Feb 12

Today’s News 12th February 2018

  • Intel's New "Smart Glasses" Shoot Laser Beam Directly Into Your Retina

    For anyone who wanted a pair of Google glasses but didn’t want to look like a lazy Borg cosplay, Intel may have just what you need. Just one catch; you have to be OK with a laser firing photons directly into your retina. 

    Consummate techie and Executive Editor at The VergeDeiter Bohn, took Intel’s Vaunt smart glasses for a test drive – which he says are “virtually indistinguishable from regular glasses,” and are the “first pair of smart eyeglasses I’ve tried that doesn’t look ridiculous.”

    The smart glasses – which weigh less than 50 grams – work by projecting a very low-powered laser (a VCSEL), which shines a “red, monochrome image somewhere in the neighborhood of 400 x 150 pixels” on to a holographic reflector on the right lens of the glasses – which is then reflected directly into your eyeball and onto your retina.

    Intel swears it’s safe. 

     “It is a class one laser. It’s such low power that we don’t [need it certified],” he says, “and in the case of [Vaunt], it is so low-power that it’s at the very bottom end of a class one laser.” –Mark Eastwood, Director of Industrial Design, Intel NDG group

    We use a holographic grading embedded into the lens to reflect the correct wavelengths back to your eye. The image is called retinal projection, so the image is actually ‘painted’ into the back of your retina,” says Jerry Bautista, the team lead for wearable devices at Intel’s NDG. Due to the fact that the glasses project images directly onto the retina, the projected image is in focus on both prescription and non-prescription lenses. 

    In addition to the micro-electro-mechanical (MEMS, or “Pico”) projector, the glasses also pack hardware and software for Bluetooth communication with your phone, as well as an accelerometer and a compass. Future models may even include a microphone for use with virtual assistants such as Alexa and Siri.

    And of this, along with batteries, are contained within a remarkably compact chassis. 

    Requiring a custom fitting to each user, the glasses project a stream of information on what Bohn says looks like a screen, delivering a wide variety of information:

    At its core, Vaunt is simply a system for displaying a small heads-up style display in your peripheral vision. It can show you simple messages like directions or notifications. It works over Bluetooth with either an Android phone or an iPhone much in the same way your smartwatch does, taking commands from an app that runs in the background to control it.

    When looking down, the Vaunt glasses project a “rectangle of red text and icons down in the lower right of your visual field,” however, when the wearer is not glancing down in that direction, the display shuts off – as it was designed to be “nonintrusive,” according to Bohn. 

    ”We didn’t want the notification to appear directly in your line of sight,” says Eastwood. “We have it about 15 degrees below your relaxed line of sight. … An LED display that’s always in your peripheral vision is too invasive. … this little flickering light. The beauty of this system is that if you choose not to look at it, it disappears. It is truly gone.” –The Verge






    Bohn says he adapted to the glasses very quickly – writing that it became “natural within less than an hour to glance over at it to make it appear, or ignore it and focus on the person I was speaking with.” 

    Or, as it turns out, not focus on the person you’re speaking with:

    So I’m talking to you right now and you feel like you mean so much,” says Ronen Soffer, general manager for software products at NDG, “but I’m actually playing a trivia game right now.” (He wasn’t actually doing that, to be clear.) But after a day of playing around with the Vaunt prototypes, I completely believe that sort of thing is not just possible soon, but probably inevitable. Intel is thinking about those implications, too. Soffer wryly jokes: “You can ignore people more efficiently that way.”

    While it was unclear how users might interact with the Vaunt glasses, some have suggested that voice recognition, head gestures or both could activate it – or one could “trust the AI to show you what you need to know in the moment,” perhaps things such as nearby gas stations if you’ve failed to notice that your fuel light has been on for the last 12 miles. 

    Imagine walking down the street, looking at a shop or a restaurant, and instantly checking out Yelp reviews. Or perhaps the system could be used to project player stats in real time while at a sporting event. Whatever the case, Intel’s Brian Soffer says the company’s AI might just know exactly what you need to see. 

    “Listen, sometimes a better way to succeed is to make the problem smaller,” says Soffer. Intel’s AI for figuring out what to show you is “focused on certain types of moments, and we’ve been developing this technology for five or six years now to focus on those wearable, out-and-about moments.”

    Developing the platform

    Intel will be launching an “early access program” later this year so that developers can begin to tinker with the Vaunt system – developing apps for both phones and the glasses themselves. 

    The Verge‘s Bohn speculates that apps may directly stream content to the Vaunt glasses from the cloud, presumably to minimize on-board processing requirements – similar to how a Google Cast-enabled TV works as an endpoint for streaming video. When asked if this was the plan, Intel said “we’ll talk about that at a later date,” adding that “it really is built as an open platform … built from the ground up to be a mobile platform that accesses the internet. And a wearable device gets really powerful when it changes the way you access the internet.”

    While it’s unclear if Intel will bring the Vaunt glasses to market or find a partner to bring them to retail, The Verge notes that Intel is reportedly looking to sell a majority stake in its augmented reality business, according to Bloomberg

    Intel has a reputation for showing off ideas that never turn into real products. It comes up with a cool concept, proves out the technology, then hopes to convince others to take that idea and turn it into a real product. CEO Brian Krzanich comes on a CES stage, talks about a charging bowl (or hey, smart eyeglasses!), and then we wait to see if they’ll come to market. Often (maybe even usually), they don’t.

    I think the intention with Vaunt is a little different from Intel’s usual playbook. For one thing, Bloomberg’s report confirms that Intel is looking for partners with “strong sales channels … rather than financial backers.” For another, Bautista and I spoke a bit about how the sales channels for eyeglasses work now back in December.

    ”There’s something on the order of 2.5 billion people that require corrective lenses,” he says. “They get their glasses from somewhere. Sixty percent of them come from eye care providers. … We would say these glasses belong in those kinds of channels. People are going to buy them like they buy their glasses today.” The Verge

    While the Vaunt glasses are lighter, better looking, and possibly have a longer battery life than other smart glasses such as Magic Leap or HoloLens, they also project less information to the user. That said, as Bohn notes, the Vaunt is the “first pair of smart eyeglasses I’ve tried that doesn’t look ridiculous.” 

    Now let’s see what developers can do to make them rock and roll. Someday we’ll be telling our grandchildren about the days before laser beams were projected into our retinas. Hopefully we won’t be blind in one eye. 

  • 'Russiagate' Delusion Dies – Who Is 'Bill' Priestap?

    Via TheConservativeTreehouse.com,

    The game is over. The jig is up. Victory is certain… the trench was ignited… the enemy funneled themselves into the valley… all bait was taken… everything from here on out is simply mopping up the details.  All suspicions confirmed.

    Why has Devin Nunes been so confident?  Why did all GOP HPSCI members happily allow the Democrats to create a 10-page narrative?  All questions are answered.


    House Permanent Select Committee on Intelligence member Chris Stewart appeared on Fox News with Judge Jeanine Pirro, and didn’t want to “make news” or spill the beans, but the unstated, between-the-lines, discussion was as subtle as a brick through a window.  Judge Jeannie has been on the cusp of this for a few weeks.

    Listen carefully around 2:30, Judge Jeanine hits the bulls-eye; and listen to how Chris Stewart talks about not wanting to make news and is unsure what he can say on this…

    …Bill Priestap is cooperating.

    When you understand how central E.W. “Bill” Priestap was to the entire 2016/2017 ‘Russian Conspiracy Operation‘, the absence of his name, amid all others, created a curiosity.  I wrote a twitter thread about him last year and wrote about him extensively, because it seemed unfathomable his name has not been a part of any of the recent story-lines.

    E.W. “Bill” Priestap is the head of the FBI Counterintelligence operation.  He was FBI Agent Peter Strozk’s direct boss.  If anyone in congress really wanted to know if the FBI paid for the Christopher Steele Dossier, Bill Priestap is the guy who would know everything about everything.

    FBI Asst. Director in charge of Counterintelligence Bill Priestap was the immediate supervisor of FBI Counterintelligence Deputy Peter Strzok.

    Bill Priestap is #1. Before getting demoted Peter Strzok was #2.

    The investigation into candidate Donald Trump was a counterintelligence operation. That operation began in July 2016. Bill Priestap would have been in charge of that, along with all other, FBI counterintelligence operations.

    FBI Deputy Peter Strzok was specifically in charge of the Trump counterintel op. However, Strzok would be reporting to Bill Priestap on every detail and couldn’t (according to structure anyway) make a move without Priestap approval.

    On March 20th 2017 congressional testimony, James Comey was asked why the FBI Director did not inform congressional oversight about the counterintelligence operation that began in July 2016.

    FBI Director Comey said he did not tell congressional oversight he was investigating presidential candidate Donald Trump because the Director of Counterintelligence suggested he not do so. *Very important detail.*

    I cannot emphasize this enough. *VERY* important detail. Again, notice how Comey doesn’t use Priestap’s actual name, but refers to his position and title. Again, watch [Prompted]

    FBI Director James Comey was caught entirely off guard by that first three minutes of that questioning. He simply didn’t anticipate it.

    Oversight protocol requires the FBI Director to tell the congressional intelligence “Gang of Eight” of any counterintelligence operations. The Go8 has oversight into these ops at the highest level of classification.  In July 2016 the time the operation began, oversight was the responsibility of this group, the Gang of Eight:

    Obviously, based on what we have learned since March 2017, and what has surfaced recently, we can all see why the FBI would want to keep it hidden that they were running a counterintelligence operation against a presidential candidate.   After all, as FBI Agent Peter Strzok said it in his text messages, it was an “insurance policy”.

    REMINDER – FBI Agent Strzok to FBI Attorney Page:

    “I want to believe the path you threw out for consideration in Andy’s office that there’s no way he gets elected – but I’m afraid we can’t take that risk. It’s like an insurance policy in the unlikely event you die before you’re 40.”

    So there we have FBI Director James Comey telling congress on March 20th, 2017, that the reason he didn’t inform the statutory oversight “Gang of Eight” was because Bill Priestap (Director of Counterintelligence) recommended he didn’t do it.

    Apparently, according to Comey, Bill Priestap carries a great deal of influence if he could get his boss to NOT perform a statutory obligation simply by recommending he doesn’t do it.

    Then again, Comey’s blame-casting there is really called creating a “fall guy”.  FBI Director James Comey was ducking responsibility in March 2017 by blaming FBI Director of Counterintelligence Bill Priestap for not informing congress of the operation that began in July 2016. (9 months prior).

    At that moment, that very specific moment during that March 20th hearing, anyone who watches these hearings closely could see FBI Director James Comey was attempting to create his own exit from being ensnared in the consequences from the wiretapping and surveillance operation of candidate Trump, President-elect Trump, and eventually President Donald Trump.

    In essence, Bill Priestap was James Comey’s fall guy.  We knew it at the time that Bill Priestap would likely see this the same way.  The guy would have too much to lose by allowing James Comey to set him up.

    Immediately there was motive for Bill Priestap to flip and become the primary source to reveal the hidden machinations.  Why should he take the fall for the operation when there were multiple people around the upper-levels of leadership who carried out the operation.

    Our suspicions were continually confirmed because there was NO MENTION of Bill Priestap in any future revelations of the scheme team, despite his centrality to all of it.

    Bill Priestap would have needed to authorize Peter Strzok to engage with Christopher Steele over the “Russian Dosssier”; Bill Priestap would have needed to approve of the underlying investigative process used for both FISA applications (June 2016, and Oct 21st 2016). Bill Priestap would be the person to approve of arranging, paying, or reimbursing, Christopher Steele for the Russian Dossier used in their counterintelligence operation and subsequent FISA application.

    Without Bill Priestap involved, approvals, etc. the entire Russian/Trump Counterintelligence operation just doesn’t happen. Heck, James Comey’s own March 20th testimony in that regard is concrete evidence of Priestap’s importance.

    Everyone around Bill Priestap, above and below, were caught inside the investigative net.

    Above him: James Comey, Andrew McCabe and James Baker. 

    Below him: Peter Strzok, Lisa Page, Jim Rybicki, Trisha Beth Anderson and Mike Kortan. 

    Parallel to Priestap in main justice his peer John P Carlin resigned, Sally Yates fired, Mary McCord quit, Bruce Ohr was busted twice, and most recently Dave Laufman resigned.  All of them caught in the investigative net…. Only Bill Priestap remained, quietly invisible – still in position.

    The reason was obvious.

    Likely Bill Priestap made the decision after James Comey’s testimony on March 20th, 2017, when he realized what was coming.  Priestap is well-off financially; he has too much to lose.  He and his wife, Sabina Menschel, live a comfortable life in a $3.8 million DC home; she comes from a family of money.

    While ideologically Bill and Sabina are aligned with Clinton support, and their circle of family and friends likely lean toward more liberal friends; no-one in his position would willingly allow themselves to be the scape-goat for the unlawful action that was happening around them.

    Bill Priestap had too much to lose… and for what?

    With all of that in mind, there is essentially no-way the participating members inside the small group can escape their accountability with Mr. Bill Priestap cooperating with the investigative authorities.

    Now it all makes sense.  Devin Nunes interviewed Bill Priestap and Jim Rybicki prior to putting the memo process into place.  Rybicki quit, Priestap went back to work.

    (page 5 pdf)

    Bill Priestap remains the Asst. FBI Director in charge of counterintelligence operations.

    It’s over.

    I don’t want to see this guy, or his family, compromised.  This is probably the last I am ever going to write about him unless it’s in the media bloodstream. I can’t fathom the gauntlet of hatred and threats he is likely to face from the media and his former political social network if they recognize what’s going on.  BP is Deep-Throat x infinity… nuf said.

    The rest of this entire enterprise is just joyfully dragging out the timing of the investigative releases in order to inflict maximum political pain upon the party of those who will attempt to excuse the inexcusable.

    Then comes the OIG Horowitz report.

    Then the grand jury empaneled (if not already); and while Democrats attempt to win seats in the 2018 election, arrests and indictments will hit daily headlines.

    Oh, lordy…

  • L.L. Bean Eliminates Lifetime Return Policy After Abuses

    Freeport, Maine bootmaker L.L. Bean is getting rid of its no-questions-asked lifetime return policy, thanks to growing abuse of the generous program, says the company.

    All returns must now be made within one-year of purchase, executives announced on Friday, adding that the policy, which has been in effect for over a century, was never meant to be used as an unlimited replacement scheme. 

    “Increasingly, a small, but growing number of customers has been interpreting our guarantee well beyond its original intent,” said L.L. Bean chairman Shawn Gorman in Friday a letter. “Some view it as a lifetime product replacement program, expecting refunds for heavily worn products used over many years. Others seek refunds for products that have been purchased through third parties, such as at yard sales.”

    Gorman says the policy should only affect a small percentage of returns, and that if a customer finds a product to be defective after one year, the company will make efforts to reach a “fair solution,” he said.

    “We stand behind all our products and are confident that they will perform as designed,” states the new return policy on the L.L. bean website. “After one year, we will consider any items for return that are defective due to materials or craftsmanship.”

    That said, customers who are known for “past habitual abuse” of the return policy can take their broken boots and pound sand, as they will not be allowed to return or exchange products even within one year of purchase, according to the site. 

    To protect all our customers and make sure that we handle every return or exchange with reasonable fairness, we cannot accept a return or exchange (even within one year of purchase) in certain situations, including:

    • Products damaged by misuse, abuse, improper care or negligence, or accidents (including pet damage)

    • Products showing excessive wear and tear

    • Products lost or damaged due to fire, flood, or natural disaster

    • Products with a missing label or label that has been defaced

    • Products returned for personal reasons unrelated to product performance or satisfaction

    • Products that have been soiled or contaminated, until they have been properly cleaned

    • Returns on ammunition, either in our stores or through the mail

    On rare occasions, past habitual abuse of our Returns Agreement

    Slate author Justin Peters is exactly the type of person responsible for the crackdown. In a Friday article, Peters brags about having ripped off L.L. Bean for the past six years – often bringing his mother along for what she called his “scam.” 

    “I needed new shoes, and so I went to L.L. Bean to buy a new pair of the same ones that had served me well for a year. Imagine my surprise and delight when the sales associate told me of the store’s generous return policy and invited me to exchange my old shoes for new ones, free of charge. What’s more, I also got a $10 gift card because of an in-store promotion of some sort. Not only did I get free shoes, I also got free money. Six years later, I still count this as one of the greatest days of my life.

    I haven’t spent a dollar on closed-toe shoes since then. Every year, around Christmas, I would drive to the L.L. Bean store in the Old Orchard Mall in Skokie, Illinois, near where I grew up, to exchange my old shoes for new ones.  Over the years, it became a cherished family outing. My mother, who is amused by my sense of thrift, insists on accompanying me on what she refers to as my “scam.” “You’d better not tell anyone about your scam,” she routinely warned me. “If too many people catch on, they’ll stop doing it.”

    I feel no guilt about taking L.L. Bean up on its offer. If they didn’t want people to take the swap, they shouldn’t have offered it!”  –Justin Peters

    Thanks Justin, good to know you’ll abuse an honor-based policy at the drop of a hat instead of paying for yourself like a responsible adult. 

    You too Meagan:







  • "Make Sports, Not War"

    Authored by Eric Margolis via LewRockwell.com,

    Considering that a nuclear conflict over North Korea appeared imminent in recent weeks, the winter Olympics at Pyeongchang, South Korea, is a most welcome distraction – and might even deter a major war on the peninsula.

    The highlight of the games was the arrival of Kim Yo-jong, the younger sister of North Korea’s ruler, Kim Jong-un. This was the first time a member of North Korea’s ruling Kim dynasty had come to South Korea. Her handshake with South Korea’s president, Moon Jae-in was a historic and welcome moment.

    So too the planned joint marches by North and South Korean athletes under a new reunification flag.  For all Koreans, this was a deeply emotional and inspiring ceremony.

    But not for US Vice President Mike Pence, who was sent by Trump to give the Olympics the evil eye.  He even refused to stand for the joint marchers in a surly act that spoke volumes about his role.  Whether he meets President Moon or Kim Yo-jong remains to be seen. Even a cup of tea between Pence and Kim could end all the crazy talk about nuclear war. Does anyone in Washington know that North Korea lies between China and Russia?

    All this drama is happening as the Trump White House is advocating giving North Korea a `bloody nose.’  Meaning a massive bombing campaign that could very likely include nuclear weapons.  Trump, who received a reported five exemptions from military service because of a little bone spur in his foot, revels in military affairs and thinks a ‘bloody nose’ will warn Kim Jong-un to be good. Trump is planning a big military parade at which he will take the salute.

    This writer went through US Army basic and advanced infantry training with a broken bone in my foot, and has no sympathy with the president’s militaristic pretensions.

    South Korea’s able president Moon is moving heaven and earth to prevent a war in which his nation would be the main victim. 

    Some 2-3 million Korean civilians died in the 1950-53 Korean War.  All North Korea and much of South Korea were bombed flat by US air power.  Now, as tensions surge, US heavy bombers and nuclear weapons ring North Korea, ready to flatten the north and make the rubble bounce.

    North Korea’s thousands of heavy guns dug into mountains just north of the DMZ (I’ve seen them) could flatten all of South Korea’s capitol, Seoul, north of the Han River, killing millions, not counting nukes and poison gas.  South Korea, the world’s eleventh industrial power, would again pay the terrible price for a new war on the peninsula.

    One of VP Pence’s main missions is to whip up support among rightwing South Koreans who bitterly oppose any peace deal between the two Koreas and support attacking the north.  Many on South Korea’s hard right are evangelical Christians.  It’s no coincidence that Mike Pence, an ardent fundamentalist Protestant, was sent to show the flag and rally opposition to any détente with North Korea.  Whatever happened to ‘turn the other cheek?’

    Washington does not want a lessening of tensions between the two Koreas.  And much less, talk of potential reunification.  If the two Koreas came to peace, what justification would the US have for keeping powerful air, land and naval forces in strategic South Korea, often called ‘America’s unsinkable aircraft carrier.’  Japan is no more favorable to a united Korea.

    South Korean President Moon has been calling for a new, positive era in north-south relations. He has been adamant in opposing any chance of war on the peninsula.  But Washington has simply ignored Moon or brushed aside his objections to threats of war against North Korea.  The North Koreans routinely accused the south of being ‘American puppets.’  Pyongyang is the only ‘legitimate, truly independent Korean government,’ charges the north.

    Interestingly, in the event of war, South Korea’s 655,000-man active armed forces and 4 million-man reserves come under the command of a four-star US general.  US nuclear weapons can be moved through South Korean bases.  The so-called joint US-South Korea joint command is mere window dressing.

    It’s hard to say how close the US was to attacking North Korea.  Trump certainly backed himself into a corner by all his foolish threats to unleash ‘fire and fury’ on North Korea. 

    The Olympics delayed the rush to war against North Korea. But once they are over, the war drums will resume beating.

    President Trump is probably thinking about a dandy parade after a short, devastating attack on North Korea – provided, of course, that the troublesome northerners don’t manage to retaliate by landing a few nuclear warheads on Japan and Washington.

  • Treasury Yields Jump After Trump Budget Director Admits Interest Rates May "Spike" On Soaring Deficit

    In a bizarre warning coming from president Trump’s own budget director, one that could accelerate the sharp market selloff which so infurated Trump last week he tweeted about it on several occasions, lashing out against those who sell stocks on “good news” claiming it is a “big mistake“, Mick Mulvaney warned that the U.S. will post a larger budget deficit this year and could see a “spike” in interest rates as a result.

    White House budget director Mick Mulvaney.

    Of course, traders have already experienced the spike, or at least a part of it: it’s one of the key catalysts that moved the 10Y from 2.60% to 2.90% since payrolls Friday (coupled with the inflationary impulse from the jump in hourly wages).

    Earlier in the day, Mulvaney spoke on “Fox News Sunday,” a day before the White House is expected to release 2019 spending proposals – and after weeks in which financial markets have been spooked by prospects for rising inflation tied to higher deficits and lower taxes.

    “This is not a fiscal stimulus; it’s not a sugar high,” Mulvaney said on of the president’s economic program, including the $1.5 trillion tax cut passed in late 2017. “If we can keep the economy humming and generate more money for you and me and for everybody else, then government takes in more money and that’s how we hope to be able to keep the debt under control,” Mulvaney said.

    In a separate interview on CBS News’s “Face the Nation,” Mulvaney said rising budget deficits are “a very dangerous idea, but it’s the world we live in.”

    As Bloomberg notes, his comment echoed Trump’s Feb. 9 tweet that Republicans “were forced to increase spending on things we do not like or want” to secure Democratic votes for the sharp buildup in military spending wanted by the White House and the Pentagon.

    “What they said was they would not give us a single additional dollar for defense unless we gave them dollars for social programs,” he said. “They held the Defense Department hostage, and we had to pay that ransom.”

    Shockingly, Mulvaney also acknowledged he would “probably not” have voted for the deal when he served in the House of Representatives and was known as a fiscal hawk. “Keep in mind I’m not Congressman Mick Mulvaney anymore,” he said. “My job as the director of the Office of Management Budget is to try to get the President’s agenda passed.”   

    * * *

    The next set of numbers – and potential catalyst for further rate upside – will be unveiled on Monday, when Mulvaney’s OMB will updating the 2018 budget released last year and its 2019 request, due Monday, in response to the two-year budget deal the president signed into law on Friday morning. That agreement, which ended an hours-long partial government shutdown, will boost government spending by another $300 billion, which will have to be directly funded with more debt. Mulvaney said that in his previous job as a fiscally-conservative congressman representing South Carolina, he would “probably not” have voted for the bill.

    The additional spending could increase the deficit to about $1.2 trillion in 2019, and there’s a risk that interest rates “will spike” as a result, Mulvaney said.

    And while Mulvaney said that lower deficits are possible over time based on sustained economic growth, in an even more bizarre development, the WaPo reported that Trump’s Budget to be unveiled tomorrow won’t project a balance in 10 years, and instead Trump’s request will abandon the long-held Republican goal of eliminating deficit in budget projections, even over a decade.

    In other words, those concerned that yields may spike further tomorrow – and slam stocks – have good reason: the OMB may unveil the first republican non-balancing budget. Actually, one look at the 30Y Treasury shows that the selling has already begun.

  • JPMorgan Publishes The "Bitcoin Bible"

    Five months after Jamie Dimon’s infamous outburst, in which the JPM CEO called Bitcoin a fraud, and threatened any JPMorgan trader caught trading cryptocurrencies with immediate termination “for being stupid”, which was followed by JPM’s head quant alleging bitcoin was a pyramid scheme, the largest US bank has released what can only be called the “Bitcoin Bible“: 71 pages of excruciating detail on everything from the technology of cryptocurrencies, to their applications and challenges. 

    While there is too much in the report – which was published on the same day that the NY Fed admitted that in “A Dystopian World, Bitcoin Would Dominate Payment Methods” which of course is the whole point behind cryptos which as a contingency plan to the collapse of fiat currencies – to be summarized in one post, and instead we will focus on the key points over the next few days, below we republish the Executive Summary from the report, highlighting the key sections.

    Executive Summary


    • J.P. Morgan researchers from across a wide range of expertise analyze various aspects of Cryptocurrency (CC) to gain insight on this market and its potential evolution in this report. CCs’ extremely rapid growth, and then fall, both in terms of number of CCs and prices and their challenge to the current financial infrastructure, are forcing all market participants to closely monitor and understand this new market.
    • Cryptocurrencies are virtual currencies that are created, stored and governed electronically by an open,  decentralized, cryptography system. CCs can be used to exchange money, to buy certain goods/services or as an investment. There are over 1,500 cryptocurrencies with a market cap of some $400bn as of February 8, 2018, with Bitcoin being the largest representing a third of the market according to CoinMarketCap.
    • Launched in early 2009, Bitcoin (BTC) is the dominant cryptocurrency with a market cap of $140 billion (representing one-third of the CC market) and nearly 17 million BTC units in circulation (capped at 21 million). Bitcoin was the first major cryptocurrency and has spawned many competing CCs and technologies, many of which still fall back to Bitcoin as a support currency. Bitcoin itself has split into two cryptocurrencies, Bitcoin and Bitcoin Cash, to improve liquidity.


    • Cryptocurrencies are the face of the innovative maelstrom around the Blockchain technology that is bringing both massive price volatility and a constant trial-and-error of new product try-outs and failures.
    • CCs are unlikely to disappear completely and could easily survive in varying forms and shapes among players who desire greater decentralization, peer-to-peer networks and anonymity, even as the latter is under threat. The underlying technology for CCs could have the greatest application in areas where current payments systems are slow, such as across borders, as payment, reward tokens or funding systems for other Blockchain innovations and the Internet of Things, as well as parts of the underground economy.


    • There are over 1,500 CCs with a market cap of $400bn. Transactions in the three largest CCs average $550bn per month and come mostly from individuals. Ownership is highly concentrated. The opportunity set around direct CC trading appears relatively limited for banks, while the two Bitcoin futures recently launched are seeing only $140mn in daily trading.
    • Blockchain saw its first expression through Bitcoin – the first CC – but is more likely to ultimately see its greatest application outside of CCs across other financial and non-financial transactions, even as Blockchain itself looks set to evolve fast as the market learns about what works best.
    • There is the potential for increased usage of Blockchain in cross-border payments, settlement/clearing/collateral management as well as the broader world of TMT, Transportation and Healthcare but only where any cost efficiencies offset regulatory, technical and security hurdles.
    • Hedge funds have been moving into this market making up most of the 175 CC funds but AUM remains only a few billion dollars. Asset managers are experiencing limited success in bringing products to market and have not been able to launch CC funds or ETFs without support from the SEC or major distributors.
    • While about half of the early CC transactions happened in the underground economy, the share of this is declining,  with investing and speculation now taking a much larger share.


    • It will be extremely hard for CCs to displace and compete with government-issued currencies, as dollars to euros and yuan are virtual natural monopolies in their regions and will not easily give up their seigniorage profits.
    • CCs are experiencing heightened volatility and will face challenges from both technology (such as rising mining costs and hacking) and regulators who are concerned about anti-money laundering and investor protection, as CC payments are irreversible and there is no recourse.
    • Security concerns have mounted in Bitcoin exchanges as hackers have infiltrated a number of CC exchanges generating large losses, while regulators are challenging anonymity.

    Below are some of the JPM team’s observations on what the future could bring for cryptos, with highlights, however the most notable admission is JPM stating that cryptocurrencies “could potentially have a role in diversifying one’s global bond and equity portfolio“, a far cry from Jamie Dimon’s emotional appeal that all cryptos are a giant fraud.

    In the early stages of innovation, usually set off by new technology — in this case Blockchain — the market experiments with many different approaches to see what shape and form will stick and end up offering the most economic value-added. We would note that it is not pre-ordained that cryptocurrencies will succeed as there are valid concerns about what economic value they really contribute. But in a time of rapid innovation, many new products will are often-and-errored. We believe the potential disruption from Blockchain cannot be ignored.

    The excitement of innovation typically also leads to price booms and then crashes among the early movers, before more realistic prices emerge among the eventual survivors. Much of this is what we see today with exponential price gains and losses, growth and diversity among cryptocurrencies. Given the amount of speculation in these markets, technical signals can be very useful in gauging market direction and they have been sending the right signals in recent months. Fundamentals are a lot less informative here, although it can be useful to look at the cost of mining CCs, even as one must also account for the elasticity of supply.

    Cryptocurrencies are both a new technology — Blockchain — and a new currency (many new ones). The new shape and form of the CC market in the future will likely ultimately depend on what economic value they are perceived to add. We would expect the marketplace and regulators to ultimately weed out what are perceived the negative, less useful characteristics of CCs and retain the positive elements that add economic value.

    As discussed more in detail below, the Blockchain technology driving CCs offers transparency to transactions and allows them to be virtual and peer-to-peer. Distributed ledger technology has the potential to offer regulators greater degrees of transparency, higher levels of resiliency and shorter settlement times, reducing counterparty and market risk.

    Allen similarly discusses various efforts under way with, for example, a number of payment processing firms increasingly partnering with technology firms/Blockchain providers to offer an alternative settlement engine to various payment participants. We expect various Blockchain-based ecosystems to coexist and compete with each other (similar to Payments networks in the current environment), with success predicating on technology capabilities (such as API features), number of participants on the network and ease of adoption. Given the hurdles, CCs are more likely to be used as ancillary payment methods rather than gaining traction as a primary source of exchange.

    While seeing a potential for the deployment of the underlying Blockchain technology in payments, we do not see cryptocurrencies competing with central bank-issued money for lawful transactions. We note that CCs have not attained the relative stability of value to make them useful as money for everyday transactions. The current set of government-issued fiat currencies — such as the dollar and the euro — provide efficient media of exchange, stores of value and units of account. Some of the early buyers of CC were clearly dismayed by ballooning balance sheets of the major central banks in the aftermath of the global financial crisis (GFC), but the lack of any meaningful inflation since, in both developed markets (DM) and emerging markets (EM), has surely reduced concerns about fiat (legal tender issued by a central bank) money.

    In addition, we find that local legal tender money tends to be a natural monopoly with only extreme hyperinflation leading people to seek out a monetary alternative. To add, we do not find that CCs are currently meeting the standards of what constitutes money as the huge volatility of CC has made use of it as a unit of account impractical. Finally, given the huge returns from running a central bank (seigniorage), governments will be quite possessive of their legal tender role and will likely put up a fight if CCs were to gain broader traction domestically.

    Some EMs, such as Venezuela and Russia, appear to be considering issuing CCs as a way to improve international funding and evade US sanctions. Aziz is quite dubious about whether any of this will work as CCs face regulatory headwinds and are neither better than fiat money in establishing policy credibility nor in providing liquidity during crises.

    Several central banks, as discussed in Feroli, are investigating whether they should issue CCs in their own currency, but are very far from actually doing so, as any increased efficiency in payments technology does not appear to be that obvious. In addition, the issuance of crypto dollars, for example, would give non-banks access to the Fed balance sheet, and thus could endanger the economically and socially important financial intermediation function of commercial banks.

    In market economies, commercial banks manage the largest part of what we call money through their deposit
    base that they in turn lend out to the economy, after holding back a fraction as reserves at the central bank. If cryptocurrencies were seen as superior to bank deposits, prompting a wholesale shift into cryptocurrencies, then a much larger share of savings would go to the central bank’s assets (government debt) and less to commercial banks loans, thus potentially dramatically increasing private credit risk premia and reducing the flow of credit to the private sector. Fractional reserve banking was a tremendous innovation that surely contributed greatly to global growth over the last two centuries, and we would expect that central banks would think twice before disturbing this source of capital to the private sector.

    We examine the potential role of CCs in terms of offering diversification in a global portfolio, given both their high returns over the past several years and their low correlation with the major asset classes, offsetting some of the cost of high volatility. If past returns, volatilities and correlations persist, CCs could potentially have a role in diversifying one’s global bond and equity portfolio. But in our view, that is a big if given the astronomic returns and volatilities of the past few years. If CCs survive the next few years and remain part of the global market, then they will likely have exited their current speculative phase and would then have more normal returns, volatilities (both much lower) and correlations (more like that of other zero-return assets such as gold and JPY). Based on its historical performance, CCs can be 10 times more volatile than core assets like stocks, or than portfolio hedges, like commodities. Liquidity is also well below most other potential hedges. Extraordinary returns can be generated in the price discovery phase, only to be followed by several years of mean-reversion toward the eventual, long-term average level. In the current market conditions, we do not believe that an allocation to Cryptocurrencies as insurance should be a portfolio’s main or only hedge. Note that even though CCs have improved risk-adjusted returns over the past several years, they have not prevented portfolio drawdown during periods of acute market stress, like the equity flash crashes of August 2015 and February 2018.

    Below we highlight some of the key charts from the JPM “cryptobible”:

    What a typical bitcoin transaction flow looks like:

    Cryptocorrelation with other asset classes: virtually nil, i.e., a perfect diversifier.

    Cryptocurrency liquidity in the context of all other major asset classes.

    Current state of cryptocurrency regulation around the globe.

    Market liquidity: average bid/ask spread to buy 10 BTC:

    Cryptocurrency concentration of hodlers:

    Monthly trading volumes by market cap:

    Speed and cost per transaction:

    Bitcoin ETFs pending approval:

    Bitcoin mining cost-curves, i.e, where should you mine for bitcoin:

  • Rand Paul Accuses GOP Critics Of "Hypocrisy" For Agreeing To Bipartisan Budget Deal

    After Rand Paul’s “principled stand’ against a budget bill that would add nearly $300 billion to the deficit over two years forced his colleagues in the House and Senate to stay up all night Thursday, just to pass an essentially unchanged bill that could’ve easily passed 12 hours earlier if it weren’t for the Kentucky Senator’s dedication to libertarian principles compulsive need for media attention, it seemed like his colleagues were rushing to be the first to issue an insulting quote about Paul to any reporter who’d listen.

    One of Paul’s colleagues said he sympathized with a neighbor of Paul’s who famously tackled the senator while he was mowing his lawn, cracking a few of his ribs. Another dryly noted that “there aren’t a lot of books written about the great political points of history” – a jab at Paul, who voted for the White House’s $4.5 trillion budget resolution and then supported Trump’s deficit-expanding tax package.

    Already one of the most ubiquitous guests on the so-called Sunday Shows, Paul took to Face the Nation this weekend to explain and defend his decision to hold up the vote and trigger another government shutdown – even if it only lasted a few hours.

    During his interview with Major Garrett, Paul said Republicans need to reconcile their commitment to limit government spending and cut down on the deficit with their tendency to overspend on the military. Paul added that the US has accomplished about all it possible can in Afghanistan, and that now is the time to bring our troops home. The US is actively at war in about seven countries, Paul said. Yet none of those interventions were authorized by Congress.

    MAJOR GARRETT: And now we have deficits projected to be a trillion dollars again and yet they’re growing non-recessionary economy or are you troubled by that?

    SENATOR RAND PAUL: Yeah, I’m very worried and I think one of the questions the Republicans I think are not willing to ask themselves is can you be fiscally conservative and be for unlimited military spending. There’s sort of this question, “Is the military budget too small or maybe is our mission too large around the world?” And because Republicans are unwilling to confront that they want more, more, more for military spending. And so to get that they have to give the Democrats what they want which is more and more and more for domestic spending and the compromise while some are happy with bipartisanship. Well if the bipartisanship is exploding the deficit I’m not so sure that’s the kind of bipartisanship we need.

    MAJOR GARRETT: From your point of view, Senator, on the defense side of the equation is the spending and the mission, are they reckless?

    SENATOR RAND PAUL: I think the mission is- is beyond what we need to be we’re actively in war in about seven countries. And yet the Congress hasn’t voted on declaring or authorizing the use of military force in over 15 years now. So I’ve been one that’s been bugging the Senate and Congress to say how can we be at war without ever voting on it don’t the American people through their representatives get a chance to say when we go to war. I think the Afghan war is long past its mission. I think we killed and captured and disrupted the people who attacked us on 9/11 long ago. And I think now it’s a nation building exercise. We’re spending 50 billion dollars a year. And if the president really is serious about infrastructure, a lot of that money could be spent at home. Instead of building bridges and schools and roads in Afghanistan or in Pakistan. I think we could do that at home and the interesting thing is I think the president’s instincts lean that way but –

    But when confronted about inconsistencies in his own voting record – such as his decision to support both the budget agreement and the Trump tax plan – Paul insisted he could “only control how I vote”.

    MAJOR GARRETT: And that’s sort of the way, Senator, because you know where the votes are. You know the votes are there for tax cuts. You know they’re not there for spending cuts. So, isn’t there any part of your voting pattern that is irresponsible?

    SENATOR RAND PAUL: I don’t think so because you know I can only control how I vote. So I voted for the tax cuts and I voted for spending cuts. The people who voted for tax cuts and spending increases. I think there is some hypocrisy there and it shows they’re not serious about the debt. But all throughout my career I’ve always voted for spending cuts and I’m happy to offset cuts in taxes with cuts in spending. So no I think that I’ve had a consistent position in being very concerned about the debt and I want to shrink the size of government. So, the reason I’m for tax cuts is I to return more of the money to the people who own that who- who actually deserve to have their money returned to them. But it also shrinks the size of government by cutting taxes or should if you cut spending at the same time.

    This, of course, begs the question: Was Paul in some sort of fugue state when he voted for the Trump tax bill last year?

    If so, he might want to get that checked out.

  • Just One Number Matters In This Coming Week

    Stock may have suffered through one of their most volatile weeks in years triggered by the unexpectedly large (if miscalculated) spike in January wages, the highest since 2009, resulting in the biggest volquake in history, and come this Wednesday it may be time for round 2, because at 8:30am on Valentine’s Day, the U.S. inflation report – far more closely watched than the payrolls release – will hold the key to the next phase.

    Indeed, as Deutsche Bank notes:

    “it’s hard to remember a data point as eagerly anticipated as next Wednesday’s January CPI report in the US. With rates, equities and vol selling off aggressively and markets on edge, the strong January average hourly earnings print this time last week has caused havoc in the market over the last few days.”

    Why is the fate of the market suddenly in the hands of the otherwise trivial CPI number? Because, as we showed every day last week, every single time the 10-year Treasury approached or surpassed the four-year high of 2.85% last week, equities investors panicked and yanked bids amid fears the specter of higher inflation would accelerate the pace of Fed rate hikes, crushing the nearly 10 year artificial bull market in stocks bought with nearly $20 trillion in central bank liquidity. This is shown in the BBG chart below.

    And with average hourly earnings reportedly breaking out, there is suddenly a threat that core CPI may surprise to the upside, and not just modestly, but materially enough for the Fed – which is already expecting to hike rates 3 times in 2018 – to precipitate its tightening intentions, and if nothing else, certainly not intervene during the current market correction.

    “What’s happening now is just price discovery between bonds and equities — how far can the bond market push yields up before the equity market cracks?” T. Rowe Price’s Stephen Bartolini told Bloomberg . “The big fear in risk markets is that we get a big CPI print and it validates the narrative that inflation is coming back and the Fed is going to have to move faster.

    While the re-emergence of wage growth – long considered the missing link in an economic recovery that’s driven the jobless rate to near record lows – took the market by surprise, what is more curious is that at least on paper, the Fed’s intentions had been widely priced in: just before the stocks meltdown, traders were allegedly in sync with FOMC projections of three rate increases in 2018. However, the recent spike in longer-yields was the result of the bipartisan Senate plan, which would boost spending by an addition $300 billion, an increasing Treasury issuance even further, and beyond the $1 trillion projected this year.

    Stocks have not taken that well.

    That said, bond bulls remain: “The Treasury market is pricing in the most bearish scenarios that were on the docket for 2018, and still 10-year yields remain stubbornly below 3 percent,” BMO Capital Markets strategists Ian Lyngen and Aaron Kohli wrote in a Feb. 9 note. To the BMO due there’s a greater risk of yields declining over the next several months than rising.

    However, skeptics will be silenced promptly on Wednesday should the CPI/Core print higher than the expected, in which case a 3% on the 10Y becomes virtually certain, and unless stocks find some pressure outlet to relieve concerns of rising inflation – ideally a statement by some central banker – the next sharp move lower in stocks will immediately follow. As Bloomberg notes, at least some speculators expect such an outcome: Block trades in puts on 10-year Treasury futures Friday pointed toward demand for protection against yields rising to that level by March 23.

    So with that in mind, and with everyone’s eyes on Wednesday’s CPI report, here is what else to look for in the coming week:

    • Feb. 12: Monthly budget statement
    • Feb. 13: NFIB small business optimism; revisions to producer price index
    • Feb. 14: CPI; MBA mortgage applications; retail sales; real average weekly and hourly earnings; business inventories
    • Feb. 15: Empire manufacturing; initial jobless claims and continuing claims; PPI; Philadelphia Fed business outlook; industrial production; capacity utilization; Bloomberg consumer comfort; NAHB housing market index; Treasury International Capital flows
    • Feb. 16: Import and export price indexes; housing starts; building permits; University of Michigan survey data

    And summarized courtesy of Barclays:

    * * *

    Below is Deutsche Bank’s take:

    It’s hard to remember a data point as eagerly anticipated as next Wednesday’s January CPI report in the US. With rates, equities and vol selling off aggressively and markets on edge, the strong January average hourly earnings print this time last week has caused havoc in the market over the last few days.

    Current market expectations are for a +0.4% mom headline reading and +0.2% mom core reading, which translate into +2.0% and +1.7% yoy readings (both a decline of one-tenth from December). Meanwhile the other potentially big event next week is in Washington with President Trump expected to release a $1.5tn infrastructure plan (which will kick off the process for producing legislation) and also his 2019 budget blueprint.

    There is other important data out in the US next week too with the January PPI report on Thursday another significant inflation reading, while Wednesday will also see January retail sales released. January industrial production (Thursday), January housing starts and building permits (Friday) and the preliminary February University of Michigan consumer sentiment survey (Friday) will also be released. In Europe we’ll get final January CPI revisions in the UK (Monday) and Germany (Tuesday) while second readings of Q4 GDP will be out in Germany and the Euro area on Wednesday. Late on Tuesday we’ll also get Japan’s Q4 GDP print.

    It’s also looking like a busy week for ECB speakers with Weidmann (Wednesday), Mersch (Wednesday and Thursday), Praet (Thursday) and Coeure (Friday) all scheduled to speak. The Fed’s Mester will speak on Tuesday.

    Finally it’s worth noting that Chinese New Year kicks off on Thursday, with mainland markets subsequently shut until February 21st.

    What to look out for next week?

    • Monday: With data fairly thin on Monday all eyes will instead be on the White House with President Trump expected to release a $1.5tn infrastructure plan, along with his 2019 budget blueprint. Away from that the only data of note is  the January monthly budget statement in the US. Heineken will report earnings.
    • Tuesday: A busier day for data with the January CPI/PPI/RPI report in the UK the main focus. In the US the January NFIB small business optimism print will be released while in Japan the preliminary Q4 GDP print will be out in the late evening. Away from data the Fed’s Mester is due to speak in the afternoon on monetary policy and the economic outlook. Pepsico will release earnings.
    • Wednesday: Front and centre on Wednesday is the January CPI report in the US, while January retail sales will also be released alongside. December business inventories is the other data release due in the US while in Europe we’ll get Q4 GDP in Germany (second estimate) and the final January CPI revisions, along with Q4 GDP for the Euro area (second estimate). Away from data the Bundesbank’s Weidmann is due to speak in the morning, followed by the ECB’s Mersch. German Chancellor Merkel is also due to speak at a CDU event. CISCO, and Credit Agricole will report earnings.
    • Thursday: Another busy day for data with January PPI, January industrial production, February empire manufacturing, February Philly Fed PMI, February NAHB housing market index and the latest weekly initial jobless claims readings all due in the US. In Europe Q4 employment data in France and the December trade balance for the Euro area are due. The ECB’s Mersch and Praet are also slated to speak at an event in Paris. It’s with noting that New Year celebrations in China will also begin on Thursday, with mainland markets subsequently shut until the 21st. Nestle will report earnings.
    • Friday: The end of the week will see January retail sales data released in the UK, along with the January import price index, January housing starts and building permits and the preliminary February University of Michigan consumer sentiment reading in the US. The ECB’s Coeure will also speak in the morning. Coca-Cola, and Kraft Heinz will all report earnings.

    * * *

    Finally, here is Goldman with its breakdown of key US events together with consensus forecasts:

    The key economic releases next week are CPI and retail sales on Wednesday and Industrial production on Thursday. There is one speaking engagement from a Fed official this week, on Tuesday.

    Monday, February 12

    • 02:00 PM Monthly budget statement, January (consensus -$51.0bn, last -$23.2bn).

    Tuesday, February 13

    • 08:00 AM Cleveland Fed President Mester (FOMC voter) speaks: Cleveland Fed President Loretta Mester will speak at a breakfast event hosted by the Dayton Area Chamber of Commerce. Audience and media Q&A are expected.

    Wednesday, February 14

    • 8:30 AM CPI (mom), January (GS +0.38%, consensus +0.3%, last +0.20%): Core CPI (mom), January (GS +0.22%, consensus +0.2%, last +0.24%); CPI (yoy), January (GS +1.98%, consensus +1.9%, last +2.1%); Core CPI (yoy), January (GS +1.71%, consensus +1.7%, last +1.8%): We estimate a 0.22% increase in January core CPI (mom sa), which would lower the year-over-year rate to +1.7%. Our forecast reflects a boost from January seasonality, and likely continued strength in shelter inflation. On the negative side, we expect a small drag from telephone hardware methodological changes. We estimate a 0.38% increase in headline CPI, reflecting firm consumer energy and food prices in January.
    • 08:30 AM Retail sales, January (GS +0.2%, consensus +0.2%, last +0.4%); Retail sales ex-auto, January (GS +0.4%, consensus +0.5%, last +0.4%); Retail sales ex-auto & gas, January (GS +0.3%, consensus +0.4%, last +0.4%); Core retail sales, January (GS +0.3%, consensus +0.4%, last +0.3%): We estimate core retail sales (ex-autos, gasoline, and building materials) rose at a 0.3% pace in January. While the growth pace likely remains solid—reflecting a boost from strong service sector data and the January stock market rally— we anticipate some correction in the nonstore retailers category after a strong holiday shopping season. Given the further rise in (sa) gasoline prices and the decline in auto SAAR, we estimate 0.4% and 0.2% respective increases in the ex-auto and headline measures.
    • 10:00 AM Business inventories (consensus +0.3%, last +0.4%)

    Thursday, February 15

    • 08:30 AM PPI final demand, January (GS +0.2%, consensus +0.4%, last -0.1%); PPI ex-food and energy, January (GS +0.1%, consensus +0.2%, last -0.1%); PPI ex-food, energy, and trade, January (GS +0.1%, consensus +0.2%, last +0.1%): We estimate a 0.2% increase in headline PPI in January, reflecting a slight uptick in gasoline prices. We expect a smaller 0.1% increase in in the PPI ex-food, energy, and trade services category. In the December report, the producer price index was weaker than expected, reflecting softness in both core measures as well as in food and energy prices.
    • 08:30 AM Philadelphia Fed manufacturing index, February (GS +21.3, consensus +20.6, last +22.2): We estimate the Philadelphia Fed manufacturing index edged down in February. It is possible the decline in January partially reflected the Bomb Cyclone storms. Commentary from industrials remains encouraging, and we expect the index to remain at expansionary levels.
    • 08:30 AM Empire manufacturing survey, February (consensus +17.9, last +17.7)
    • 08:30 AM Initial jobless claims, week ended February 10 (GS 230k, consensus 228k, last 221k); Continuing jobless claims, week ended February 3 (consensus 1,928k, last 1,923k): We estimate initial jobless claims ticked up by 9k to 230k in the week ended February 10. Continuing claims – the number of persons receiving benefits through standard programs – declined in the previous week and may continue their general downward trend since early January.
    • 09:15 AM Industrial production, January (GS +0.5%, consensus +0.2%, last +0.9%); Manufacturing production, January (GS +0.4%, consensus +0.3%, last +0.1%); Capacity utilization, January (consensus 78.0%, last 77.9%): We estimate industrial production rose +0.5% in January, as the utilities category likely rose further and manufacturing rebounded from last month’s soft report. We expect manufacturing production rose +0.4%, reflecting strength in non-auto manufacturing.
    • 01:00 PM NAHB homebuilder sentiment, February (consensus 72, last 72)

    Friday, February 16

    • 08:30 AM Housing starts, January (GS +4.0%, consensus +3.3%, last -8.2%); We estimate housing starts rebounded 4.0% in January, reflecting a catch-up with the recently more resilient single-family permits, partially offset by unseasonably cold weather.
    • 08:30 AM Import price index, January (consensus +0.6%, last +0.1%)
    • 10:00 AM University of Michigan consumer sentiment, February preliminary (GS 94.8, consensus 95.5, last 95.7): We estimate the University of Michigan consumer sentiment index edged down 0.9pt to 94.8 in the preliminary estimate for February. We note the possibility of the recent stock market selloff over the last week to weigh on surveys conducted last week. The report’s measure of 5- to 10-year inflation expectations was 2.5% in January, near the middle of its 12-month range.

    Source: Barclays, DB, Goldman

  • Stock & Bond Investors Are Now Paying The Price For The Fed's Dangerous Experiment

    Authored by Vitaliy Katsenelson via ContrarianEdge.com,

    The Federal Reserve’s changing of the guard — the end of the Janet Yellen’s tenure and the beginning of the Jerome Powell era — has me remembering what it was like to grow up in the former Soviet Union.

    Back then, our local grocery store had two types of sugar: The cheap one was priced at 96 kopecks (Russian cents) a kilo and the expensive one at 104 kopecks. I vividly remember these prices because they didn’t change for a decade. The prices were not set by sugar supply and demand but were determined by a well-meaning bureaucrat (who may even have been an economist) a thousand miles away.

    If all Russian housewives (and house-husbands) had decided to go on an apple pie diet and started baking pies for breakfast, lunch, and dinner, sugar demand would have increased but the prices still would have been 96 and 104 kopecks. As a result, we would have had a shortage of sugar — a common occurrence in the Soviet era.

    In a capitalist economy, the invisible hand serves a very important but underappreciated role: It is a signaling mechanism that helps balance supply and demand. High demand leads to higher prices, telegraphing suppliers that they’ll make more money if they produce extra goods. Additional supply lowers prices, bringing them to a new equilibrium. This is how prices are set for millions of goods globally on a daily basis in free-market economies.

    In the command-and-control economy of the Soviet Union, the prices of goods often had little to do with supply and demand but were instead typically used as a political tool. This in part is why the Soviet economy failed — to make good decisions you need good data, and if price carries no data, it is hard to make good business decisions.

    When I left Soviet Russia in 1991, I thought I would never see a command-and-control economy again. I was wrong.

    Over the past decade the global economy has started to resemble one, as well-meaning economists running central banks have been setting the price for the most important commodity in the world: money.

    Interest rates are the price of money, and the daily decisions of billions of people and their corporations and governments should determine them. Like the price of sugar in Soviet Russia, interest rates today have little to do with supply and demand (and thus have zero signaling value).

    For instance, if the Federal Reserve hadn’t bought more than $2 trillion of U.S. debt by late 2014, when U.S. government debt crossed the $17 trillion mark, interest rates might have started to go up and our budget deficit would have increased and forced politicians to cut government spending. But the opposite has happened: As our debt pile has grown, the government’s cost of borrowing has declined.

    The consequences of well-meaning (but not all-knowing) economists setting the cost of money are widespread, from the inflation of asset prices to encouraging companies to spend on projects they shouldn’t.

    But we really don’t know the second-, third-, and fourth derivatives of the consequences that command-control interest rates will bring. We know that most likely every market participant was forced to take on more risk in recent years, but we don’t know how much more because we don’t know the price of money.

    Quantitative easing: These two seemingly harmless words have mutated the DNA of the global economy. Interest rates heavily influence currency exchange rates. Anticipation of QE by the European Union caused the price of the Swiss franc to jump 15% in one day in January 2015, and the Swiss economy has been crippled ever since.

    Americans have a healthy distrust of their politicians. We expect our politicians to be corrupt. We don’t worship our leaders (only the dead ones). The U.S. Constitution is full of checks and balances to make sure that when (often not if) the opium of power goes to a politician’s head, the damage he or she can do to society is limited.

    Unfortunately, we don’t share the same distrust for economists and central bankers. It’s hard to say exactly why. Maybe we are in awe of their Ph.D.s. Or maybe it’s because they sound really smart and at the same time make us feel dumber than a toaster when they use big terms like “aggregate demand.” For whatever reason, we think they possess foresight and the powers of Marvel superheroes.

    Warren Buffett — the Oracle of Omaha himself — admitted that he doesn’t know how the QE experiment will end. And if you think well-meaning economists running central banks know, you may have another thing coming.

    Alan Greenspan — the ex-pope of the Federal Reserve — in a 2013 interview with the Wall Street Journal said that he “always considered [himself] more of a mathematician than a psychologist.” But after the 2008-09 financial crisis and the criticism he received for contributing to the housing bubble, Greenspan went back and studied herd behavior, with some surprising results. “I was actually flabbergasted,” he admitted. “It upended my view of how the world works.”

    Just as the well-meaning economists of the Soviet Union didn’t know the correct price of sugar, nor do the good-intentioned economists of our global central banks know where interest rates should be. Even more important, they can’t predict the consequences of their actions.

    *  *  *
    Vitaliy Katsenelson is the CIO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.) He wrote two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. 

Digest powered by RSS Digest

Leave a Reply

%d bloggers like this: