Global Market Comments
December 21, 2016
Fiat Lux
Featured Trade:
(THE BOND CRASH HAS ONLY JUST STARTED),
($TNX), (TLT), (TBT),
(TESTIMONIAL)
CBOE Interest Rate 10 Year T No (^TNX)
iShares 20+ Year Treasury Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
When I was a little kid in the early 1950s, my grandfather used to endlessly rail against Franklin Delano Roosevelt. The WWI veteran, who was mustard gassed in the trenches of France and was a lifetime, died-in-the-wool Republican, said the former president was a dictator and a traitor to his class who trampled the constitution with complete disregard. Candidates Hoover, Landon, and Dewey would have done much better jobs.
What was worse, FDR had run up such enormous debts during the Great Depression that, not only would my life be ruined, so would my children's lives. As a six year old, this disturbed me deeply, as it appeared that just out of diapers, my life was already pointless.
Grandpa continued his ranting until three packs a day of unfiltered Lucky Strikes finally killed him in 1977. He insisted until the day he died that there was no definitive proof that cigarettes caused lung cancer, even though during to war they were referred to as ?coffin nails?.
What my grandfather?s comments did do was spark in me a permanent interest in the government bond market, not only ours, but everyone else?s around the world.
So, whatever happened to the despised, future ending Roosevelt debt? In short, it went to money heaven.
I like to use old movies as examples. Remember, when someone walked into a diner in those old black and white flicks? The prices on the wall menu? said: ?Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.?
That is where the Roosevelt debt went. By the time the 20 and 30-year Treasury bonds issued in the 1930s came due, WWII, Korea, and Vietnam happened, along with the great inflation that followed.
The purchasing power of the dollar cratered, falling roughly 90%, Coffee was now $1.00, a hamburger $2.00, and a cheap steak at Outback cost $10.00. The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.
Who paid for this free lunch? Bond owners, who received minimal and, often, negative real inflation adjusted returns on fixed income investments for three decades.
In the end, it was the risk avoiders who picked up the tab. This is why bonds were known as ?certificates of confiscation? during the seventies.
This is not a new thing. About 300 years ago, governments figured out there was easy money to be made by issuing paper money, borrowing massively, stimulating the local economy, and then repaying the debt in devalued future currencies.
This is one of the main reasons why we have governments, and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.
Ever wonder how the new, impoverished United States paid for the Revolutionary War? It issued paper money by the bale, which dropped in purchasing power by two thirds by the end of the conflict in 1783. The British helped too by flooding the country with counterfeit paper money.
The really fascinating thing about financial markets so far this year is that I see history repeating itself. Owners of bonds had a great start, but I think the worm has turned.
I agree with bond maven, Geoffrey Gundlach, that bonds peaked in both the US and Europe last week, and that we are eventually heading back to a 2.75%-3.0% yield on the ten-year Treasury bond. Geoffrey has been long bonds until now.
Sell every rally for the rest of the year.
Bondholders can expect to receive a long series of rude awakenings when they get their monthly statements. No wonder Bill Gross, the former head of bond giant, PIMCO, says he expects to get ashes in his stocking for Christmas this year.
The scary thing is that we could be only two years into a new 30-year bear market for bonds that lasts all the way until 2042.
This is certainly what the demographics are saying, which predict an inflationary blow off in decades to come that could take short-term Treasury yields to a nosebleed 12% once more.
That scenario has the leveraged short Treasury bond ETF (TBT), which has recently leapt from $31 to $43, soaring all the way to $200.
If you wonder how yields could get that high in a decade, consider one important fact. The largest buyers of American bonds for the past three decades have been Japan and China. Between them, they have soaked up over $2 trillion worth of our debt, some 12% of the total outstanding.
Unfortunately, both countries have already entered very negative demographic pyramids, which will forestall any future large purchases of foreign bonds. They are going to need the money at home to care for burgeoning populations of old age pensioners.
So, who becomes the buyer of last resort? No one, unless the Federal Reserve comes back with QE IV, V, and VI.
Check out the chart below, and it is clear that the downtrend in long term Treasury bond yields going all the way back to April, 2011 is broken, and that we are now heading substantially up.
The old resistance level at 2.40% will become the new support. That targets a new range for bonds of 2.40%-2.90%, possibly for the rest of 2016.
There is a lesson to be learned today from the demise of the Roosevelt debt. It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra low interest rates and spending it all.
With inflation at nil, they have a free pass to do so. In effect, it never has to pay it back, but enables us to reap immediate benefits. My friend, Fed Reserve Chairwoman, Janet Yellen, certainly thinks so.
If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create domestic US jobs. Not a penny would go to new social programs. Long-term capital investments should be the sole target. Here is my shopping list:
$1 trillion ? new Interstate freeway system
$1 trillion ? additional infrastructure repairs and maintenance
$1 trillion ? conversion of our transportation system to natural gas
$1 trillion ? construction of a rural broadband network
$1 trillion ? investment in R&D for everything
The projects above would create 5 million new jobs quickly.
Who would pay for all of this? Today?s investors in government bonds, half of whom are foreigners, principally the Chinese and Japanese.
How did my life turn out? Was it ruined, as my grandfather predicted? Actually, I've done pretty well for myself, as did the rest of my generation, the baby boomers. My kids are doing OK too.
Grandpa was always a better historian than a forecaster. But he did have the last laugh. He made a fortune in real estate, betting correctly on the inflation that always follows borrowing binges.
Thanks to both of you for taking the time to answer me back. I am going to hang in there. I like your newsletter because the unbiased perspectives you share and the way in which you look at market opportunities in a realistic, factual manner.? I am just hoping to turn that advantage into profit and learn.
I don?t like financial advisors as they open your account, offer canned advice, and disappear after they take your money. I want to have the independent skills needed to manage my own wealth, as I grow old. I don?t expect that to happen overnight or without advice, but I am hoping that your newsletter is something above par not just in appearance, but in results.
Time will tell.
Thank you again for returning my emails. That says a lot.
Best,
Ryan
Hammond, New York
Global Market Comments
December 20, 2016
Fiat Lux
Featured Trade:
(IS THERE A BITCOIN IN YOUR FUTURE?),
(TESTIMONIAL)
I often am asked at lunches and speaking engagements whether people should be investing in bitcoin. My answer was always that it was a scam and to be avoided at all costs.
I was vindicated when the value of the online cryptocurrency collapsed 74% from its peak, from $1,230 to $320 to the US dollar.
After all, why should an arbitrarily valued currency, like bitcoin, be worth more than any other, like the US dollar?
I really hope the pizza parlor in New York City that sold a pizza for 8 bitcoins years ago unloaded their proceeds before the crash.
After some major security upgrades, the cryptocurrency has since rallied back up to $670.
Then Marc Andreessen, of leading venture capital firm, Andreessen Horowitz, made some comments the other day that piqued my interest.
He said that he was a major investor in several parts of the bitcoin ecosystem. He thought it had a great long-term future and he was especially interested in bitcoin infrastructure plays.
Smelling a rare opportunity to smash my own preconceived notions, biases, and prejudices, I started making a few phone calls around Silicon Valley.
It wasn?t long before someone put me in touch with Mr. Celso Pitta, the CEO of BTCJam. BTCJam is the world?s first peer-to-peer bitcoin lending company and they are paving the way for alternative crypto-currency investing.
What I learned from him was fascinating.
Long considered a ?gold for nerds? and ?online gold?, the financial community is in fact taking bitcoins seriously. Recently, the US Treasury and the Department of Homeland Security held a conference in Florida to bring the industry into its anti-money laundering payments standards.
Where do bitcoins come from? Bitcoins are ?mined? by computers. Every couple of minutes the bitcoin network releases an algorithm and the computer that solves the algorithm first, receives the bitcoin.
They are created from scratch by bitcoin ?miners? who exchange them for local currencies to cover their own costs and compensation for the bitcoin infrastructure.
Bitcoins are a completely decentralized, transparent, and digitally traded currency. Some predict that cryptocurrencies like bitcoin may replace traditional fiat paper currencies in the near future.
In the end, bitcoins are just a giant global payment ledger balanced out by debtors and creditors. As it is electronic, it can be sent and administered for free.
BTCJam has created from scratch a global online marketplace of borrowers and lenders in over 180 countries. Go to their site (https://btcjam.com) and you will find a parade of borrowers from around the planet looking to take out loans and bitcoin lenders looking to invest. Look at the individual players and it is clear that they are young and tech savvy.
Each potential borrower lists the details for their loan, along with a host of personal information. The purposes cited I found included a new transmission for a broken down car in England, a vacation to Japan and the start up of many small business. It also seems a lot of young Americans are seeking to consolidate student loans.
Once a user signs up, BTCJam subjects every application to its credit evaluation software, which examines more than 300 different parameters.
BTCJam uses traditional data that banks use such as personal identification, banking confirmation, and income verification, but they also use a host of other resources such as: LinkedIn, Facebook, PayPal, and eBay accounts.
Believe it or not, a person with 1000 Facebook friends has a much better credit standing and a lower default rate than someone with only 1 friend.
Customers are then given an ?A? to ?E? rating based on their loan algorithm. This software was developed by CEO Pitta, a native of Brazil, who boasts a heavy background in artificial intelligence and facial recognition software.
The company is taking advantage of the void of lending resources in emerging nations; frequently, these people can only turn to loan sharks and other risky loan sources.
Large international banks are reluctant to invest in these places because of the local currency risk. When a loan on BTCJam is fully funded, the borrowers convert their bitcoin into local currencies to spend in the local economy.
Remember how the poorest countries leapfrogged telephone landlines and went straight to cell phones 20 years ago? Well, the same thing is now happening in consumer credit through peer-to-peer lending.
Many developing countries suffer from the complete lack of credit rating agencies. There, every client is considered high risk, and lending is priced according to the standards of the worst borrowers.
Credit card interest rates run as high as 200% in Brazil, 90% in Mexico, and are well into double digits in Indonesia and the Philippines. Overall, they average 175% in the BRICS. As a result, the rates charged by BTCJam seem like a bargain by comparison.
When borrowers sign up at BTCJam and input all their information, they are given a suggested interest rate. They then have the choice to set their monthly interest rate as high or low as they want.
Loans that follow the suggested interest rate are more likely to be funded quickly by investors. Over time, the loan is gradually paid back in full by the borrower as they convert their money back into bitcoin.
Now for the lender side of the equation. BTCJam has investors from all over the world: they attract people that already have bitcoins and are looking for returns on their bitcoins. They also bring in lenders who are new to bitcoin and buy a few for the purpose of investing in BTCJam.
Lenders are completely free to choose which loans they want to invest in and how much they want to invest. Interest rates vary based on the risk profile of the borrower. They range all the way from 14% for the highest quality ?A+? borrowers to 100% for the low-end ?E-? hopefuls.
BTCJam is a bitcoin-only platform: lenders invest bitcoin and borrowers receive bitcoin. Borrowers have the option to link their loan to USD, which helps them avoid the risk of volatility long term. This enables them to lock in the bitcoin price at the time they receive the loan.
BTCJam lists every outstanding loan, and the investors connected to that individual. There is an online discussion on the potential advantages and disadvantages of each borrower. Some of the comments are quite funny. Others are downright rude.
It gets better: BTCJam will soon introduce automatic investments. Lenders will then have the opportunity to set specific criteria such as: the amount they want to invest, which asset class they want to invest in, and for how long. This will significantly enhance the use of the website and lenders will never have to miss out on good loans.
Pitta told me that globally, the total loan portfolio has a 10% default rate. But if you focus on only their ?A? rated customers, that rate plunges to a mere 1.8%. This is in the same ballpark as the largest US consumer lenders.
Do the math with high yields and a non-payment rate this low, and you can easily see that risk sophisticated and tolerant depositors will do these loans all day long.
The peer-to-peer lending model is one of the fastest growing corners of the financial industry. The giant Credit Ease in China is the largest, with a $9 billion loan portfolio. They are followed by the $3-$4 billion Lending Club. The UK has Zopa, with a $1 billion loan book.
This all compares to total credit card debt for the US alone of $1 trillion. Clearly, there is an enormous, high cost, low return, entrenched market to be explored here.
The entire bitcoin story did get tarnished by the bankruptcy of Mt. Gox operation in Japan, which went under with $60 million in liabilities. They claimed they were the victims of the hackers.
Industry insiders say that incompetent management, inferior software, and lax controls are much more likely culprits. These
are common transgressions in every start up industry.
Which brings me to BTCJam?s own business model, which recently obtained several million in seed capital from venture capitalists, like Ribbit Capital and the Founders Club.
They are poised to eat the lunches of emerging nation banks, which have always ignored, overcharged, or abused their local customers. It all seems to me ripe ground for disruption.
I think it is safe to say that in 20 years, the global financial system will be unrecognizable from what it is today. Ultimately, Bitcoin and BTCJam may have a large influence in the transition from traditional currencies to an all out system of online money.
?Nobody knew it was August, 1982 until it was August, 1984,? said Chris Verone, head of technical analysis at research boutique, Strategas.
Global Market Comments
December 19, 2016
Fiat Lux
SPECIAL END OF THE YEAR ISSUE
Featured Trade:
(GO LONG CHRISTMAS CHEER AND HOT BUTTERED RUM AKA
A THANK YOU FROM THE MAD HEDGE FUND TRADER),
(MY LAST RESEARCH PIECE OF THE YEAR)
You are in the safe zone now, with your trading portfolios up more than 25% on the year, if you followed every one of my Trade Alerts to the letter.
I know a lot of you made much more.
I will be making a beeline for my beachfront estate at Incline Village on the pristine shores of Lake Tahoe and work from there for the next two weeks.? That is, if I can battle my way through the Sacramento traffic.
The car will be packed with Christmas presents, ski equipment, snowshoes, board games (yes, ?Qi? is a word in Scrabble), my backpack, and food for 12 guests for a week.
After working 12-hour days six days a week all year to make you wealthier and wiser, please read my last research piece of the year below which is written tongue in cheek.
And what a year it has been. Over 26 trips and 40 speaking engagements in 20 countries. I managed to log 75,000 flight miles, a distance of roughly three times around the world.
Some 250,000 frequent flier miles were posted to my various accounts. Whenever I board Virgin Airlines, the crew lines up at attention and snaps off a brisk salute. Needless to say, first class is the Land of Milk and Honey for me.
The research I gathered was enough to publish 260 daily letters totaling 350,000 words. That is about half the length of Tolstoy?s War and Peace, but then Tolstoy had to pen his tome with a quill and ink, not Word for Windows.
I also managed to pump out 90 trade alerts with a success ratio of 80%.
According to the email traffic, many of you did extremely well. If you are into triple digits, please send me an email. I would love to receive a testimonial from you.
And this was a year that many professionals describe as the most difficult of their careers, what with the New Year meltdown, Brexit, and the presidential election from hell.
You know when they are advertising power tools and Pajamagrams on CNBC, it is time to get out of Dodge. I?m taking the hint.
Over the next two weeks, I will consume a suitcase full of research and, after much cogitation and contemplation, write my 2017 Annual Asset Class Review which will be published on Thursday, January 5th.
I will also be rethinking my business model, so if any of you have suggestions on how I can improve this service, send me an email at madhedgefundtrader@yahoo.com. Put ?Suggestions? in the subject line. My intention is to always keep improving the product so I can continue to under promise and over deliver my services.
A nostrum of Silicon Valley is that whenever you think you are finished, you?re finished.
Please forgive me in advance if I take a few hours catching some ?big air? off of Squaw Valley?s treacherous double X black runs.
If you have any trading questions, please seek me out on the northern section of the Tahoe Rim Trail around 11,000 feet where I will be snowshoeing my way around the lake in subzero temperatures.
I will probably be the only guy up there so you can just follow the first set of tracks you find. That is, if hungry mountain lions don?t get you.
I?ll have my Bowie knife and an industrial sized can of bear spray so I?ll be fine. As for you, I?m not so sure. This is what I do during my winter leisure time.
During my absence, I will be posting some of my favorite pieces from the last year which gave insights on how markets would play out over the coming decades as well as a lot of basic financial educational pieces.
I have thousands of new subscribers who will be reading these for the first time. Many legacy readers may have missed them the first time around or forgotten the data because they are older than me.
I hope you find them another useful step towards your education about the global financial markets. Charts and data have been updated to make them relevant.
Finally, I want to thank you all for an incredible year. I rode the Orient express from London to Venice. I lived in the lap of luxury at the Hotel Cipriani in Venice and at Raffles in Singapore.
And I managed to haggle the merchants in Tangier?s historic bazaar down on the price of the most elegant handmade carpets.
I had the opportunity to meet heads of state, CEOs, top money managers, our nation?s military leaders, and even a Maori chieftain.
I had the pleasure of flying the length of the Grand Canyon at low altitude, weaving my way along the Colorado River. And, oh yes, I made it to the top of the Matterhorn one more time.
I really did get to rub shoulders with the high and mighty who run the world and harvest their pearls of wisdom which I passed on to you.
I logged 200 hours as a pilot flying to such diverse locations as the Great Barrier Reef in Australia and Honda?s loading docks in San Francisco.
I never minded the horrendous jet lag, the well-deserved hangovers, or the traffic jams in China. Your subscriptions to my products, your support of my research, and your endless compliments made it all worth it.
I always tell people that I am not in this for the money, and it?s true.
Not a day goes by that I don?t receive an email from a grateful subscriber who claims that my research has helped them pay off their mortgage, fund a kid?s college education, or pay for a parent?s uninsured operation or a child?s chemotherapy.
Subscribers tell me I am teaching them to fish, thus, sparing them from the frozen tasteless kind they sell at Safeway which they must wait in line for to pay inflated prices. You can?t buy that kind of appreciation, not for all the money in the world.
It certainly beats the hell out of spending my retirement scoring a 98 on the local golf course. And I?ll never beat Tiger Woods, no matter how many blonds I date.
To leave you all in the Christmas spirit, I have posted a video and pictures of the Polar Express in Portland, Oregon.
Taking my 88-year-old mother for a ride has become an annual event, and it is a thrill for my younger kids as well. To watch a short video of one of the largest steam engines in the world, please click here at https://www.madhedgefundtrader.com/polar-express-2016/?
Merry Christmas and Happy New Year to All!
Good Trading in 2017!
John Thomas
The Mad Hedge Fund Trader
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
All work and no play makes Jack a dull boy.
With Apologies to ?The Shining? (1980)
?If the Fed brings a lump of coal in 2016, then they better bring some candy canes for the kids as well.? said Bill Gross, former CEO of bond giant, PIMCO.
