A Byte Future

1 Nov

Finally, you probably are thinking, a bitcoin based futures market. Bitcoin miners the world over are at long last able to hedge out their production and distribution risk. We were all wondering that with such an active forward cash market (a requisite for an active futures contract) why does there not already exist such an animal. The legitimization of price discovery in the ether world is now complete. Advocates of this product have pointed out that the highly volatile nature of bitcoin lends itself perfectly to  a futures based product. The ultimate question however is: has there ever been a futures based contract derived from something that may not have a future itself?.  If you are looking for the perfect contra-indicator we just saw it with famous “value” investor Bill Miller waxing poetic on the merits of bitcoin (an asset for which he has devoted 30% of his funds assets) when he recently stated ” I that believe there is a nontrivial chance it goes to zero, but every day it does not that chance goes down as more venture capital flows in and people become more comfortable buying it”.

Driverless Fed

19 Oct

If historical correlation means anything, then President Trump would be best served by appointing either Peter Dinklage or Robert Reich as the next Fed chairman. The perfect correlation between the Federal Funds rate and the height of the sitting Fed Chairman/Chairwomen is  incontrovertible. While one might argue that this relationship is spurious at best, you can’t argue with the numbers and as we all know, numbers don’t lie. In fact, as the world moves toward more autonomous modes of transportation, it would make complete sense to move towards a Central Bank that is purely driven by data, with no human interface or objectivity. Under this new Central Banking model, all monetary policy would be derived from a model (dot plot?) with the input derived from the usual suspects of: consumption, inflation, capital market environment, etc.. The advantages of such a model are many, not least of which is that such a model reinforces the political neutrality of the institution. We find it curious that with all the advances in AI and process technology, no real conversation has taken place regarding the mechanization of monetary policy decision making. Trillions of dollars slosh around capital markets daily driven by highly sophisticated algorithms, but we suspect that the public takes some false comfort in the fact that there are 12 people that are “in control” of the domestic and global financial system. Driverless cars- sure, Driverless Fed- too risky.


10 Oct

The advent of crypto-currencies and ICO’s and other various forms of ether fairy dust should provide at least some fodder for questioning the viability of hard currencies. As we all know from Economics 101, a nations currency represents a claim on the full faith and credit of a particular nation state. Unlike bitcoin however, the trillions of dollars of currency trades that take place daily do not involve a real concern as to the ultimate financial stability of the underlying sovereign itself. Two recent events should give dollar holders pause when it comes to U.S. credit stability, namely the decision by Congress to eliminate the debt ceiling and President Trumps off hand comments regarding Puerto Rican Debt. These two seemingly unrelated events both represent efforts by Government to escalate their influence in the bond holder/sovereign creditor relationship. In plain terms, the congressional action tells bondholders “The Sky’s our limit”, while Trumps remarks tell creditors “Don’t expect much”. While some would say don’t read too much into this, it may prove to be a foreshadowing of things to come as the worlds largest debtor is now led by a President known to treat debt repayment as merely one option.

Paradigm Lost

24 Sep

Headlines touting driverless cars, the death of the combustible engine and other various forms of industry killing technology, reveal the difficulty in discerning what is simply an overly zealous capital market and a real paradigm shift. While the distinction may not appear overly important at first glance, we would argue that the distinction between investments in innovative concepts and ideas born of “free”access to capital often are divorced from long-term permanent shifts in structural paradigms. We can again look to the oil market as a current example of the blurred lines between the structural/secular and the cyclical.

While the concept of peak oil is not new to the investment nomenclature, the excitement surrounding alternative vehicles has given birth to the concept of peak demand. The current line of reasoning shows oil demand slowing drastically going forward as alternative vehicles make aggressive inroads into the combustible engine vehicle markets. This kind of simplistic forecasting fails however to take into account a whole host of real-life practical considerations.  It is no great surprise that Governments, at both the local and National level, have latched unto this Muskmania with Governments in Europe calling for the end of combustible engine sales by the mid-century. What we did not hear from any of this rhetoric was a well thought out, well designed plan to deal with any of the aforementioned real-life practical issues.  But, that is what you get in periods of capital mis-allocation, the cost of capital is not the only thing that is being suppressed; reality is as well.



21 Aug

We look on with somewhat bewilderment at the rise in the valuation of Tesla relative to the valuations of traditional auto manufacturers. For a company that produced 76,000 vehicles last year, it has a market cap of $330 bln.  If those at the Federal Reserve are scratching their heads at the lack of pricing power, they should look no further than the drivers behind this relative valuation. Mark Fields, ex CEO of Ford, is probably wondering as well having been pushed out in favor of a more radical Tesla-like strategy. We take no issue with Tesla as a company, vehicle or technological pioneer but rather the leeway and latitude that is given the company in the capital markets, as evidenced by a $1.8Bln bond issue for a company that doesn’t promise to be cash positive any time soon.  The problem with the Musking of the global economy is that traditional companies are making real competitive decisions based on unrealistic or skewed metrics. How does Ford compete with a company with thirty times its market cap, losing money on every car produced.  As we have continually highlighted, the mis-allocation of capital, driven by zero and negative real rates of interest, has real world ramifications for real world pricing power.

Sturm und Drang

23 Jun

For some unexplained reason, I started thinking about Sturm und Drang over the weekend. The  rough English translation of this  German phrase means storm and stress, and has evolved to characterize those situations of a highly volatile nature. The term itself however was  initially used to define a movement  emanating during 17th century Germany in response to the neo-classical periods such as the French enlightenment. If the period leading up to the 1760 was about rational thought and aesthetics, the period from roughly 1760 to 1780 was all about raw emotion. It has been said that while history rarely repeats itself, it does rhyme, one can’t help but wonder if we are entering a new period of  global Sturm und Drang. The emergence of populist strength in a majority of G7 and non-G7 countries is one indication that the promise of hope and change  for the majority of the citizenry has been mostly an illusion. However, for all the storm and stress extant in the real world, the capital markets could not be more unSturm und unDrang.  The financial press seems fixated  on popular measures of volatility such as the VIX and the apparent disconnect between potential market moving events and the flatlining of said measures. We believe however that, as usual, the focus has been on the 1000 foot view of the trees much to the exclusion of the 30,000 foot view of the forest.  The movements by global central banks to solve a whole host of economic problems, typically outside their purview, has led to a massive, deeply ingrained and entrenched global mis-allocation of capital.  The result has been the suspension of “economic reality” as evidenced by: negative real rates of interest, deeply unprofitable industries with unlimited access to capital markets, Governments at both  the Sovereign and State levels operating with no fiscal restraint, etc..  However, while economic reality may have taken a holiday, the basic laws of math and gravity still exist. 


28 Apr

In the spirit of Brexit and Frexit, Central Bankers are now intimating that we may approaching the uncharted waters of QExit. The Fed has begun to make overtures to the markets regarding the normalization of its balance sheet, leaving everyone to speculate as to what a shift in the composition of said balance sheet may look like. Having said that, some at the Federal Reserve are also expressing concern that a re-normalization of the balance sheet might leave it vulnerable to an external global shock. Given that our sitting President is a “low interest guy”, any destabilizing move by the Fed would most likely be met with substantial political fallout, or a series of angry tweets at the very least. In short, while the Fed may allow some recomposition of its balance sheet due to  simple portfolio runoff, don’t expect any major shifts forthcoming.