- Bitcoin Soars Above $9,000, Hits New All Time High On Burst Of Asian Buying
Less than 24 hours ago, we noted that Bitcoin had broken above the recent resistance level around $8,300 and hit a fresh all time high of $8,650, observing that the world’s biggest cryptocurrency by market cap is now rising at a pace pace that has put the $10,000 price target by both Mike Novogratz (and Jose Canseco) firmly in its sights. It didn’t take long however for bitcoin to find a new round of eager buyers, and in early Asian trading, a burst of buying out of Korea’s Bithumb exchange, has sent bitcoin surging another several hundred dollars higher, and around midnight ET bitcoin had surpassed $9,000, sending its maret cap to $150 billion, making it more valuable than corporations like Siemens, Mastercard or McDonald’s. The sharp gains come as the combined market capitalization for all cryptocurrencies also peaks at new highs – currently standing at just shy of $300 billion.
At this rate of appreciation, the crypto may hit the key psychological level of $10,000 in under a week. Needless to say, the long term chart is about as exponential as it gets, so as usual, buyer beware.
Bitcoin started the year just above $1,000, and the YTD gain is now above 900, which however pales in comparison to Ether’s nearly 5,000% YTD return and Litecoin’s 20x. One month ago, Mike Novogratz was the first to predict a $10,000 price in 6 to 10 months. It may come in that many weeks instead. As a store of value, Novogratz likened bitcoin to digital gold, and said the technology is beginning to make “more and more sense” as we move increasingly into the digital. Novogratz continued to say that, while bitcoin is a bubble, the mania is justified, because it is a technological advancement that promises to fundamentally alter our lives.
“I can hear the herd coming” Novogratz said.
And bubble or not, Novogratz concluded eloquently on the extreme nature of cryptocurrencies’ potential…
“Remember, bubbles happen around things that fundamentally change the way we live,” he said. “The railroad bubble. Railroads really fundamentally changed the way we lived. The internet bubble changed the way we live. When I look forward five, 10 years, the possibilities really get your animal spirits going.”
Bitcoin is set to become “the biggest bubble of our time,” he added, and could reach $10,000 very soon due to fast-building interest. In retrospect, he may be right much faster than even he anticipated.
- How The Deep State Squeezed America's Wealth
Authored by Bill Bonner via InternationalMan.com,
Salvator Mundi, said to be by Leonardo da Vinci, is the world’s most expensive painting.
Last Wednesday, at auction, each square inch was valued at nearly $1 million – including the bummed-up, restored, and damaged parts.
The painting may not be da Vinci’s work. Or perhaps, since it has been so heavily doctored up, little remains of his work. And whoever’s work it was must have been having a bad day.
And yet, it sold for over $450 million (including auction-house charges) – a lot of money for such a depressing work of art.
Donald Trump as da Vinci’s Salvator MundiThe question on the table: Why?
But since we don’t know the answer to that question, we’ll answer another one: How come so many people have so much money?
Made in the Middle
The latest GOP “tax reform” proposals raise questions, too.
Though billed as a “middle-class tax cut,” the middle class gets almost nothing from the proposed plan.
Instead, almost all the benefits go to: (1) business owners, and (2) the rich.
And since the feds are unwilling to cut spending, the middle class ends up with about $2.2 trillion of extra debt, which it will have to reckon with eventually.
We bring up the tax cut because we think it helps explain the painting. Not for nothing are Republicans and the modern Salvator Himself, Donald J. Trump, setting up the middle class for a huge bamboozle.
A train ride we took on Monday – the Acela Express from Baltimore to New York – was subsidized by taxpayers from all over the country.
The train runs from one end of today’s modern economy to the other. It goes from Washington, D.C. – the center of politics – to New York – the center of money.
In between is nothing but poverty and dereliction. There are factories that last made a product in the ’50s. There are workers’ houses almost unchanged in half a century. There are abandoned warehouses… wrecked cars… junk steel… and burly men in orange vests working with machines.
The middle is where real work was done and real things were made, shipped, and distributed; it shows few signs of growth or prosperity.
It is as though a sausage had been squeezed in the middle, driving the rich meat to the ends. In between is lean… and greasy.
How come?
Deep State’s Fingerprints
Every crime scene has many fingerprints on it.
Most are of the innocent.
An aging population, for example, is not exactly something you can do anything about. Technological innovations, too, are largely beyond public policy control.
But there’s one set of fingerprints on the tax cut flimflam… the relative poverty along the Northeast Corridor… and the $450 million painting: the Deep State’s.
The insiders use fake money – the post-1971 dollar – to transfer wealth and power from the people who earn it to themselves.
It is as though they loaded up the train in Newark and Trenton… and shipped everything to Washington.
You earn real money by making real things and providing real services. But fake money is different. You don’t earn it by adding to the world’s wealth.
You get it by subtracting from it… that is, by borrowing from future output.
Real money is not controlled by anyone.
It is earned – freely – in win-win exchanges. Back in the 1950s and 1960s, it ended up in places like East Baltimore and Trenton because they used to make things people wanted.
But fake money takes a different route. It is created by the insiders… and controlled by them. It goes where they want it to go.
No Stimulus
Money always bows to politics; often, it is completely beholden to it.
In Russia, the oligarchs took government-owned property and used it to build their fortunes. In China, state-owned enterprises and favored entrepreneurs get government-backed credit to build their apartments, factories, and shopping malls.
And in America, the fake money is directed to favored sectors by 73,000 pages of the Internal Revenue Code… and 81,000 pages of the Federal Register.
So, it is hardly a surprise that the latest tax proposals favor the Deep State at the expense of the middle class.
Readers may argue that the money “stimulates” the economy… and that it “trickles down” to the common people. If so, there is little evidence of it.
As a percentage of the working-age population, fewer people have jobs today than at any time since the 1970s. Back then, the typical man had to work 900 hours to earn enough to buy a new pickup truck. Today, he has to work 1,500 hours.
Central banks have increased the world’s monetary base (and their own balance sheets) by $20 trillion so far this century.
This money didn’t go to the fellow in the orange vest. Instead, it went to Russian tycoons… Chinese billionaires… art collectors… hedge fund managers… and rich people on both ends of the track.
* * *
The Trump team reached out to Bill’s network for advice on the economy. Recently, Bill’s team sent them a field memo on a coming crisis… They’re now releasing it to the general public… (It’s not what you expect.) Click here to read more.
- Muir: "People Are Going To Be Wiped Out" By Short-VIX ETFs
Back in August, we highlighted a story in the New York Times about a former manager at Target who decided to try day trading with $500,000 he had saved up. Over the following years, he turned that into $13 million by following one simple strategy: Shorting volatility every time it spiked.
As MacroVoices host Erik Townsend points out, that strategy has worked for many retail investors over the past eight years. And in a brief “postgame” interview with the Macro Tourist Kevin Muir following a longer interview with Francesco Filia, a fund manager at Fasanara Capital, the former explains how many investors don’t understand the risks associated with shorting volatility, as well as the possible repercussions if exchanges and brokerages don’t take the appropriate steps to limit this.
Townsend begins the discussion by asking Muir about a chart he created of the VXX – the long-VIX ETF – which, because of the low-volatility environement, has repeatedly split leading to unbelievable wealth destruction.
Going back to 2009, the price of the ETF has gone from $120,000 a share to just $35. And while a sudden spike in volatility could see it surge, with so many investors on the other side of the trade, it's worth considering what might happen if they couldn't pay.
It’s frightening. And I don’t think enough people are – well, there are some – but I don’t think that enough people are really considering all these things. And I think that guys like the Interactive Broker chairman, that are taking proactive steps to make sure that there’s enough margin, we need to see more of that. We need to see more people saying, hey, wait, this is actually a very, very scary instrument that has a lot of risk in it.
I watched a Real Vision interview with John Hempton from Bronte Capital, and he talked about phoning up the infamous Target salesman guy, the fellow that quit his job as a Target manager to trade XIV and all the VXX products, and he turned his 1/2 a million bucks into 13 million bucks. The part that really scared me about it was that John phoned him up and he was expecting to talk to this very sophisticated guy, and his basic takeaway was that, although he had a lot of buzzwords, and he understood kind of what the products represented, he didn’t really understand his true risk.
And I think that there’s just a myriad of people out there that are trading these things that don’t understand that. The more people that wake up and realize this, and stop playing this game, the better off we’ll be, actually.
Brokerages have caught on to this, Muir says. Interactive Brokers, one of the largest online brokerages, is now asking retail investors to post between 300%-400% margin when they short certain VIX contracts – because brokerages recognize that one sharp drawdown in the S&P 500 could blow millions of short traders out of their positions, potentially leaving thousands of customers with massive negative balances that could threaten the brokerages’ existence.
Erik, you’re absolutely correct. And Interactive Brokers, one of the largest electronic brokers out there, realizes the risk. If you look at the way that they’re margining these products, they’re margining them completely different than what the exchanges and everyone else say is the proper amount.
So if you look at the VIX futures, the front month is $6,200 – the exchange minimum is $6,200 – which works out to roughly 50% of a contract. The next month is $4,000, which works out to 30% of a contract. And the far months are $2,500, which works out to 17% of a contract.
But if you go to Interactive Brokers and you want to sell this VIX contract short, you have to put up 300%–400% of the contract. Because they’ve looked at it and they’ve realized that if the S&P has a 10% down move, which isn’t out of the realm of possibility, that the VIX could spike up to 37 really easily. And people are going to be wiped out if that happens.
Should the VIX suddenly spike, the repercussions of such a move would be further complicated by the billions of dollars sitting in various VIX-linked ETFs. Because individuals sellers would probably disappear from the market in such a situation, the ETF market makers would find it nearly impossible to hedge their positions, potentially triggering the dissolution of the funds, or even the collapse of some of these firms.
There’s $1.2 billion of the XIV, which is the short ETF. There’s $1.3 billion of the SVXY, which is another short one. These are staggering numbers.
In my days, when I was on the institutional desk, we had this big – I did index arbitrage, and we used to go out and buy the baskets and sell the futures. One day the risk manager came to me and said, if you had to take this position off (because we had accumulated this big position) how long would it take you? And who would do it?
And I said, the reality is that there’s nobody. You know, we were the biggest player in the market and there was nobody that was going to take this off of us. The only way was to go all the way to expiry.
Well, the reality is that these numbers are way bigger than any market player can absorb. And, if we get a situation where – as Francesco says, all it’s going to take is a return of the VIX from its current level of 10 to its average level of 18 or 19 to wipe out these products.
I guess that’s the point that I want to make: If you’re actually owning these things, you should be aware that all it will take is a move of 80% and then they’re going to wind down these products. So the XIV, when it moves up, if all of a sudden VIX goes from 10 to 18 in a day, they’re going to wind down that product.
And what’s going to be really scary is the amount of VIX futures that is going to have to be bought, because they’re short all those VIX futures and they’re going to have to buy them back.
And I just don’t know who’s going to sell it to them. For the first time – for a long time, I didn’t view this VIX as that big a deal, and there were some smart guys like Jesse Felder that were going on about it – I just think that it has been taken to a level that is becoming increasingly worrisome. And it actually could create a market dislocation in itself.
And what is it Warren Buffett says? What the wise man does in the beginning the fool does in the end. Well, VIX, at this point, we’re hitting a point where if you’re actually continuing to bet on it you’re going to be in the fool category.
Because it’s not going to take much to have a big spike that wipes a lot of people out. And it’s actually very, very worrisome.
Of course, it would take a large intraday move to trigger a truly catastrophic spike in the VIX. But at least one analyst, Bank of America’s Michael Hartnett – whose work we have cited here – believes there could be a 1987-style crash in the early months of 2018. Hartnett’s reasoning? The bearish positioning seen at the beginning of 2017 has completely flipped. Investors’ long positions are larger than they’ve been in years.
And as we’ve repeatedly pointed out, with volatility and volume so subdued, hedge funds have remained overwhelmingly short vol, fearful of missing out on even one tick of the torrid rally for fear of pissing off their clients.
One things for certain: Given the market’s already dramatically overextended rally, the day of reckoning is coming. The only question is will it be a steady decline, or will it happen suddenly?
Given the incredibly stretched nature of positioning, the latter scenario, Muir and Co. believe, seems far more likely.
* * *
Muir's discussion begins just after the hour mark:
- Meet Laikago: China's $25,000 Robo-Labrador
The Japanese have their non-nagging synthetic wives, the Saudis have their Shariah-compliant humanoid citizens, Americans are content with a backflipping supra-human, and now the Chinese get their very own 50lb, poop-less, robo-dog…
Meet Laikago – named after Laika, a Soviet dog who was the first living creature to orbit the Earth.
The Chinese-made robot dog weighs 22kg, a bit less than a common Labrador, and is around 60cm tall.
“It is a kind of medium automatic robot, a robot-dog in short,” creator Wang Xingxing told RT’s Ruptly video news agency.
“We have popularized Laikago among science and technology companies, and science fans. So Laikago is a scientific toy.”
The four-legged mechanical pet is able to run on grass and can assimilate canine-like movements, just like a flesh-and-blood pooch.
The initial price for Laikago will be around US$25,000, but may drop in the future.
No doggy-doo, vet visits or bones… now everyone can buy a robot canine online and enjoy spending time with their new four-legged friend (admittedly perhaps not the cuddliest or most-loving version of "man's best friend,") feeding it only with electricity.
The makers did not comment on whether RoboDog is so lifelike as to hump your leg or drink from the toilet.
- The MbS-Blackwater Marriage Of Convenience
Authored by Ghassan Kadi via The Saker blog,
Mohamed Bin Salman’s (MBS) royal Saudi coup is still in the making and its stories of mystery and intrigue are unfolding.
Some recent articles written about this unprecedented Saudi development have focused on whether or not MBS was actually desirous of instigating reform within the kingdom of sand and capable of putting together the infrastructure that made such reform possible and how. Other more cynical articles have cast little doubt on his ability to create any change and classified him as yet another puppet of the legacy that his grandfather King Abdul Aziz, the founder of the Saudi dynasty, has forged with the West. In between the two extremes, many perhaps waited in anticipation to see what was to happen next in the now quick-changing kingdom that did not change at all in essence for nearly a hundred years.
To put recent developments into perspective, we must objectively look at MBS’s achievements and failures since his rise to prominence; with a special emphasis on the developments of the last few weeks.
MBS has failed to turn previous Saudi Government failed policy on Syria to his advantage by distancing his own legacy from it. If anything, the outcome of the Syrian opposition conference that was held in Riyadh was a farcical outcome of Saudi diplomacy. Not only did this conference coincide with the 20th of November 2017 Putin-Assad Sochi victory summit, but it is still “demanding” the removal of Syrian President Assad from power.
The arrogant and seemingly naive Saudis seem to be still under the illusion that they are able to dictate terms of settlement of the “War on Syria” despite the fact that they have put all of their efforts into winning it but have lost decisively.
However, the more painful fact for them is that they lost without a single bargaining chip remaining for them to capitalize on.
Whilst MBS can be “excused” for not being able to find a face-saving way out of Syria, he has failed abysmally in the war that he orchestrated in Yemen, and as this war drags on, the international community is beginning to wake up to the atrocities and genocide that the Saudi-led coalition is inflicting upon Yemen, and no one can be held more accountable for this military failure and crime against humanity than MBS himself.
MBS also failed to contain the loss he “inherited” from the failures of previous Saudi policies in Lebanon and Iraq. If anything, his determination to remain steadfast with these has turned regional Saudi policies into a total joke.
So where did MBS score any success, if any at all?
In my previous related articles and herein, I have mentioned and reiterate that MBS is increasingly gaining popularity within the ranks of young and educated Saudi men and women of all ages and in general amongst the grass-roots of the population. Hence, in this venture, he is scoring two birds with a single stone. In rounding up more popular support, he is confiscating and freezing badly-needed cash under the pretext of corruption.
The estimates of the number of incarcerated Saudi princes and businessmen are not any less subject to a game of guess work than the funds involved in this kerfuffle. Ignoring how many men have been put under detention, the tally of funds confiscated and frozen is estimated at a minimum of USD 150 bn to a maximum of USD 800 bn.
Given that the total official Saudi savings reserve is in the tune of “only” USD 700 bn after decades of high financial times, even the low estimate of USD 150 bn is a huge sum by proportion and by any proportion of course. It is little surprise that MBS is trying to replenish into the coffers of the state such sums, and if he manages to do it, it would be to his credit.
Whilst on the subject of official Saudi savings, after many decades of huge petroleum exports and at elevated prices, the Saudi savings reserve figure should be in the vicinity of a few trillion dollars. But a huge proportion of Saudi petro-dollars has been squandered on royal funds, holidays yachts, prostitutes, drugs, bribes, theft, corruption at all levels, and on this account and this account only, MBS can be acknowledged for bringing corrupt individuals to account.
But whether or not MBS is able to stamp out corruption and/or whether or not he is guilty of the same charge, as his cousins and some others argue, how much command does he have over the affairs of the kingdom, and over the royal family he staged a coup against?
Inside, unconfirmed reports allege that whether or not MBS has any command on traditional local troops that he can rely on, he is not taking any second chances.
To elaborate, the reader ought to be reminded that the Al-Saud legacy built its reign of power (and terror) on Wahhabism and money.
Wahhabism was used as the doctrine, and money was the catalyst for buying loyalty and support.
With MBS’s purge on the royals, no traditional royal supporter with known wealth is left feeling safe. How can they feel safe if they hear reports of news of princes like Al-Walid bin Talal not only being in custody, but also getting tortured and his assets frozen and sieged by the state?
In my previous article, The Second Saudi Dynasty: MBS’s Reset Button, I wondered how can MBS count on any local supporters. Apparently, he is not.
Recent inside information that was later on published in various media, reports that MBS has been using Blackwater to do his dirty work.
If those reports are true, MBS has hired Blackwater to arrest, with orders to kill whoever resists arrest, Saudi princes and high-ranking businessmen, and to answer to no one but him.
In retrospect, the fatal shooting of Prince Abdul Aziz, son of former King Fahed, was highly unlikely to have been done by a Saudi as this would attract a death sentence in the event of the coup failing.
It has even been reported that Blackwater personnel are driving around in tinted Saudi Police and security agency personnel vehicles in a manner that is totally unbeknown and hidden from the Saudi public.
This cannot be corroborated any more than they can realistically be dismissed.
If true, such reports indicate that MBS’s coup is not over. They indicate that he is not taking any chances, but most practically, they indicate that he trusts no one; no one expect Blackwater.
Most importantly and significantly however, such news, if confirmed, indicates that MBS does not have a true hold on power.
If such is the case, and seeing the ambition he has, there is more reason to believe that MBS is going to have no choice but to go with his cousins all the way to the wire and until he has destroyed them all and confiscated all of their assets.
After all, he needs their money to achieve his dreams and get his kingdom out of its financial mess. He needs to blame his failure on them. He needs to eliminate any possible claim they can make for the throne.
Almost overnight, MBS has changed Saudi Arabia from a kingdom of sand upon which Al Saud reigned with a solid foothold and strong base, to a kingdom of quick-sand upon which princes and power brokers no longer have a leg to stand on. They either have to pledge total and unconditional loyalty to MBS or fear persecution. On the other hand, if they do pledge that loyalty, and MBS’s coup fails as a result of a counter-coup, then they will risk being seen as enemies of the winners of the counter-coup. It is a damned if you do and a damned if you don’t situation.
Not any less perplexing than the dilemma of the princes is the dilemma of the lower tiers of power in Saudi Arabia; especially senior military officers and their subordinates. With its tribal mentality, Saudi Arabia has had several tiers of armed forces, some of whom are loyal to particular princes rather than to the state itself. Prince Mutaib for example, the son of former King Abdullah, was until the 4th of November, the Minister of the National Guard. The hierarchy within the National Guard are loyal to him personally, and now the big boss is in jail. MBS therefore has a few options; either to coerce those military officers to become loyal to him under the risk of them stabbing him in the back, or, to throw everyone in jail and bring his own people in. But, where would he bring his own people in from and who are they to begin with? After all, and despite all the great power he gave himself, he is Mr Johnny-come–lately and he hasn’t had the advantage of time to slowly build his own army. His practical alternative was based on pragmatism and securing his own safety, and to that effect, he cannot find a more faithful and better trained army than Blackwater. And even though Blackwater does not come cheap, but clearly to MBS the objectives he seeks justify the costs.
Some may argue that Blackwater can also be bought by counter coup leaders and even foreign governments. Whilst this is possible, MBS remains to have no better alternative. However, one would imagine that for a company like Blackwater, to guarantee its business success and continuity, it would have a strict code of conduct that stipulates that it will refrain from entering contractual agreements that can generate conflict of interest between its clients. After all, and irrespective of its criminal and underhanded mercenary modus operandi, who would hire it knowing beforehand that it is in the habit of breaking contracts and replacing them with ones with the adversaries? Whilst it is arguable as to whether or not any client of Blackwater can actually take legal action against it and win is another story because, without any doubt, Blackwater, inhumane and criminal as it is, cannot afford to see its reputation ruined.
To sum it up therefore, whilst MBS’s coup is still in the making and its final outcome remaining unclear, what is evident is that MBS does not have enough local Saudi power base that he can rely on in the upper echelons of power. Whilst his grass root popularity among the general population is on the rise, traditional power brokers can neither be supportive of him, seen to be supportive or seen to be against him. Either way, and even though some of them could potentially become strong and faithful proponents of MBS, at the moment any pledges of allegiance are highly risky for all involved.
In his reliance on Blackwater however, MBS is achieving a more guaranteed short term objective. However, this policy can backfire very violently; because it is allowing certain key Saudi power brokers to sit on the fence for a little longer until they see who is the final winner in all of this for them to eventually back.
- LA, NYC Detectives Collaborate On Weinstein Probes As Arrests Loom
Detectives in New York and Los Angeles have been hinting for weeks that they’re close to arresting disgraced studio head Harvey Weinstein for one of any number of credible sexual assault claims that both fall within the statute of limitations and involve accusers who can provide the evidence prosecutors need to make pursuing a case worthwhile.
As the various investigations into Weinstein wend toward completion, the Guardian is reporting that police departments in several disparate jurisdictions are collaborating to help strengthen their cases and ensure that the maximum number of prosecutable cases are brought against the one-time mogul.
Detectives in several cities investigating Harvey Weinstein for sex crimes are likely to be collaborating as they build evidence and assess whether the film producer can be arrested and charged, experts believe.
Investigators in New York, London and Los Angeles have opened criminal cases against Weinstein in the last six weeks, as the disgraced producer faces lawsuits on both sides of the Atlantic following a flood of accusations of sexual misconduct.
Los Angeles police department (LAPD) detectives have interviewed witnesses in preparation for presenting a case to the district attorney’s office. The DA will then decide whether to press criminal charges over accusations that Weinstein raped an unnamed actress in a hotel in Beverly Hills in 2013, according to David Ring, a lawyer for the alleged victim.
Many believe the NYPD will be the first to act, if only because Manhattan District Attorney Cyrus Vance Jr. quashed an earlier investigation into Weinstein before accepting a campaign donation from Weinstein lawyer David Boies. The LAPD and Beverly Hills police are also expected to pursue criminal charges. But police in London are also reportedly preparing to file charges based on the testimony from three women who’ve accused Weinstein of rape.
Of course, as we’ve pointed out in the past, the pending criminal cases against Weinstein are only the beginning of his legal problems. Many of the more than 80 women who have come forward to accuse Weinstein of sexual assault or harassment plan on filing civil suits, which are much easier to prove than criminal cases, and often result in out-of-court settlements.
The first civil suits targeting Weinstein, and his former company Weinstein & Co. for abetting his monstrous behavior, are already being filed.
The sheer volume of complaints against Weinstein, Christensen said, will be much more easily introduced in civil cases, where rules about evidence involving a defendant’s character and the standard of proof are less stringent than in criminal court.
The UK lawyer Jill Greenfield is expected to file civil lawsuits on behalf of a number of women in the high court in London in due course, having written to Weinstein demanding settlements but without hearing back so far.
People are contacting me,” she said. “I’m expecting to coordinate a claim for a number of victims."
Following the decision not to charge Weinstein in connection with her case, Ambra Battilana Gutierrez signed an agreement in which the film producer paid her $1m.
“I thought I needed to support my mom and brother, and how my life was being destroyed, and I did it,” she told the New Yorker earlier this week.
The actor Dominique Huett filed the first civil suit since complaints against Weinstein came pouring out in early October, in the New York Times. She is claiming $5m in Los Angeles superior court, alleging that the Weinstein Company “aided and abetted” Weinstein in “repeated acts of sexual misconduct".
Of course, Weinstein has been hiding from the world – reportedly wearing disguises when he ventures out in public – communicating with the world only through his defense attorneys, Ben Brafman and Blair Berk. With penury and incarceration looking almost inevitable at this point, he’ll need all the legal guidance he can afford.
- Why Superintelligent AI Could Be The Last Human Invention
When we create something more intelligent than we could ever be, what happens after that? We have to teach it.
MAX TEGMARK: Hollywood movies make people worry about the wrong things in terms of super intelligence. What we should really worry about is not malice but competence, where we have machines that are smarter than us whose goals just aren’t aligned with ours. For example, I don’t hate ants, I don’t go out of my way to stomp an ant if I see one on the sidewalk, but if I’m in charge of this hydroelectric dam construction and just as I’m going to flood this valley with water I see an ant hill there, tough luck for the ants. Their goals weren’t aligned with mine and because I’m smarter it’s going to be my goals, not the ant’s goals, that get fulfilled. We never want to put humanity in the role of those ants.
On the other hand it doesn’t have to be bad if you solve the goal alignment problem. Little babies tend to be in a household surrounded by human level intelligence as they’re smarter than the babies, namely their parents. And that works out fine because the goals of the parents are wonderfully aligned with the goals of the child’s so it’s all good. And this is one vision that a lot of AI researchers have, the friendly AI vision that we will succeed in not just making machines that are smarter than us, but also machines that then learn, adopt and retain our goals as they get ever smarter.
It might sound easy to get machines to learn, adopt and retain our goals, but these are all very tough problems. First of all, if you take a self-driving taxi and tell it in the future to take you to the airport as fast as possible and then you get there covered in vomit and chased by helicopters and you say, “No, no, no! That’s not what I wanted!” and it replies, “That is exactly what you asked for,” then you’ve appreciated how hard it is to get a machine to understand your goals, your actual goals.
A human cabdriver would have realized that you also had other goals that were unstated because she was also a human and has all this shared reference frame, but a machine doesn’t have that unless we explicitly teach it that. And then once the machine understands our goals there’s a separate problem of getting them to adopt the goals. Anyone who has had kids knows how big the difference is between making the kids understand what you want and actually adopt your goals to do what you want.
And finally, even if you can get your kids to adopt your goals that doesn’t mean they’re going to retain them for life. My kids are a lot less excited about Lego now than they were when they were little, and we don’t want machines as they get ever-smarter to gradually change their goals away from being excited about protecting us and thinking of this thing about taking care of humanity as this little childhood thing (like Legos) that they get bored with eventually.
If we can solve all three of these challenges, getting machines to understand our goals, adopt them and retain them then we can create an awesome future. Because everything I love about civilization is a product of intelligence. Then if we can use machines to amplify our intelligence then we have this potential to solve all the problems that are stumping us today and create a better future than we even dare to dream of.
If machines ever surpass us and can outsmart us at all tasks that’s going to be a really big deal because intelligence is power.
The reason that we humans have more power on this planet than tigers is not because we have larger muscles or sharper claws, it’s because we’re smarter than the tigers. And in the exact same way if machines are smarter than us it becomes perfectly plausible for them to control us and become the rulers of this planet and beyond.
When I. J. Good made this famous analysis of how you could get an intelligence explosion, or intelligence just kept creating greater and greater intelligence leaving us far behind, he also mentioned that this super intelligence would be the last invention that man need ever make. And what he meant by that, of course, was that so far the most intelligent being on this planet that’s been doing all the inventing – it’s been us.
But once we make machines that are better than us at inventing, all future technology that we ever need can be created by those machines if we can make sure that they do things for us that we want and help us create an awesome future where humanity can flourish like never before.
- Citi's Shocking Admission: "There Is A Growing Fear Among Central Bankers They've Lost Control"
Earlier we showed a variation on a VIX chart from Citi’s Hans Lorenzen which, if it doesn’t impress, or scare you, then nothing probably will.
However, leaving readers unimpressed – and unscared – will not satisfy Lorenzen, which is why the credit strategist who works together with the godfather of rational doom, Matt King, and has been warning for weeks that now is the time to sell credit, unloads in one of the more effusive missives of dripping negativity to hit during this holiday week when one after another equity sellside analyst has been desperate to outgun each other with their ridiculous 2018 year end S&P forecasts.
And while Lorenzen touches on many things, at its core, his warning is straight out of Shumpeter: the longer nothing changes, the greater the crash will ultimately be, a topic which DB’s Aleksandar Kocic dissected over the summer, even defining an entirely new term in the process: metastability.
So without further ado, here is Lorenzen explaining why “embellishing the status quo will be the market’s undoing.
Ultimately, extreme valuations, the lack of risk premia, and a lack of responsiveness to tail risks are merely symptoms. The real question is what the skewed incentive structure resulting from that backstop has done to the fabric of markets after so many years. To our minds the answer is that trades and strategies which explicitly or implicitly rely on the low-vol environment continuing, are becoming more and more ubiquitous.
Realised historic vol is de facto an exogenous input to much of the risk management framework that underpins modern finance. With lookbacks extending a few years, an extended period of market stability reduces VaR measures and improves Sharpe ratios. Both allow / encourage investors to take more risk – driving valuations higher and vol lower still, creating a self-reinforcing dynamic. Intuitively, returns should follow flows – money is deployed and the asset price goes up. But in the real world the causation works the other way.
What this means in real-world terms:
Long periods of one-way markets breed survivor biases. The fund manager with lots of beta outperforms, the cautious fund manager underperforms. Either the latter gets on the bandwagon or soon enough outflows from the fund will ensue. Over time, fewer and fewer “critics of the regime” are left standing.
In an asset class where the upside is constrained, like in credit, that dynamic is further reinforced by the fact that a fund manager has to take more and more beta relative to benchmark in order to sustain the level of excess carry that will merely cover costs. The lack of volatility and the super high correlations between credits and the index (Figure 24), leave precious little scope for alpha (Figure 25).
Here we can add another piece to the short vol conundrum, because the closer spreads get to the lower bound, the more explicitly being long credit in itself becomes a short-vol position. With less and less upside remaining, owning credit risk become a question of generating a small amount of carry (or premium) for taking future downside risk – essentially, akin to selling a put option.
Meanwhile, as spreads collapse, as dol implied and realized vol, we are all “happily” ignoring that more risk is being issued into the market than ever before (Figure 26) and that the credit quality of the market keeps slipping – for the first time ever the market cap of the BBBs is about to overtake the rest of the € IG index (Figure 27).
What happens next should be familiar from the last financial crisis: the infamous step up in risk:
When the conventional asset class of choice no longer offers a “decent” return potential, money looks to the next one on the quality spectrum for a pickup. IG funds holding BBs and AT1. DM funds buying EM debt. European and Asian funds holding more and more $ fixed income. Corporates moving their liquidity from money markets to short-dated IG credit funds. Mandate creep in the investment criteria. Even synthetic structured credit is making something of a comeback. The list of tourist trades goes on and on. Most of these too are predicated on the status quo – if volatility and risk premia were to rise, retrenchment back towards the original / natural asset allocation would be swift and uncompromising.
And then, one day, the market will finally discount that the central banks are no longer set to injection trillions in liquidity: that’s the moment the public finally begins to admit the emperor is not wearing any clothes.
You could rightly argue that many of these factors are generic to every bull market. The fact that volatility clusters is exactly because of these (and other) selfreinforcing dynamics. But the implicit ceiling on vol / cap on downside from the central bank backstops has, in our view, allowed them to run for much, much longer than would have been possible in a market operating on its own devices.
You could argue that there is nothing to worry about as long as fundamentals remain strong. But those looking at the economic data, corporate earnings or leverage trends to indicate the next turn in markets are looking in the wrong place, if you ask us. Over the last 50 years, only 2 out of 19 corrections in US credit were led by a recession. 12 had no overlap with a recession at all. In half the corrections, there wasn’t even a discernible turn in the leading economic indicator beforehand. Plainly, there is a long history of market corrections being triggered by other factors than fundamentals – Black Monday in 1987 and the correlation crisis in 2005 are two obvious examples.
Still, judging by the current state of the market, Citi writes that traders “evidently don’t expect a sharp market correction to happen tomorrow.”
While the probability of a next-day loss still feels quite low there is an obvious temptation to stay invested a little bit longer for professional investors, tasked not with delivering a return of money, but a return on money and with high frequency. The process of judging that near-term probability manifests itself in the frenzied search for “triggers”. Surely, if one could just get a slightly better call on the next trigger, then it’d be possible to get out just in time before everyone else jams the exit? We don’t dismiss the importance of triggers. Indeed, when you look back at the last fifty years, nearly every major correction in credit can be associated with a triggering event (Figure 28). With hindsight everything is easy.
Here Citi has some advice: don’t look for triggers; instead focus on the big picture.
We are sceptical that hunting for the next trigger is worth the effort. If a trigger seems obvious, then it’s probably obvious to everyone and chances are it will be too late. Triggers are often latent – the long-term problem is obvious, but it is ignored until suddenly it explodes without much warning (think the Greek sovereign debt crisis). Multiple factors often have to combine to create a triggering event – the GFC wasn’t just about sub-prime, it was about excessive leverage, inadequate regulation, unchecked financial innovation, misaligned rating methodologies, inadequate backstops and a host of other things. The last couple of years have seen several widely peddled “triggering events” crystallise with remarkably little shake out.
So what about the big picture? Here one can argue that in recent years the market simply wasn’t vulnerable with so much central bank money behind it. However, Lorenzen believes that “2018 is different.” As we see it, it is now increasingly vulnerable to a mid-cycle, “technical” correction, based on what we have discussed above:
- Central bank asset purchases are set to be the smallest in a decade (Figure 29). A $1tn of incremental demand versus 2017 is needed from private sources.
- At least in the US, the opportunity cost of not being invested in credit (i.e. the yield differential to 3m LIBOR) is likely to be the smallest since 2007.
- The perception of a backstop has facilitated a multitude of trades and strategies that are contingent on a low level of volatility in an increasingly crowded space. Now that backstop is moving “out the money”.
- Vol is near historic lows and has been so for longer than ever before. More risk than ever before is being issued into a credit market where spreads, on a like-forlike basis, are close to the 2007 tights and where breakevens are wafer thin.
Lorenzen then branches into some chaos theory for good measure:
In the context of a self-reinforcing, herding market, the pivot point where the marginal investor is indifferent between putting more money back into risk assets and holding cash instead is fluid. But when the herd suddenly changes direction, the result is a sharp non-linear shift in asset prices. That is a problem not only for us trying to call the market, but also for central bankers trying to remove policy accommodation at the right pace without setting off a chain reaction – especially because the longer current market dynamics run, the more energy will eventually be released.
And while not intended to be a conclusion, or even a punchline, the next line from the Citi strategist should scare the living daylights out of anyone: it is a direct admission that central bankers have now lost control.
That seems to be a growing fear among a number of central bankers that we have spoken to recently. In our experience, they too are somewhat baffled by the lack of volatility and concerned about the lack of response to negative headlines.… Our guess is that sooner or later in the process of retrenchment they
will end up going too far – though that will only be obvious with
hindsight.Frankly, that’s about the scariest admission from one of the world’s biggest banks that we have read in a long time.
* * *
As for how this period of cataclysmic metastability ends, here is Lorenzen’s dire conclusion:
In a fairy tale, turning points come suddenly and unexpectedly. Everything that has long been taken for granted is suddenly in pieces. In that sense markets are not all that different. People have gotten used to the paradigm that has been built up since the Great Financial Crisis. It has been tested on several occasions – 2011, 2012 and 2015 – and on each occasion central banks have overcome the challenge, thus ultimately reinforcing the regime.
The emperor in Andersen’s story was only able to parade around naked because the social norms, customs, conventions and vested interests that had built up over time were so strong that even the blatantly obvious was better left unspoken.
Similarly, the low risk premia, the low level of volatility, the lack of responsiveness to tail risk and spillover of systemic events, the reluctance to sell etc. to us are all indications that the market now has an almost Pavlovian response to central bank liquidity. The mere thought of it is enough to still leave us salivating, even when it is patently in the process of being turned off. Yes, excess liquidity will remain in the system even after central bank net asset purchases fall to zero, but as we have argued, if that money has chosen to stay out of the securities market now, then why should it seamlessly come flowing in at these valuations when the backstop is moving out the money?
While our conviction in the exact timing and magnitude of the paradigm shift is admittedly low – hence the deliberately very wide range in the scenario forecasts – it is unwavering when it comes to the broader point that central bank asset purchases will remain the key driver of markets. Exactly because trades and strategies have been built up around an assumption of the status quo, we fear that the inflection point, if / when it comes will be anything but smooth and linear. Indeed, the longer we remain in the current paradigm, the greater the chance that it ends up being both sharp and painful.
One of our favourite quotes pertains as much to markets as it does to economics:
“In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”
? Rudiger Dornbusch
Surely, that is a sentiment which the emperor who had his vanity and pride shattered so abruptly from the least likely angle would recognise all too well?
We end with one of our favorite pictures: the one we call Yellen’s moment of epiphany haw it all ends.
No wonder the Fed chair can’t wait to get the hell out…
- Demographic Dysphoria: Swiss Village Offers Families Over $70,000 To Live There
Across the world, demographic dysphoria is taking shape, creating numerous headaches for governments. To avoid the next economic downturn, governments are searching for creative measures to increase population growth and deliver a sustainable economy. In Europe, a near decade of excessive monetary policy coupled with a massive influx of refugees have not been able to reverse negative population growth– first spotted in 2012.
As for Switzerland, a small mountainside village near Leukerbad in Canton of Valais called Albinen, is now experiencing a population crisis. The village of 240 inhabitants is one many areas in the country experiencing a mass exodus in recent years.
The report blames depopulation on Switzerland’s younger generation moving to big cities in attempt for a better life. With declining population, the village’s economy has come to a halt with local businesses closing up shop. Even the local school system had to shut down because activity in the area is non-existent.
Among the remaining residents, widespread panic has reached the village’s council, with locals demanding officials do something to reverse the declining trend and improve the economic outlook for the area.
In a last ditch effort to avoid a total collapse of the local economy, officials are now offering 70,000 Francs ( 71,467 US Dollars) to families (of 4) under the age of 45 to move in and settle down for 10-years.
Here are the strict rules,
The communal council has accepted the initiative and has drawn up a regulation which provides financial assistance for anyone who would deposit his papers in Albinen. The planned amounts are 25,000 francs per adult and 10,000 francs per child. A family of four would thus receive 70,000 francs. The financing of the operation would go through the creation of a fund in which the municipality would pay 100,000 francs annually.
The offer is, however, subject to certain conditions. The interested parties must be under 45 years old. They must make a commitment to reside at least ten years in the commune, specifies the president. The minimum amount of their investment is set at 200,000 francs. It can not be a second home. Real estate complexes of investor groups are excluded from the offer.
Tour Albinen from above:
The village’s local newsletter explains why officials want to pay outsiders to live in their community,
It is an investment in the village’s future, adding that the community will profit from the new families through taxes, construction contracts and purchases in the village shop, while young people will bring life back to the village. In a best-case scenario, even the village school will reopen.
Thomas Egger, director of the Swiss Association for Mountain Regions (SAB) said, “the rural exodus is an insidious phenomenon that spans several decades. The only closure of a post office is not yet a warning signal, but when the last store, the last restaurant closes, the doctor has no visit, the situation becomes dramatic”.
Over the years, many mountain municipalities have implemented creative measures to attract new residents. Several municipalities have, in the past, offered rebates for the purchase of land or housing. Some municipalities offer public transportation or even discounts for goods and services to new residents.
In a poll, one Swiss Newspaper asked: “would you be ready to settle in Albinen against 70,000 francs?” The overwhelmingly response of 3,257 participants was – No.
Perhaps in a preview of things to come, mountain regions in Switzerland offering cash for outsiders to live in their communities is an act of desperation and demonstrates demographic dysphoria is full steam ahead in the western hemisphere. It’s only a matter of time before larger municipalities take note and offer similar packages. We think this could be useful in the United States for cities like Baltimore and Detroit where population totals have hit record low levels.
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