MoMos no likey Ms. Yellen…

 

Bonus Bonus Chart: Biotechs battered…by most in almost 3 years today

U.S. lawmakers have asked Gilead Sciences Inc to explain the $84,000 price tag of its new hepatitis C drug Sovaldi, which is encountering resistance from health insurers and state Medicaid programs – spraking concerns they may have a harder time pricing new medicines.

It seems like the government is basically going after externalities from yet another bubble sector likely bursting the bubble

 


    



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Fed “Fails” Stress Test, Releases Revised Results

First the Fed screws up the “dots” – on one hand telling HFT algos not to worry about rate hikes, on the other saying the FF rate in 2016 will be a scroching 2.25%, then Yellen flubs the “6 month” statement sending stock into a tailspin and Hilsenrath and Liesman explaining in overdrive that she didn’t mean what she said, and now, we learn with the traditional Friday afternoon “shove under the carpet” bomb, that the Fed also flubbed its stress test results. Sounds about par for the world’s most powerful, and clueless, monetary institution.

From the Fed:

The Federal Reserve on Friday issued corrected results for the 2014 Dodd-Frank Act stress test.  For 26 of the 30 firms, the correction led to either no change or at most a 0.1 percentage point change in the firms’ minimum, post-stress tier 1 common capital ratios in the severely adverse scenario.  The change led to a 0.3 percentage point increase at two firms, a 0.2 percentage point decrease at one firm, and a 0.5 percentage point decline at another.  

 

The capital ratios were adjusted to address inconsistencies in the treatment of the fourth quarter 2013 actual capital actions and assumptions about preferred and employee compensation-related issuance over the course of the planning horizon.

 

The attachment reflects the updated minimum tier 1 common capital ratios and the changes from the prior release.  The Federal Reserve will reissue a full result paper on Monday with corrections as they affect all capital ratios.

This is almost as sad, if entertaining, as the Treasury releasing a complete set of TIC data, then hours later admitting it had the goalseek formula set incorrectly, and revising the entire thing.

For those who still care about anything the megalomaniacal, if somewhat confused, central planners at Marriner Eccles have to say, here are the revised results.


    



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David Cameron Wants Fan of ‘Rules-Based Anarchy’ Back in Parliament

British Prime Minister David Cameron
has said
that he would like to see London Mayor Boris Johnson back in
parliament.

Johnson, who once described his ideal society as something
similar to “rules-based
anarchy
,” has been discussed as a possible future prime
minister, although Johnson rejected such talk in 2012,
saying that
the chances of him becoming prime minister are
thin:

My realistic chances of becoming Prime Minister are
only slightly better than my chances of being decapitated by a
Frisbee, blinded by a champagne cork, locked in a disused fridge,
or reincarnated as a olive.

However, last year
Johnson
used a rugby analogy to point out that he wouldn’t be
opposed to the idea of pursuing Cameron’s job under the right
circumstances.

Last year, an article in the
Economist
suggested than Johnson was a mainstream
British politician that could “tap into” the “passive libertarian
sentiment among the disengaged.” The same article had the following
to say about young Britons:

Young Britons are classical liberals: as well as prizing social
freedom, they believe in low taxes, limited welfare and personal
responsibility. In America they would be called libertarians.

The self-described fan of “rules-based anarchy” may indeed be
able to speak to a young classically liberal generation, but
assuming Johnson is open to the idea of one day living in 10
Downing Street he still needs to re-enter parliament and win the
leadership of the Conservative Party before that can become a
realistic prospect.

Watch Channel 4’s docudrama, “When Boris Met Dave,” below. It is
an interesting and entertaining look at the
Johnson-Cameron relationship, which began when they were both
students at Oxford University. 

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Who Just Dumped $220 Million Nasdaq Futures In 1 Second?

At 10:27:21 ET, the Nasdaq 100 e-mini futures contract suddenly dropped on extreme activity as someone decided it was an opportune time to dump 3000 contracts or around $220 million notional. As Nanex notes, the ETF – QQQ – also collapsed (with over 1200 trades in 1 second) as bids and offers were crossed and markets went flash-crashy for a few tenths of a second. The questions is – who was it? Waddell & Reed?

 

Via Nanex,

1. QQQ Trades (cicles) and NBBO shaded red when crossed (bid > ask), yellow when locked (bid = ask), or gray when normal (bid < ask).
Note how the trades print way ahead of quotes. Chart shows about 140 milliseconds of time.



2. June 2014 Nasdaq 100 (NQ) Futures trades and quote spread.
NQ trades in Chicago – comparing the activity to the QQQ's traded in NY, we see that NQ futures initiated the drop. QQQ's reacted about 4 milliseconds later – the time it takes light to travel between the two cities.



3. Nasdaq non-ISO trades (dots) and quote spread (shading).
ISO trades can appear slightly ahead of quotes, so we only show non-ISO trades. These trades should appear after quotes: the dots should be on or to the right of the gray shading.



4. Nasdaq and BATS non-ISO trades and quotes.
We can see that Nasdaq quotes are lagging BATS quotes: the gray shading (Nasdaq quote spread) appears offset to the right of the pink shading (BATS quote spread). This tells us that some of the delay was caused BEFORE Nasdaq quotes reached the SIP. Because Nasdaq trades appear ahead of Nasdaq quotes (and BATS trades), we know direct feeds got that information faster than the SIP did. We call this condition fantaseconds



5. Zooming out on QQQ trades and NBBO.



6. Zooming out on the June 2014 Nasdaq 100 (NQ) futures trades and quote spread.




    



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How Much Is a Pack of Joints Likely to Cost?

At Fast Company,
writer Thor Benson
calculates how much a pack of joints
—or marijuana
cigarettes
, if you prefer—would be likely to cost should a
major cigarette company decide to get in on the game soon. As of
now, rumors that Marlboro is going to pot (I’m sorry) are just
that: rumors. But as the weed business begins booming legally in
more states, “don’t be surprised to see big tobacco turn into big
marijuana,” writes Benson. Until then, pricing a pack of joints is
purely a thought exercise. But who hasn’t wondered what a 20-pack
of Camel Greens might cost? 

In June of 2013, a company named BOTEC speculated that the
production cost of marijuana ranges from $2 to $3 per gram, which
“implies a price to retailers of $6.25, which is broadly consistent
with current access points paying about $5 per gram.” The average
Marlboro cigarette has just under one gram of tobacco in each of
the 20 cigarettes contained in a pack. So at the low end of things,
you’re looking at a production cost of nearly $40 per pack of Mary
Janes.

… But production cost also does not factor in what the company
must charge to make a profit. The Economics of
Smoking
, written in 1992, declared that production costs are
often half of what cigarette companies wholesale their product for,
so what costs a large corporation $40 per pack could result in a
$70 or $80 retail price.

Bummer. But Benson is optimistic that economies of scale could
bring the cost down. Another price-lowering solution might be for
companies to mix tobacco with marijuana.

If marijuana cigarettes were to be mixed with tobacco, at a
50-50 ratio, it would bring the cost down significantly. Many
tobacco farmers will wholesale
a pound of their product for less than $2
. With a 50-50 ratio
of marijuana to tobacco, the cost of producing a pack of 20
pre-rolled joints could be brought down to just a little more than
$20—so a $40 pack at the store.

But adding in tobacco would likely bring on more state sin
taxing, so perhaps not a terribly cost-saving measure for
consumers. Plus we’d have to endure a lot of concern over how
half-marijuana and half-tobacco cigarettes would normalize
marijuana, or re-normalize tobacco, or something. Heaven help us
should anyone make one cherry flavored.  

Of course, with the kids all going e-cigarettes and vaporizers
these days, perhaps the more savvy route for businesses would be
selling e-joints. Electronic cigarettes are “now regularly used as
a way to consume marijuana,” according to Benson. (I am marginally
ashamed that I didn’t know this.) There’s apparently a
booming underground
 and
legal market in
 THC oil e-cigs already. 

Marlboro’s parent company, Altria,
recently acquired e-cig manufacturer Green Smoke
, a move which
Quartz writer John McDuling thinks signifies its interest
in the marijuana business. One e-cigarette manufacturer told
McDuling that use of the products for smoking pot is “an open
secret,” and that “all the big tobacco companies” are looking into
marijuana vaping technology. If you’d like to learn more about the
technology yourself, meet John: 

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James Montier: “The Market Is Overvalued By 50%-70%” And “Nothing At All” Is Attractively Valued

A month ago we presented a must read interview by Swiss Finanz und Wirtschaft with respected value investor Howard Marks, in which, when explaining the motives driving rational investing he summarized simply, “in the end, the devil always wins.” Today, we are happy to bring our readers the following interview with one of our favorite strategists, GMO’s James Montier, in which true to form, Montier packs no punches, and says that the market is now overvalued by 50% to 70%, adding that there is “nothing at all” that has an attractive valuation, and that he sees a “hideous opportunity set.”

Still, despite the clear bubble in stocks, he is unsure what to do since financial repression could last very long with “the average length of periods of financial repression in history is 22 years. We’ve only had five years so far.” Finally on the topic of Japan and Abenomics, “for me, there is too much hope and expectation embedded in Abe, not unlike Obama in 2009: There was so much hope projected into Obama that he could only disappoint.” He did, well… everyone but the 0.001% billionaires. Then again in a world in which there is only hope left, what happens when that too is removed?

From Finanz und Wirtschaft

James Montier is a full-blooded value investor. Pickings are slim these days, though, says the member of the asset allocation team at the Boston-based asset manager GMO. He sees a «hideous opportunity set» for investors, with the S&P-500 being overvalued by 50 to 70 percent.

James, are you able to find anything in today’s financial markets that still has an attractive valuation?

Nothing at all. When we look at the world today, what we see is a hideous opportunity set. And that’s a reflection of the central bank policies around the world. They drive the returns on all assets down to zero, pushing everybody out on the risk curve. So today, nothing is cheap anymore in absolute terms. There are pockets of relative attractiveness, but nothing is cheap or even at fair value. Everything is expensive. As an investor, you have to stick with the best of a bad bunch.

Where are these pockets of relative value?

There are two and a half of them. The half pocket is high quality stocks, companies that have high and stable profitability. But granted: They are nowhere near as compelling as they were even a year ago, so we are slowly selling our high quality positions. We are by the way also reducing our overall equity weight gradually as this year goes on. We have already taken about five points out, and we are at 50 percent now. By the end of the year we’ll probably be at around 39 percent.

And what are the other pockets of value?

European value is still somewhat okay – although there we have increasing concerns about the prospect of deflation in the Eurozone. The breakup risk of the Eurozone has been diminished, the thing seems to be holding together. But that comes with the cost of outright deflation in peripheral countries. That’s a big issue for European equities, not only because deflation increases the discount rate in real terms, but it also increases their debt in real terms. They will owe more in real terms the longer this deflation goes on.

What sectors fall under European value?

A mixture of asset rich sectors: Utilities, oil & gas, some telecom, some industrials. Names we like in that field are Total, BP, Royal Dutch, Telefonica and the like. The problem with all those sectors is that they tend to be debt heavy, which is why the prospect of deflation is such a big issue.

But the European market in general is not cheap anymore?

No. The time to be buying broad European equities was two years ago.

How do you make sure you don’t fall into a value trap with sectors like utilities and telecom?

You can deal with it by demanding a very large margin of safety. I’d argue you don’t get that right now. You could try fundamental analysis, have guys who think they know something about these stocks, and the third is good diversification. You don’t want too much in any one individual name. That’s why we own 150 stocks in our European value portfolio.

What about the mining sector?

They are tricky. We spent a lot of time thinking about mining as well as oil & gas. We’re quite happy with oil & gas. But the mining sector looks expensive to us today. The problem is there is so much supply coming onstream over the coming years, that commodities like iron ore and copper will show significant excess supply even on the assumption of unchanged demand. So we stay away from materials.

What about financials?

We tend to stay away from them, too. You just don’t know what you’re buying. Their balance sheets are built the wrong way around, their assets are liabilities, their liabilities are assets, you just end up scratching your head. So generally, they end up in our too-difficult-to-understand bucket. We own some financials, but only in small size.

And the third pocket of value?

Emerging markets are relatively attractive. But again, despite their underperformance of late, they are not outright cheap.

Every investor seems to hate emerging markets these days, and everyone loves developed markets like the U.S. and Europe. What do you make of that?
This is weird. We see a reverse decoupling theory. For years we heard that emerging markets can decouple from developed markets, and now we hear it the other way round. Neither of these assumptions is true. I don’t think decoupling can happen in either direction. If my assumption is correct that emerging markets are the canary in the coal mine, developed markets will get a hit.

Brazil, China and Russia all trade on single digit P/E right now.

Yes, true. The trouble is that many of these markets basically consist of two things: Financials and resources. Russia is a prime example. And when you look at the credit cycle in many of these markets, they are often quite extended. So they might look cheap, but you have to ask yourself if the earnings they have today will be sustainable. You definitely want to be cautious with financials in emerging markets. We own some assets in markets like Russia or Korea. Gazprom for example, which trades at a P/E of 2, is very cheap. But again, this is not a market to be enthusiastic. Every asset has been affected by the quest for return. I call this the Cinderella curse: Cinderella has already been taken out by Prince Charming, so you are left with the choice between her two ugly stepsisters.

And in order not to be alone, you end up taking out the ugly stepsister?

Yes. That’s what the investing world looks like right now. Not attractive, but there is no good alternative. You have to own some assets. And you just try to get paid as much as possible for taking these risks.

Do you see outright bubbles anywhere?

By some measures, you can say we are in a bubble, for example in U.S. equities. But it doesn’t feel like a mania yet. Today we experience something like a near-rational bubble, based on overconfidence and myopia by investors. It’s a policy-driven, cynical kind of bubble. Not a mania.

You coined the term foie gras rally, where the Fed just shoves liquidity down investor’s throats. How will it all end?

Probably not well. The exit from these policies is going to be extraordinarily difficult to handle. Today’s situation shows parallels with 1994. Then, the Fed had thought that they had done a great job in communicating their policy going forward. But it turned out the markets were not prepared at all, given the fact that it resulted in the Tequila crisis in Mexico. Couple that with expensive markets, and you have a good reason to want to own a reasonable amount of dry powder. You don’t want to be fully invested in this world.

Since the tapering started in December 2013, markets take it rather calmly.

Yes, the ones that suffered were the emerging markets. The S&P-500 just keeps drifting upwards. But I think emerging markets are the canary in the coalmine, the first signal. They had been the beneficiaries of these incredible capital inflows. So the fact that they are the first ones to suffer makes sense. It’s not a huge surprise that stock markets in the U.S. have not reacted, because the bond market has not reacted. The bond market seems to think the tapering will turn out fine. Maybe they’re right. But there is no margin of safety in asset pricing these days. That’s no comfortable position to begin a tightening cycle.

What if there won’t be any exit?

That’s a possibility. The Fed might decide that growth is still too weak and that inflation is not an issue. Then they could keep their policy in place for longer. The history of financial repression shows that it lasts a very long time. The average length of periods of financial repression in history is 22 years. We’ve only had five years so far. That creates a huge dilemma for asset allocators today: How do you build a portfolio with such a binary situation? Either they exit QE, or they don’t. And the assets you want to own in these two scenarios are pretty much inverse. So you either bet on either one of these scenarios, with is kind of uncomfortable for a value-based investor, or you say because we don’t know, the best we can do is build a robust portfolio. A portfolio that is able to survive in all kinds of scenarios.

And what does such a portfolio look like?

If you have continued financial repression, you want a much higher share of equities, because they are the highest performing asset, compared to bonds and cash. If you think financial repression will go on for another 20 years, you need to have equities. For the scenario that the central banks will exit their policies, you will want to own cash, because that’s the only asset that does not get impaired when interest rates rise. So you have two extreme portfolios: One almost fully in equities, the other almost fully in cash. So that’s what we do: We have about 50% in equities, and 50% in dry powder-like assets. That means some cash, some TIPS, and some long/short equity spread trades. But as said, we are reducing the equity part over the course of the year, to build up dry powder.

The pattern in the past years was rather simple: Whenever the S&P 500 corrected by more than 10%, the Fed launched a new program. Could that continue?

You can’t rule it out. That’s part of the Greenspan-Bernanke-Yellen put. Whenever there was a problem, the Fed rescued equity markets. That created a huge moral hazard. Investors have come to believe that the Fed will always make sure that nothing bad happens to equity markets.

Does that explain the buy the dip mentality we see these days? Or is there really so much money left on the sidelines, just waiting to get into equities?

Valuations suggest that most people are fully invested today. I don’t see much evidence of people being overly cautious, but a lot more evidence of people getting exuberant. But bear in mind: Owning a large chunk of cash today hurts your performance. Following a value-based strategy requires you to be patient. We know that patience is a rare treat in human beings, and it is extraordinarily rate among investors. Patience hurts. But it is less foolish to do the right thing for the long term, than try to second guess what will happen in the short term.

What is the fair value of the S&P 500 right now?

Several valuation measures suggest that the S&P is overvalued by 50 to 70%. Every piece of valuation I do says this market is too expensive. The only U.S. equities we currently own are high quality names like Microsoft, Procter & Gamble or Johnson & Johnson.

What’s your view on Japan?

It is far from obvious that prime minister Shinzo Abe will succeed in breaking the mold. He has succeeded in weakening the Yen, but now they increase consumption taxes next month – and thereby run the risk of a re-run of 1998, when Japan killed its own recovery. For me, there is too much hope and expectation embedded in Abe, not unlike Obama in 2009: There was so much hope projected into Obama that he could only disappoint. I’m not sure that Abe will succeed in ending deflation in Japan.


    



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Black Preschoolers Are Getting Suspended in Epic Numbers. In Other News, Preschoolers Get Suspended?

locked inZero
tolerance has arrived in the pre-K set
, and it’s just as ugly
in miniature.

Data to be released Friday by the Education Department’s civil
rights arm finds that black children represent about 18 percent of
children enrolled in preschool programs in schools, but almost half
of the students suspended more than once. Six percent of the
nation’s districts with preschools reported suspending at least one
preschool child.

Those trends set kids up nicely to funnel straight into the
school-to-prison pipeline awaiting them in middle and high school.
As Scott Shackford
noted in a blog post about new “guiding principles” on discipline
from the Obama administration
, “One study found that 95 percent
of out-of-school suspensions were for nonviolent, minor disruptions
such as tardiness or disrespect.” In other words, administrators
are using discretionary, catch-all chanrges to boot kids out of
school, especially black girls and boys:

Overall, the data shows that black students of all ages are
suspended and expelled at a rate that’s three times higher than
that of white children. Even as boys receive more than two-thirds
of suspensions, black girls are suspended at higher rates than
girls of any other race or most boys. 

Stay tuned for the inevitable suspension of a preschooler for
parroting parental profanity that they don’t understand in 4, 3, 2,
1…

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Rand Paul: 2Libertarian 2Be Electable?

Kevin Williamson–who also
wrote about the Ron Paul campaign
for National
Review
throws
some cold water at

Politico
 
on those excited that Rand Paul seems to be
rising in reputation and attention so quickly that it’s a safe bet
he could actually become president.

Williamson points out:

Paul’s libertarianism is intended to offer a little something
for everybody, on the left and right—spending cuts for the
Republican base, legal relief for potheads, a presidential pat on
the head for gay people. But if he gets serious about substantive
reform along these lines, his libertarianism is instead going to
offer something to outrage everybody…..

We spend almost all of the federal budget on a handful of
programs: Social Security, Medicare, Medicaid and defense. So any
plausible, politically sustainable campaign to impose some sanity
on America’s national finances is going to mean reforming—i.e.,
cutting—all of those.

How unpopular is that? Solid
majorities
 of Americans oppose cutting Social Security and
Medicare benefits and raising taxes to pay for
them, even though a larger majority also believes that the cost of
those programs will create economic problems. The number of people
who think we spend
too much on the military
 hasn’t topped the 50-percent mark
since the Vietnam War. Think about George W. Bush’s attempt at
Social Security reform, which left him the loneliest man in
Washington. Or consider that in 2012, fiscal conservative
wonk-emperor Paul Ryan ran for the vice presidency on a campaign
that blasted the Obama administration for making Medicare cuts.
Which is to say, even the man in Washington most associated with
the words “fiscal conservative” knows better than to run as
one. 

I think Williamson is right on the big points: American
dedication to libertarian principles writ large—life, liberty and
the pursuit of happiness is great; people should mostly be left
alone to manage their own lives as long as they are not hurting
others; government is too big and spends too much–tends to shatter
when it runs up against any actual shrinking in any government
function that they think affects them in any way.

Rand Paul has alternately evaded and embraced the term
“libertarian” and can certainly not be expected to enthusiastically
advocate every idea about politics anyone in the larger libertarian
movement has ever advocated as he runs for president–especially
not the anarcho-Rothbardian end, which his father has few problems
with although he never self-identifies as anarchist
himself. 


Last time I talked to him
, Rand Paul was openly pretty weary of
being pinned down on extreme questions of applying libertarian
principal to specific political questions. Rachel Maddow taught
him back in 2010
when it came to free association and private
property and civil rights law that that’s a losing
game. As Slate notes,
Rand has announced he no 
longer
wants to answer questions
 about what his father Ron
says, does, or believes. 

But as I wrote
in the New York Times 14 months ago
, before
the current Rand Paul wave began cresting, what he has going for
him, if what libertarians believe about the manifest dangers of
overreaching and overspending and overborrowing and overinvading
government is true, is reality, and the hope that someday,
somewhere soon, Americans will realize that merely lowering yearly
deficits is not sufficient to quash the dangers of government debt
threatening our future.

So it’s ultimately too soon to say how big a deal Rand Paul will
get to be nationally in a presidential context. But plenty of
people seem to be able to
consider voting for him for president now
, as he polls near the
top of the prospective GOP field for 2016. I can imagine, though,
that it is easier for media and voters to admire him more as a
fresh-air senatorial maverick than to gird up for the sort of
wrenching (however necessary) changes in national politics a
President Rand Paul would imply.

I have no doubt that right now serious libertarianism will be a
hard national sell, even to a Republican Party that in theory
should be able to embrace the small-government part. It also seems
likely that any liberal/progressive affection for the anti-security
state, pro-civil liberties Rand Paul will lcrash and burn against
the wall of his opposition to abortion and government income
transfer programs. Paul told me in my New York
Times 
piece of the need for more social tolerance and
minority outreach for the GOP, but I think no amount of that will
overcome the abortion and income transfer stuff when it comes to
winning over Democrat-leaning independents.

That said, a Santorum-like focus on being “socially
conservative” is unlikely to be a national winner for the Party at
any time moving forward into the 21st century, so there’s another
good reason–besides reality itself–for some major Party to suck
it up and offer something close to real libertarianism.

Then there’s foreign policy. Recently, Paul’s attempts in the
face of an actual old fashioned Cold War era crisis to balance
between the strongly noninterventionist, America can be seen as an
evil empire itself, wing of his father’s fan base and a more
jingoistic Republican base attitude, Paul has
managed to both link himself to Reagan
, not advocate military
action, and still talk vaguely tough against Russia and do no
America-blaming.

This hasn’t been good enough to keep Rick Santorum–whatever you
think or don’t think about that guy, he did rack up the
second highest number of primary votes for the 2012 GOP race and
thus is presumptively “next in line”–from
saying
 Paulite foreign policy is basically a weak,
Obamaite disgrace no Republican can countenance, indeed “a very
serious threat to our own security.”

I think it will be best for Paul’s presidential ambitions if the
American people are not feeling themselves, America’s interests, or
even America’s vague and overweening sense of international
amour propre threatened in 2015-16. Americans don’t like
war, to be sure–until government and media start telling them it’s
necessary and they aren’t going to have themselves or their sons
and daughters drafted to fight in. 

No doubt, how libertarian Rand Paul can get away with being will
be a continuous topic of pundit and voter concern between now and
the end of next year.

What
Paul told me back in January
might be worth revisiting in
thinking about these issues:

“I’ve got half the libertarians on the Internet beating up on me
for not being pure enough,” Paul says, “and the rest of the
mainstream beating up on me for being too libertarian. It’s a box
they put me in.”

“But I’m in the business of trying to advance a philosophy and
advance an economic program that’s better for the country. And I’m
also in the business of winning elections and trying to convince
people to come in the direction of smaller government and more
individual liberty,” Paul says. “I sometimes wish for a little more
forbearance among the purists, but I’m trying to do the best I can
to advance a philosophy and program that is more individual liberty
for everyone and is pulling in the direction of what some of the
purists might want” even if they “might not see it as pure as
they’d like.”

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“QE Was A Massive Gift Intended To Boost Wealth”, Fed President Admits

With Bernanke gone, the remaining Fed members knowing full well they will be crucified, metaphorically of course (if not literally) when it all inevitably comes crashing down, are finally at liberty with their words… and the truth is bleeding out courtesy of the president of the Dallas Fed:

  • FISHER SAYS QE WAS A MASSIVE GIFT INTENDED TO BOOST WEALTH

Which incidentally coincides with Bernanke’s heartfelt “admission” that “my natural inclinations, even if it weren’t for the legal mandate, would be to try to help the average person.As long as helped to boost the wealth of the non-average billionaire., all is forgiven. “The result was there are still many people after the crisis who still feel that it was unfair that some companies got helped and small banks and small business and average families didn’t get direct help,” Bernanke said. “It’s a hard perception to break.” The truth, as again revealed by Fisher, will not help with breaking that perception.

We wonder how President Obama, that crusader for fairness, equality and all time Russell 200,000 highs, will feel about that? In the meantime, just like the Herp, QE is the gift that keeps on giving.. and giving… and giving… to the 0.001%.

 

 


    



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What is Payment Protocol “Ripple” and How Does it Allow for Physically Backed Digital Gold Currency Exchange

I’ve known about Ripple for close to a year now. I’ve been meaning to write a post on it for several months, but since doing so is such a difficult effort I kept putting it off. The most accurate expression I’ve seen to-date describing the daunting task of explaining Ripple to someone who has never heard of it is the following line published in a recent Bitcoin Magazine article:

If you’re ever explaining Bitcoin to someone and they’re getting it, start talking about Ripple, just to confuse them again.

That was precisely how I felt when a friend of mine first introduced me to Ripple. I had only recently really gotten behind Bitcoin, and now I had to try to understand something else? Even worse, something that seemed far more complicated. While I was interested in the idea right off the bat because I have a huge degree of trust in this person’s opinion on technology, it seemed overwhelming so I put the entire thing to the side.

My perspective changed later in the year when another friend of mine asked me if I knew about Ripple. It turns out he is friends with the head of Markets and Trading at Ripple Labs, Phil Rapoport. Since Phil is based in NYC, and I was headed there, I decided to set up a meeting and develop a more informed opinion on the subject.

By the time I met with Phil, I had put a lot more thought into Ripple in order to ask good questions by the time he showed up. I was highly skeptical for many reasons.

Ripple is not particularly embraced within many areas of the Bitcoin community, and I can understand why. Going in, I had many doubts. It is first and foremost a payment protocol, and secondly a “math based currency.” Since I couldn’t grasp the payment aspect until my meeting with Phil, I had spent all of my time thinking about the currency aspect of it, and that part was not appealing to me when compared to Bitcoin.

First off, the currency is pre-mined. This means that all the units are already in existence from day one and controlled by the creators, as opposed to Bitcoin, where the currency is mined over time by computers confirming transactions and ensuring the system runs smoothly. The distinction is important since the distribution process for Ripple is entirely opaque, while the distribution process for Bitcoin is far more transparent. While you do not know who exactly receives the bitcoins as each block is created, you do know how many are being distributed and at what pace until that moment in 2140 when the very last BTC is mined. With Ripple (the native currency of the protocol is known as XRP), the only thing we know is that there are 100 billion in existence (the most there will ever be) and that the founders kept 20 billion for themselves. The remaining 80 billion have been allocated to a company called Ripple Labs, which is in charge of distributing the remaining XRP as they deem appropriate. To-date, about 9.5% of the 80 billion have been distributed and you can track the progress here.

From a business standpoint, I can understand why this would be the case. They can sell some of it into the market to pay day-to-day expenses (Ripple already has a total valuation of about $1.4 billion), they can allocate it to employees as compensation, they can give it away via charity such as their partnership with the World Community Grid, and most importantly they can gift them to strategic ”Gateways” (more on those later) in order to grow the payment system into what it needs to become in order to succeed.

One of the things that I and many others in the Bitcoin community have loved about Bitcoin is the fact that some poor computer nerd could have started mining bitcoins from his home computer several years back and now be a millionaire. It is very grassroots in that way. The people who saw its potential early on had the ability to participate in what was kind of like a decentralized IPO. All you needed was a little vision and some computer chops. There is something brilliant and beautiful in that distribution process. While mining is now a very expensive affair and out of the reach of the average person, this wasn’t the case in the beginning when there was far more risk involved in the entire experiment.

With Ripple, a somewhat equitable early distribution process was never on the table. The founders have/are allocating the currency in a highly centralized and opaque manner. There’s something about this that rubs many in the crypto-currency community the wrong way. Moreover, because Bitcoin is such a grass roots creation, it is simply much more political than Ripple is or ever will be. Buying Bitcoin and supporting it is for many of us an expression of disgust with the Federal Reserve in particular, and the legacy banking system in general. While many supporters of Ripple will most definitely harbor similar sentiments, buying XRP isn’t really a statement, while buying and spending BTC very much still is.

So those are some of the “negative” aspects of Ripple. I think they represent much of the skepticism in the Bitcoin community. They certainly reflect many of my own sentiments before I learned more about the tremendous potential of the payment system.

I will now explain how I overcame my initial skepticism on Ripple and saw the enormous power and benefit of the payment protocol itself. Earlier, I described some of the main differences between Ripple and Bitcoin. I called your attention to many of the aspect of Ripple that folks within the Bitcoin community tend to dislike. I think it is also important to understand some similarities they share.

One major similarity is that they both represent new payment systems that at their core allow for transfers of value from one person to another across the world at essentially zero cost. Both run on open source code and empower merchants and economic growth generally by eliminating the middlemen currently taking anywhere from 2%-3% for merely processing payments. The tens of billions of dollars spent on such fees can be repositioned as fuel for the global economy and put to more productive uses.

They were both released to the world for free. This represents a huge revolution not just in payments, but in potentially how some startups might choose to fund themselves in the future. Within Bitcoin, the unit of exchange, BTC, is needed in order to participate in the payment protocol. In that way, bitcoins, can be seen as the equity of the network. Early adopters bought or mined bitcoin, and as they increased tremendously in value, many of them have used their wealth and knowledge to greatly advance the protocol to where it is today.

Ripple also has a currency, called XRP, which can also be seen as the “equity” of the payment system. Here is where we start to see a major difference between the two systems. Within the Bitcoin network, you will use BTC, whereas the Ripple network is currency agnostic for the most part. The system does not discriminate between one currency or the other. Using Ripple, you can send payment to someone quickly and at essentially no cost whether it is USD, gold, XRP, or bitcoins.

That said, the currency XRP does play two major roles in the system.

1) Since it is the native currency on the protocol, it is the only currency traded or exchanged on the system that does not have any counter-party risk. Anyone with a Ripple wallet can send anyone else XRP at any time with no exceptions, sort of like Bitcoin. By contrast, in order to receive any other currency or asset of value on the system you must trust certain “Gateways.”

2) There is also a certain amount of XRP that is destroyed with every transaction on the system. The amount is a negligible .00001 XRP (a extraordinarily tiny fraction of a penny), and is used to prevent spam transactions from clogging the protocol. As such, each wallet on Ripple needs to have a minuscule XRP reserve balance of 20, which is at total of $0.28 at current prices.

In a nutshell: XRP has value as the reserve currency of the payment system. It is the grease in the wheels of the whole thing.

Ok, so I probably lost a lot of you above with the whole “Gateway” and “trust” concept. Let me explain.

First of all, no other currencies or items of value are actually held within the Ripple payment system. Gold traded on Ripple will be held in a vault somewhere, and U.S. dollars (USD) traded will be held in some sort of external financial institution, a bank, credit union or whatever. This is where “Gateways” come into play. “Gateways” are essentially companies that serve as the custodians for non-XRP assets that trade on Ripple.

To make this easy to understand, I will use the USD example. If you are a U.S. citizen and want to hold USD in your Ripple wallet the best “Gateway” to use at the moment is SnapSwap. SnapSwap has a bank account at Bank of America and you “fund” your Ripple wallet with USD by sending the currency to SnapSwap’s bank account. At that point your USD enters the Ripple network and you can purchase XRP and send it to anyone, or you can send your USD to anyone on the Ripple network who also “trusts” SnapSwap. As I mentioned earlier, you don’t need “trust” to send or receive XRP, you only need “trust” to send other items of value that have counter-party risk. Since there is obviously counter-party risk associated with your USD (risk resides at both SnapSwap and Bank of America) a Ripple user must conduct due diligence to determine whether or not they “trust” SnapSwap in order to receive USD via Ripple. The choice is yours.

For more information on how SnapSwap funding works, I suggest reading this explanation.

This brings me to what I think is one of the most exciting parts of Ripple, the ability to trade physically backed, deliverable precious metals. All you need is a “Gateway” with a vault (or access to one) that is willing to allow the metals to trade instantaneously and in fractional amounts on the payment system. While my mind was already excited about this potential after I met Phil in NYC, one of the things holding me back from writing this article was the lack of a solid option for doing so. Well that option arrived in January with the launch of Ripple Singapore as a “Gateway” in late January.

In the press release describing the service they explained:

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