Chair Yellen is no Joe Namath

All I’m going to say is the Fed chair Yellen is no Joe Namath.

On Wednesday in a speech the Fed head said, “Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.”

Namath guaranteed the New York Jets would win Super Bowl III and backed it up.

Yellen, who seems to be on the path of bursting asset bubbles with a credit-busting, rate-raising strategy, also said, “asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates.”

Even if you discount the 2.5% drop in Google yesterday on the huge European regulator’s $2.7 billion fine for skewing its search results, stocks sold off hard on her comments.

Now I’m not one to pandered to ageism, however at 70 years old, Chair Yellen has a different time horizon than the rest of us.

But if the Fed thinks it can burst stocks, art and home asset bubbles by constricting credit in a low inflation environment, then Yellen & Co are looking at a possible deflationary crisis, which they have little in their toolbox to combat.

One can think that the Fed can always lower rates again and expand its balance sheet to fight deflation, but that’s just continuing the boom/bust cycles.

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Bitcoin still seems to be blue chip in crypto market

Here’s what stumps me. Why would you invest in a newer derivative of volatile newish alternative investment?

I have written extensively on bitcoin. I’ve told readers about its soaring run up in price and its less than equally roller coaster rides down. Pointed out it reaching $3,000 and the $500 drop in the span of 18 minutes soon after.

Also questioned the exchanges that seem to have outages as prices begin to fall.

However when I wrote of the other cryptocurrencies that have popped up in response to bitcoin, such as litecoin and ethereum I was a bit more skeptical. Some of these digital currencies are not currencies at all and are based off bitcoin pricing, but not 100% correlated.

You can see this in their pricing over the last 10 days, while bitcoin is in a range between 2,550 and $2,700, these alt coins are falling faster on a percentage basis.

I still have a somewhat conventional investing philosophy, stay in the best-known entity in the space. While bitcoin’s pedigree is somewhat questionable, it still has a far longer track record of trading than any of these other instruments.

Oh, and one other thing, ethereum has an instrument attached to it called “gas”, which you can purchase with the crypto to enhance your ethereum investment. Gas is something that vaporizes quickly and that may be what happens to your investment in these other digital instruments.

Ethereum exchanges need to right flash crash losses

The cryptocurrency market suffered a major flash crash on Wednesday losing 96% in value in 10 seconds, before bouncing back.

Ethereum — which is a derivative off of bitcoin — plunged from $315 to $0.10 on massive volume created by a deluge of stop-loss orders and margin squeezes.

A stop-loss order is a trade that is executed automatically once a security – in this case ethereum – hits a particular price.

Again as I wrote earlier, the culprit in the crash is the exchanges, which could not correctly process a large sell order. Of course the exchange alleges that there could be market manipulation behind the crash, due to a large sell order.

Adam White, the vice president of GDAX which is an exchange run by Coinbase, posted on the firm’s blog, outlining what took place at around 12:30 p.m. PT on Wednesday. According to White, the multimillion dollar market sell order resulted in a number of orders being filled from $317.81 to $224.48.

“Our initial investigations show no indication of wrongdoing or account takeovers. We understand this event can be frustrating for our customers. Our matching engine operated as intended throughout this event and trading with advanced features like margin always carries inherent risk,” White said in a blog post.

“We are continuing to conduct a thorough investigation and will keep customers updated with any resulting actions.”

Some investors point the  initial coin offering (ICO) demand on Ethereum to a funding launch for an ethereum-based messaging app called Status which took plenty of processing power off of the network.

Message boards point to Ethereum buy orders at $0.10, which were fulfilled and as the price soared back to $300, made millions on the crash.

When stock exchanges flash crashed in May 2010, trades such as the one above were cancelled. It is still unclear what will happen to crypto investors who had their Ethereum was sold for pennies on the dollar, due to stop-loss orders that were executed at far lower levels than the contract specified.

Ethereum is trading at $328 Thursday morning.

 

Markets ignore Euphrates line in the sand

This will be a brief posting today, since I have to remove a large tree limb that came down on my wife’s art studio during Monday’s storm.

As I wrote yesterday, the markets are immune to a sell off despite global events. Monday’s development in the Middle East.

Humans are said to have developed in the Euphrates Valley, well this week we could see the ramping up of our demise in the same region as US-Russian warplanes may be having dog fights over the Crescent of Civilization.

Given this difficult situation where the Pentagon came out and said that US fighters will defend the airspace against all hostile actors, equity markets hit new highs, the VIX, or fear index, almost had a 9-handle and bonds are at very low yields. It’s too strange to be true.

Look no further than the price of crude. At $44 a barrel there is no premium being paid for the unrest in the Gulf Oil states as well as Middle East.

I’ll have more on this as I dig further, but there’s a limb that needs to be removed from the roof.

Fed’s rate hike hurts the ailing US consumer

I stand corrected. The Federal Reserve raised rates by 0.25 points Wednesday.

However, that does not mean it was correct to do so.

If you look at the US economy right now we have a slowing economy as GDP projections of +3% for the quarter are being pulled back to sub 2%. We also have inflation targets that are well below the Fed’s 2% target. Right now it’s at 1.6%.

The US has credit constriction you don’t have to look any future than look at the retail sector to see that the cost of cash is rising and more difficult to attain.

The growing asset bubbles are no longer the sure-fire collateral for extending credit.

So into this environment, the Fed takes it funds rate to a range between 1% and 1.25%. We already see that the consumer has tapped out on credit card usage with available credit at a years low-level, while outstanding balances hit all-time highs.

Student loan debt also at all-time high levels and mortgages for new and existing homes have been flat to slightly lower as rates rise. Car loans are persona non grata for originations and resale in the market due to low quality (think NINJA mortgages) and high quantity.

So why would the Fed raise rates at this time? To put another bullet in the chamber in case it needs to lower them again. To also tell Wall Street to tighten its reigns on credit and bring the bond market inline with other asset classes.

However this rates rise only affects us on the downside. We will pay more for credit and still get little to no interest on our savings.

And how the markets reacted tells you there is little change in either stocks or bonds. It was expected.

Now the Fed also announced the beginning of a plan to unwind its $4.5 trillion balance sheet. These were toxic mortgages and other troubled assets along with plenty of treasury bills and notes.

Now the Fed reinvest those proceeds as they mature, next year it will pare back the reinvestment according to a schedule that will be phased in.

There are lots to say about this and I will address it in the near future, but let’s just say I don’t believe the unwinding will be able to be pulled off beginning in 2018 for reasons I will address later.