ECONOMY: Which Financial Black Swans Are Scariest?

Source:  SeattleBubble

Source: SeattleBubble

Remember when the markets took a dive of 5% last week and everybody said it was a "correction"? 5% is not a correction, it's a haircut. We reproduce below a few examples of market crashes to give context for what's in store at the end of a poorly managed bullish market cycle sporting several asset bubbles -- let's call it 20 to 40%.

But for the few wizards out there, it's hard to know where the fire starts. So we instead want to point you to three places where there's kindling and smoke. First, the volatility trade. Read this spectacular piece on why the world is far more exposed to being short volatility that may seem. It argues that in addition to the explicit $60 billion shorting volatility instruments like VIX, there is $1.5 trillion in implicit volatility shorts through strategies like risk parity (i.e., assuming we can trust historic correlations and standard deviations), and another $3.8 trillion in share buy-backs that create the illusion of growth and stability. As we saw last week, volatility may not be correctly priced, after 9 years of rising equity markets and low interest rates. During crises, correlations across asset classes go to 1, because end of the day we are just humans trading perceived value.

Second, and this could be a long shot, inflation and unemployment could be much higher than measured according to ShadowStats. This is purportedly due to changes in the approach to measuring CPI in the 1980s and 1990s, which had the net result of keeping entitlements payments in the US lower. Most economists disagree with ShadowStats, and modern efforts like the MIT Billion Prices projects finds that data from large online retailers tracks CPI fairly closely. But there is a non-zero probability that politics has impacted macro economic data. This type of argument supports the gold-bugs and the Bitcoin maximalists. But guess what, Bitcoin's 50% value drop was pretty correlated with the overall market, so it does not appear to be a great hedge in the short run. Because the short run is an ocean of inexperienced sentiment.

And last, younger generations are more heavily indebted than prior ones, especially with persistent student debt. Carrying around this burden implies an additional tax on Millennials which they pay to the government before buying a house or spending on consumption. The cost of this debt is 600 bps higher than the price banks get at the discount window. No wonder Millennials are printing their own money in the form of crypto currency, hoping to inflate away the debt through lottery. What other options are there?

Enjoy the tinfoil hat!


BLOCKCHAIN: The Small-Cap Coin Rush

Source:  Coinmarketcap  (and its 300 million monthly uniques)

Source: Coinmarketcap (and its 300 million monthly uniques)

Literally everyone around us is either trading crypto or starting crypto companies. Two conclusions are possible: (1) from now on all startups are crypto startups, like all tech startups use Web and Mobile, and (2) people are chasing the dragon because it's a dragon. Checking in with investors that have gone through the DotCom experience, most say that it feels like 1997 -- where both the excitement and the bad decision-making are palpable and public. So what are the key symptoms?

The first data point is that the mainstream excitement about crypto has shifted from Bitcoin into alternative cryptocurrencies, i.e., alt coins (XRP, IOTA, ADA, TRON, ICX, etc). The reason is simple. Many people have onramped from fiat into crypto via Bitcoin in 2017. But you you have to believe some wacky things to get Bitcoin to increase 100x from here. With tradeable coins that have a $50-500 million marketcap, it is still possible to imagine (rightly or not) those 100x returns. And in fact, there is a cottage industry of Youtube personalities that keep publicly available spreadsheets that evaluate Initial Coin Offerings, Twitter day-traders working through candlesticks and resistance levels, and well-branded investment newsletters. Talk of "pump and dump" is rampant, and celebrities are leveraging influence to drive coin prices. Tetras Capital penned a great article on Coindesk about the black hole of this phenomenon, and how to navigate it.

One of their conclusions was that the cheaper the price of a particular token (not the marketcap, just the $ price), the better return it had in the last month. That's not a great investment rationale, and has nothing to do with technology or potential. So if you participate in this market, understand that while a technical innovation wave is indeed underneath it all, the current market is a set of options whose strike prices are based on sentiment, fear of missing out, and social media marketing bots.

The antidote to dragon-chasing is data. The good news is that there are some great data providers out there. If you use Google sheets, check out the Cryptofinance plugin. To track social media activity, see Solume (and the chart below that shows the correlation between social discussion and XRP price). We are impressed with OnchainFXCoinmetricsSeigniorage and Iceberg for quantitative and fundamental data. The other antidote is indexing. The best thing thing that could happen in the space are boring vanilla ETFs priced at 5 bps, tracking (1) large cap, (2) mid cap, and (3) small cap coins. We track many crypto funds that are pursuing token basket strategies, but Crypto 20Crescent Crypto and 2030 come to mind. The race is on to be the next Dimensional Fund Advisors and get your name on a business school.

Source:  Solume .

Source: Solume.

FINTECH: Public Company Blockchain Pretenders

Source: Autonomous Research

Source: Autonomous Research

Welcome to the first rumblings of Crypto Eighteen. We are calling it that to make the whole year more valuable! Apparently this is a tactic that works -- by our count, some 31 public companies have already jumped on the crypto bandwagon by either adding Blockchain to their name or putting out a press release announcing a pivot to Blockchain technologies (including our favorite, Long Island Iced Tea becoming Long Blockchain Corp). If history is a guide we’ll see 100+ instances of this in 2018 – an academic study found that in the Dot Com bubble the instances of name gaming went from 13 in 1998 to 126 in 1999.

The DotCom name game dropped to 36 in 2000, and from late 2000 through 2001 the trend completely reversed with 57 companies deleting DotCom from their names. Oops! But let’s be honest: No one likes to talk about hangovers in the middle of a party. Turning to performance, the median stock in our Blockchain sample is up 265% in 2017. This puts the Dot Com name game to shame, where stocks with name changes only went up 118%. Paltry compared to the rise of Bitcoin, but what isn't. And if you haven’t started hating yourself for not being a Blockchain millionaire yet, let us just point out that these "Blockchain" companies have a combined market cap of $22bn.

Without further ado, here's the sample: The Crypto Company (CRCW), Natural Resources Holding Ltd (NRHYY), Global Blockchain Technologies Corp (BLKCF), Intercontinental Technology (RCGR), LongFin Corp (LFIN), UBI BlockChain Internet (UBIA), Riot Blockchain (RIOT), MGT Capital Investments (MGTI), DNA Dynamics (DNAD), Online Blockchain PLC (OBC-GB), Digital Power Corp (DPW), Nodechain Inc (VPTK), Siebert Financial Corp (SIEB), Xunlei Ltd (XNET), Seven Stars Cloud Group (SSC), Overstock.com (OSTK), US Global Investors (GROW), BIG Blockchain Intelligence Group (BIGG), Net Element (NETE), Gain Capital (GAIN), Nxt-ID (NXTD), NQ Mobile (NQ), Long Island Iced Tea (LTEA), Hive Blockchain Technologie (HIVE), 360 Blockchain Inc (BKLLF), Social Reality Inc (SRAX), On Track Innovations (OTIV), Future FinTech Group (FTFT), Chanticlear Holdings (BURG), Marathon Patent Group (MARA), Blockchain Group  (364-HK)

We don't recommend anything about these companies, other than noting that they exist, are doing this, and are gaming the pinballing valuation mechanics between the public, private and crypto markets. Speaking of, did you say Uber's price collapsed by $30 billion?