Metaliquid

Hello, y buen dia, Yesterday I read on my favorite Buenos Aires expat blog, Bubblear, than you just scored an amazing job. Congratulations, and don’t waste too much time reading naysayer comments. This job is going to put you under public scrutiny, and it’ll be uncomfortable but if you keep a clear head and watch your words in the press, you’ll be ok. 

You and I have a lot in common, we’re both children of privelidge, we both have an international perspective, like moneyed nomads we have spent much of our adult life living in various countries, and in a sense our individuality is a bi-product of not feeling constrained by borders or currencies. And we both love finance, we both want to be excellent at what we do, and reach our 40s with a sense that we were responsible for making things better for the societies we inhabit. 

People will complain that you don’t deserve your position. That your series of academic accolades tower in excess while young people can’t get the first degree because of broken education systems. They’ll mention your family, it’ll start to get personal. Some may even argue that your age puts you at odd angles to your peers, or disqualifies you. 

Forget about that. Your age and rigorous academic background probably puts you at a higher level of qualification than 70% of the staff in all the regulatory organizations, commercial banks, and the central bank, 70% being a conservative estimate. Focus on the math, focus on the system dynamics. This is a rare opportunity for the slow wheel of socio-economic progress to skip a 15 year generational lag. You can combine elegant models backed by thought-through computer science with political diplomacy to seed the next boom for Argentina. 

Argentina is in a lot of trouble. Rationalizing the whys and hows of the possible solutions is probably also part of your job description a little bit, and this will cause cognitive dissonance. But I think being from the outside most of your life, knowing what a developed country is like, it’s clear that Argentina is in trouble in part because of mistakes made in monetary policy. I’m not going so far as to say fiscal policy: I once stood with my children in the hood during a boy’s birthday party, sipping non-brand cola, and saw “Cristina es Pueblo” graphitti’d on a cement wall across the broken-up parking lot of the projects - two of the buildings had been recently painted, but the other two had not. I get it, but at what price must the pueblo be nurtured? Does it really have to come to perpetual capital controls, high inflation, and net-revenue-negative attempts at surveillance in pursuit of tax collection?  Decentralized money is here. Bitcoin’s usage in Argentina is among the highest in the world when it comes to non-speculative usage volumes. A small population relies on it to bring money into the country. Now those two sentences together may sound funny, this technology is where the internet was in 1995 when it comes to adoption the technogists claim. Meanwhile in conventional banking in Argentina, all the revenues come from fees and credit card interest, there is more revenue earned by mildly-professional shadow bankers who earn trading spread on foreign cash or surrogates such as the contado con liquidacion. Conventional lending is next to impossible because the interest rates are too expensive and inflation is unpredictable. Collateralized business credit is the most plausible aspect, but the reality is most businesses in Argentina need to operate at least partially en negro because so much of their margin is eaten by the loss of official exchange rates and punitive taxes meant to compensate for under-collection (similar dilemma in Greece, albiet the opposite monetary context). The net result of a dysfunctional commercial banking environment is that most of the money supply remains in cash. Why do you think the US can get away with quantitative easing but when the BRCA-as-government-puppet takes the money supply up by 400% the pero loses 80% of its value? Meanwhile the dollar gets even stronger! How unfair is that? It’s because your home currency has very little inverse-pyramid-scheme working for it in banking, and the US Dollar has been adopted as the basis for moeny creation internationally via derivatives and subsidiary-cycling in what was archaically named the “eurodollar system”. For academic-level depth on the subject I highly recommend reading Jeff Schieder at Alhambra Investment Partners. Bottom line, the pyramid for dollars is so massive, it denominates notional liabilities for swaps that total hundreds of trillions of dollars. How’s that Chinese Yuan Swap that brought the BRCA’s reserves back above 30 billion working? The Chinese Central Bank recently also threw in the towel against pegging to a currency that is starkly appreciating due to its scarcity from the unwinding of those epic net-liabilities.  Argentina’s story for the last 13 years since the last major crisis is one of going their own way, trying manifest what Noam Chomsky called “the threat of a good example” that might rebuke the gifts of the Washington consensus which is ultimately about making the world safe for international banks to earn spreads creating “dollars” through derivatives. And then after Nestor passed the torch to his wife, it was less about manifesting and more about sisters doing it for themselves. (That was a song from the 80s, I’m also too young for that, I heard it referenced on Orange is the New Black.) Social justice became the mode and the rhetoric, the Argentina government took the mantle of an developmental NGO with a spy agency, a tax collection database, and a printing press. I lived in Argentina throughout the process, I saw it work, and I saw it reach diminishing returns. Seriously bad investments, such as factories whose profit margins depend on tariffs and import restrictions, were made in the name of social justice. 

Today Argentina faces the same reckless inflation that had precluded any economic growth for almost 30 years, a period of tumult that made even Carlos Menem and dollar-pegging look good. Now, after 11 years of healthy growth from a very different model, and 2 years with slow growth teetering on recession, there is a risk the bad times will return. There’s a solution for that.  Argentina is prevented from paying its debt and potentially get back into the global capital markets, because a Judge said no, and that’s how the old banking system works, a single Judge can legally block a soveriegn nation from paying a coupon.  There’s a solution for that.  The Argentine government will very likely remain Peronist for the duration of your position, the odds that Argentina will vote for a guy who thinks it’s cool to make cat calls seem low. That kind of Donald Trump stuff only really plays to red-blooded North Americans I guess. Social justice as a fiscal policy objective is going to remain on the agenda, but how will it be paid for? There’s a solution for that too.  And how about giving Argentine banks a predictable inflation rate and a stable basis to lend against the rich collateral that exists in Argentina’s farms and real estate? How about simultaneously extending those services to those who are underbanked, or whose homes are unregistered? What could be better than getting banking services into the cheap Android phones of Villeros? 

Well I won’t disappoint there either. 

You must spend 100 hours of research, when you can budget the time, but regulary, to catching up with the open source and licensed software available that would enable all these solutions. Mostly decentralized technology like the Bitcoin protocol won’t vibe with bank AML policies, nor can banks hold bitcoins on their balance sheets as an asset due to the unknown counterparty risk of its decentralized ledger being secured by a network of psuedonymous data-centers. But you can check out Hyperledger, Ripple, and Tendermint, those can satisfy regulatory requirements for KYC and bank participation. 

Now that you know there are a spectrum of blockchains that are more or less decentralized, and on the semi-centralized side there are tools that fit into your regulatory framework, consider applications: - Small business and personal credit can be issued and traded just between banks (Ripple, Hyperledger) or also open to public participation (Tendermint, Omnilayer over Bitcoin, Counterparty over Bitcoin, Ethereum). Originate-to-distribute can bring international capital through the back-door at the level of secured debt.

- The immense wealth of the nation’s private persons, farmland and residential real estate, should have a simple regulatory structure for Trusts to purchase and legally hold, then allowing issuance of securities to international investors. Alternately individuals can remain title holders and you can securitize or hold home equity lines. This will give the Argentine middle class liquidity again, but how to incentivize that they invest in Argentina?

- Begin the issuance of ARS on a blockchain admitting Argentine banks as consensus hubs and registered persons as participants. Then you can have fungible pesos moving around in irreversible and highly trackable transactions digitally using any medium including smart phones. Because of ID registries associated to the bank accounts of the Argentines using that payment method,  the money can be either canceled/re-issued (in the case of permissioned ledgers) or backed-up (in the case of more pure cryptographic ledgers) so the risk of cash theft can be elimated from many people’s lives. The additional benefits include:  1) Standardization of interest rates in a liquid and transparent market. 

 2) Taxes can be accounted for and in some cases such as IVA, immediately collected using a decentralized application plugged into your permissions hierarchy. Yes, I’m giving you the keys to go tax people more effectively, the flipside to that is taxes beyond IVA must have a lower rate, a rate designed to anticipate >90% collection rates in the future, but only for income accountable on the decentralized ledger. The money saved in IVA by paying in cash can eventually become less attractive than the yields, efficiency, tax savings and credit those tax receipts qualify one for if using the open ledger. If it just looks like an invitation to harassment from AFIP it won’t catch on, it must offer a very healthy and long-term carrot, then the net result can be revenue-positive for the government and the people. 

 3) The standardization and cost-reduction in social programs adminstered by the government. 

- Let Villeros own their property, using the same ledgers as a document registry. Start-ups like iNation or BitNation are offering technology in this direction. This will enable more credit (you’d be surprised what some of the Villa houses in Puerto Madero would be worth) and cut down on crime. Additionally, such a document registry makes banking administration cheaper and less error prone, and this applies also to the full spectrum of government tramites. 

- Argentine banks and the government can issue debt that is distributed to holders of corresponding bond-tokens on a given blockchain. The government could use one of the above protocols to issue those tokens to all restructured bond holders today and then pay the last year’s coupons for transaction fees totaling .025 USD per recipient. The dollar payments can be made in something like Tether, which issues dollars on the Bitcoin blockchain backed by a Trust in Taiwan, or by on-blockchain Eurodollars issued against a smart contract hedge. Eris Industries structured contract framework might be a good place to look. Another angle, by forking Ethereum’s virtual machine software, it would be possible for Javascript-based applications to run on the Argentina-specific blockchain. Then bank employees could take existing code or develop directly and make a contract backed by pesos to hedge the dollar price of real estate assets, and thus back the issue of dollars on the national blockchain with soil, the constituion’s protections on private property and the robustness of Trust charter law. 

As long as there is fungibility between the national synthetic dollars and dollars on other blockchains through a liquid swap market, which may well penalize the nationally based dollars a few points, then the bond holders can eat sandwiches with that money. 

The long term adjustments away from the current model of paying 6 pesos for soy dollars when the convertability value is over 15 is out of your hands. But these ideas will help banks convert more of the economy into peso transactions. A healthy banking sector requires widespread use of digital money, can help lead the country towards a scenario where deficits are filled by more broadly collected taxes at a reasonable rate, and money supply growth can come from the keyboard over the printing press. But if you fail to create those conditions from the inside, if the flogging continues to slide convertability towards 20, with blue and official rates rushing to catch up, the population of Argentina can still use the decentralized technology to evade taxes, evade losses from devaluation, and continue the general flight of capital out of the country. 

The amount of cash dollars Portenos alone have under their matresses is proportional to the Qatari Soveriegn Wealth Fund, but of the crowdsourced variety. 

While you were freaking out over what price you’d get for your Ether pre-sale investment, the world’s largest trade surplus country and the mother-client of the wholesale eurodollar system - China - stopped making it’s currency a bastion of deflation-appreciation and let it find a level just a bit closer to where every other major currency has fallen relative to the dollar. Now the Yuan is flirting with being another inflated-on-demand tool of socialist despots whose Central Bank says one thing and consistently means another - like a very professional Trollbox. This may portend grim omens for the macro. 

Meanwhile, in the neo-eurodollar system of bitcoin exchange, the CNY market rallied on the initial announcement while lagging the main market devaluation (reddish-orange is the HK freer market, orange-yellow is the official fix). USD bitcoin languished, then on the second day of deval, the “gotcha” after no further devaluation was promised the night before, bitcoin caught a real pop and the result was that the CNY price was still a steal relative to where it “should be”. Of course, like the prices of Ether on 3 exchanges having a 10% differential due to difficulty of moving capital, the ultimate capital controls country is going to exhibit these gaps between difficult to access liquidity pools. Curiously, the BTC pool is the easiest one to access, any mainlander with some papers and a bank account can move modest capital through it - but tonight bitcoin sells off, the CNY discount still promising. Interestingly, this has affected the futures, since the OK contract settles half on CNY price. The contracts trade at a premium to the spot prices to be found, but at a discount to the index price, which is lossy and ineffective as a hedge unless you have a specifically downward view on bitcoin prices. One would think that this could spur long-term flows of devaluing CNY into BTC and other assets in the free, globalized system, but today these people are happily taking a hit to sell their CNY-purchased bitcoin for dollars. 

Considering the range of strategies at the time-series (goal: sequential profits) and orderbook (goal: highest-probability fill) levels of operation, and that “strategies” is a fuzzy word for “algorithms” when you get right down to it, it should be possible to develop some kind of mathematical notation for discrete transforms of one type of algorithm into another. There is already a body of work to build on in existing computer science, this article explores higher level trading concepts with similar goals, synthesizing these may become a longer-term R&D project.

Consider that for any orderbook strategy there is a counter-part that can predate the prior routine and increase its average cost of liquidity, transforming it into low-risk profits. The profits are mechanical, and assuming the converse strategy can execute more quickly, the probabilities approach 100%.  But for any time-series strategy, a converse strategy operates on a probablistic plane. A simple moving average cross-over strategy, trying to buy breakouts, can be “predated” by a range-trading strategy, until the range is definitively broken. The range-trading strategy makes profits and then gives one back, and its ability to have long-term positive expectancy hinges on the efficacy of the signals that turn it off when trending environments manifest. 

So you have a dimension of orderbook structure defined by deltas in how algorithms cancel and replace orders, a compound-dimension of price movements over time in a probability distribution, and a compound-dimension of volume collating existing positions, average orderbook depth and average execution volumes into a probability distribution of volumes. Since all executed volumes first originate as limit orders and then market orders, we can simplify this to the atoms of market activity - cancel orders, market orders, limit orders, parameterized by price and volume.   All trading algorithms create a topology inside the 5-dimensional distribution of market events. 

This probably sounds tremendously obscure, and surely one can build different models that could be useful. The application is: 1) map your model to recognizeable market data

2) create an internal machine learning environment where execution/sizing/placement logics are atomized and characterized by their posture relative to other logics  3) iterate using memetic algorithms, or nueral nets, or whatever package you want to import 4) compare the Fourier transform of execution algorithms fills and cancels to an F-transform of executed prices (for orderbook level logics) or of different scales of price movement (for timing logics) or of different scales of volume activity (for sizing logics), let the ML algos optimize to fit the curve as it adapts - the lookback period will depend on the timeframe of the system embodying the set of logics. In a small market like bitcoin, something like this may even allow a large fund to find the efficient frontier of exploiting their own impact on market liquidty. 

Real Estate is probably the oldest form of “capital” in the sense of an income-generating/saving asset that can be assigned per property rights to individuals or institutions. While proto-tribal civilization may well have been anarcho-communist matriarchy, or perhaps not, looking at Catal Huyuk 10,000 years ago it seems there’s a precedent for property. The Old Kingdom of Egypt at least, 5000 years ago, had the concept  of nobles owning their homes in orbit of the supreme monarchy. Residential real estate is something everyone can understand because we all live somewhere and either own our home, pay a mortgage on it, pay rent, or own our home and collect rent on someone else’s home. Owning one’s own home is a stable bastion that makes everyone’s life easier.

Commercial real estate is a more recent development, and financially it acts like a more specialized derivative of the residential real estate we all know and love. In the 20th century, the financialization of real estate brought favored money flow to commercial floorspace. The great department stores of Manhattan, towered over by the vertical scaffolding of value that high rise construction allowed to create offices, board rooms, kitchens and break rooms, a parallelization not just financially but also in the logistics of everyday life. 

The corporate balance sheet made use of formal space that replicated creature comforts while spatially ensconcing official hierarchies, or that made mass produced goods sold at a lean-but-measured gross profit pay rent on expansive and decadent floorspace. As individualistic marketing came to warp the commercial spaces into psychedelic buffets of temptation fueled by credit cards, in the latter half of the century, there developed the notion that sales could be measurably boosted by an investment in a comprehensive space - immersive shopping - beyond the multi-storied department store to the full-blown shopping mall; movie theater and food court plucked on top like the cheery and walnuts of a sundae you neither needed nor deserved but ordered anyway. 

And it worked. Commercial real estate has appreciated in excess of the equivalent square meter prices of its more mild, residential counterpart. Sales did grow, and also the money supply, as the psychological effect bought with all that concrete and lighting exceeded the stagnant purchasing power of the middle class, and made them net-debtors to a dream of shopping excellence. And to pay off that debt, take on more debt to get a college degree so you can live in the office complexes and make 60k a year. For everyone else, a global construction boom boosted commodity prices, floating entire national economies on export revenue, and created many millions of low-skill jobs all over the world.

From an investor’s point of view, CRE is quite attractive for both its stability and growth potential, which becomes a self-fulfilling prophecy on the capital gains side masked by the decent yields that a global boom in financed-consumerism enabled. You can take a million mortgages and securitize them or put 5,000 rental units under a REIT and have minimal dividend interruption, but investing in a new building in Manhattan has been just as seemingly stable with all the excitement of high upside. 

But this may be ending. Decentralization is not just for crypto-finance, it’s rooted in the premise of network communications. The economic growth that we have enjoyed in the last 20 years, and perhaps moreso in the 20 years ahead, can be attributed to the capacity for anyone to contact anyone else in the world and therefore do more with less. Crypto-finance is merely extending the contact to payment and auto-enforced contractual agreement. Then there’s the decentralization of food, energy and manufacturing, which is 40% better tech, 60% re-organization based on more individuated incentives. The Internet of Things ties them together with cryptographic signatures allocating operational “ownership” in a more-real-than-legal sense. 

Given this horizon, it would make sense to me if Commercial Real Estate stopped being the darling asset of banks and corporations, or the investors they have pawned off securities to. We may see a period where defaults return to CRE financing models, where the capital gains underperform residential, and way underperform in a crash. Meanwhile, a generation already pinned with stagnant incomes and debt, paying record-high rental yields just to live because dislocations created by the bubbles-on-demand policies of central banks make buying a house implausible, they are going to try and reduce their economic footprint in order to gain the agility that might allow some upward mobility. Oil back at levels last seen 10 years ago, despite money supply now several times greater, says something about this secular shift in mentality.  The nuts-and-bolts trend to look at when considering the decline of commercial real estate would be the adoption of eCommerce as an alternative to brick-and-mortar shopping. The US and Europe have already adopted to near-saturation and we’ve seen the fortunes of many publicly traded retail outfits plummet as their volume moves online. Locations close, CFOs divest assets, fuel usage is consolidated to a single UPS truck instead of 50 SUVs - that odious vehicle class that will always remind me of the Bush Era, when farms were turned into McMansion scatterplots and people spent their home equity loans at Best Buy. 

Credit card payments in the “emerging” world have allowed eCommerce in Asia, LatAm and Africa to get some traction - the room for growth is enormous and may pre-empt a few trillion dollars of value from going to commercial real estate valuations that “should” show up there under the 20th century model. But the even more significant trend is people doing things at home or in ad-hoc commercial spaces under the System D model, where we are likely to see the majority of economic growth. Until fully decentralized eCommerce platforms such as OpenBazaar catch on, and transactions get recorded in blockchains, it will be hard to measure this most-important dimension of the decentralization trend and its impact on commercial real estate.  It’s worth noting that while CRE has been a huge asset class, one of the biggest, CRE securities have not caught on in the way that REITs have with mainstream investors. Many of these buildings are closely held by private interests still. But the decentralized assets that will instead attract the growth in money-flows, like shares in renewable energy, medium-scale farms and rental properties, these will become liquid soon thanks to more open financial technology. I can only lament the lack of a good liquid index product to short CRE long-term against a basket of decentralized property assets, this ETF looks ok, but maybe if I do my homework I could find some CDS to trade against the debts secured by particular properties that seem sensitive to these trends. 

The cost of extremely short-term liquidity is the life blood of the legacy fiat-system, and in a way too in the new decentralized successor. 

Here’s a formula in Tradingview that sums this up nicely. You take the weekly highs of the premium in the highly traded Okcoin futures contract and compound that for 52 weeks. That’s the annualized yield one would receive if they could get roll premium like that every week. To get an idea of how that might blend, look at either the moving averages or the upper Bollinger Band. It’s a range of 20% p.a. to over 100%, given current volumes I estimate that 100MM could park in this without crushing the returns.

The Argentines have a phrase: “me da bronca”, it’s a word that nice summarizes the combination of indignant resentment, and disappointed compassion held by a people who have robustly handled a series of busts. Bronca is what I felt today for Greece, after covering bitcoin shorts from the night before.  George Carlin said: Germany lost WWII, Fascism won it. Governments, even ones with efficient economies, cultural tendencies towards full income reporting in their home countries, and technically thorough means of measuring economic activity to catch evaders, tend to be able to collect a consistent  of GDP regardless of policy changes. This goes contrary to the 20th century socialism playbook, where higher tax rates has been believed to generate more total revenue over a long-term, but it is supported by a long data series of governments reading that playbook, thinking this time would be different. Argentina and Greece are interesting, because Argentines are so heavily influenced by Italian heritage, and their economic realities are longitudinally spaced the way Greece and Italy are, while they also have similar cultural latitudes. Same problem with tax evasion and cash economy, similar government attitudes, similar levels of corruption. Many variables are similar, but the monetary: Argentina’s Euro is the US Dollar, to the sum of about $160B in physical cash. Argentine savers hold (with their hands) 1 in 15 of every $50 and $100 bill printed  - the repressed cousin to recycled petrodollars: unrecycled soydollars, soon to be soy-yuan. Even Greece’s GDP is close in size. The primary difference is that Argentina told the holders of its USD-denominated debt, “investors must accept the risk fo default when they buy high-yield bonds”, and Greece just copped out again. 

The story of Goldman Sachs coming under review for helping an earlier administration hide even earlier administrations´ debts off-balance-sheet so they could get into the Euro, is instrumental here. Greece’s fiscal situation is a bi-product as much of its policies as of the high-flying eurodollar era of finance, where $400 Trillion in interest-rate swaps enable hidden leverage against the collateral of bonds that, at some point, may see fit to go down for a 10-year cycle. But by that same token - pun very much intended - the era of decentralized finance built on smart contracts is what will save Greece.

Here is a quick digest of different things that could be tried: 1) Use this seeming capitulation and renewed ELA support to let the Greek people get their money out of risky EUR deposits - not by pulling it into stagnant cash and crashing the banking system again, but by encouraging national-payment-brokerage of EUR deposits for Tether-Euros which are based on a banking Trust in Isle of Man and issued on the Bitcoin blockchain. Because both Tether and the banks require KYC on everyone, it’s actually quite trivial to trace unreported income held in this manner, even if they trade those Euroes for another asset. It’s a short term way to the get population more financial resiliency and up the learning curve of using cryptocurrency. 

2) Reduce corruption and improve tax collection with Factom-stamped cryptographic signature of relevant documentation. This alone could turn things around.    3) Mutual Credit networks, start with the non-export mercantile sector, mostly small-medium sized businesses. Funnily enough, I know a guy who was one of the co-architects of the Euro, and then decided Mutual Credit is the way to go, see his and the other co-architect’s collaboration: New Money for a New World. Basically, using national ID data as the jumping off point, you can have reputation scores that are like a more multi-dimensional credit score, and myriad currencies issued in filtered circles of peers. This is how you expand money supply dynamically, without risk of runaway inflation, without cost of interest, with the efficiency of lots of working people making decisions instead of a smaller number directing fiscal policy.  4) This list would not be complete without approaching the idea of the Drachma, but an awesome Drachma that makes Scotland want to give independence another go. Here’s how you do it: Every citizen gets a Drachma account alongside their existing accounts, even kids, everyone gets an account - clearly this is easier to do as an e-wallet than a brick-and-morter deal. Every month, everyone gets 100.000 Drachma. The lovely bills that were designed earlier this year gets put into circulation as a back-up, so the convenience of cash is available. Then, there should be a 100% trusted repository of Drachma “pure banking ledger” balance that backs issuance of Drachma tokens on various blockchains, this role would ideally be served by the Bank of Greece.

Conventional wisdom says the thing will see rampant inflation - but not if decentralizing banking principles are applied. With the cash being the b-side, the banking sector able to see higher growth from lending Drachma, the fungibility of a blockchain token allowing for price discovery, and the utility being that much greater. Like we see in developing markets, Drachma yields will be sweet but laden with exchange risk, while Euro yields will be marginal, yet the Drachma needn’t be like Argentine Pesos. The more the currency has to fall to find its value, the more decentralized banking enables yield growth, as liquidity is safely provisioned to speculators trading the Drachma/bitcoin, Drachma/gold, Drachma/Euro and other contracts. After dropping some distance, the risk/reward of getting that yield is pretty good, and the currency can find a level, maybe a 5% variance over a given year, it’s not like the Euro is more stable.  Of course there need to be assets backing this, and there needs to be real growth enable by the liberation of the small business person and the consumer from corruption. Greek exports could jump and Greeks could find themselves the owners of their proceeds. 4.2B USD worth of national gold reserves, 1.2 million Drachma per year per person, a direct inflation of about 13.2 Trillion Drachma a year, so as a baseline we’d expect an exchange rate of 3142 Drachma/Dollar the first year, 6300 the next, 9450 the third, 12600 the fifth, and so on, such that after 15 years the 100k note is worth about $2.25, but inflation is expected to be only 10%. The annual Drachma inflation would fall by half each year and eventually you get to a stable, enduring currency - maybe you knock off 3 zeroes and do a new note series issuance then, try to get the same graphic designer. This is like a more aggressive version of the Drachma exchange rate of olde, but with the boon that the Drachma is not exclusive legal tender, thus the people do not suffer for its non-monopoly, they just use it as a tool. Also, more assets than just the gold could be the reserves, and this benchmark does not take into account the boon of tradeflows, domestic velocitiies, or the net-growth from Drachma-denominated debt issuance by the domestic banks.

A preferential tax rate for Drachma-denominated income enables the subtle migration towards a fairer tax-schedule that is more consistently paid, while also creating an invisible leverage for the currency’s demand at the cost of future government revenues that would never occur otherwise. A semi-stable Drachma with global payment capabilities via blockchain fungibility then obviates the need for Euros and the associated leverage of hostile Tuetons.

Now, considering that these things are possible with software that is either available now or can be tested over the next year, does it seem like a good idea to put up 50B EUR worth of assets just to get the banks re-opened after 6 unnecessary weeks of shaming? At least if they are not legally domiciled in Liechtenstein, it’s easier to blow off odious debt terms when Greece has the strength to due so, like a national-scale, “produce the deed”-style repudiation, which would by the way be very Argentine! 

Rates went as low as they can mathematically go, earnings ratios as high as they can go discounted by those lowest of the low rates. The old school fiat system has been pushed up the asymptote of debt creation by trillions in freshly typed money. The theme going forward for any investor, even Bill Gross is saying how it feels like the ending of a 34 year era, is positioning one’s capital for purchasing power preservation and also for growth in the face of phase transition. The transition begins in the minds of the people and ends in the database access protocols of the financial system. The more people realize that the digits on their online banking are fictitious notions, liabilities that cannot be honored indefinitely, and subject to limitation of use by decree, the closer the herd gets to a tipping point. 

Bitcoin may have recently returned to bull market territory, volatile for sure, but it’s a 3.5 billion dollar market cap - it doesn’t take the whole world changing for it to double or triple from here. It only takes a few more institutions to follow the lead of the big 3 hedge funds already loaded, or another hundred thousand investors to take their first positons, to add $100 to the price. 

What’s really going to change the game though is decentralized banking. Holding bitcoin beyond 10% of one’s net worth can be... stressful to say the least. It’s nice to see capital gains happening against the strongest currency in the world, out-performing bubble assets favored by the stewards of the bankrupt system, but if people can hold savings and make payments in that strongest, stable currency and get decent yield without risk of bank failure or capital controls, that solves a problem billions of people have. 

So open source protocols are going to compete with proprietary permissioned ledger systems that are used by consortiums of legacy institutions, which has the double-benefit of accelerating the adoption of resilient infrastructure and keeping the financial industry around in a leaner, cleaner form - only 70% of the jobs will become redundant, fear not financial professionals!

There are some things money can’t buy when you’re living under capital controls, for everything else, there’s bitcoin. 

Bitcoin options - trading bitcoin with leverage using futures is amazing, let’s have options! Better yet, let’s have those options as a smart contract, so if I buy a call I can see an address with 1 BTC locked up waiting for expiration or my exercise. 

Trading options on SPY or GLD is a lot of fun - the prior has a skew bias towards the Puts and implied volatility correlates with the downside, the latter has the opposite.

Forex options should have caught on more, perhaps there’s a future for them on decentralized exchanges.

But if BTC is due for another epic bull market, the options action will be fabulous. You know there would be some punter loading up on January 500 calls right now, putting like 50% of his capital into them, maybe selling short-term options periodically to manage risk, and the IV for those calls would pop if there was a real rally, and the skew would get more extreme so the really far OTM calls spurt up more proportionally to the  merely 20 or 50% out call options. Then the serious capital comes in and starts selling volatility in the aftermath of a big rally and blow off, skew flattening trades come in until the next big rally. The call premiums become expensive enough that collar positions reach a decent little credit, an order comes into place pricing 8 or 9 contract months along 16 or 20 strikes each. Does that sound like fun? Index futures on global real estate shares - securitize a trillion dollars worth of rental property paying an average 5% yield, 4.2% after fees perhaps, depends on how they are administered. Group all those relatively small-sized issuances, ten million worth for a building here, quarter million for a house there, pooled into REIT-style funds and then profiled based on regionality and of course the currencies those rents are paid in. Then make a global product that SDR-style bundles the cashflow currencies into a blend weighted by the best yields, perhaps with some criteria to filter out unstable jurisdictions and risky economies. Maybe 100 REITs from 30 countries, most of them OECD. Now you’ve got an index that should bubble if there’s a global real estate bubble (which may happen if they crank up the credit a third time) and should perform decently and kick-back a blended dividend. Now create futures for it! Builders, developers and even home owners can hedge risk of their illiquid assets. Since the long-side contract holders are giving up the yield from holding the index, one might expect hedging demand to push contracts into backwardation - these contracts are cash-settled so backwardation doesn’t imply a lack of faith in delivery as seen with Comex gold - so the long-side gets convergence with the index and could arb that yield out of it. 

Then create similar indices for farm and renewable energy agglomerations, and put on spread trades between them!

DAC Crypto-equity - these tokens exist purely in blockchains and in the memory of an AI-driven company, paying out dividends, because the AI has no love for money, it just runs the company and excess funds go out the back door to shareholders. There will be DACs whose crypto equity yields 1-2% at many billions of dollars in valuation. Here are some 100-baggers to watch out for:

Decentralized logistics management involing couriers, drones and self-driving vehicles, depending on the area.

Decentralized banking insurance app.

Health insurance fund with hyper-competitive premiums. Take that Obamacare.

Rental management (expanding our lexicon of DAC functionality to key-signed Internet-of-Things triggers, in this case an apartment lock).

Decentralized Manufacturing Supply Chain Management - for all those Makers out there, and growing, how do you know what to make for maximal profit? There’s an app for that. 

Sustainable Farming Scientific Management - let’s take all the data about weather and terrain and soil and market and give farmers a clear guide, sell lead-gen to the logistics DAC.

Ride sharing, see LaZooz. 

Data storage, DNS, ect. Maybe Google will nail this but there are several start-ups already. 

Eco-designed modular housing - just go to a website and design your house, put a down payment in escrow, robots and/or manual laborers come by your target site to set up the house, dig the geothermal heating loop and install the solar panels. Many people may find themselves doing contract jobs assigned by DACs as TaskRabbit is a precursor, on completion the contract pays out an escrowed sum then and there. 

Edible Landscaping - this one would have mostly human employees, what a bright future. 

And so on, use your imagination. 

Trading algorithms change market structure for the better. Yes it’s about making money, but only because if it wasn’t about optimizing risk-adjusted returns it wouldn’t work at all. 

My analysis of the OkCoin spot market, which has been the primary mover in price action for over a year now, indicates that algorithms trading on very short-time frames enable the extreme liquidity that OkCoin’s book has enjoyed, and that the retail algorithms designed by Chenpeng Zhao in his time there are letting large players with 100-10000 coin positions trade “manually” with enough sophistication that it keeps a bid or ask going at the key levels where price tends to find a pause. 

On one end of the scale you’ve got things like Wealthfront and CoVestor which will surely explode onto the international blockchain scene in the form of Registered Investment Advisers offering shares, or their Eastern counterparts once that regulation clicks into place. On the other end, we’re starting to see a broader “revolution” in FinTech in the form of better user experiences, hell just the other day I filed a tax return composed mostly of many dozens of capital gain events using a slick Angular JS app called TaxSlayer, the same is happening for front-end services like Even that still depend on legacy banking to clear all the transactions. So as the decentralized exchange tech + smart contracts comes out to eat the banking back-end, paraphrasing Andressen, the front-ends are eating human inefficiency by making smart money management a one-click experience. Decentralized banking, as I have it designed prototypically, is basically a packaging of multiple smart contracts needed to make it possible into a one-click transformation of capital in an accepted form into XYZ currency at t% yield. 

Where Metaliquid is going technologically, is a dApp client for running your money. A dBanking app would be like native savings at a protocol level in a simple client, and extending that to be a decentralized online brokerage is a matter of some RPC calls to whichever protocol is getting the volume. The new normal for investing will be retail algos that tend to perform pretty well, or at least on average better than the passive yields and the asset-securities yields. Then the pro algos will have to either predate those retail algos based on order-flow, which we may agree is beyond the ethical limit of what algo trading should do, or they’ll use the data to profile market liquidity in order to estimate what kind of medium a given wave is propagating through, and position or range-flip accordingly, which is ethical data science to extract a legit profit that facilitates real price discovery. Let’s say that Sidechains or Factom-clearing, or whatever enables relatively high frequency trading on-blockchain, can set a clearing environment to have a minimum tick. If the serious volume prefers the liquidity environment that forms on a chain with a 100 microsecond minimum tick, then the market will have spoken on the matter. Since this is basically software deployment and not a NYC-based corporation running the exchange infrastructure, there is no need to play up volume and thus revenues by compromising market integrity for liquidity-extractive HFT firms... maybe.

Part of the real revolution, beyond the transparent clearing and monetary autonomy, is that automation will become woven into the financial lives of billions of people. The facilitation of price discovery has become scientifically understood to the point that it can be boiled down to a cute user interface with colored buttons and a handful of integers for the user to consider. At all levels of the pyramid, automation is going to help people survive or thrive against the backdrop of jobsageddon, what bittersweet benefits automation can provide. 

Back in 2011, the bitcoin market was dominated by Mt Gox, a primordial soup of hobbyist liquidity stacking on top of slightly-more-early adopted capital that was hobby money but was becoming worth thousands, tens and hundreds of thousands, and around that year’s peak of $31, there were several lucky punks who had picked up tens or hundreds of thousands of bitcoin at sub-$1 prices and were suddenly millionaires, if only for days or weeks. It was like the woman in the pond, between the sputtering and hacks of 2011 and the sputtering and insolvency in 2013 you have a period where the liquidity of bitcoin was shallow, but then crystallized and hatched into a monetary commodity with a 10-figure market capitalization. The goat is Mark Karpeles gloating about the money he ripped off - or whatever. 

The group of people are the VCs, the start-ups, the idiosyncratic angel investors with island passports, the journalists, the activists, the lawyers, the regulators, the traders, the bot developers, and you. 

Narcissus over there on the checkerboard, that’s bitcoin, and the board is the Bitcoin blockchain. 

Now what’s most striking about this metaphor is how liquidity as a luminary factor and a concept defines this Dali painting you’re looking at. 

Liquidity in the bitcoin market used to come down to the bank accounts of 1 poorly run exchange. Some of those accounts were seized, and the rest was history. 

Now liquidity in the bitcoin market comes down to a combination of bank accounts in Singapore, Hong Kong, Taiwan, Wells Fargo and Silicon Valley Bank in the US, some EU accounts, and the exchanges host much of that liquidity in the form of term-deposit instruments that pay a very good interest rate, but the user’s capital has been solidified into a commitment ot expand the potential leverage that other users can take. this leverage has in turn enabled not only bigger positions for speculators, but is a pre-requisite for making highly efficient arbitrage possible (along with declining fees). The 2014 bear market, with its epic volatility exceeding 500% over the course of the year, in cumulative daily-scale trend moves, 

If we had another Mt Gox, imagine the fallout, not just traders losing deposits, but savers as well. Perhaps a Chinese exchange goes dark and we’re left with Mainland China investigative recourse that makes the extremely slow Japanese investigation of Gox look like an episode of Parks and Rec. Perhaps Bitfinex could even go dark - that last one in particular seems unthinkable but it is always possible, albeit implausible, with centralized exchanges. 

Technical analysis from the crypto-specific blogosphere might tell you that bitcoin’s price just broke a trendline, thus, bear market over. 

A bit of testing shows the truth to be a bit more complex. 

Every time a trendline defined by failed break-outs was broken, we did see some decent bullish action thereafter, for a time. Trade able, but not a harbinger of a major shift in the market. For a more definitive confirmation, wait for the 13 and 21 week moving averages, or at least the 21 and 13 day moving averages, to be surmounted and cross over each other. 

Having made that disclaimer, this cyclical bear market is a bit long in tooth - though the market felt that way 6 months ago. The 3 funds dominating trading still have the same structural incentive to compete at the bid to be 100% long before BTC/USD exceeds $320 and goes green for the year. The risk to them of dumping and shorting down to 125 is decent, given that a whole new wave of much more numerous institutional investors will be abel to buy in via the GBTC shortly. 

Looks like this booming intermediate term trend in the dollar is going to take a nap. 

If I had to make an Elliot Wave analysis, perhaps under duress, I’d say The range from 2008-2011 was a corrective deal, facilitating the transition from the dollar bear market of 2001-2008. The capping off of gold and the sundering of stocks in August 2011 began the Wave I of this dollar bull market. 2012-2014 had a two year, sleepy sideways correction in the spirit of a Wave IV, but was a Wave II. Obviously the last 9 months constitute Wave III. So now we’re in Wave IV, which might have more of a yo-yo-like character to compliment the low volatility of the preceding corrective period. It may last a shorter time as well, perhaps 15 months. The rising moving averages (weekly chart looks better) are points to watch and may provide support as this thing carves out a cup-and-handle looking formation. Wave V would be a global deflationary flashpoint, and also the best opportunity for US investors to diversify since the top of the dotcom bubble. Since Wave III did 25% or so in 9 months, we might anticipate a 20-30% move from 92 or 93 toward 110-115 sometime around late 2017.

Notice all the caveat language used in these prognostications. Got tea leaves? 

Unlike a stock or monetary commodity, this kind of breakout is not the preluse to a multiplying of value. Currencies are more prone to mean reversion, if only because the system actually likes them going down, and tons of political and trade factors weigh in, which are generally cyclical. 

Remember, financial repression sometimes blows spectacular speculative bubbles. Here’s the Argentine stock market:

And let’s not forget that until recently, the Venezuelan bonds were the best yielding and their stock market outdid the Argentine counterpart. 

As in Wiemar Germany, stock markets can go up faster than their home currency is devalued. Unfortunately Trading View doesn’t have the time series on the parallel dollar market in Argentina, but I know it well. Between the stability of the Nestor era in 2004 (USD/ARS @ 3) and the late 2012 level of the index, there was a 65% devaluation, against a 100% appreciation (and that’s looking at the price troughs). But then, hold on to your hats, 2013 to present saw the peso devalue another 70%, (reaching 16 on the parallel market) whilst the index is up 500%. If you invested $100,000 in 2004, you’d have 600,000 pesos buying you slightly more than $100,000 in 2012. But then, if you invested $100,000 , you’d have gotten about 550,000 pesos, put it in the Merval, and you’d have 3.3M pesos you could convert in an unmarked office to about $270,000 today, with the parallel market supressed 20% under the convertibility ratio of money supply to Central Bank reserves. 

OkCoin Weekly Forwards - 649,237

BTCChina - 125,068 (Formerly much lower until they dropped fees in November)

OkCoin CNY - 102,000

Huobi CNY - 47,753 (Formerly higher)

Bitfinex - 24,000

796 Weekly Forwards - 19,000 (Formerly much higher)

OkCoin USD - 17,052 (Rising)

BTC-E - 9,000

Bitstamp  - 8,037 (Formerly much higher)

Coinbase - 6,892 (Surely rising as they bring in more states and so much banking liquidity)

ItBit - 1,476

Currency controls are a funny thing. 

On one hand, they are a gift from the gods of central planning; executed in a balanced fashion, capital controls can buy a politburo much needed financial relief for years in the form of subsidizing fiscal deficits and monetary debasement through repression. 

On the other hand, all that repression accumulates in torrid and inevitable outcomes, the only question being how well the central-planners have measured for damage control.

They always, always create dislocations in markets, at first to the long-side of assets the captive population’s money is left with to invest in, and then in a spread between official exchange rates and a parallel, freer market. 

In the case of Chinese Renminbi (or “Maobucks” as I like to call them) the parallel market is geographically an accurate descriptin, the Hong Kong-based, just off the shore activity goes by the ticker USD/CNH as opposed to CNY, and their spread so far has been small. 

I an clocking 5-8 trades per minute on Chinese bitcoin exchanges, which are the highest volume places to trade in the current market regime. Perhaps Coinbase and the GBTC on NASDAQ will disrupt that before the quarter is up, but for now it’s all about no-fee CNY trades. I have decided a 10% devaluation to a lower peg between 6.5 and 6.8 is likely in the wake of looming Chinese QE, and I am comfortable with that, given the considerable gains to be had parked in CNY doing arbitrage. 

But if I wanted to time it, I would keep an eye on the spread. I’m basing my inventory model off USD referencing CNH, because I know the moves in that will be more instructive. 

Of course, how to hedge that? 

Perhaps in the coming months, there will be a USDCNH futures contract trading on decentralized exchanges. Maybe in the meantime I should talk to some folks out in HK that run centralized bitcoin-funded futures exchanges about getting such a product out. I wouldn’t put the position on today, but if the spread starts to grow to over .5%, I’ll be paying attention. 

If I had to guess about the future, I’d wager a tactical retreat of weaker CNY to accommodate the deleveraging dollar carry trade makes sense in their larger plan of supplanting USD as the global unity of account. Granted CNY is so far away from being that still, but definitely closer than they were in 2009. They are slowly accumulating pr’dy much all the gold and are weaponizing systems to supplant the London Gold Fix (an older weapon of European gentlemen) and compete with the IMF (UK also on that boat). 

So if trillions in USDs get paid back along the rising trend, you get to a turning point where the Fed cuts rates back due to corresponding deflation risk, or maybe .75% +  the bank’s vig is still cheap enough funding to capture yield in the developing world, and the strong dollar gives way to a carry-trade again. What would the operable currencies to invest borrowed dollars in be in 2018/19? Brazilian Reales? Sure! Indian Rupee’s? Why not? Argentine Pesos? Only if you really love wine. But most of all, the Chinese Yuan could be the hot money love child of choice. After all, it would be the most liquid, we could probably buy trillions of dollars worth of Yuan without moving the market more than 25% too much.

So you may see China in 5 years as the world growth leader (in aggregate, not anymore in % terms) with hot money flows from the US again, CNY is allowed to gradually appreciate again as in 2005-2014. And then the actual trade clearing, they would hope, would be done in CNY.