Latest posts of: cypherdoc

ok, i think i got this figured out. watched it yesterday and have been thinking about it all day and night.

i'm very glad i watched this video b/c the presenter clearly is intelligent, geeky enough to understand Bitcoin, and works in forex coding software at Bloomberg a big financial organization unto itself. it's also intellectually challenging to take apart his arguments.

he touched on so many interesting areas but i think everything can be traced back to Central Banks (esp the Fed) and moral hazard:

1. to understand all of this you have to go back and understand how the gold standard actually worked. everyone hear buys gold as a store of value for all the already discussed reasons but very few actually know how it practically functioned.

ppl back then monitored a countries money supply, interest rates, and amount of gold reserves. countries had fixed exchange rates. such as USD/JPY=1.2 or AUD/JPY=2.0 (just making those numbers up). it was a self regulating system in that gold would move away from overly profligate countries to more prudent countries.

so lets say a Japanese company came to the US, set up a local business, and earned USD's. they then faced the question of should they exchange those USD's for yen or keep the USD's? or perhaps exchange them for gold? he could look at the US's above metrics and for instance see that its money supply had been growing continuously for the past 11 months, interest rates were falling, and gold reserves were leaving the US. in other words, the US was getting too aggressive about stimulating growth via the lending of too much money (or printing). those excess USD's would increase the competition for lending by banks thus driving down interest rates. the Japanese business holding these new fiat USD's would say "WTF about the low interest i'm getting here in my US bank acct? it's b/c these US bankers are printing/lending too much money. they aren't treating me fairly and i'm going to go cash all these USD's and exchange them out for yen where i can get a higher interest rate in Japanese banks". this dynamic was happening b/c the majority of USD holders were exchanging their USD's for gold and moving this gold to fiat in countries that offered higher interest rates or they just decided to hoard the gold. this is how the exchange rates were maintained and this is how gold would flow from one country to another acting as a self regulator. the US seeing its gold reserves diminish would then be forced to increase interest rates to reign in the excess lending and throttle back their economies and money supply and thus increase its gold reserves back to normal. you can see that in this system there really was no incentive to buy or hoard gold b/c it didn't pay an interest rate whereas fiat did and there was no threat of debasement. it worked beautifully as businesses could then rely on a stable exchange rate and didn't have to worry about currency risks on top of investment risk. that is until bankers started to bend the rules.

1. so today, why do institutions, like IB's, speculating abroad or corporations building factories abroad feel a need to hedge their foreign currency? that's obvious b/c the fixed exchange rates have gone away and the exchange rates are too volatile and pose a secondary risk on top of the primary risk of the investment. why are they so volatile? b/c there is no gold standard. b/c of CB printing whenever their respective economies weaken introduce an unpredictable risk factor. you just never know when the printing presses are going to crank up to the benefit of some insider.

i watch currency crosses much of the day and night. i can't tell you how many times in the middle of the night you'll see a huge Roman candle spike up in the USD/JPY cross. invariably when i click the news tab i read a just released one liner about how the BOJ has just printed up another 200 billion Yen or so in a blatant attempt to shove down the value of the yen to try and stimulate their economies and make it more attractive for foreigners to come buy their goods. i shouldn't just pick on the BOJ. this happens all the time whenever any of the CB's release or announce more QE. of course, the currency on the other end of the cross goes up in value only to have that CB print more money a month later to neutralize the original effect.

so what the hell are currency forwards? Bromberg makes them sound like they're some legitimate necessary feature of a currency. IMO they're just another derivative mechanism concocted by IB's supposedly to allow institutions/corporations/currency speculators to protect themselves against this volatility. well how did Bruno Iskil's hedges work out? NOT. these derivative contracts only exist b/c of excess speculative money released by the CB's. they are just taking the place of a gold standard to attempt to reduce volatility. they wouldn't be necessary if we had sound money with a stable value.

why do we accept the need to encase in a vacuum sealed vault somewhere in France a standard metric weighted gram of whatever material but not demand a similar constant for our unit of money? businesses worldwide need to be able to deal in a sound money whose value isn't whipping all over the deck like a hooked fish.

2. 4-7 T currency market: now you understand how this market has gotten so damn big. the CB's have flooded the world with so much of this 0% yielding fiat as their CB's try to weaken their own currencies and stimulate borrowing.

speculators can take this cheap money and speculate on all forms of assets; stocks, bonds, commodities.

but you also have pure currency speculators continually crisscrossing the globe trying to find the next currency that will increase in value relative to what they currently hold. it really is a teeppee and is insane. they hedge with the currency forwards he's talking about. what a casino! the existence of these markets can be traced back to Central Banks (esp the Fed) and moral hazard.

you also understand just how close Bitcoin is to exploding in value. it is a new fledgling currency that sits on the edge of this huge pot of money. i guarantee you, every forex trader is eyeing Bitcoin and tiptoeing closer and closer. no one here has pointed out that Bromberg himself admitted he owns Bitcoins. he also recognizes how brilliant it is but only advances arguments that align with the current systems moral hazard and violence (taxes). either you bet that the current system will continue to ramp higher and higher in exponential fashion or you bet that change is a comin'.

3. there's another dynamic going on here that's even more interesting. for this you have to understand the UST market.

prior to 1971, the US gov't found itself running up huge deficits, productivity was dropping, the economy was stagnating, and their gold reserves were dropping. when the Fed depegged in 1971 it set off the last truly inflationary period here in the US. interest rates soared as the bond vigilantes attacked by selling UST's, gold soared as everyone saw inflation exploding and the Fed thru Volcker was forced to raise interest rates into 1981 to squash inflation. the 10 yr UST yielded 15.32% at that time. gold crashed and interest rates started falling. thus began the longest period of moral hazard via debt buildup and CB printing the world has ever seen.

you see, their is a huge block of UST bond speculators that have repeatedly executed the bond vigilantes since 1981. one of the most famous is Gary Shilling. he will tell you flat out that he doesn't invest in UST's b/c of yield; he buys them for price appreciation. this is an incredibly important point for all to understand here and is the answer as to the conundrum as to why the hell ppl keep buying UST's. the bond price is the inverse of the bond yield, i.e., when a bond yield is cut in half, the price of the bond doubles. since 1981, Shilling has made an absolute fortune just buying UST's. as interest rates have fallen his portfolio has exploded. UST's happen to be the best investment of all since that time which most ppl don't understand. it sounds so counterintuitive b/c when the avg investor thinks of UST's, their eyes glaze over and they say "why give money to the most profligate nation on earth for such a puny interest rate for so long?". well, i just explained it to you why the most hated investment in the world has turned out to be the very best for the last 3 decades.

but the key thing here is that it depends on the moral hazard of the Fed to step in to buy UST's whenever the US economy slows. the bond speculators know that the Fed, Wall St, and gov't will scream for lower interest (aka money printing) rates to encourage speculation/investment to prop up their asset prices. these bond speculators have learned to expect this intervention and front run the Fed every time they get a whiff of weakness in the real economy and as reflected in a downturn in the stock market. they have killed the bond vigilantes time and time again playing this game. they've done it in Japan as well. so they step in and front run causing UST prices to rise and interest rates to fall; sure enough the Fed then announces a cut in interest rates and buys UST's at the elevated premium prices thru POMO to shove the short end of the yield curve down (yes i know they've even extended this to the mid and long end at times); the bond speculators then sell their UST's to the Fed for USD's and divert those winnings back into stocks for the next wave up. wash, rinse, repeat.

the problem is that now we are at the lower bound; 0% interest rates effectively. the 10 yr UST is now only yielding 1.7% as of Friday and the 3 mo is around 0.8%. there is precious little room to go lower' although the bond speculators will keep arguing that you can keep halving the interest downwards forever (sounds like the divisible Satoshi argument, eh?) but i do see cracks forming in the UST bond market. the Fed is said now to be the buyer of last resort reportedly having to take down 70% of auctions currently. China has certainly backed away. but i still wouldn't bet against UST's just yet b/c there is now significant evidence the worldwide economy will be heading into the tank as i have been predicting for a couple of months now. foreign sovereign bonds are failing and provide a hint of what is to come.

i would argue that all this debt and money printing has elevated all assets to bubble levels. the reflation from 3/09 is failing. investors don't care that they sit in cash now earning nothing. they are more concerned about preserving their wealth. what's happening is that all this liquidity is pushing on a string. no one is willing to risk betting on bubble priced assets. this is why you see corporations like Apple hoarding cash. this is why bank deposits have soared. this is why even the banks save most of their bailout money in the form of excess reserves and won't lend it out. this is why i have money under my mattress and in Bitcoin. this is why ppl continue to invest in gold. liquidity pushing on a string. unfortunately, all assets are set to fall; the only question is will the UST bonds keep rising in price? truly the greatest bubble of all time and the last one to pop. it's just a matter of time.

4. so with that background what is this that Bromberg is talking about with the deposit market, UST's, investment vehicles? i think he's talking about money markets as deposit markets. money markets invest in sovereign bonds typically esp. UST's. you have to wonder if the institutions that plow their money into them are playing the same game as the bond speculators? or perhaps they are the bond speculators? they know that the Fed will be there to guarantee the price of their bonds at all times and even pump them up. this has indeed reduced volatility but at the same time creates bubbles. even more, they have driven up the value of their bond portfolios to enormous heights. what a deal if you understand what's going on!

however, there are cracks appearing in the money market space that have been well documented over the past several years as investors/institutions have actually pulled huge amounts of fiat out. certain money markets have been caught investing in European PIG bonds and have sustained large losses. thus, it appears that this game may be ending despite what Bromberg has said or wishes.

this gets to my argument against his argument that institutions/investors/speculators will never move into Bitcoin b/c it doesn't offer a yield. i just explained to you that most UST bond investments are made for price appreciation, not yield. thus, just b/c Bitcoin doesn't offer a yield doesn't mean that these entities will never invest in Bitcoin. in fact, my bet is that one day they will conclude that Bitcoin is a currency and b/c of its scarcity and properties, has the MOST potential for price appreciation. and at that time, the price will explode. no one gives a shit about yield. i know i don't.

when asked about gold, he abruptly and casually flipped out a straw man argument that you can't earn more gold by depositing gold. this is true but i just explained to you what matters most is price appreciation. think about it. most of you are in gold b/c you hope it goes to $30,000 an ounce, not just b/c its a store of value. you guys want to become Kings aka The Greatest Transfer of Wealth the World has Ever Known. i won't get into that b/c you all know how i feel about gold at this point and i don't want to question anyones motivations.

anyhow, i'm tired. i wasn't going to post this b/c its takes too much effort and i like to concentrate on my subscribers. but that's how i put it all together and i hope it helps.

in conclusion: Broberg's arguments are a straw man and can be viewed in the context of the known problem of Central Banks (esp the Fed) creating moral hazard.