Today’s News 15th December 2017

  • Banks Demand 11th-hour Reprieve On Key Part Of MiFID II

    The clock is ticking down and there are only about three weeks to go before the dreaded MiFID II regulatory structure is implemented on 3 January 2018. While it’s been difficult to judge the industry’s preparedness for the change, several aspects of the new regulations have attracted the most debate and concern. These have included transaction reporting, unbudling of research costs and whether institutional investors will absorb the costs or pass them on to their clients and trade identifiers. As the deadline nears, one of these issues – Legal Entity Identifiers (LEI) – has assumed more significance than the others. 

    The enforcement of LEI’s to identify legal entities is targeting increased market transparency via audit trails. Each market participant will need its own 20-character “alphanumeric code” and the relevant codes for buyers, sellers and issuers of the security will be required to complete a trade.

    As we discussed yesterday in “UBS Is Using Ethereum Technology To Soften The Impact Of MiFID II”, a group of financial institutions, led by UBS, are building a compliance system based on the blockchain which manage LEI requirements. Briefly, reference data hashed to the Etheruem blockchain will mutualize the application of LEI’s for the buyer, seller and issuer in financial market transactions in real-time. While bankers are becoming increasingly upbeat on the capabilities of blockchain technology…

    In a presentation obtained by CoinDesk, Christian Nolting, also the bank’s (UBS) global head of wealth, and Marcus Muller, global head of the CIO office, explained digital currencies and blockchain to their fellow bankers. In the presentation, the bankers asserted that the “opportunities associated with blockchain technologies are huge,” and could be fully put into practice within the next few years. And in what's possibly one of most grandiose predictions about blockchain's impact on the global economy, the bankers predicted that roughly 10% of the global gross domestic product (GDP) would be tracked or otherwise "regulated" by a blockchain by 2027.

    …the new system is not going to rescue thousands of investors and corporate issuers who are unlikely to have their LEIs ready in time for the MiFID II deadline. For example, Thomson Reuters estimates that only about two thirds of the roughly 15,000 companies listed on European exchanges have an LEI.

    If the regulators don’t budge, a large number of entities will be shut out of the markets.  Something is going to have to give, quickly, as the Financial Times reports.

    Banks are pushing for an eleventh-hour reprieve for a key part of new European markets rules because about a fifth of their clients do not have the vital tag they will need to continue trading. They are worried that some investors could be shut out of deals from the start of January because thousands of counterparties or corporate issuers will not have their unique trade identifiers.

    In recent weeks the banks, which play a critical role in the market organising trades, have undertaken campaigns to raise awareness among customers before the arrival of the new Mifid II rules on January 3. At the same time they have been pressing for regulators to ease their hardline stance and are growing increasingly confident authorities are set to grant a grace period of several months.

    Speaking to a senior executive at a large investment bank, the FT reports that “15 to 20 per cent” of his clients do not yet have LEIs and that is not expected to change much in the next three weeks. Executives at three other banks told the FT they were is a similar, or worse, situation while a fourth remarked that it would be a “s*** show” if his bank was forced to refuse to do business with clients without LEIs from January 3. Neil Robson, a lawyer at Katten Muchin Rosenman in London, told the newspaper that “Asian applications for LEIs are lagging way behind those from European entities and US entities.” If the banks are to win their reprieve, it could happen today, as the FT explains.

    Market participants are hoping a meeting by the European Securities Markets Authority (Esma) on Thursday will give them breathing space, and a two-month grace period in which they can retrospectively report deals once the client has its LEI. Esma declined to comment. The UK’s Financial Conduct Authority (FCA), like Esma, has frequently told the industry it will take a tough “No LEI, no trade” stance for Mifid.

     

    However, three people who have discussed the issue with the FCA say they detect signs of its position softening. “They (the FCA) are effectively saying they’re not in a position to take differing views (to Esma),” one banker said, adding that he hoped Thursday’s Esma meeting would yield a “pragmatic solution”.

    MiFID II has been termed a “Big Bang” for financial markets. This author started working in financial markets, in equities, shortly after the last “Big Bang” in 1986. We remember a big-hitting salesman, who'd married into a family controlling a major retailing company, was sat next to another salesman who specialised in selling retailing equities to institutional investors (synergy). In turn, the specialist retail salesman sat next to the trader in retail equities whose wife was, coincidentally, a big trader in retail and other equities – we could monitor her trading account on the in-house system (transparency). Moving jobs to the pre-eminent investment bank in London some years later, the head of compliance would stand behind a market-maker and ask him why he had a particular position in a stock, while sucking in air through his teeth. That was the signal for the trader to flatten his book. It's sad that despite the tsunami of strangulating regulation ever since, abuses – e.g. rate rigging, money laundering, front running, etc, have only got bigger – while no senior management from the banks have been charged (except in Iceland). There is a link there, obviously, which the regulators choose to ignore. Consequently, MiFID or not, things aren't going to change.
     

  • South Korea Braces For Terrorism At The 2018 Winter Games

    It’s difficult not to empathize with South Korea right now: The country is preparing to host the Pyeongchang winter games in February – a moment of immense national pride – as the risks of a terrorist attack (not to mention nuclear annihilation) have intensified.

    To wit, Reuters reports that the South Korean government is taking precautions to assuage the international community’s fears. Police conducted a series of security drills on Tuesday to prepare against terror attacks ranging from a hostage situation, a vehicle ramming a stadium and a bomb-attached to a drone.

    South Korea Police and firemen were among around 420 personnel participating in the exercise, held in front of the Olympic Stadium at Pyeongchang, just 80 km (50 miles) from the heavily fortified border with North Korea as SWAT team members rehearsed a scenario where they shot down a drone with a bomb attached that was flying toward a bus carrying athletes.

    In another situation, a terrorist takes a bus full of tourists hostage and tries to ram the vehicle into the stadium before being gunned down by police. Officers in gas masks also practiced removing a chemical bomb.

    Anxiety on the Korean Peninsula has been rising in recent months due to a series of missile tests by North Korea as it continues its pursuit of nuclear weapons in defiance of UN sanctions and warnings from the US.

    “Please keep in mind that accidents always happen where no one has expected,” South Korean Prime Minister Lee Nak-yon said.

     

    “Please check until the last minute whether there are any security loopholes."

    Lee did not mention North Korea, but South Korea’s Defense Ministry on Friday flagged risks that North Korea could resort to terrorist or cyber attacks to spoil international events.

    Some 5,000 armed forces personnel will be deployed at the Winter Games, according to South Korean government officials and documents reviewed by Reuters.

    Hacking is also a risk that the South Korean government is preparing for.

    Pyeongchang’s organizing committee for the 2018 Games (POCOG) has also hired a private cyber security company to guard against a hacking attack from the North, tender documents show.

    To minimize the risk of provoking an aggressive North Korean reaction during the games, South Korea has asked Washington to delay regular joint military exercises until after the Olympics, the Financial Times reported. The latest headlines suggest this request has been accepted and joint drills have been delayed until April.

  • Australian Central Bank – Bitcoin Is Bad But You'd Love A Digital "e-AUD"

    Sweden’s Riksbank, the world’s oldest central bank, is exploring the possibility of a digital register-based e-krona; the Reserve Bank of New Zealand is researching whether its physical currency could be replaced by a digital alternative; the Bank of England is trialling blockchain-like systems; the Monetary Authority of Singapore is examining the use of distributed ledger technology for clearing and settlement of payments; and the PBoC said in October that it had completed tests on algorithms for a prototype of its own digital currency.

    Now the Reserve Bank of Australia (RBA) has entered the fray with an all too familiar refrain.

    We’re paraphrasing…Bitcoin is bad, the realm of criminals and little more than a speculative mania, but the technology underlying Bitcoin has great potential, which we can exploit in time with our own “superior” digital currency.

    This is what Philip Lowe, the RBA’s Governor, actually said about Bitcoin at the Australian Payment Summit, which took place today at the Hyatt Sydney Regency in Sydney Harbour.

    When thought of purely as a payment instrument, (Bitcoin) seems more likely to be attractive to those who want to make transactions in the black or illegal economy, rather than everyday transactions. So the current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment.

    No surprise there, just more of the same from banking Mafiosi like Lowe, the ECB’s Constancio (“tulip”) and most notably, JPM’s Dimon. The Financial Times article outlining the RBA’s thinking sets out the case for blockchain/distributed ledger technology.

    Central banks, commercial banks and other financial institutions are exploring how to use private distributed ledgers to make financial transactions cheaper, more transparent, and less vulnerable to fraud. Banks and settlement systems currently use central electronic ledgers to track money transfers. But these systems can be slow, often rely on manual input and are open to hacking. Distributed ledger records transactions through a network of computers rather than a single central party…The attractions of the technology include the ability to make fast digital money transfers that do not carry the cost of handling cash, tracked securely by the network.

    But…there’s just one thing missing, which is where we “need” our central banking friends.

    However, a potential drawback of bitcoin-style systems is the lack of a central entity standing behind the liability, Mr Lowe said.

    Philip Lowe’s and his RBA colleagues are examining the potential for an eAUD, which would be issued alongside physical banknotes – although the FT article neglects to add the word “initially” (if you’ll excuse our cynicism).

    Australia’s central bank is exploring creating electronic banknotes using the technology underpinning bitcoin, as major central banks around the world race to bring cash into the digital age. Philip Lowe, governor of the Reserve Bank of Australia, said in a speech on Wednesday that the bank was analysing the benefits and drawbacks of issuing an electronic form of the Australian dollar — the “eAUD” — alongside traditional banknotes.

    Speaking at the Australian Payment Summit, Mr Lowe said: “It is possible that the RBA might, in time, issue a new form of digital money…perhaps using distributed ledger technology.” He added that although the RBA has “no immediate plans” to issue digital dollars, the central bank is “continuing to look at the pros and cons”. The central bank also is exploring a new digital dollar settlement system based on the use of distributed ledger technology, or blockchain, the technology behind bitcoin. Digital dollars could take the form of a “token” that is issued and stored in consumers’ digital wallets, which can then be used for payments in a similar way to physical bank notes.

    Perhaps in a classic case of “problem, reaction, solution”, we’re speculating of course, the RBA will introduce an eAUD and phase out physical currency during the next financial crisis. In the case of Australia we may not have too long to wait as we discussed last month in “The Party’s Over For Australia’s $5.6 Trillion Housing Frenzy”. However, we noted the best analogy for the “Down Under” economy in “Why Australia’s Economy Is A House Of Cards” in which Matt Barrie and Craig Tindale argued that the three decades long expansion was mostly the result of “dumb-luck”.

    As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.

    Browsing through the speaker biographies at the Australian Payment Summit, besides being RBA Governor, Philip Lowe is also (we can’t help but smile) a member of Australia’s Financial Stability Board and “spent two years at the Bank for International Settlements working on financial stability issues”. On a serious note, we know the direction which central banks want to lead us, as we argued a week ago with regard to the nomination of Marvin Goodfriend as Fed governor.

    It’s clear from reading between the lines that although central bankers are not engaging in a public discussion, the architects of the boom-bust cycles are considering their policy options for the next crisis…the one where their latest credit/asset bubble bursts in horrendous fashion. It’s also clear that the preferred solution is negative interest rates and either abolishing paper currency or taxing it in line with a depreciating digital currency standard.

    The RBA’s Philip Lowe is another minion seeking to control the narrative for the banking Mafiosi.

  • PCR: "In A Triumph For Feminism Police Say A Mistletoe Kiss Without Consent Is Rape"

    Authored by Paul Craig Roberts,

    Criminalizing a bit of Christmas fun has to make you wonder

    Is there any aspect of our life left into which the police state does not intrude?

    Parents are regulated as to how they discipline their children. Spankings that were the tool of choice in my day are now illegal. Spanking is considered child abuse and can result in state seizure of the child and prosecution of the parent.

    The state prescribes the terms on which children can be transported in cars. The cars themselves can only be designed within safety and fuel economy parameters determined by the state.

    The unsupervised children at play of my generation no longer exist outside of small towns. Not that long ago I reported on the arrest of a mother on the grounds that she permitted an underage kid to play unsupervised in the front yard of the home on a cul-de-sac. The arrest was made on the false report of a neighbor. The police seized the opportunity to arrest a mother on the basis of “failure to supervise an underage child.” The family was traumatized. The mother was put in jail, the child in Child Protective Custody, and the father rushed home from work to see if he could rescue his family from the intrusion of the American Police State. It has happened to many, and Americans sit there sucking their thumbs, hoping the lion will choose another antelope.

    The parents, grandparents, and aunts and uncles of my day would all have been locked up. My entire generation would have been raised in orphanages.

    When the state substitutes its judgment for that of parents, it takes the job away from them. Even within the same family children differ. Parents have to find the best approach for each child. Moreover, children who are always supervised never grow up. They learn neither responsibility nor street smarts. Children are even regulated how they can play. No pointing the finger and saying “bang, bang.” Even words are policed, some words no longer being permissible.

    Perhaps someone has studied the impact on culture of such intense state intrusion into private life. And there are other culture-changing factors. Consider Identity Politics. The other day I listened to a recording of Barbara Streisand singing “A Woman In Love” from 1980, and Celine Dion’s “The Power of Love” from years ago. Both of these performers are gifted with beautiful and powerful voices. I wondered if they have a counterpart today.

    I haven’t time to listen to much music, so I do not know. But the thought occurred to me that these are songs about love between a woman and a man. Moreover, in the official videos, the man is white.

    Identity Politics is gradually delegitimizing heterosexual relationships, especially if the male is white, as Identity Politics defines the white heterosexual male as the oppressor of all other races and genders.

    Having heard that in “advanced circles” women are subjected to peer pressure not to have relationships with “white, sexist, racist males,” I was wondering if today Streisand would have to have a black lover in her video and whether Dion would have to pitch her song to a lesbian lover.
    Otherwise, would they be the hits they were during their time? Indeed, could Dion survive using the politically incorrect word, “lady”?

    People are born into what exists. They have no experience of what previously existed. Therefore, they do not know what has been lost. This generational effect is the best ally of the police state.

    People born into a country, in which unaccountable police can brutalize and murder and steal, born into a country, the government of which declares itself above both domestic and international law and the US Constitution, a country that ignores constitutional protections such as habeas corpus and due process of law, a country that based on a false claim that the country is indispensable and exceptional claims the right to destroy entire countries whose governments refuse to follow Washington’s orders, a country that claims the right to control explanations and that brands those who tell the truth to be conspiracy theorists, Russian agents, anti-semites, and enemies of the people, know no different. What to my generation is totalitarian horror is normal to them.

    That country is the United States of America. It is the most shameful country on earth. The United States is a country whose rulers regard their hegemony as more important than the wellbeing of people and the life of the planet.

    If the world is to survive America and if America is to survive as a country in which citizens are permitted free thought, free speech, to make their own decisions, to raise their own children and otherwise to be a free people, Americans will have to get angry at those who are destroying them and reply to the everyday violence that they experience in many different forms with violence of their own.

    There are two forces in history. One is ideas. The other is violence. Karl Marx said that ideas, although sometimes effective, such as his own, can become the control mechanism of the ruling class. In contrast, Marx said that violence is the effective force in history.

    In Marx’s analysis violence serves the working class, but this is no more than Marx’s assumption. Violence serves those who use it most forcefully.

    Today Washington’s violence has brought America up against Russia, China, Iran, and North Korea. Washington has outmatched itself.

    US President Trump, by seeking protection from Israel against his own government, has re-ignited Arab hostility to Israel and to the US.

    Today Israel is alone, defended only by Washington whose own stupidity has created powerful enemies.

    Washington has proved itself incapable of leadership. Russia, China, and Iran have proven that they are capable of leadership, and they are also making it clearer by the day that they are fed up with Washington.

    It is past time for Americans to get fed up with Washington, its lies and its abuse of power.

  • Billionaire Chairman Of China's Giant Network Invested In OkCoin

    Giant Network Chairman Shi Yuzhu has invested tens of millions of dollars in cryptocurrency trading platform OkCoin, according to local media reports citing unidentified people familiar with the matter. According to local media sources, the investment was widely anticipated.

    According to Bloomberg, it’s unclear whether the investment took place before or after China halted domestic Bitcoin exchanges. OKCoin CEO Star Xu declined to comment to QQ.com.

    Xu Mingxing, founder and CEO of OKcoin, apparently confirmed Shi’s investment. Xu also confirmed that Lei Jun, another celebrity billionaire – though it’s unclear whether the two men made their investments before or after China introduced regulations banning active trading of ICO tokens and cryptocurrencies on local exchanges, forcing many customers to migrate to South Korean, Hong Kong or Japanese exchanges. Lei had previously denied his investment.

    Back in 2014, OKCoin raised around ten million dollars in Series A funding from investment institutions (Ceyuan Venture Capital, Mandra Capital, Ventures Lab) and venture capitalists (prominent angel investor Cai Wensheng, founder of e-commerce site Xiu.com Huang Jin, founder of developer community CSDN Jiang Tao, chairman of Chinese Yough Angel Investor Leader Association Yang Ning, founder of angel investor Pre-Angel Wang Lijie, founder of tech media Leiphone Lin Jun, etc.).

    In September, Chinese authorities shocked the bitcoin market when they abruptly banned exchanges from actively trading ICO tokens and digital currencies like bitcoin. Exchange-based trading volume in the country immediately plummeted as domestic investors turned to exchanges based in Japan, South Korea or Hong Kong to conduct business.

    But local exchanges are apparently surviving after tweaking their business model.

    They now facilitate peer to peer transactions, a business model pioneered by website LocalBitcoins.

    Since the exchanges shuttered active trading, peer-to-peer trading volume in the country has exploded…

  • America's Painful Self-Delusion

    Authored by Allen Marshall (Crimson Avenger) via Defiant Living blog,

    America is the only nation brought forth by a set of beliefs, and those beliefs, captured so eloquently in our founding documents, are some of the most powerful and inspiring ever conceived. We consider this to be the land of the free, where the individual is supreme and nothing prevents us from going as far as our talents can take us. That image of America – that “brand” – is incredibly strong.

    However, there’s a very large gap between that long-held image and the reality of America today.

    What was once a government built for the people is now a government run for the rich and powerful, one that throws the people under the bus whenever their interests differ from those of the corporate and political leaders who run the show.

    And living in one world (the corrupt) while stubbornly believing you live in another (the ideal), despite mounds of evidence, causes a distinct kind of stress, often called cognitive dissonance.

    Psychologists suggest that when people are in a state of cognitive dissonance, they’ll search for a way to resolve it, either by rejecting one view or the other as either wrong or unimportant. If you’re a smoker looking at the link between smoking and cancer, for example, you’ll either quit smoking or decide that the research is biased, wrong, or doesn’t apply (in other words, that you’re smart enough to quit before the long-term damage is done).

    But what happens if you can’t resolve the two?

    For most of us Americans, resolving our cognitive dissonance would mean either accepting that we’re impotent and living futile (and feudal) lives, or rejecting our lifestyles and actively fighting the rot in the system.

    If we’re not willing to do either of those, the dissonance stays – and eats at us.

    People carrying this kind of ongoing, underlying stress find ways of coping with it; in America we’re doing it with self-medication, compulsive behaviors and distractions. Consider the following examples of the way we cope with the ever-present stress in our lives:

    • Drugs – Our country is awash in drugs, both legal and illegal, that keep us numb. In 2014, there were 245 million prescriptions filled for opioid pain relievers. The number of deaths from drug overdoses has risen from around 30,000 in 2005 to 64,000 in 2016. And communities across the country are being devastated by the opioid epidemic, as explained in this in-depth reporting by Cincinnati.com.
    • Drinking – People don’t only use drugs to self-medicate; drinking does the trick as well, and we’re doing a lot more of it than we used to. According to a new study in JAMA Psychiatry, overall drinking in the US increased by 11% between 2002-13, while high-risk and problem drinking rose even higher: high-risk drinking rose by 29.9%, while problem drinking rose by 50%.
    • Mental Illness In 2015, 17.9% of adults held a diagnosis for a mental disorder, while a 2010 study found that 46.3% of children ages 13-18 had a mental disorder at some point in their young lives, and the majority of those adults and children are given prescriptions. This includes a dramatic increase in ADHD diagnoses for children: According to SharpBrains, “Among children aged 5 to 18, between 1991-92 and 2008-09, rates of ADHD diagnosis increased nearly 4-fold among boys – from 39.5 to 144.6 per 1000 – and nearly 6-fold for girls – from 12.3 and 68.5 per 1000 visits.”
    • Obesity – If drinking and drugs aren’t your thing – or even if they are – more of us are coping with stress by overeating, and it’s showing up on our waistlines. From 1990 to 2016, the average percentage of obese adults increased from 11.1% to 29.8%; when you add in the number of people who are overweight but not obese, it rises to more than two in three adults.
    • Sleeping problems – Sleep has a significant impact on our physical and mental health, and in America we’re not getting enough of it: The CDC states that 50-70 million American adults have a sleep or wakefulness disorder.
    • Media Usage – Is there any better distraction from life’s problems than media? We certainly spend a lot of our time being passively entertained: In 2016, Americans consumed an average of 10 hours of media per day, compared with 7.5 hours per day globally. Nielson reports that lower income adults spend much more time with media than do affluent adults, with adults in households with include under $25,000 watching 211 hours/month of television, versus 113 hours/month for adults in households earning $75,000 or more. (The trend is similar across other media as well.)
    • The Disease of DebtAccording to the New York Fed, household debt reached a new peak in the third quarter of 2017, at $12.8 trillion. Part of our debt problem comes from the compulsive shopping we do as a distraction; the other results from denying the reality that our wages aren’t keeping up with the increase in the cost of living, meaning that we use debt to plug the gap rather than reducing our living standards to align with our reality.

    We’re collectively doing so much damage to ourselves, solely to protect our psyches from the reality that the America that used to be is no longer the America we have. And who does that help? As you can see from the points above, it doesn’t help us: Instead, it helps the rich and powerful who are subverting the system. They’re corrupting everything this country once was, and by willfully refusing to acknowledge that reality, we’re inadvertently helping them to do it.

    The best thing we can do – for our mental and physical health, as well as for our country – is to open our eyes to what America has become, not what we wish it still was. It’s time to face reality and take action.

  • One Bank Believes It Found The Identity Of Who Is "Propping Up The Bitcoin Market"

    Back in May when the Chinese domination over Bitcoin was ending, we predicted that it would shift over to Japan, specifically, we said that “just as the Chinese bubble frenzy in bitcoin is fading, it may be replaced with a new one, in which thousands of Mrs. Watanabe traders shift their attention away from the FX market and toward digital currencies” and added that “If the transition is seamless, there is no telling just how far this particular bubble can grow.”

    Judging by the exponential price surge in bitcoin in the subsequent period, we were clearly right on the latter, and now, according to a new analysis, we were also right on the former, because as Deutsche Bank reveals in a new report by Masao Muraki, “Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped) are driving the cryptocurrency market” and who according to DB, happen to be more or less idiots, arguably because for the time being they are outperforming every other asset class… in history, to wit: “Japanese retail investors are less financially literate than their US peers across all age groups. Compared to the US, financial literacy is particularly poor among people 35-54 years of age. The poor literacy of Japanese retail investors also stands out beside UK and German investors.”

    Ah yes, by contrast the financial literacy of the world’s central-planners is off the charts. Look where that got us…

    In any case, and without further ado, please meet the (rather boring) people who are propping up the Bitcoin market, at least according to Deutsche Bank.

    Here are the details:

    The identity of who is propping up the Bitcoin market

    1. 40% of cryptocurrency trading is Japanese yen-denominated

    An 11 December Nikkei report stated that 40% of cryptocurrency trading in Oct-Nov was yen-denominated. Japanese traders have reportedly come to account for nearly half of cryptocurrency trading since China started to shut down cryptocurrency exchanges, and this is said to be widely known among industry insiders (various estimates exist). This report shows that Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped) are driving the cryptocurrency market.

    2. The true face of investors engaged in leveraged FX trading

    “Mrs. Watanabe” is a buzzword often used by US/European media and market participants to symbolize the typical Japanese retail investor who trades in FX. Following Abe and Kuroda, Watanabe may be the most famous Japanese name among market participants (although the purported creator of Bitcoin, Satoshi Nakamoto, is also famous). Japan accounts for a high 54% of global foreign exchange margin trading (leveraged FX trading) (source: Forex Magnate, 1Q2017), so Japanese retail investors are major players in FX markets. Data from GMO Click Securities which is the top company in its industry indicates that men hold 79% of FX trading accounts, and 63% of these men are aged 30-49 (as of end-September 2017; Figures 3-4). The typical Japanese leveraged FX trader is thus a man in his 30s or 40s and really ought to be called “Mr. Watanabe”.

    As the speculative frenzy over cryptocurrency heightens, the spotlight is falling on the unique characteristics of Japanese retail investors. The Nikkei report mentioned above cited an example of a 38-year-old business man who invested ¥8m ($70,000) in Bitcoin, including his bonus. The average household income of a 38-year-old is about ¥6.1m, the average savings are ¥5m, and the average borrowings are ¥8.8m. This report was also a topic of conversation among the managers of Japanese financial institutions that I visited this week.

    3. Financial literacy

    How much financial literacy do retail investors engaged in leveraged FX/cryptocurrency trading possess? According to a survey by the Central Council for Financial Services Information (the Bank of Japan), Japanese retail investors are less financially literate than their US peers across all age groups (Figure 6). Compared to the US, financial literacy is particularly poor among people 35-54 years of age. The poor literacy of Japanese retail investors also stands out beside UK and German investors (Figure 7).


    Before the FSA started applying pressure, the core investment products sold by banks and brokers were investment trusts with distribution yields above 10% (products with yields above 20% were particularly popular) that took compound risks and drew down principal (the typical purchase commission was above 3% and annual management fees were over 2%).

    Figure 8 shows the top 3 reasons that Japanese retail investors engage in leveraged FX trading: 1) expectations of high returns, 2) they can easily invest in foreign currencies, and 3) many investors are earning profits. However Figure 9 shows that most investors say they quit leveraged FX trading because they did not do well (only 7.5% said they realized their profit goals).

    More than a few Japanese investors positively value volatility. We have believed that “Japan is the Galapagos of asset management markets, pursuing its own path amid the long period of deflation. Japan’s investment style is typified by a combination of low-risk, low-return deposits and high-risk, high-return investments” (see our 11 December 2014 report, “Initiation: Securities firms confront changing “Galapagos market””).

    4. Investors’ winning percentage and turnover

    New investors continuously enter the leveraged FX trading market and repeat the metabolism of being forced out by a margin call due to sharp market changes. This results in a market with a tumultuous annual participant turnover.

    Leveraged FX trading is essentially a zero-sum game. Japanese retail investors are playing this zero-sum game with institutional investors engaged in algorithmic trading. It would be very difficult for business men trading on their smartphones during lunch or after work to sustain their trade wins. In Figure 5, we equate increases in FX trading account margins with wins, and decreases with losses. Over the past 10 quarters, we estimate that wins to losses were basically even in six quarters, while significant losses dominated in four quarters.


    5. From leveraged FX trading to leveraged cryptocurrency trading

    We think that retail investors are shifting from leveraged FX trading to leveraged cryptocurrency trading. Firms such as the GMO Group and SBI Group are embracing the sense of urgency and starting to offer cryptocurrency trading services. Factor breakdown is difficult due to market variables, but leveraged FX trading has been sluggish since February 2017 (Figure 1).

    Cryptocurrency has been trending up, so retail investors’ unrealized gains are also rising. With few investors leaving and a steady inflow of new investors, the investor pool has been expanding. We believe that investors participating in leveraged cryptocurrency trading are typically Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped). We think that the pool of cryptocurrency investors not using leverage is even larger.

    6. Margin call risk and fail risk

    Leveraged cryptocurrency trading services are available in Japan. Some major FX brokers are using the same 25x leverage limit that applies to FX trading, but there are no direct rules in leveraged trading of cryptocurrency. During the Swiss franc shock in January 2015, many retail investors not only received margin calls but also incurred losses greater than their margin balances, because forced settlements couldn’t be implemented in a timely manner. This shows that investors can suffer losses which brokers end up booking as credit losses even with leveraged FX trading of developed nation currencies. Authentication of Bitcoin settlements takes at least 10 minutes. The risk of incurring losses greater than margin is higher than in normal FX trading, due to high intraday volatility. As a result, we believe that brokers also face a higher risk of failure.

    7. Unrealized gains are also virtual

    The National Tax Agency recently indicated that profits generated by the sale or use of cryptocurrency are classified as miscellaneous income in principle and are required to be filed in income tax returns. We think that many investors are hesitant to realize profits because, combined with other sources of income, these profits would be subject to income tax (up to 45% tax rate) and residence tax (around 10%).

    The progressive taxation system means that the tax rate rises in keeping with income for a single fiscal year (on a calendar year basis). For investors thinking of taking profit in the near term, a rational tax trade would be to sell some holdings this year and the rest next year. In contrast, investors hoping that profits will be taxed as capital gains in future (20% tax rate; but we cannot see any movement towards this) may put off realizing profit.

    8. Fair value of cryptocurrency

    Cryptocurrency such as Bitcoin that have pure distributed systems do not have an underlying value like precious metals. Value is not guaranteed by an issuer because there is no issuer. The value of cryptocurrency is thus entirely based on the belief that it can be exchanged for goods or sovereign currencies (BoJ review of December 2015). While valuation of exchange rates between legal tender and cryptocurrency should be the vital factor, it is retail investors (including “Mr. Watanabe”) who are currently carrying out price discovery.

    With a broader range of investors set to enter the market in 2018 and an increase in the ways to hedge (short selling), we expect to see the market’s price discovery function being utilized. The CBOE Futures Exchange began offering Bitcoin futures trading on 10 December and the CME plans to start on the 18th (the US Futures Industry Association sent a critical letter to the Commodity Futures Trading Commission who self-certified new contracts for bitcoin futures products. The letter said that there has not been enough discussion on topics such as margin levels, transaction limits, stress tests, and settlement).

    Rather than the cryptocurrency used for speculation, our focus is on the impact that distributed ledger technology (broadly defined as blockchain technology) can have on financial transactions and the business models of financial institutions. Furthermore, as speculation in cryptocurrency is growing to a scale that cannot be ignored, we plan to look more deeply into the potential impact on the market if the bubble should burst and the effect of concerns over this on regulations and monetary policy.

  • Some Ex-Cons Are Finally Finding Jobs: But Does The Fed Care?

    While CNN doesn’t dedicate much time to covering the subject, we’ve repeatedly pointed out that, contrary to what conventional wisdom might lead one to believe, incarceration rates among white Americans have risen since 2000 while incarceration rates for minorities have fallen.

    The US prison population is finally shrinking after swelling to more than 2 million people, placing the US among the countries with the largest prison populations. Nearly one in five inmates are incarcerated on nonviolent drug charges.

    And in 2000, there were 449 white inmates per 100,000 citizens while in 2014, the rate increased slightly with 465 inmates per 100,000.

    In recent years, opioids have devastated many predominantly white rural communities, sending many young men to prison, while also causing a surge in drug-overdose deaths. Whether you believe this downward mobility among white men is the cause – or a symptom – of the endemic ills associated with it, data appear to show that the recent uptick in the employment participation rate is a signal that the labor market truly is beginning to tighten.

    That means millions of working-age men are sidelined. Opioid abuse and high incarceration rates could be drivers. Some 10 percent of adult men not in prison had a felony conviction in 2010, up from less than 5 percent in 1980, research shows. And criminal histories are a hiring barrier — as Zito’s story illustrates.

    Many working-class whites struggle to find the types of manufacturing jobs that their parents held, which once provided a home and a better life for many. But manufacturing jobs have been declining for more than 30 years. Over the past two decades, robots are increasingly taking over more of the manufacturing jobs that are left.

    Beginning about four or five years ago, the participation rate ticked slightly higher. The marginal gains may not ultimately mean much when measured against the yearslong decline that began long before the baby boomers began leaving the workforce in droves. Still, trying to nurture better conditions for the workforce’s most marginal members should be a priority for incoming Fed Chairman Jerome Powell, Bloomberg reports.

    Setting aside the notion that the Fed’s policies seem to consistently and implicitly favor the wealthy, raising the participation rate – and reducing the ranks of the 20 million working men who have inexplicably left the workforce – would be a major political coup for the incoming Fed chair. It might even help restore of the central bank’s credibility.

    While Janet Yellen delivered another 25 basis point rate hike, as was widely expected, today's meeting was her last as the leader of the FOMC. Bloomberg claims one reason her successor should "tread lightly" when it comes to raising interest rates would be to preserve this hard-fought progress along the labor market's most marginalized edges.

    Michael Zito got a job in July, and that game-changing development likely owes a lot to a tight U.S. labor market.

     

    The 57-year-old New Yorker spent 27 years in prison after killing an acquaintance who he says broke into his Brooklyn apartment and beat his wife. When he was released on Dec. 12, 2016, he had never used a mobile phone.

     

    He had no home, no living relatives, and no computer skills. Yet eight months later, he landed work in building maintenance.

     

    “I have a low-paying job, but I have a paycheck, which I’m happy for,” said Zito, who makes $11 an hour keeping antique elevators running at a 1920s building in Queens. With the money, he hopes to move out of a shelter soon. Plus, he says, “it gives me a little bit of extra job experience.”

     

     

    Stanley Richards has witnessed the healing properties of low unemployment. As executive vice president of the Fortune Society, the nonprofit that helped Zito get a job, he’s seen companies become more willing to hire his clients as the shadow of the 2007-2009 recession fades.

     

    Construction had been a really hard sector to place people, Richards said, but “because there are so many opportunities in that industry now, we have been able to partner with companies who are hiring our people."

     

    To be sure, the Fed isn’t playing a zero-sum game. Cautious tightening shouldn’t trigger a hiring or growth slump — it will just slow progress. Economists reckon that rates are still low enough to boost growth, despite recent increases.

    Bloomberg also references the worsening economic inequality in the US and implores the central bank – to our eternal amusement – to do more to combat this troublesome trend.

    Goldman Sachs Group Inc. economists say America’s labor market is operating at two speeds. On one hand, employed workers who change jobs do so quickly – at 4.1 percent last month, headline unemployment is tight. On the other, people sidelined by the recession for structural reasons – from felony raps to outdated skills – are only slowly trickling back in.

     

    Job-finding prospects for the non-employed have gotten better and “could improve further in a labor market as tight as in 1999-2000,” they wrote in a research note this fall. That may boost the labor-force participation rate by a few more tenths of a percentage point.

     

    “For the Fed, the implications of this divided labor market are double-edged,” the Goldman economists wrote. If the low short-term unemployment rate matters more for inflation, as they suspect, letting the job market run creates the risk of overheating. “The FOMC seems to find this trade-off unappealing and is likely to continue to tighten steadily as a result.”

    Ultimately, whether Powell’s policies benefit men like Michael Zito – the ex-con who spent nearly 3 decades behind bars – is incidental. The central bank has repeatedly demonstrated that a stable equity market is its enduring aim.

    Michael Zito

    And although lawmakers and the media made a fuss about Powell’s only marginally more permissive views about financial industry regulation, his approach to monetary policy will be familiar.

    After all, there’s a reason Trump didn’t choose Taylor.
     

  • Bitcoin Surges To New Record High, Ethereum Slides

    Despite record bubble heights, hoards of futures shorts ready to pounce, funding ISIS, and being a "highly speculative asset," it appears the world's citizens are willing to place some assets in the safety of a decentralized, non-fiat asset.  

    Bitcoin is surging once again as Asia opens, to new record highs at $17,661.

    The catalysts for the most recent surge is unclear though today saw a Senior VP at eBay suggest they are "seriously considering" Bitcoin integration and Israeli PM Netanyahu suggest Bitcoin could replace banks

    “Is the fate of banks that they will eventually disappear? Yes. The answer is yes. Does it need to happen tomorrow? And do we need to do it through Bitcoin? That’s a question mark.”

    Ethereum appears to be taking the brunt of the rotation.

     

    Interestingly it appears the relative price level of 22 ETH per BTC is some kind of support/resistance for now…

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