The Grand Crowded Trade of Financial Speculation

Doug Nolan

Even well into 2017, variations of the “secular stagnation” thesis remained popular within the economics community. Accelerating synchronized global growth notwithstanding, there’s been this enduring notion that economies are burdened by “insufficient aggregate demand.” The “natural rate” (R-Star) has sunk to a historical low. Conviction in the central bank community has held firm – as years have passed - that the only remedy for this backdrop is extraordinarily low rates and aggressive “money” printing. Over-liquefied financial markets have enjoyed quite a prolonged celebration.

Going back to early CBBs, I’ve found it useful to caricature the analysis into two distinctly separate systems, the “Real Economy Sphere” and the “Financial Sphere.” It’s been my long-held view that financial and monetary policy innovations fueled momentous “Financial Sphere” inflation. This financial Bubble has created increasingly systemic maladjustment and structural impairment within both the Real Economy and Financial Spheres. I believe finance today is fundamentally unstable, though the associated acute fragility remains suppressed so long as securities prices are inflating.

The mortgage finance Bubble period engendered major U.S. structural economic impairment. 

This became immediately apparent with the collapse of the Bubble. As was the case with previous burst Bubble episodes, the solution to systemic problems was only cheaper “money” in only great quantities. Moreover, it had become a global phenomenon that demanded a coordinated central bank response.

Where has all this led us? Global “Financial Sphere” inflation has been nothing short of spectacular. QE has added an astounding $14 TN to central bank balance sheets globally since the crisis. 

The Chinese banking system has inflated to an almost unbelievable $38 TN, surging from about $6.0 TN back in 2007. In the U.S., the value of total securities-to-GDP now easily exceeds previous Bubble peaks (1999 and 2007). And since 2008, U.S. non-financial debt has inflated from $35 TN to $49 TN. It has been referred to as a “beautiful deleveraging.” It may at this time appear an exquisite monetary inflation, but it’s no deleveraging. We’ll see how long this beauty endures.

The end result has been way too much “money” slushing around global securities and asset markets – “hot money” of epic proportions. This has led to unprecedented price distortions across asset classes – unparalleled global Bubbles in sovereign debt, corporate Credit, equities and real estate – deeply systemic Bubbles in both (so-called) “risk free” and risk markets. And so long as securities prices are heading higher, it’s all widely perceived as a virtually sublime market environment. Yet this could not be further detached from the reality of a dysfunctional “Financial Sphere” of acutely speculative markets fueling precarious Bubbles - all dependent upon unyielding aggressive monetary stimulus.

I have posited that aggressive tax cuts at this late stage of the cycle come replete with unappreciated risks. Global central bankers for far too long stuck with reckless stimulus measures. A powerful inflationary/speculative bias has enveloped asset markets globally. 

Meanwhile, various inflationary manifestations have taken hold in the global economy, largely masked by relatively contained consumer price aggregates. Meanwhile, global financial markets turned euphoric and speculative blow-off dynamics took hold. A confluence of developments has created extraordinary financial, market, economic, political and geopolitical uncertainties – held at bay by history’s greatest Bubble.

Bloomberg: “U.S. Average Hourly Earnings Rose 2.9% Y/Y, Most Since 2009.” Average hourly earnings gains have been slowly trending higher for the past several years. Wage gains have now attained decent momentum, which creates uncertainty as to how the tax cuts and associated booming markets will impact compensation gains going forward.

February 2 - Bloomberg (Rich Miller): “As Jerome Powell prepares to take over as chairman of the Federal Reserve on Feb. 5, some of his colleagues are publicly agitating for a radical rethink of the central bank’s playbook for guiding monetary policy. Behind the push for reconsideration of the Fed’s 2% inflation target: a fear of running out of monetary ammunition in the next recession.
With interest rates near historically low levels—and likely to remain that way for the foreseeable future—these officials worry the Fed will have little leeway to aid the economy when a downturn inevitably hits. They argue that revamping the inflation objective beforehand could help counteract that. ‘The most important issue on the table right now is that we need to consider the possibility of a new economic normal that forces us to reevaluate our targets,’ Federal Reserve Bank of Philadelphia President Patrick Harker said in a Jan. 5 speech.”

“Is the Fed’s Inflation Target Kaput?”, was the headline from the above Bloomberg article. 

There is a contingent in the FOMC that would welcome an inflation overshoot above target, believing this would place the Fed in a better position to confront the next downturn. With yields now surging, these inflation doves could be a growing bond market concern.

Interestingly, markets were said to have come under pressure Friday on hawkish headlines from neutral/dovish Dallas Fed President Robert Kaplan: “If We Wait to See Actual Inflation, We’ll Be Too Late; We’ll Likely Overshoot Full Employment This Year; We Central Bankers Must Be Very Vigilant; Base Case Is For 3 Rate Hikes in 2018, Could Be More.”

Are Kaplan’s comments to be interpreted bullish or bearish for the struggling bond market? Are bonds under pressure because of heightened concerns for future inflation - or is it instead more because of a fear of tighter monetary policy? Confused by the spike in yields back in 1994, the Fed questioned whether the bond market preferred a slow approach with rate hikes or, instead, more aggressive tightening measures that would keep a lid on inflation.

Just as a carefree Janet Yellen packs her bookcase for the Brookings Institute, the Powell Fed’s job has suddenly morphed from easy to challenging. With tax cut stimulus in the pipeline and signs of a backdrop supportive to higher inflation, a growing contingent within the FOMC may view more aggressive tightening measures as necessary support for an increasingly skittish bond market. At the minimum, the backdrop might have central bankers thinking twice before coming hastily to rescue vulnerable stock markets.

Ten-year Treasury yields surged 18 bps this week to 2.83%, up 44 bps y-t-d to the high going back to January 2014. Thirty-year yields jumped 18 bps to 3.09% (up 35bps y-t-d). Rising yields are a global phenomenon. German bund yields rose another 14 bps to 0.77%, the high since July 2015. UK yields this week rose 13 bps (1.58%), and Canadian yields rose eight bps (2.36%). Higher bond yields were not limited to developed markets. Yields rose 18 bps in Mexico (3.91%), 14 bps in Brazil (4.82%), 18 bps in Peru (4.66%) and 20 bps in Argentina (6.42%). Yields rose 16 bps in India (7.56%) and 11 bps in Hong Kong (2.27%).

The marketplace has begun to ponder risk again. With liquidity abundant and “Risk On” in total command, market participants have been happy to disregard risk as they chase (somewhat) higher yields at the Periphery. Hit with an unanticipated bout of risk aversion, the Periphery suddenly looks less appealing. Hungary’s bond yields surged 31 bps this week to 2.57%, Russian yields jumped 19 bps to 7.19% and Ukraine yields rose 19 bps to 6.91%. 

Elsewhere, Deutsche Bank was slammed for 11.6% on poor earnings and renewed investor anxiousness. European bank stocks dropped 3.0% this week. Down 4.2% this week, Germany’s DAX equities index is now down for the year.

Equities were hit this week by the first significant selling in some time. For the week, the S&P500 dropped 3.9%. Down 1.7%, the Banks (financials more generally) outperformed as yields lurched higher. Economically-sensitive stocks were under pressure, as were the highflyers. The Semiconductors sank 4.6%, and the Biotechs dropped 4.3%. Broader market losses were in line with the S&P500. For the most part, it was broad-based selling with few places to hide.

February 1 – Bloomberg (Sarah Ponczek and Lu Wang): “Coordinated selling in stocks and bonds is making life miserable for investors in one of the most popular asset allocation strategies: those lumped together under the rubric of 60/40 mutual funds. Counter to their owners’ hope, that pain in one will be assuaged by the other, this week has seen both fixed-income and equities tumbling as concern has built about the pace of Federal Reserve interest rate increases. Funds that blend assets have borne the brunt, suffering their worst weekly performance since September 2016.”

Stock prices have been going up for a long time – and seemingly straight up for a while now. 

Bonds, well, they’ve been in a 30-year bull market. Myriad strategies melding stocks and fixed-income have done exceptionally well. And so long as bonds rally when stocks suffer their occasional (mild and temporary) pullbacks, one could cling to the view that diversified stock/bond holdings were a low risk portfolio strategy (even at inflated prices for both). And for some time now, leveraging a portfolio of stocks and bonds has been pure genius. The above Bloomberg story ran Thursday. By Friday’s close, scores of perceived low-risk strategies were probably questioning underlying premises. A day that saw heavy losses in equities, along with losses in Treasuries, corporate Credit and commodities, must have been particularly rough for leveraged “risk parity” strategies.

It’s worth noting that the U.S. dollar caught a bid in Friday’s “Risk Off” market dynamic. Just when the speculator Crowd was comfortably positioned for dollar weakness (in currencies, commodities and elsewhere), the trade abruptly reverses. It’s my view that heightened currency market volatility and uncertainty had begun to impact the general risk-taking and liquidity backdrop. And this week we see the VIX surge to 17.31, the high since the election.

The cost of market risk protection just jumped meaningfully. Past spikes in market volatility were rather brief affairs – mere opportunities to sell volatility (derivatives/options) for fun and hefty profit. I believe markets have now entered a period of heightened volatility. To go along with currency market volatility, there’s now significant bond market and policy uncertainty. 

The premise that Treasuries – and, only to a somewhat lesser extent, corporate Credit – will rally reliably on equity market weakness is now suspect. Indeed, faith that central bankers are right there to backstop the risk markets at the first indication of trouble may even be in some doubt with bond yields rising on inflation concerns. When push comes to shove, central bankers will foremost champion bond markets.
While attention was fixed on U.S. bond yields and equities, it’s worth noting developments with another 2018 Theme:

February 2 – Wall Street Journal (Shen Hong): “Chinese stocks had their worst week since 2016, with fresh concerns about Beijing’s campaign to cut financial risk and predictions of a slowing economy helping erase half of the market’s year-to-date gains in just a few days… Mr. Zhang [chief executive of CYAMLAN Investment] said the increasingly frequent market intervention by the ‘national team’ to prop up the major indexes could prove counterproductive. ‘It’s OK to bring in the national team when there’s a huge crisis but if it’s there everyday, it will create even more jitters,’ Mr. Zhang said. ‘If you see policemen everywhere, don’t you feel less safe?’”

The Shanghai Composite dropped 2.7% this week. Losses would have been headline-making if not for a 2.1% rally off of Friday morning lows. The Shenzhen Exchange A index sank 6.6% this week, and China’s growth stock ChiNext Index was hit 6.3%. The small cap CSI 500 index fell 5.9%, and that was despite a 2.1% rally off Friday’s lows (attributed to “national team” buying). Financial stress has been quietly gaining momentum in China, with HNA and small bank liquidity issues the most prominent. As global liquidity tightens, I would expect Chinese Credit issues to be added to a suddenly lengthening list of global concerns.

Unless risk markets can quickly regain upside momentum, I expect “Risk Off” dynamics to gather force. “Risk On” melt-up dynamics were surely fueled by myriad sources of speculative leverage, including derivative strategies (i.e. in-the-money call options). As confirmed this week, euphoric speculative blow-offs are prone to abrupt reversals. Derivative players that were aggressively buying S&P futures to dynamically hedge derivative exposures one day can turn aggressive sellers just a session or two later. And in the event of an unanticipated bout of self-reinforcing de-risking/de-leveraging, it might not take long for the most abundant market liquidity backdrop imaginable to morph into an inhospitable liquidity quandary.

February 1 – Bloomberg (Sarah Ponczek): “When stocks fall, investors typically pull money out of the market. But when U.S. equities suffered their worst two-day slump since May, some traders didn’t blink an eye. Exchange-traded funds took in $78.5 billion in January, exceeding the previous monthly record by nearly 30%. ETFs saw close to $4 billion a day in inflows even on the stock market’s down days, according to Eric Balchunas, a Bloomberg Intelligence senior ETF analyst…”

Adding January’s $79 billion ETF inflow to 2017’s record $476 billion puts the 13-month total easily over half a Trillion. If the ETF Complex is hit by significant outflows, it’s not clear who will take the other side of the trade. This is especially the case if the hedge funds move to hedge market risk and reduce net long exposures. And let there be no doubt, the leveraged speculators will be following ETF flows like hawks (“predators”).

January 28 – Financial Times (Robin Wigglesworth): “Vanguard fears that ‘predators’ are taking advantage of exchange traded funds at the expense of retail investors and hopes that an expected overhaul by US regulators will not mandate perfect transparency for the booming $4.8tn industry. ETFs try to track indices and markets such as the S&P 500…, giving investors cheap exposure to a wide array of assets. The vast majority disclose their holdings daily and if an index they track changes, they must then adjust their holdings before the close of trading. The daily shifts in markets means ETFs are vulnerable to opportunistic traders such as hedge funds and high-frequency trading firms who can try to ‘front-run’ their efforts at rebalancing their holdings.”
And I’m having difficulty clearing some earlier (Bloomberg) interview comments from my mind:

January 24 – Bloomberg (Nishant Kumar and Erik Schatzker): “Billionaire hedge-fund manager Ray Dalio said that the bond market has slipped into a bear phase and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years. ‘A 1% rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981,’ Bridgewater Associates founder Dalio said… in Davos…”
Dalio: “’There is a lot of cash on the sidelines’. ... We’re going to be inundated with cash, he said. “If you’re holding cash, you’re going to feel pretty stupid.’”
Here I am, as usual, plugging away late into Friday night. So, who am I to take exception to insight from a billionaire hedge fund genius. But to discuss the possibility of the worst bond bear market since 1981 - and then suggest those holding cash “are going to feel pretty stupid”? Seems to be a disconnect there somewhere. Going forward, I expect stupid cash to outperform scores of brilliant strategies. The historic “Financial Sphere” Bubble has ensured that ungodly amounts of “money” and leverage have accumulated in The Grand Crowded Trade of Financial Speculation.

Italy's Big Banking Mystery

The country’s financial institutions are regaining their health, yet they’re hardly increasing corporate lending.

By Marcello Minenna

Most eyes are on Italy’s upcoming election, but economists also are focusing on an Italian mystery.

The country has made considerable progress cleaning up the problems in the financial system that seemed to be holding back the economy, and the economy is growing again. Yet that growth seems to have little relationship to the newfound health of the banks, and no one can quite say what the breaking of this link means for the future.

The year is opening with much-needed good news for Italian banks. The volume of nonperforming loans on bank balance sheets has fallen to €173 billion gross, or €66 billion net excluding collateral or other provisions covering possible losses. That’s a decline of 30% year-on-year to the net figure.

     Photo: iStock/Getty Images 

Italian banks also have decreased their holdings of Italian government bonds, a link between the sovereign and the financial system identified by the European Central Bank and the European Commission as another soft spot in the financial system. Italian banks now hold “only” €336 billion in Italian government debt, an appreciable decline of nearly €47 billion during 2017.

In one respect this banking cleanup is having the expected effect. Banks are lending to households again, with credit to households increasing by 2.9% year-on-year in November 2017. That’s low compared with France, where the rate was 5.8%, but better than Spain or Portugal, where household credit still is contracting.

The puzzle is that credit to enterprises is not enjoying a similar upward momentum. Growth in corporate credit in Italy has been stuck at around zero since November 2015, according to the most recent ECB data, while it’s accelerating in the rest of Europe—5.8% in France and 4.7% in Germany. This is happening despite an increase in Italian industrial activity (2.2%) and business investment (3.2%) in that span. Those trends should be increasing companies’ demand for credit, yet the banks aren’t satisfying that demand.

Several factors explain this. One is that the banking cleanup still has a way to run. Roughly 60% of the reduction in nonperforming loans is attributable to only six banks—the two largest lenders, Unicredit and Intesa San Paolo, which are now well into turnaround plans, and four smaller banks that were bailed out in late 2016. That suggests that despite healthy economywide figures, many banks may not yet be in a position to lend more.

There’s also less than meets the eye to the reduction in reliance on sovereign bonds. The main factor has been bond purchases by the Bank of Italy, the country’s central bank, as part of the ECB’s eurozone-wide quantitative-easing program. Rather than a virtuous “recomposition” of bank balance sheets in which banks use the proceeds of bond sales to the central bank to extend other forms of credit, banks mostly seem to be absorbing the new cash and unwilling or unable to lend it out again.

There’s a bigger factor, however: regulatory pressure. Italian banks still live under the threat that the ECB will approve a new regulation on nonperforming loans that could dramatically increase the amount of capital banks must hold to protect against potential losses. This addendum to existing regulations currently is under review. Italian banks, like all European institutions, face a new battery of stress tests in May 2018 that could expose them to additional capital requirements. These two looming challenges have kept Italian banks in deleveraging mode, prioritizing risk reduction over any other goal.

Their solution is to ration corporate credit. The ECB’s negative interest rates and quantitative easing have suppressed borrowing costs in Italy as everywhere else in the eurozone. The average interest rate for a loan to an Italian nonfinancial company is now 1.74%, only 0.03 point more than in Germany—essentially a zero spread. But those Italian loans are going only to the healthiest companies that can offer substantial collateral or other guarantees.

Ample evidence of a capital hunger not satisfied by traditional banks can be found in the explosion of new Individual Savings Plans. This investment instrument, introduced in 2017, amounts to a conduit to feed ample household savings into enterprises. This has provided more than €10 billion in financing to small and medium-size enterprises in the first 12 months of the program. That’s equal to 50% of the bank loans extended to all companies in 2017. Capital scarcity also is driving traditionally conservative Italian managers into the stock market, with a 118% increase in new listings on the small-company board of the Italian Stock Exchange in 2017.

The current “bankless” economic recovery is unprecedented in Italy. The question is how much longer it can continue if banks don’t get back in the lending game son.

Mr. Minenna is a doctoral lecturer at the London Graduate School of Mathematical Finance.

There, In The Distance, A Black Swan

by: The Heisenberg


- Suddenly, one tail risk at the top of everyone's 2018 "biggest worry" list doesn't seem so far-fetched.

- But as usual, there's more to the discussion than what you'll get from generic commentary, so here's the nuance.

- And boy, oh boy am I glad I remembered what Chris said in December.
"You know all those times you've heard people reminisce about the Bernanke tantrum and the great bund tantrum of 2015? Yeah, well this is what a tantrum episode feels like."
That comes from Friday evening's "bad dream". It occurred to me on Saturday morning that a lot of readers might not actually remember those episodes, and even if they have some recollection of the events having occurred, they might not remember exactly what the fallout was.
So, in light of that consideration, I thought you might be interested in the following chart and table from Deutsche Bank, which depicts recent Treasury selloffs and quantifies their depth.

Note: If you're curious as to the seemingly paradoxical connection between Fed QE announcements and Treasury selloffs, you might want to check out my buddy Kevin Muir's short Thursday note here.
(Deutsche Bank)
Notably, what the red line there shows is that despite having gotten materially "worse" this week, the magnitude of the nominal rise in 10Y yields is actually not out of step with previous episodes. Additionally, it would appear that this has considerably more room to accelerate if recent history is any guide.
That goes some ways (albeit simply citing historical precedent is far from definitive in this case) towards answering a question I posed first thing Saturday morning. Namely this:
We're kind of back in a position where everyone is asking for predictions again only now, everyone wants to know how far markets will fall, whereas just a week ago, the question was how high markets will rise.

Of course, I was referring to equities there, but because the proximate cause of the stock market decline was rising yields, we might has well view the two as inextricably linked for the time being. That link is precisely what I tried to communicate on Thursday (i.e., one day before the slide in stocks really accelerated), when I quoted Bloomberg's Richard Breslow who said the following this week about the driver of equity returns in the near term:
This is no time to be analyzing individual stocks. Whether they go up or down from here will be index-wide and dependent on bond yields and the dollar, little else. Big, not little, canaries.
Yes, "big, not little canaries" and the Treasury market is the "biggest" canary around; assuming the idea of a "canary" being "big" isn't a misnomer in the first place.
Anyway, folks are already out revising up their year-end targets for 10Y yields. Deutsche Bank, for instance, lifted theirs from 2.95% to 3.25%. This should go without saying, but one of the questions here is what this ultimately means for the curve. In the (very) short term, it looks like the momentum crowd might have gotten the call right on the Treasury selloff, but in assuming the consensus (i.e., bear flattening as the Fed hikes against a backdrop of still-depressed long rates), they might have been offsides on the curve. How they "correct" that view could have implications for where 10Y yields go from here. Here's Deutsche Bank:
Our analysis of the HFRX Macro/CTA Index suggests that momentum-following strategy funds have a significant positioning bias toward bearish flatteners. The key issue now is when and how these flattening positions will be unwound. We are inclined to think that it will come in the form of CTAs adding more short positions in the 10yr, rather than reducing their shorts in the front end. A switch in strategy by momentum traders from bearish flattening to bearish steepening could cause more selling in Treasury futures, kicking rates another notch higher.

About that bear steepening: it's something you need to watch pretty closely. It is not at all difficult to make the case for a steeper curve. That doesn't mean you'd be right, it just means that it's not hard to make an ostensibly plausible case. I mean, for one thing, Treasury's borrowing needs are rising in part due to the deficit-funded tax cut in the U.S. and that comes at a time when the Fed can effectively exert some level of control over the long end via balance sheet rundown. Bottom line: There's more marketable supply and that supply will now need to find a market clearing price. That could be bearish for Treasurys. Additionally, bullish bond shocks from Europe and Japan are bound to fade as the ECB moves to normalize and the market begins to test the BoJ's mettle in earnest amid improving econ data in Japan and the first signs that the country's deflationary mindset might be breaking. Finally, Friday's average hourly earnings print (and if you had to point to one thing that catalyzed the decline in stocks, that was it) seems to suggest that inflation pressures are building stateside.
There's another argument for a steepening view and it was articulated on Friday by the above-mentioned Kevin Muir as follows:

In the coming years as the global economy strengthens, bond markets will increasingly price in hawkish monetary policy shifts. But Central Bankers will resist them. We have seen this already with both the ECB and the BoJ. They will err in raising more slowly than the market wants. Over the past couple of years, the Federal Reserve has obviously been an exception. They have gotten somewhat ahead of the market. Yet that’s now changed. Trump’s election was a momentous signal that populist policies are what the people want. And what does that mean? 
More inflation. 
But inflation is exactly what sends bond prices lower and previously caused Central Bankers to tighten. Well, I am a seller that Central Bankers throughout the world tighten anywhere near as much as bond markets are worried about. And ultimately that’s what will cause yield curves everywhere to steepen, eventually hitting record wides. Yup - that’s what I believe. Before this coming bond bear market is over, yield curves will hit record steep levels.

And see therein lies the problem. If you're say, the Fed, what do you do if inflation comes calling? If rate rise ends up being a product of higher breakevens, well then the black swan cometh. The tail risk is realized. There's no "right" answer. Consider this from Deutsche Bank's Aleksandar Kocic, out on Friday:
However, and this is the second point here, higher rates mean moving closer to the tail risk strike. This is the domain of negative convexity exposure of the central banks – a scenario that has no adequate policy response. Such an outcome would represent a choice between allowing rampant inflation with a possibility of either triggering a bond unwind trade or causing a stock market crash and possibly recession. Because of that, in the higher rates scenario, monetary policy would be a wild card.

Right. And although Jerome Powell is a policy veteran, when it comes to being Fed Chair, he is by definition a rookie. Keep in mind that the quandary presented in that excerpted passage would be playing out against balance sheet rundown. Additionally, and this may or may not be relevant, one has to wonder what would happen to rates vol. if all of that coincided with a decision on the part of market participants to start hedging whatever MBS exposure they take on as the Fed lets those assets rundown.
The hilarious thing about all of this is that despite having a "tail risk" character to it, and despite there being all manner of caveats and embedded contingencies, it really isn't far-fetched at all.
In fact - and I didn't mean for this to end up being the punchline, but boy, oh boy am I glad I remembered it because it works out great - all you need to tie all of this together is one quote from Aviance Capital Management's Chris Bertelsen, who spoke to Bloomberg for an article dated December 15.
Think about what happened on Friday in terms of how stocks reacted to the Treasury selloff which worsened as soon as the upbeat wage growth hit the wires and then recall this from Chris with that in mind:

All you need is an [...] increase in wages [...] and then at the end of a couple weeks you’re going to say, 'Oh my gosh, what happened? The Nasdaq is 5 or 6 percent off.'
I'd drop the proverbial mic there, but instead, I'll leave you with two visuals from the December edition of BofAML’s FX and rates strategy fund manager survey. I trust you'll see why these have become markedly more relevant in the two months since...

The Blockchain Revolution Is Heading To Space


There is a new wave of coders and hackers looking to upend the entire internet, signaling the start of a brand new space race.

No, this isn’t an episode of HBO’s Silicon Valley, this is actually happening.

Currently, the internet is built by large centralized services including server owners, data managers, cloud providers, search engines, telecommunication companies, and social media websites. And these entities are beginning to expand their reach.

Internet security and net neutrality are quickly becoming hot topics as more people become aware of the dangers of centralization. And for good reason. Google, Amazon, and Facebook are racing to create new infrastructure that could very well threaten the internet freedom which we have grown accustomed to. The way data is used and abused by massive corporations is taking center stage in discussions regarding the future of the internet, and people are demanding change.

And it’s no surprise that the crypto-fanatics are looking to disrupt this pattern, with some even looking towards the stars for solutions.

Blockchain, the tech that built bitcoin, and 2017’s hottest buzzword, could very well be the answer.

The technology has the potential to disrupt nearly every industry imaginable, and the internet is no exception. Everything is heading to the blockchain, from energy trading to citizenship identification.

No stone will be left unturned.

Source: Equinix

It brings a voice to the voiceless, accountability to the unaccountable, financial services to those without resources, ownership to those lost in the system, and even identity to the stateless. On top of all of this, it could allow smaller entities a stake in some of the biggest and most powerful industries on the planet, which will ultimately chip away at the entire notion of “too big to fail.”

“The possibilities of this technology are limitless - it is a paradigm shift that will impact every industry in every corner of the world. Any centralized market place that is dominated by a few middle men is likely to be taken over by blockchain technology. Anything you can think of where the marketplace can become more democratic,” says Steve Nerayoff, CEO of Global Blockchain Technologies Corp., the world’s first publicly traded stock that invests in top-tier blockchain and digital currency innovations.

Indeed, this technology has the potential to create an entirely new internet, or at least, an entirely new way to share data in a completely decentralized fashion. And while this is still a long-term goal, some companies are looking to fuel the adoption of blockchain technology in the short-term.

Leading the way in blockchain adoption is Blockstream Inc., one of the world’s leading blockchain innovators. The company is at the forefront of the industry, providing new solutions to scaling issues, privacy issues, and security, and now, the company has created a satellite network with the goal of enhancing coverage and creating opportunity for the 4 billion people without internet access to participate in the blockchain revolution.

Bitcoin has become an entirely new e-commerce platform with the potential to change the lives of millions living in poorer countries with unstable currencies. And with blockchain satellites, anyone with a phone or a computer will be able to make and receive transactions, access data, or add to the distributed ledger.

“With more users accessing the Bitcoin blockchain with the free broadcast from Blockstream Satellite, we expect the global reach to drive more adoption and use cases for Bitcoin, while strengthening the overall robustness of the network,” says Dr. Adam Back, co-founder and CEO of Blockstream Inc.

Blockstream’s current satellite coverage.

Many argue that Blockstream’s approach is, in fact, centralized. But this is only the beginning. More and more companies are looking to send their platforms into space, as well.

Getting ahead of this trend is Global Blockchain Technologies Corp., an incubator for blockchain startups that are aiming to change the world. If there is something happening in the blockchain space, you will normally find Global Blockchain at the center of it - with the cryptocurrency induced stock explosion of Eastern Kodak being the latest example. And now, as the blockchain races to space, there will undoubtedly be a few Global Blockchain backed companies joining the fray.

The race is already underway however, with Vector, a forward-thinking nanosatellite startup, and Nexus, a blockchain developer, having teamed up to launch a new cryptocurrency hosted in space. According to Nexus, the currency will be completely decentralized, while granting greater transparency and freedom in accessing global financial services. Nexus also notes that, because the peer-to-peer network will be hosted in space, the services will not be tied to a nation-state, further protecting its users from data harvesting mega-corporations and overreaching governments.

Spacechain is another player with its eyes on the sky. Also using nanosatellites, the Singapore based company is looking to go head to head with the likes of Google and Amazon. Zheng Zuo, Spacechain’s ambitious 25-year-olkd CEO noted: “You can run a decentralized ecommerce platform, but in the backend, you’re using [Amazon Web Services],” adding, “It’s their technology infrastructure. After we all start depending on this centralized service, it’s hard to realize true decentralization.”

While each of these projects are looking to space for their own reasons, there is no doubt that others will follow, and as the competition grows thicker, so too will the possibilities.

It would not be farfetched to suggest that blockchain satellites could provide a new hedge against global catastrophe. Even if grids fall and ground-based internet infrastructure fails, satellites will still be able to beam down smart contracts, voting ballots, currencies, and more.

This race into space seems to be the perfect metaphor for blockchain’s unrelenting rise, a rise that investors and industry giants like Global Blockchain Technologies Corp are watching intently.

As the blockchain industry powers through milestone after milestone, it seems that the potential of this new tech is just being realized.

Turkey Enters the Fray

By Jacob L. Shapiro

Over the weekend, Turkey commenced Operation Olive Branch in a small part of northwestern Syria called Afrin. The outcome of the incursion should not create much suspense: Turkey will conquer Afrin with relative ease. The importance of Turkey’s incursion lies instead in the challenges it poses to relations between Turkey and the three other foreign powers invested in Syria’s future: Russia, Iran and the United States. For the second time since 2011, Turkey has deployed its military in Syria from a position of weakness. It will shape the future of Syria from a position of strength.

Never in the field of human conflict has such a limited military operation been threatened for so long: Turkey warned of the invasion of the Syrian Kurdish region of Afrin for almost a year. Serious military operations are not announced via public relations campaigns because the element of surprise is crucial to achieving victory. One reason for Turkey’s bravado is that it doesn’t need the element of surprise to achieve victory in Afrin. The most generous estimates of enemy combatants in Afrin are around 10,000 fighters, lacking armor, artillery and air assets. Turkey has roughly 40,000 troops on the border with plenty of all three. The most serious impediment to Turkey’s invasion was the presence of a small number of Russian soldiers, but once Russia pulled those soldiers out, Afrin’s conquest was assured.

There is a second, more important reason for Turkey’s boisterous year of threats against Afrin: Turkey did not want to invade. It fears being dragged into a quagmire in Syria. When the Syrian civil war began, Turkey relied on proxies to bring down the Bashar Assad regime. When that failed, Turkey made amends with Russia and cosied up to Iran to secure its interests through diplomacy: the so-called Astana Troika. Turkey’s goal in agreeing to the cease-fire negotiated in Astana was to buy its proxies time to strengthen themselves and to prevent the Assad regime from reconquering the country. If Assad could not be defeated, then at least his regime, long hostile to Ankara, would not be allowed to return to its full strength, and at least outside powers would respect that Turkish wish.

All seemed to be going well from Turkey’s point of view until December, when the Assad regime – backed by Russia and Iran – undertook a major offensive in the Idlib de-escalation zone against anti-Assad rebels. The Assad regime said it was targeting jihadist groups like al-Qaida; Turkey claimed the regime was breaking the cease-fire and called for Russia and Iran to rein Assad in. (Both were technically right.) The Assad offensive forced Turkey’s hand. Had Turkey let the operation continue unabated, Assad would have destroyed the most powerful remaining rebel stronghold. Turkey had to show Assad and his foreign backers that there would be consequences if his forces did not stop.

Unsurprisingly, Assad’s government reacted harshly to Turkey’s announcement early last week that it planned to intervene in Afrin. The town of Afrin is roughly 23 miles (37 kilometers) from the outskirts of Syria’s most populous city, Aleppo. It is not a coincidence that Aleppo has seen the fiercest fighting of the war and that control of the city has changed hands multiple times. It is a vital population center, and before the war, it was the country’s largest industrial center. It is also a predominantly Sunni Arab city, which means its population tends to distrust Assad’s Alawite-dominated regime. The regime spent a great deal of blood reconquering the city, and the goal of its operations in Idlib province is to secure Aleppo from future attack.

Turkey’s intervention puts a major dent in that plan. Conquering Afrin means Turkey links up the two largest remaining rebel strongholds. That will make it easier for Turkish-backed anti-Assad groups to move supplies and materiel should they face additional attacks. But more distressing from the Assad regime’s point of view is that it puts Turkish military forces in prime position to support a new rebel offensive on Aleppo. The new threat north of Aleppo forces Assad to reconsider the offensive in Idlib and pull those forces back to ensure that he can defend against new rebel attacks. In effect, because Turkey could not convince Russia or Iran to control Assad’s fighters, it was forced to follow through on its threats. Being forced into a move you don’t want to make is not a symbol of strength but of weakness.

Victory, or the Appearance of It

Underscoring Turkey’s weakness is that the new Turkish military operation would not have been possible had Russia not given its tacit approval, which Turkey dispatched its chief of general staff and the chief of its National Intelligence Organization to Moscow on Jan. 18 to secure. Turkey asked Russia for two things in that meeting. The first was to withdraw its soldiers stationed in Afrin. Russia had dispatched soldiers to Afrin in June 2017 under the guise of a “Russian Center for Reconciliation.” The stated goal of this Russian military presence was to prevent fighting between Syrian Kurds and anti-Assad rebels in Afrin. The second thing Turkey asked was for Russia to allow the Turkish air force to use Syrian airspace to support its offensive. In this part of the country, Russia controls the skies – the Syrian air force has been decimated in the course of the war – and Turkey is not ready for a military confrontation with Russia.

Even though Russia’s Ministry of Defense confirmed the withdrawal of Russian soldiers from Afrin on Jan. 20, and even though Turkish air assets have conducted strikes on Afrin in recent days, Russia is not happy with this outcome. Russia would have preferred Turkey not undertake the operation because it weakens the Assad regime. It also makes Russian overtures to Syrian Kurds look meaningless, and this is a relationship Russia has cultivated in the hopes of creating yet another thorn in Turkey’s side going forward. Russia subordinated these interests, however, to its overall goal in Syria: victory, or at least the appearance of it. Russian President Vladimir Putin declared victory in Syria in December, and he needs something to show for it at home. For that, Putin needs Turkey, and for Turkey, Putin was willing to look the other way in Afrin.

Russia is hosting the Syrian National Dialogue Congress in Sochi on Jan. 29-30 that it has presented as integral to bringing the civil war to an end. For the congress to work, Russia needs all the combatants to come to the negotiating table and agree to stop fighting. Russia can bring Assad to heel. Turkey can do the same with the rebel groups in Idlib. In return for Russian approval of Operation Olive Branch, Turkey likely agreed to use its influence with non-Kurdish anti-Assad rebels to bring them to Sochi at the end of the month and to enforce their observance of whatever agreement is reached there. This is what enabled Russia to announce that it had agreed with Iran and Turkey on the final list of participants in the congress the day after Turkey began its military operations in Afrin.

There is a secondary Russian consideration to keep in mind. In the long term, Russia views Turkey as an enemy. (Turkey sees things the same way.) Turkey is not just an enemy to Russia’s interests in the Middle East; it is also an enemy in the Balkans, the Black Sea and the Caucasus, more consequential areas of Russian interest by far. This is one of the reasons it is so important for Russia to preserve the Assad regime. By preserving the Assad regime, Russia preserves an enemy of Turkey. The more concerned Turkey is with events on its southern border, the less bandwidth Turkey has to be concerned with other areas in Russia’s sphere of influence. Russia would prefer Turkey not deploy its military anywhere, but if Turkey is going to flex its muscle, let it be in Syria, not elsewhere.

Ambitions Without Leverage

The two powers without much say in this situation are Iran and the United States. Iran, like Russia, wants to see a full resurrection of the Assad regime, but for very different reasons. Russia wants Assad to survive for domestic consumption in Russia and for power balancing in the region once it withdraws its forces. Iran, meanwhile, has ambitions to dominate the region. To do that, Iran needs allies in a region where Iranian allies are hard to come by, for both sectarian and ethnic reasons. The importance of a pro-Iranian government in Syria for Iran’s overall strategy cannot be overstated. Syria is the bridge connecting Iran to the Mediterranean. If Iran loses Syria, it loses its ability to project power in the Levant and to support its proxies, like Hezbollah.

In this sense, Iran has already achieved its most basic need. A full resurrection of the Assad regime is desired but not necessary; Iran can settle for partial resurrection as long as that includes access to Lebanon and, by extension, the Mediterranean. From Iran’s perspective, the defeat of the Islamic State and the continued offensive of Assad regime forces in Idlib were both necessary for that access to remain unimpeded. A rehabilitation of IS or a failure in Idlib would jeopardize the Assad regime’s security and, in turn, Iran’s regional ambitions. Iran opposes Turkey’s move in Afrin because of the serious long-term threat it poses to Assad. If Turkey and its proxies can threaten Aleppo, they can threaten the Alawite coastal enclaves, and perhaps even cut off Iran’s unbridled access to the Mediterranean.

Iran likely attempted to get Turkey to call the operation off: When Iran’s deputy foreign minister went to Moscow earlier on the same day that Turkey announced the commencement of its Afrin engagement, he was probably petitioning Russia to try to convince Turkey not to proceed with the operation. The problem for Iran is that it had no leverage over Turkey when it comes to Afrin. There are no Iranian soldiers stationed in Afrin. In addition, Iran’s contribution to Assad has come in the form of ground forces. Iran’s air force is limited, and its domestic missile development program is still relatively unsophisticated. Turkey did not fear any potential Iranian retaliation against its moves; from Turkey’s point of view, Iran was part of the reason Turkey was forced to act in the first place.

Iran also didn’t have any leverage over Russia to get Moscow to protest Ankara’s moves more vigorously. Russia, while not happy about Turkey’s intervention, calculated that it was better to trade Afrin for Turkish compliance in the diplomatic realm than to confront Turkey over so small a territory, a territory over which Turkey could exert control whenever it chose – not unlike Russia and its move in Crimea. Iran’s need to see the Assad regime survive means Iran still depends on Russian support for the Assad regime. Russia’s air campaign in Syria was limited, but even so, if Russia packed up its fighters and bombers tomorrow, it would greatly weaken Assad’s forces. Iran does not have the capability to fill the gap should that happen, and therefore it must go along with Russia’s decision not to resist Turkey’s move in Afrin.
The Expanding Mission

And then of course there is the United States, which has been sending mixed signals to Turkey from the start. The U.S. armed Syrian Kurdish groups and then stopped arming Syrian Kurdish groups. The U.S. said it would not defend Syrian Kurds in Afrin, basically giving Turkey a green light to invade, and then condemned Turkey’s aggression. The U.S. has repeatedly voiced its desire for Turkey to take a more active role in managing the Syrian civil war, but it has also criticized Turkey for the jihadist company it prefers to keep in Syria, which has at least something to do with the U.S. fantasy that a secular, liberal democratic Arab force is just waiting to be discovered in the Syrian countryside.

One thing Iran, Turkey and Russia can all agree on is that they would like to see U.S. forces withdrawn from Syria. That is why even amid the serious strategic divergences among the Astana Troika, the three countries have remained constant in their criticism of the United States. Turkey views continued U.S. support of the Kurdish-dominated Syrian Democratic Forces as tantamount to support of its Kurdish separatists at home. Iran views the U.S. presence on the ground in Syria and hostility toward the Assad regime as a threat to its interests. Russia doesn’t much care about the presence of U.S. forces but benefits from the continuous blows to U.S. prestige and the distrust of the U.S. shared by the members of the shaky alliance among Russia, Turkey and Iran.

U.S. involvement began in Syria for one reason: to defeat the Islamic State. The U.S. remains concerned about the potential for an Islamic State resurgence, but it now has two additional interests. The first is to prevent Iran from realizing its regional ambitions. From the U.S. perspective, one of the unintended consequences of the partnership with Iran in fighting IS was that it greatly strengthened Iran’s position. The U.S. therefore is concerned with ensuring Iran’s position is sufficiently curtailed. The second additional interest is that the U.S. does not want to trade one Islamic caliphate for another. The strongest anti-Assad groups are, for the most part, various shades of jihadist. Syria’s branch of al-Qaida is one of the strongest and has a cooperative relationship with Turkey. This has led the U.S. to support Syrian Kurdish groups, and to the present hostility with Turkey.

It is a hostility that will not dissipate anytime soon. Until now, Turkey has mostly sought to realize its strategic interests in Syria indirectly. The failure of that strategy has necessitated Turkey’s intervention in Afrin. This creates something of a paradox. Turkey intervened in Afrin because it was not strong enough to get outside powers to respect its interests. In the long term, however, Turkey is better positioned than Iran, Russia or the U.S. to assert power in Syria. It is the only one of the four countries that is also predominantly Sunni, and it is the only one with a history of direct rule of this region. The invasion of Afrin is part warning and part foreshadowing to those who stand in Turkey’s way: Turkey’s idle threats are idle no more.

GE Looks Ugly in Its Underwear

GE’s new transparency is welcome, but a focus on cash shows the company is probably no bargain even after its swoon

By Spencer Jakab

Investors, who have grown numb to bad news at GE, actually celebrated the company’s weak earnings on Wednesday. Photo: Thibault Camus/Associated Press 

Sunlight may be the best disinfectant, but General Electric is learning that it can leave some nasty burns—particularly for those who have spent too much time in the shade.

Investors, who have grown numb to bad news at GE, actually celebrated the company’s weak earnings on Wednesday and only sold off shares after the disclosure of a Securities and Exchange Commission probe into GE’s accounting. What has become increasingly clear as the bad news mounts at GE is that the company’s business is pretty weak.

The SEC review concerns not only the recent bombshell about the company’s $7.5 billion charge for a legacy insurance business but also revenue recognition in its industrial business.

That latter item, including so-called contract assets, may lead to restatements of past financials.

While GE is a serial tweaker of financial disclosure, the company is doing the right thing by shifting its focus to more transparent free cash flow. Unfortunately, it paints an unflattering picture. Even after its shares fell 44% in the past year, and even using 2016 financial figures, before the recent collapse in earnings in its power unit, a comparison with industrial competitors hardly suggests a screaming bargain. GE’s ratio of enterprise value to free cash flow is 31% dearer than the median of eight peers. And, even as GE posted its best return on invested capital in a decade that year, it was the second-weakest of that group in 2016. Today’s numbers, of course, look worse, and there doesn’t appear to be anything in the near future to turn things around.

GE ended the year with net cash of a little more than $11 billion in its industrial units. Cutting its dividend in half will preserve a little more than $4 billion this year, but suspending dividends from its GE Capital unit for the foreseeable future as it plugs its insurance hole will offset those savings. And while GE sees net cash climbing to about $15 billion by the end of 2018, that includes an anticipated $4 billion to $5 billion in proceeds from disposals. In other words, the actual business of selling and servicing stuff probably won’t generate any net cash this year.

In addition to the uncertainty about how much contract assets flattered past earnings, even cash flow may have been boosted. GE Capital often buys receivables from its industrial units so cash is received more promptly. As the finance business conserves cash to make statutory insurance contributions, that could create a short-term hiccup. GE Capital also may be less willing to underwrite riskier deals for industrial equipment, sapping revenue.

It says something about GE that horrific earnings and an SEC probe knocked only 3% off the share price. Wednesday’s news could have been worse. It also speaks volumes that bargain hunters have avoided this wounded blue chip. There clearly was a lot less there than met the eye.