The recent run in large-cap tech stocks (with the top 5 accounting for a stunning 55% of the Nasdaq's YTD gains) has evoked memories (nightmares?) for some investors of the last euphoric NASDAQ run.
Via Goldman Sachs,
In the absence of growth, you buy growth. Makes sense. Indeed, notions of fiscal stimulus, pro-cyclical policy and central bank tapering have fallen to the wayside as quickly as they came into the narrative in Q4:16. It is against this backdrop that five companies poised to dominate disruption – Facebook, Amazon, Apple, Microsoft and Alphabet – have added a total of $600 bn of market cap this year (chart above) or the equivalent GDP of Hong Kong and South Africa combined. Parallels to the “Nifty-Fifty“ and 1999-2000 are growing as their performance is even more pronounced on a risk-adjusted basis. However with this success have come unintended portfolio consequences for investors. To help frame the debate for investors, we note:
Ownership. Per our US Portfolio Strategy team, all five stocks are currently in the top 10 of the Hedge Fund VIP basket with Facebook, Amazon and Alphabet holding the top 3 spots. Mutual funds across Core, Growth and Value are also overweight all but Apple and the five names combined are 11.8% of holdings vs. a blended benchmark of 11.2%.
FAAMG through the Factor Lens: A strong relationship with our Investment Profile (IP) Growth and Momentum factors should come as no surprise, but FAAMG also increasingly trades like Low Vol. Indeed, FAAMG’s correlation over the last 5 years to Growth, Volatility and Momentum sits in the 92%, 90% and 96th%ile. Further Momentum as a factor, in isolation, has built a valuation bubble underneath it not seen since ‘Factormageddon’ of last year.
Realized Volatility (6m) for FAAMG has fallen over the last year and is currently not only below that of the average stock in the S&P 500 but is also below the average Consumer Staples & Utilities stock ignoring any potential cyclical, regulatory (e.g. antitrust, online activity) or tech disruption risk.
Like many other asset classes, FAAMG is cueing off 10-year bond yields, but not in the direction you might expect. Post the election, correlation turned negative, which is more analogous to a bond proxy/yield sector such as Staples or Utilities.
Within the NDX, Biotech is the largest non-Tech sector (now 8%). While the space tends to be positively correlated to Tech and secular growth, it has recently turned negative.
Driven by the rise of mega-tech, Momentum, as a factor, has built a valuation air pocket underneath it creating cause for pause.
Indeed, in our view, factor valuation is a useful gauge of investor sentiment and crowdedness. Our work shows that downside risk increases when factor valuations are stretched vs. history. To that end, the current P/E of the long/short Momentum factor is 1.8 std. deviations above its 3-year average, which is a level last seen in early 2016 just prior to “Factormageddon” – a period in late Q1:16 when the momentum factor fell sharply amidst a spike in factor volatility.
And finally, for those worried this is Dot-Com boom bust all over again, Goldman offers a head-to-head comparison of the five largest Tech stocks at the peak to the Big-5 today on a number of different metrics including size, valuation, profitability and free cash flow.
Size – a draw: While the current FAAMG stocks are almost 30% bigger than the Bubble stocks in market cap terms, they aren’t as large a portion of the index (~16% of the S&P at the peak, vs. FAAMG at 13% today).
Valuation – Advantage: FAAMG: During the Bubble, the five largest Tech stocks traded at almost 60x FY2 P/E with the “cheapest” stock (LU) trading at 36x. Currently, FAAMG trades at around 23 X FY2, with only one stock (AMZN) trading over 30x.
Cash balances – Advantage: FAAMG: All the FAAMG stocks have significantly more cash than the Tech stocks did back in the Bubble by an order of almost 8x. The difference is also significant as a percentage of enterprise value (13% for FAAMG vs. 2% for Tech in the Bubble).
Free Cash Flow – Advantage: FAAMG: FCF generation for FAAMG stocks is still relatively robust, though has plateaued recently. Despite this slowdown, FCF margins still stack up modestly better than Tech. However, the real difference emerges in favor of FAAMG on a yield basis (reflecting the stretched valuation levels), where the current aggregate is 400 bp higher.
Profitability– Advantage: Tech Bubble: Asset productivity (Gross Profits / Total Assets) was significantly higher for the Tech Bubble stocks than FAAMG today, likely an indication that these businesses have gotten more capital intensive over time. Similarly, ROIC was higher though we note this could be skewed by accelerated depreciation practices today. These strong profitability metrics suggest the Tech Bubble was more a valuation problem than an issue with fundamentals.
So the bottom line is – despite valuation air-pockets, there's plenty of room to run on this epic bubble as long as G3 Central Banks keep buying…
Over the past few months, the story of the Awan brothers has been largely ignored by mainstream media. However, the brothers Abid, Imran, and Jamal Awan are at the center of a criminal investigation by U.S. Capital Hill Police. The Awan brothers were Pakistani IT specialists, whom worked for more than 30 house and senate democrats, as well as Rep. Debbie Wasserman Schultz. The substantial scandal has raised questions about who may have been passed data which the Awans had access to, given Pakistan’s history of collaborating with a number of foreign countries who have demonstrated past willingness to influence U.S. politics.
Imran was first employed in 2004 by former Democrat Rep. Robert Wexler (FL) as an “information technology director”, before he began working in Rep. Debbie Wasserman Schultz’s office in 2005.
The family was paid extremely well, with Imran Awan being paid nearly $2 million working as an IT support staffer for House Democrats since 2004. Abid Awan and his wife, Hina Alvi, were each paid more than $1 million working for House Democrats. In total, since 2003, the family has collected nearly $5 million.
The staffer’s services were so important to congressional members, that on March 22, 2016, eight democrat members of the House Permanent Select Committee on Intelligence issued a letter, requesting that their staffers be granted access to Top Secret Sensitive Compartmented Information (TS/SCI). Of those that signed the letter were representatives Jackie Speier (CA) and Andre Carson (IN), the second Muslim in Congress, both of whom employed the Awan brothers.
The brothers were also employed by members of the House Permanent Select Committee on Intelligence and the House Committee on Foreign Affairs, such as: Jackie Speier (D-CA), Andre Carson (D-IN), Joaquín Castro (D-TX), Lois Frankel (D-FL), Robin Kelly (D-IL), and Ted Lieu (D-CA). Lieu has since openly called for leaks by members of President Trump’s administration despite the fact that he may until recently have been under surveillance by a foreign entity.
One bombshell that has been all but ignored by the main stream media is that Imran Awan had access to Debbie Wasserman Schultz’s iPad password, meaning that the brothers also had direct access to the notorious DNC emails.
The brothers are accused of removing hundreds of thousands of dollars of equipment from congressional offices, including computers and servers, while also running a procurement scheme in which they bought equipment, then overcharged the House administrative office that assigns such contractors to members.
Some congressional technology aides believe that the Awan’s are blackmailing representatives based on the contents of their emails and files, due to the fact that these representatives have displayed unwavering and intense loyalty towards the former aides.
For example, Rep. Gregory Meeks (D-NY), once named one of the most corrupt members of Congress, had at one time or another employed each of the brothers has stated that they were being “falsely targeted because they are Muslims, some with ties to Pakistan.”
According to Pat Sower, who has managed IT services for several members of Congress, something is amiss: “There’s no question about it: If I was accused of a tenth of what these guys are accused of, they’d take me out in handcuffs that same day, and I’d never work again.”
On February 20th, 2017, the Daily Caller reported that investigators found that congressional information was being copied to an off-site server, implying that the brothers were improperly accessing information and stealing congressional property.
According to one congressional staffer, the Awan’s set up a remote access so they could connect from wherever they are, and have full access to everything on the member’s system.
Despite being ordered by Capitol police that he was no longer to come near House servers, Rep. Debbie Wasserman Schultz (D-FL) has kept Imran, whom is the suspect in a major criminal investigation, on in an “advisory position” in order to get around police orders.
Terror Ties And Unravelling Of Scandal
The security breach of congressional data may have actually benefitted terrorists indirectly. According to a former CIA source close to Townhall columnist Fred Fleitz, whom has held national security jobs for 25 years with the CIA, DIA, Department of State and the House Intelligence Committee staff, the Awan brothers may have ties to the Pakistani intelligence service, ISI.
The Awan’s had reportedly received a $100,000 loan from Dr. Ali al-Attar, an Iraqi politician. Dr. Attar is currently wanted by the U.S., and has also been linked to Iranian-backed Hezbollah. According to Philip Giraldi, a former CIA officer, after giving the loan to the Awan brothers in 2012, Dr. Attar was “observed in Beirut, Lebanon conversing with a Hezbollah official.” Dr. Attar is also accused of helping provoke the 2003 U.S. invasion of Iraq as a leader of Iraqi dissidents opposed to then President Saddam Hussein.
On May 22, 2017, the Daily Caller reported that one of the suspects, Hina Alvi, has since fled to Pakistan, where her family is said to have significant assets and VIP-level protection. According to court documents, the Awan brothers are treated as VIPs by Pakistani officials, traveling throughout the country with a police motorcade. This brings about the question: Why are simple House IT staffers provided the protection and security similar to that of diplomats?
Debbie Wasserman Schultz Threatens Capitol Police
On May 24, at the annual police budget hearing, Rep. Debbie Wasserman Schultz used her position on the committee to challenge the chief of the U.S. Capitol Police, of his departments confiscation of a laptop owned by Imran Awan. The laptop was found by police after it had been hidden in an unused crevice of the Rayburn House Office Building.
Schultz demanded that the police relinquish custody of the laptop and have it returned to her office. However, because the laptop was the property of Imran Awan, whom is under criminal investigation, the chief refused to comply with Schultz orders. This lead to Schultz openly threatening the chief, stating that she believed his department was “violating the rules when you conduct your business that way and you should expect that there will be consequences.”
Pakistan’s Ties To U.S., China, Saudi Arabia and Israel
The apparent infiltration of DNC politicians and government systems by the Awan brothers is significant given Pakistan’s strategic ties to other countries who have also attempted to wield influence in the U.S. The United States and China both have a long history operating in Pakistan for various purposes such as political influence and trade. Diplomatic cables released by Wikileaks show that the United States began a concerted drive to use Pakistan’s mountainous western regions as a springboard for training and deploying mujahideen groups which the U.S. would use to further policy objectives around the Middle East.
Former President Barack Obama also has some past ties to Pakistan. During the 2008 Presidential election, it was reported that President Barrack Obama had taken a trip to Pakistan in 1981. During this trip, Obama stayed with his college friend Ali Hasan Chandoo. The Chandios are considered to be the largest landlords in the Sindh province of Pakistan. Hasan also donated $50,000 – $100,000 to Obama’s 2012 Presidential campaign.
The Barack H. Obama Foundation was founded in 2008 at the home of Alton Ray Baysden. A former Special Agent for the U.S. State Department’s Bureau of Diplomatic Security, Baysden has also previously served as a Counselor with the U.S. Embassies in Haiti, Pakistan, Syria, and the Ivory Coast.
As a regional superpower and one of the main competitors to the United States, China has increasingly competed with American interests for influence in the country. According to China Daily, economic cooperation between the two countries increased substantially after China re established ties to the United States in 1979. China and Pakistan have recently begun to collaborate on a number of infrastructure projects, development of nuclear capabilities and military collaboration which would include the deployment of Chinese troops in Pakistan.
China has also begun to boost Pakistani claims regarding sovereignty and territorial integrity as a part of its drive to develop the “One Belt, One Road” project which is a cornerstone of President Xi Jinping’s strategy to rival the United States as a superpower. On May 9th, 2017, Indian news source The Economic Times reported that India was contesting renewed Chinese claims that Pakistan’s claims to the regions to Jammu and Kashmir were not final and should be renegotiated.
Pakistan also maintains close ties with countries who have a history of attempting to influence U.S. policy and politics such as Israel and Saudi Arabia. Saudi Arabia has a long history of collaboration with Pakistan, especially in military affairs. The country also gave considerable financial backing to the Clinton Foundation, a matter which generated significant controversy during the 2016 presidential election.
Despite officially frosty relations between Israel and Pakistan, the two countries have routinely collaborated together in the past. Pakistani news source the Daily Times has noted that this cooperation began during the Soviet war in Afghanistan and continues to this day. In 2010, Wikileaks cables revealed that Pakistan’s ISI and Israel routinely collaborate on matters relating to terrorism. It was also alleged in 2013 that Israel provided Pakistan with high tech defense equipment which was acquired via the United Kingdom. Like Saudi Arabia, Israel has similarly been criticized by academics and observers for using it’s influence in the United States to formulate U.S. foreign and domestic policy.
The close ties that Pakistan maintains to countries which have a history of meddling in U.S. affairs creates concerns about where the data which the Awan brothers had access to might have ultimately ended up. The Awans ties to terror groups similarly indicate that the security breach may have resulted in information being passed directly to extremists.
With the markets breaking out to new highs, it is not surprising to see a continued stream of analysis grappling for bits of data to support the bullish mantra. As you know, I have increased equity allocations in models with the breakout, but this is a tactical position only as the fundamentals simply do not support the rising risk levels currently.
However, despite 8-years of a bull market advance, one of the prevailing myths that seeming will not die is that of “cash on the sidelines.” To wit:
“Underpinning gains in both stocks and bonds is $5 trillion of capital that is sitting on the sidelines and serving as a reservoir for buying on weakness. This excess cash acts as a backstop for financial assets, both bonds and equities, because any correction is quickly reversed by investors deploying their excess cash to buy the dip,” Nikolaos Panigirtzoglou, the managing director of global market strategy at JPMorgan, wrote in a client note.
This is the age old excuse why the current “bull market” rally is set to continue into the indefinite future. The ongoing belief is that at any moment investors are suddenly going to empty bank accounts and pour it into the markets. However, the reality is if they haven’t done it by now after 3-consecutive rounds of Q.E. in the U.S., a 200% advance in the markets, and ongoing global Q.E., exactly what will that catalyst be?
“There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.”
Every transaction in the market requires both a buyer and a seller with the only differentiating factor being at what PRICE the transaction occurs. Since this must be the case for there to be equilibrium to the markets there can be no “sidelines.”
Furthermore, despite this very salient point, a look at the stock-to-cash ratios also suggest there is very little available buying power for investors current.
Each month, the Investment Company Institute releases information related to the mutual fund industry. Included in this data is the total amount of assets invested in mutual funds, ETFs and money market funds. As a rough measure of investor sentiment, this indicator looks at the total assets invested in equity mutual funds and ETFs, and compares it to the total assets invested in the safety of money market funds.
The higher the ratio, the more comfortable investors have become holding stocks; the lower the ratio, the more uncertainty there is in the market. Currently, with the ratio at the highest level on record there is little fear of holding stocks.
Negative free cash balances also suggest the same as investors have piled on the highest levels of leverage in market history.
Furthermore, with investors once again “fully invested” in equities, it is not surprising to see cash and bond allocations near historic lows.
Cash on the sidelines? Not really.
Everyone “all in the boat?”Absolutely.
Historical outcomes from such situations? Not Great.
Just when we thought there were no surprises left in the world’s foremost incubator of “financial engineering” that is China, we got a stark lesson in never underestimating China’s market manipulating ingenuity.
According to Caixin, around two dozen Chinese companies recently offered their employees a deal: buy company shares while guaranteeing that any losses would be covered. While employees think they may be getting an unbeatable deal – after all, who can say no when your employer promises you all the upside with no downside – the reality is that any participants in such scheme are merely locking in their fates with that of their soon to be insolvent employer who desperately needs to raise the price of their stock to fend off collateral calls on stock-backed loans
Still, as Reuters points out, attracted by guarantees that their principal is “safe” workers are eagerly stepping up to take advantage of the offers. However, it remains far from clear how these guarantees would work, with employees in some cases being asked to buy shares and hold them for at least 12 months. Details aside, many of the companies that resorted to this drastic stock price manipulation were quickly rewarded and saw their share prices spike.
The entire farcical episode is reminiscent of what happened in 2015 when China’s stock bubble grew exponentially, then burst just as dramatically. At the time, there were similar efforts, but then it was the government appealing to major shareholders’ patriotism to buy and hold shares in what Beijing said was as a battle against speculators, both domestic and foreign. This time, with the proposal centered entirely on the private sector, the motive is different and is the result of companies using their own stocks as loan collateral, a practice that according to Reuters’ estimates has quadrupled in China over the past two years, and which is driven mostly by founders and major shareholders posting large batches of stock as loan collateral in recent months.
Fundamentally a ponzi scheme, this works without a glitch during rising markets but falling prices especially among small and mid-cap companies, have eroded the value of that collateral, raising the specter of forced liquidation – where lenders, often Chinese brokerages, make borrowers sell the pledged shares. Selling the stock adds more pressures on share prices, triggering a downward spiral.
Shenzhen Fenda Technology, a maker of speakers and electronic accessories, was among the first to encourage staff to buy shares one week ago. At the end of March, Xiao Fen, the company’s chairman and top shareholder with a 44.5% stake, or 416.4 million shares, had put up 84% of his holding as collateral for a loan, the company said. It did not say what the loan was for. Trading in the company’s shares was suspended in late December pending a reorganization, but resumed in mid-April, when the stock price slumped to near their 2015 market crash low. Last Friday, Xiao promised any employee who bought shares in the company by June 6 and held them for at least a year would be shielded from losses.
What he did not say is that any employee who took advantage of the “generous offer” was effectively providing a bailout lifeline to the chairman. This probably should have been explained to the workers who participated in the offer simply because they saw their co-workers jump right in. “A lot of colleagues I know have bought shares. I have too,” said one worker, who gave only his family name, Li. “The company is quite good and the chairman has guaranteed principal, so, of course, we’re interested. I know some colleagues even bought shares with borrowed money.“
Shenzhen Fenda Technology shares jumped by a tenth after the announcement, but have since edged back down.
Also last Friday, Shenzhen-listed Hunan Kaimeite Gases launched such on offer with a four-day deal. Other companies offered similar deals but for different lengths of time. Kaimeite justified the ludicrous proposal by saying its stock was – what else – “undervalued”: “The company is undervalued due to recent volatile trading of the market,” according to Kaimeite Gases’ announcement, filed with the Shenzhen Stock Exchange on Friday. “The buyback plan is to boost investors’ confidence, and it’s based on our bullish view on company’s outlook.”
Immediately after the buyback proposal, shares surged: Kaimeite Gases jumped by the legal daily maximum of 10% to 8.86 yuan ($1.30) last Friday. It closed at 8.98 yuan on Tuesday — the day the employee deal ended. As of May 31, the prices of shares of Kaimeite dropped 26.1% since this year’s peak of 10.94 yuan on Jan. 25.
Many others quickly piggybacked on the idea.
The price of Guangdong Biolight Meditech stock fell by a quarter this year, undercutting the value of the 14.6 million shares that its chairman Yan Jinyuan posted as collateral as of the end of the first quarter. On Monday, Yan made a promise like Fenda’s Xiao, and the share price also rose.
With the idea spreading fast, about 100 notices on share buybacks were filed by companies’ major shareholders to A-share markets from June 1 to Tuesday, according to financial data provider Wind Info. By comparison, the number of notices on reducing shares stood at 26 during the same period.
* * *
In a sign that at least someone in China is paying attention, some analysts criticized the practice as a “bailout style” buyback for struggling companies. Xu Yang, chief analyst from HuaAn Securities Co., said it is hard to argue that paying for losses is a smart move for the market over the long term. “Buyback from major shareholders usually provide support on sentiment during market downturns,” Xu said. “But this kind of buyback notice could lead to potential risks of market manipulation.”
Wu Kan, head of equity trading at Shanshan Finance, said that however well intentioned these efforts are, usually by the companies’ founders or big shareholders, there is a question mark over their financial ability to make such guarantees. “It could be driven by the genuine belief that the stocks are worth investing in. But it could be a desperate move to prop up share prices to avoid margin calls,” he said.
Furthermore, the promise to take any losses “isn’t legally binding and largely depends on big shareholders’ virtue. And you can’t rule out insider trading during the process, which is why regulators are demanding better disclosure,‘ he added.
* * *
Growing concerns about the lunacy of this latest ponzi scheme to manipulate stocks higher have failed to prevent gullible employees from rushing in. Sun Xishan, a sales worker at Biolight, said he missed the chance to buy stock on the day of the announcement, but would try to get in on the shares later. “I know the company well, it’s in pretty good shape and its performance is growing. The chairman promised to cover losses if any, so it’s hard not to be interested if one has money,” Sun said, cited by Reuters, who is about to lose all the money he puts into this “guaranteed” profit scheme.
The scheme however unveils a deeper threat facing China’s smaller publicly-traded companies. If markets continue to slide, there could be a surge in margin calls on these loans, potentially triggering a vicious cycle of share selling, increasing the risk of broader financial instability. “If stock prices fall, but shareholders don’t have enough capital to replenish their collateral, the pledged shares would face forced selling,” said Meng Shen, director of Chanson & Co, a Beijing-based boutique investment bank. “That would develop into a negative spiral; as the more you sell, the lower the stock price, which would then trigger more forced selling.”
Of course, China has a broader issue with collateral that could endanger the health of its financial system – as discussed last week, fraudulent or “ghost” collateral, where pledged products either don’t exist or are already sold or pledged to multiple lenders.
BofA strategist David Cui warned that a potential “vicious selling circle” could lead to a replay of China’s mid-2015 market crash. “As the 2015 experience shows, with high leverage, a vicious selling circle can quickly develop,” he said, noting a “moderate” risk of broad-based financial instability. At that point either Beijing will have to step in with another bailout, or scenes such as this one which emerged during the 2015 market rout, will become the norm once again.
After last earnings season I noted without a strong rebound in consumer spending, I expect aggregate earnings growth to slow later this year (especially if declining energy prices cause credit to tighten). While asset inflation remains unchecked, consumer spending does not appear to be responding or accelerating. Two consumer companies on my possible buy list announced earnings this week – both suggest the operating environment remains challenging.
Casey General Stores (CASY), the convenience store operator, reported results on Monday with sales and earnings that were less than expected. Specifically EPS declined to $0.76 from $1.19 during the quarter and $4.48 vs. $5.73 for the year. During the quarter, same-store fuel gallons declined -0.5%, while grocery same-store comps increased 1.5% and prepared food/fountain comps were up 3.2%.
Management noted that similar to others in its sector, Casey’s “experienced downward pressure on customer traffic which had virtually impacted same-store sales across all of our categories.” Management blamed decelerating customer traffic on the weak agricultural economy, the difference in food away and food at home prices, and competitor promotional activities.
Management commented further on the agriculture economy saying, “The USDA anticipates either a flat to slightly declining farm income in calendar 2017. So we’d anticipate this piece of the challenging environment to continue to at least to the end of the calendar year.”
Labor costs were also discussed, with management calling labor very tight and wage pressures challenging. I thought the following comment was interesting, “It’s not uncommon for people to jump ship for $0.25 raise here and there, and so that has been a challenge.”
One of my favorite economic reports, the Marlboro Red Consumer Sentiment Indicator (MRCSI), was mentioned again this quarter and continued to suggest the consumer remains cautious.
Management commented, “I mean one of the things that we faced in the cigarette category, we do see, albeit it’s gradual but it’s been continuing for the next several quarters, a movement away from carton to pack purchasing. We’ve also seen it moving away from full value purchasing to a more discounted brand, which could be a generic brand.”
And finally, management had some interesting comments on their fiscal 2017 expectations versus actual results. Management explains, “…there’s no question that when we put our goals out for fiscal 2017, I’m not sure we fully anticipated the customer response, the consumer response I should say in relation to the economic conditions.” Management went on to note they are taking economic conditions into account more this year than they did last year.
Although Casey’s stock declined 8% on the news, trading at 18x EV/EBIT, it continues to trade over my estimated business valuation. Casey’s is one of the many high-quality companies I follow and like, but in my opinion, remains too expensive to generate future adequate absolute returns. Hence, it remains on my possible buy list, but not in my portfolio.
United Natural Foods (UNFI), the distributor of natural and organic foods, also announced earnings results this week. Although results appeared as expected, annual sales guidance was revised lower and its stock declined -4%.
Management noted the grocery environment remains challenging (side note: Isn’t it interesting restaurants often blame grocery stores for taking market share, yet grocers continue to struggle? Maybe it’s not where the consumer is spending, but how much the consumer has to spend).
Specifically, management stated,
“Net sales finished below our expectations in the third quarter driven by broad-based retail softness, the rationalization of business in conjunction with our margin initiatives and lack of inflation.”
“Same-store sales in many of our retail customers were under pressure or negative during the quarter. Our retail customers are facing competitive pressure not only from other food retailers but also from many channels now carrying assortment of better-for-you products.”
“…when you look at general same-store sales and year-over-year, quarter-over-quarter, many of the retailers across most of the channels are facing some real headwinds in terms of growth. And as part of that, we’ve seen certainly a fair number of store closings as retailers are coming together. And so in the near term, that’s been a real headwind for us.”
Kroger reports next week, hopefully providing us with more useful grocery and consumer data points. That said, for those waiting for the consumer to get the U.S. economy out of its 1-2% growth funk, further patience may be required. From a bottom-up perspective, I’m not seeing it.
Learning through observation is an important trait for humans, and can account for many aspects of why we are a highly advanced species. Just as peers’ behavior influences our own, it should come as no surprise that we are also influenced by the emotions of those around us.
Those who inject themselves into our lives also influence our emotions. It is no longer just face to face contact that humans deal with on a daily basis, but also a barrage of information from the news media and social media.
A Facebook study performed in 2014 has implications far beyond the social network. The study found that when a user was shown fewer positive posts, they were more likely to write negative posts themselves, and vice versa. So simply by having some negativity injected into them, a person is more likely to go and express negativity. And what will those further infected with negativity do? The same thing, spreading the sadness that Facebook primed.
And though Facebook always takes things further, they are still relatively new to the emotional manipulation scene. News media have been doing this for years. During the 90’s, violent crimes rates were dropping, and the news was showing more stories about murder. By the end of the 90’s people were clamoring for the government to do something about the out of control murder rate that seemed to be skyrocketing. But the world was actually safer than a decade earlier; the only difference was that people were hearing about more negative things in the media.
Just consider how easy that is for social and mainstream media to manipulate people on a broad scale. It is less about inserting a particular belief, and more about influencing the overall feelings.
They could even induce certain emotions for certain reasons. For instance, if a re-election is coming up, Facebook could inundate people with negative posts, even having nothing to do with the election. But feeling negative overall, if that person goes to the polls they would be more likely to vote for change since something is causing them to be so sad all the time.
Or maybe when Facebook needs to sell you something, they will spread positive posts all over your feed, putting you in a good receptive mood where you are more likely to say yes, because you just nodded yes in agreement to posts about how cute puppies are, that women are being empowered, and that chocolate isn’t so bad for you after all.
As Usual, Facebook Pushes the Privacy Boundaries
But Facebook wants to take it even further. Facebook wants real-time updates on how happy or sad they are making people.
They have submitted a patent to spy on users through their phones’ camera in order to analyze their facial emotions in real time. They want to see every wrinkle and grimace, smile and chortle. With this information, their big data empire will grow to untold heights. Never has a company before had such immense power to analyze that type of data on such a large scale.
Facebook says it could use the technology to deliver more content that people like, without them having to “like” it. But another possibility is that they could deliver content to change the emotions of the viewer. In a perfect world, they would see the content making someone sad, and instead, deliver happy content until that frown turns upside down. But in the real world… it is possible Facebook would do the opposite.
Of course, this is super creepy. As a private company, Facebook should be able to do what it wishes. But every step it takes seems to make the social networking site less palatable. Will they go too far? Or is there “baby steps” approach to data domination effectively curtailing any exodus?
The other question is, just how much of this information will be made available to employers, schools, governments, and other organizations who want to scoop up specific users’ data in order to vet them for a job or admittance into their group?
Recently a group of students who were accepted to Harvard had their offers revoked after it was discovered that they were participating in a meme sharing Facebook group. The students posted and joked about offensive memes. When Harvard found out, it revoked the acceptance offers for some of the students.
Harvard is not to blame for this; you could debate whether or not they went too far, but it is entirely within their rights as a private organization to refuse admittance to those they deem immature or a liability to their reputation. But a just a few years ago, this was clearly not an issue. Whatever offensive opinions a person held in their minds were not given a public avenue that could damage their reputation.
Now, it is currently pretty easy to avoid this type of public shame: just don’t post and react to offensive material. But with the new facial emotion analysis technology that Facebook is exploring, will you even be able to hide your true opinion?
Could you imagine a dystopian future where everyone walks around with a dead-pan blank expression to keep their “thought crimes” from companies and governments?
Unfortunately, Facebook could be pioneering this type of situation. Beliefs that you never expressed publicly could come to light by seeing how your face reacts to information, memes, and articles.
Think of all the eye rolls they will be recording every time an article about the social justice warriors’ newest shenanigans is released. Is scoffing a micro-aggression?
With the announcement that 25-year old "Reality Winner" (no, really) had been arrested for stealing and leaking top secret documents, it became clear to us that a near and dear friend who was very ill for a very long time had finally been pushed over the brink: we regret to say that Satire is dead.
Because seriously, when a story gets this "in your face" ridiculous – what details are left for us to push to humorous extremes?!
Start with her name: "Reality Winner." Then let's tick off the other boxes: lesbian bodybuilder, ardent Bernie Sanders supporter, a "Black Lives Matter" enthusiast who (though white herself) argues that "Being white is terrorism." A woman whose social media posts include referring to the President of the United States as a "piece of shit" and the "Tangerine in chief," who additionally declares that in a war between the US and Iran, she'll side with Iran.
And still…STILL…she was given a top secret security clearance and access to classified materials. Which raises two very troubling questions: just what in blazing Hell does someone have to do to not get a security clearance, and how many other angry, ignorant, communist-leaning, anti-American social justice warriors are currently embedded in (and sabotaging) our intelligence agencies?!
We're guessing the number to be terrifyingly high, but can't know for sure because trying to find out would require functional intelligence agencies. And that ship, like Satire, has sailed.
As "infrastructure week" draws to a close, President Donald Trump is preparing to meet with his Romanian counterpart, President Klaus Iohannis, in the Oval Office on Friday before the two hold a joint press conference in the Rose Garden to talk security, defense spending and other economic concerns.
The press conference is set to begin at 2:45 ET.
Romania, which joined NATO in 2004, increased its defense budget to equal 2% of its GDP this year – one of only 5 NATO members to hit that target. Trump, who has waffled back and forth on whether he considers the alliance “obsolete,” said last month during a meeting of NATO leaders at the defense alliance’s new headquarters in Brussels that its members owe the US a lot of money for paying for their defense.
The visit by Iohannis is meant to underscore the defense and military ties between the two countries. Romania is host to an $800 million ballistic missile shield built by the US that was “switched on” last month. US officials say the shield is meant to counter the threat from Iran.
Russian President Vladimir Putin has said Moscow views the missile shield in eastern Europe as a "great danger" and Moscow will be forced to respond by enhancing its own missile strike capability, according to Reuters.
The Romanian military recently agreed to buy Patriot missiles from US defense contractor Raytheon, a deal worth hundreds of millions, if not billions, of dollars.
The missiles would be part of an integrated air defense system comprising six newly acquired F-16 fighter jets as Romania brings its forces up to NATO standards and retires outdated communist-era MiGs, Reuters reported.
Iohannis has said that he hopes to make a good impression on Trump, and that their meeting is an important milestone in the relationship between the two countries.
“I truly wish for us to have a very good first contact with President Trump. I want to convince him that together we can make the partnership stronger, deeper,” Iohannis said, according to Romania Insider.
The Romanian President is currently on a visit to the US, a visit that started on June 4 and will end Friday after the meeting.
As Romania Insider reports, Iohannis is the first leader from Eastern Europe to meet with Trump. The two leaders already met once at the NATO summit in Brussels last month.
Iohannis will meet with Secretary of State Rex Tillerson following his meeting with Trump.
I have read many articles lately claiming that Bitcoin is in a bubble. Some proclaim it similar to the famous Great Tulip bubble of 1637… but that comparison is only for those who do not understand the significance of what is happening currently with blockchain technology. If you are new to Bitcoin and blockchain technology, I would suggest that it’s highly important for you to take the time to research the basics of how it works and why it’s different – simply Google “how does Bitcoin work.”
The main argument of those who proclaim it to be in a bubble is that the people buying it at these prices are not buying it for its original purpose – which they believe to be enabling transactions. Yes, it is being used for transactions, much more than 100,000 businesses now take Bitcoin for transactions. But instead naysayers believe that others are buying it as an “investment” and thus will surely be burned.
For me, and I believe most who understand what is happening, we are not buying it for either of those reasons. We own it because we see it acting as a “store of value,” where nothing else priced in dollars is. With interest rates artificially low (manipulated by central banks), a normal person cannot earn even near the pace of actual inflation with any type of traditional savings account. Bonds are artificially in a bubble, stocks are artificially in a bubble, real estate is in yet another bubble, everywhere one who understands bubble dynamics looks they see a bubble (but not Bitcoin, people are trading in their worth less and less dollars for them). The bubble is the dollar – the world’s “reserve” and “petro” dollar is being drowned by central banks all over the globe, not just our own “FED.”
And thus there is no store of value to be found. This is a terribly ugly situation for people who believe in hard work and saving to get ahead; to someday retire comfortably. Retirees on fixed incomes simply cannot, and will not be able to keep up as the impossible math of dollar debt continues on its vertical ascent.
We would love to love gold and silver, but those too, are manipulated by central banks who own the majority of it. They manipulate and derivative the markets to artificially keep devaluation of the dollar hidden.
Control of the dollar is centralized with the banks, that’s why we refer to them as “central” banks. All the power and control resides with them; as private individuals were wrongly, and illegally, given the power to “coin” money with the Federal Reserve Act of 1913.
What makes Bitcoin a better store of value?
1. It is decentralized. This is huge! It means that it is not under the control of central banks, and thus cannot be manipulated directly by them. This is THE MOST IMPORTANT aspect, it is a game changer as it changes the WHO is behind it – something that gold and silver do not do because central banks have printed “money” to buy the majority of it.
Caution – Central banks may be able to indirectly manipulate blockchain currencies in the future if they create ETFs and other derivatives based upon them. This, however, will not change the underlying store of value, and when it happens I would encourage you not to own the derivative, but to instead buy Bitcoin directly, again because it’s not in control of the central banks, is decentralized versus their centralized everything which makes them vulnerable. Yes – Central Banks can print dollars and use them to buy Bitcoin, but that will only drive the price up and cause others to enter as well. In the end they cannot manipulate what they don't control.
Even if central banks were to “ban” exchanges in one country, all one will have to do is join an exchange overseas. This has the central banks trumped, it cannot be stopped.
To better understand the power of decentralization, please take the time to watch the video at the end of this post, or (click on this link).
2. Unlike tulips, dollars, or even precious metals, Bitcoin is strictly limited in its supply. This is where the math comes in. Bitcoin was founded in 2008 and there will ultimately be only 21 million Bitcoin ever mined. Today we are approaching the 80% mark, the remaining 20% will take years to mine, and the “mining” gets more difficult and slow as we go.
This is a hard feature built into the coding. It’s what makes Bitcoin a store of value – the more money that comes in, the more each Bitcoin is worth. As I type, that is $2,774.00 per Bitcoin according to Coinbase where you can go to open an account, much like a brokerage account (there are currently 7.3 million Coinbase users). Of course you can buy Bitcoin in any increment, you don’t have to buy them in whole units.
People all over the world can buy, own, and transact in Bitcoin. There are now 7.3 billion people on the planet, so if all 21 million Bitcoin were distributed evenly to every person on the planet, each person would have only .0028767 of one bitcoin!
Another way of stating that math is that only 1 person out of every 347.6 people can possibly ever own a whole Bitcoin.
Today the market cap of Bitcoin is $45.17 Billion. The more money that comes in, the higher the market cap, the higher the price of Bitcoin.
Many analysts start to compare Bitcoin’s market cap with that of large companies like Apple, whose current market cap is 18 times that of Bitcoin’s at $810 Billion.
But here’s the deal. Bitcoin is not a company, it is a form of money. Unlike dollars, there will not be an endless supply. In fact, if you took the entire M2 money supply of the United States, currently $13.5 trillion, and put it all into Bitcoin instead, then each Bitcoin would be worth $642,857. But Bitcoin is not just traded in dollars – it’s traded in every currency in the world. And right now global M2 money supply is calculated as roughly $72 trillion, or $3.4 million per Bitcoin.
It’s true that other blockchain currencies are springing up like daisies, or tulips. But their market caps combined are just now rivaling that of Bitcoin’s. So, yes, they will be “diluting” bitcoin’s math. Not all crypto currencies have hard limits to their supply, and that will mean that they will always be worth less. Right now Ethereum is in second place with a market cap of about $24 billion compared to Bitcoin’s $45 billion. Litecoin is another cryptocurrency designed to be “silver” compared to Bitcoin’s “gold.” There will only be 84 million Litecoins ever mined, exactly 4 times the amount of Bitcoins. However, Litecoins are currently trading for roughly 1/100th the price of Bitcoin, I would expect the math to eventually catch up as more people become aware of Litecoin’s also limited supply.
3. Bitcoin is a better store of value because it is secure. Decentralization and encryption make it secure. It can be stored in electronic cyber “vaults” where you keep a hard copy of the encryption cypher. This means that your exchange can be hacked, your computer hacked, but your bitcoin don’t actually reside in either! They reside on someone else’s computer somewhere – and only you have the code to get to it. Thus they cannot be confiscated by a government, a banker, or a hacker.
I liken this to the pursuit of freedom versus the pursuit of security. When you pursue freedom, you get security at very little cost. That’s what decentralization does. Bitcoin is the pursuit of freedom – whereas centralized systems, such as central banking, or even socialism, are the pursuit of security and the abandonment of freedom.
Pursue freedom!
4. Bitcoin transactions are stored on a public ledger, all confirmed transactions are included in the blockchain. Again, decentralized bookkeeping is less vulnerable and more secure than centralized legers. This is where Ethereum, another blockchain currency, shines. Ethereum is built upon an encrypted ledger and can be used for many purposes, not just as a currency.
One use is that these encrypted ledgers will enable safe and secure online voting one day soon.
Someday Bitcoin will, in fact, be in a bubble. But that day is not now, not even close. The great thing about all cryptocurrencies is that they can and do exist alongside of whatever “money” we use for our transactions. They also exist alongside of gold/silver, and may in fact be drawing money that otherwise would be seeking a store of value there.
So I say, let competition reign! I will use dollars for transactions because I have to (for now), but I will use cryptocurrencies, gold, and silver to park my dollars so that the central banks cannot destroy their value. And that in a nutshell is why Bitcoin is NOT in a bubble, and won’t be for quite some time.
That said, do expect many sharp pullbacks along the way. Remember that NOTHING moves in a straight line, EVERYTHING moves in waves. You need to pullback to fuel the next push higher – this is true with all waves. The chart shape is definitely showing parabolic growth, but I expect that when looked at across many more years this will simply be a part of building a base.
So how will we know that a true bubble has formed? For me I know that cryptocurrencies are the future and that they will trade alongside sovereign currencies and will eventually replace them. I will NOT own any cryptocurrency created or “managed” by a bank. Until the market cap of Bitcoin rivals that of the United States, I will not be convinced that growth has stalled. There are, of course, other signs we can look for.
As a review, here are HYMAN MINSKY’S SEVEN BUBBLE STAGES:
The late Hyman Minsky, Ph.D., was a famous economist who taught for Washington University’s Economics department for more than 25 years prior to his death in 1996. He studied recurring instability of markets and developed the idea that there are seven stages in any economic bubble:
Stage One – Disturbance:
Every financial bubble begins with a disturbance. It could be the invention of a new technology, such as the Internet (Bitcoin). It may be a shift in laws or economic policy. The creation of ERISA or unexpected reductions of interest rates are examples. No matter what the cause, the outlook changes for one sector of the economy.
Stage Two – Expansion/Prices Start to Increase:
Following the disturbance, prices in that sector start to rise. Initially, the increase is barely noticed. Usually, these higher prices reflect some underlying improvement in fundamentals. As the price increases gain momentum, more people start to notice.
*I THINK THIS IS WHERE BITCOIN IS NOW
Stage Three – Euphoria/Easy Credit:
Increasing prices do not, by themselves, create a bubble. Every financial bubble needs fuel; cheap and easy credit is, in most cases, that fuel (central banks creating it still like mad). Without it, there can’t be speculation. Without it, the consequences of the disturbance die down and the sector returns to a normal state within the bounds of “historical” ratios or measurements. When a bubble starts, that sector is inundated by outsiders; people who normally would not be there (not yet with Bitcoin). Without cheap and easy credit, the outsiders can’t participate.
The rise in cheap and easy credit is often associated with financial innovation. Many times, a new way of financing is developed that does not reflect the risk involved. In 1929, stock prices were propelled into the stratosphere with the ability to trade via a margin account. Housing prices today skyrocketed as interest-only, variable rate, and reverse amortization mortgages emerged as a viable means for financing overpriced real estate purchases. The latest financing strategy is 40, or even 50 year mortgages.
Stage Four – Over-trading/Prices Reach a Peak:
As the effects of cheap and easy credit digs deeper, the market begins to accelerate. Overtrading lifts up volumes and spot shortages emerge. Prices start to zoom, and easy profits are made. This brings in more outsiders, and prices run out of control. This is the point that amateurs, the foolish, the greedy, and the desperate enter the market. Just as a fire is fed by more fuel, a financial bubble needs cheap and easy credit and more outsiders.
(I believe stage 4 is still in the distant future for Bitcoin)
Stage Five – Market Reversal/Insider Profit Taking:
Some wise voices will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”
This stage can be cruel, as the very people who shouldn’t be buying are. They are the ones who will be hurt the most. The true professionals have found their ‘greater fool’ and are well on their way to the next ‘hot’ sector. Those who did not enter the market are caught in a dilemma. They know that they have missed the beginning of the bubble. They are bombarded daily with stories of easy riches and friends who are amassing great wealth. The strong will not enter at stage five and reconcile themselves to the missed opportunity. The ‘fool’ may even realize that prices can’t keep rising forever… however, they just can’t act on their knowledge. Everything appears safe as long as they quit at least one day before the bubble bursts. The weak provide the final fuel for the fire and eventually get burned late in stage six or seven.
Stage Six – Financial Crisis/Panic:
A bubble requires many people who believe in a bright future, and so long as the euphoria continues, the bubble is sustained. Just as the euphoria takes hold of the outsiders, the insiders remember what’s real. They lose their faith and begin to sneak out the exit. They understand their segment, and they recognize that it has all gone too far. The savvy are long gone, while those who understand the possible outcome begin to slowly cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away without notice. Whether the outsiders see the insiders leave or not, insider profit taking signals the beginning of the end.
(This is where I believe Stocks, Bonds, Real Estate, Auto prices, Student loans, etc. are today; although it is wise to remember that the best performing markets in terms of percentage rise are the ones where hyperinflation is occurring – Zimbabwe, Nigeria, and today Venezuela. An interesting thought is that we may see cryptocurrencies appear to be inflating while real assets move to another round of deflation – dollars seek safety/store of value)
Stage seven – Revulsion/Lender of Last Resort:
Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap and easy credit or some unanticipated piece of news. But whatever it is, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in, prices start to tumble downwards, credit dries up, and losses start to accumulate.
(When this happens to stocks, I expect Bitcoin and other cryptos to benefit).