Will Facebook’s Libra Bring Cryptocurrency into the Mainstream?



Wharton's Itay Goldstein and Cornell's Ari Juels discuss Facebook's new cryptocurrency, Libra.


Facebook, the world’s largest social network with 2.4 billion users, is developing a cryptocurrency that has the potential to reshape the global financial system. Called Libra, the cryptocurrency and blockchain system is backed by major companies and groups and scheduled to hit the market in 2020. Facebook wants Libra to become a global currency that could help the 1.7 billion ‘unbanked’ people get access to financial systems.

Unsurprisingly, the announcement was met with calls for tough scrutiny from regulators and skepticism from technologists and the cryptocurrency community. Congressional committee hearings already are planned. In an op-ed for The Financial Times, Facebook co-founder Chris Hughes called the prospect of Libra’s success “frightening.” Facebook’s practice of moving fast and breaking things works for a college social network, he said, but “it’s not appropriate for the global monetary system.”

Wall Street, however, gave a thumbs up to this endeavor because it adds a potentially big source of revenue for Facebook beyond advertising. The stock was up as much as 8.5% in the days after The Wall Street Journal reported that big backers have lined up behind Libra. “For Facebook, this is a big opportunity, obviously,” said Wharton finance professor Itay Goldstein on the Knowledge@Wharton radio show on SiriusXM. With more than two billion users, he said, Facebook can profit handsomely from consumers using Libra even if the transaction fees are low.
At the same time, Goldstein sees Libra generating a lot of concern. With privacy issues and outsized market power plaguing Facebook, its plans to get into finance and become a kind of “bank of the world” will set off alarm bells for regulators, he said. It’s also a “tricky time” for tech giants to be expanding their influence, Goldstein added. “There’s generally a crackdown on the so-called ‘Big Tech’ and how much power they have.”

What is Libra?

“It’s actually surprisingly challenging to describe Libra,” said Kevin Werbach, Wharton professor of legal studies and business ethics and a blockchain expert. “Libra is several different things at once. It’s Facebook creating a cryptocurrency. It’s potentially a new decentralized global payments platform. It’s potentially the thing that will bring cryptocurrency truly into the mainstream. It’s potentially Facebook’s strategy to compete against [China’s] WeChat and Alipay by integrating payments with messaging. I think it’s [also] potentially the company’s strategy on reestablishing trust with users and regulators.”

Libra is a cryptocurrency like bitcoin but with key differences. To make it a stable currency, its value will be pegged to a basket of fiat currencies and backed by reserves consisting of bank deposits, government securities and other ‘low volatility’ assets, according to Libra’s white paper. This should weed out speculators who want to make a fast buck from big price swings.
Stability in a currency also makes it useful for buying and selling; no one wants the price of, say, a cup of coffee, to jump wildly from day to day. Initially, Libra will be on a “permissioned” blockchain in which access is granted to validators — entities that validate transactions. The Libra blockchain eventually plans to become permissionless: Anyone can run a node as long as technical requirements are met.

Libra will be governed by a nonprofit group based in Switzerland consisting of 28 founding members, which includes Facebook’s Calibra unit, Visa, Mastercard, Uber, PayPal, venture capitalists and others. They can each control a validator node by investing at least $10 million through the purchase of Libra Investment Tokens, which grant rights to a share of future interest earned by the reserves. The Libra blockchain will be open to anyone who wants to build applications on it. Facebook plans to create a WhatsApp digital wallet for Libra, among other endeavors.

By setting up a nonprofit group, Libra Association, Facebook seeks to diffuse the concerns of regulators, competitors and consumers that it will control Libra. “Facebook understands at this point that it’s the subject of massive skepticism and concern because of its practices,” Werbach said. “So Facebook is smart enough not to think that it could create a system that is purely controlled by Facebook — and that the regulators of the world would hand over the keys to the financial system to that entity.”

Technically, Libra is not a blockchain in the precise sense because transactions are not aggregated into blocks, Werbach said. However, other systems lumped under the blockchain category are that way, too. “It’s actually not that important,” he said. What is important is that Facebook took a “technically solid approach.” Ari Juels, a computer science professor at Cornell University, agreed. “They’ve laid very sound theoretical foundations … for the construction of the blockchain itself. The so-called consensus algorithm they’re using is based on well-studied techniques, and they’ve taken pains to improve its security formally.”

But one concern is that like bitcoin, Libra “leaks a lot of information about users’ transactions,” said Juels, on the radio show. Another worry, he added, is its usability. “The Achilles heel of almost any cryptocurrency system is key management. It’s very hard for users to manage their private keys. These are keys that they use to authorize transactions and participate in the system in general,” he said. “Something like four million bitcoins, representing many billions of dollars in value, have been lost simply because keys have evaporated” — lost by users or stolen.

That means Facebook has to figure out how to make it easy for consumers to manage their keys. “The only way to do this [easily] is to have users’ keys managed for them by some corporate entity, presumably,” Juels added. “And then the decentralization story begins to break down.” If the system is used to manage user identities, and the keys are stolen, “then there’s risk of things like identity theft.”
More Than Mobile Payments

With all the complexities that come with cryptocurrencies, why doesn’t Facebook just offer mobile payments of fiat currency like WeChat Pay in China, M-Pesa in Africa and Paytm in India? That’s because “Facebook wants [Libra] to be ubiquitous,” Werbach said. “There is no existing fiat currency that extends beyond the territory of an issuing country.” For a payment system to be truly global, it has to be based on a cryptocurrency, he added.

But the problem with most cryptocurrencies today is they lack price stability, are prone to be used for illegal activities, and they seek to circumvent central authorities, among other obstacles that impede mass adoption. Libra was created to avoid many of these challenges, and its blockchain system also could become “a framework that will support many platforms,” Werbach said. “Facebook has Calibra that will build on Libra. Amazon might come and build its own set of applications on top of Libra.”

A key selling point for Libra is its purported stability, since it will be pegged to a basket of currencies and other assets. However, “there are huge questions as to whether they can actually do it, whether this can actually be resilient in times of stress,” Goldstein said. “If everyone wants to convert their Libra into dollars or other currencies at the same time, this is effectively what we think of as a run.” Added Werbach: “If there is a run on Libra, who is going to backstop it? That’s a relevant financial stability concern for central bankers.”
Other cryptos generally don’t pose a systemic threat to the financial system because they’re not fungible or widely used. Typically, cryptos have “ingress and egress points” where hard currencies are exchanged for them and vice versa, Juels said. “If you want to buy something in the real world, it’s hard to do it with cryptocurrency,” he said. Libra will be different.

Libra, at its heart, also bucks the libertarian ideals that have characterized cryptos. That means cryptos meant to “empower individuals [are] being co-opted by corporate concerns,” Goldstein said. While being governed by a handful of entities doesn’t have to be a “bad thing,” he said, by the time Libra becomes permissionless, corporate entities would be so entrenched in the system that users will be dependent on them.

A big social goal for Libra is to reach the unbanked. Providing an easy payment mechanism that’s integrated into Facebook has the potential to make a difference in the lives of those with little or no financial access, Werbach said. But there is room for doubt. “The global financial inclusion is a harder problem [to solve] than it seems” and secondly, people are “quite skeptical” that Facebook is truly motivated by social altruism, he said. It could just be a cover for an expansion of its market power.

Thumbs Up or Down?

Werbach said that all the details for Libra have not yet been worked out and as such much of the commentary about it should come with caveats. But on the whole, Libra gets a thumbs up from him. “This is a brilliant idea for Facebook because if they can pull it off, it can simultaneously address a whole series of challenges that they face” such as being able to expand into payments and the rebuilding of trust in the company, he said.
Werbach does not see Libra supplanting financial institutions or central banks; these could be validators on Libra’s system. “If Libra is successfully launched, I would expect many of the world’s major banks to be involved,” he said. “Banks have expertise in building services and applications on top of money. The fact that there is a new kind of asset and a new kind of entity doesn’t mean that banks have no value.” Besides, Facebook is under such pressure from antitrust regulators that any hint of it crowding out players in another industry would be viewed negatively, he said.

A silver lining is that Facebook’s entry into cryptocurrencies would hasten their regulation — and give them more legitimacy over time. “I have felt for a long time that there needs to be more regulatory engagement with cryptocurrencies, not to shut them down but to actually transition them to become more trusted and widely used,” Werbach said. Scams, fraud and theft are all problems that hinder wider adoption.

“Libra, by getting the attention of all of the world’s regulators, … will hasten the coming of the regulatory resolution of cryptocurrencies,” Werbach said. While these rules will not benefit all cryptocurrencies but rather mainly major ones like bitcoin, he added, “in the long run, it will be good for the cryptocurrency world.”

The incredible shrinking stock market

Axel Springer’s take-private is symbolic of a radical shift in capital markets

Richard Henderson in New York




Axel Springer, a German journalist, turned one Hamburg newspaper into a publishing behemoth that now spans hundreds of titles and billions of euros in annual revenue. The company that bears his name was typical of a growing business that turned to the stock market to fuel its growth, giving a diverse group of investors a claim on an expanding stream of profits.

Now, 34 years since the stock first listed, public investors will no longer have that claim. Axel Springer shares are set to drop off the public market after the company struck a takeover deal this month with KKR, the private equity group.

The retreat into private hands is symbolic of a radical shift in capital markets that has changed the nature of European and US stock exchanges as conduits of capital between growing companies and everyday investors. In the US alone, the number of listed companies stands at just over 4,000, half the amount in 1996, the zenith for the US market. Europe has also contracted, to a lesser degree.

The post-crisis rise of private equity is just one driver behind the change. Other factors include the slower pace of new companies launching on public markets, while mergers that combine multiple stocks have also cut the tally of listed companies. Low interest rates, meanwhile, have increased the appeal of debt financing for companies that may have previously decided to raise money by selling equity.

“Stock markets are not competitive places to raise capital or sell companies right now,” said Robert Buckland, an analyst at Citi. “Public equity markets are shrinking because companies can find cheaper capital elsewhere.”




As investors have sought higher returns, they have reduced allocations from stocks and bonds and instead put the money to work into alternative classes of assets, such as private equity. KKR and peers such as Blackstone and the Carlyle Group have drawn in tens of billions of dollars in the past decade, including more than $2tn in money sitting on the sidelines they have yet to put to work, known as “dry powder”.

“Venture capital and private equity have been around for a long time but they really hit their stride in the last decade,” said Nick Colas, co-founder of DataTrek Research. “With private equity you can use leverage, you’re not beholden to the scrutiny of a public company and you have more control to make cuts more easily.”

At the same time as this wave of money has flowed into private equity, companies have used their own cash to buy back stock, removing shares from public markets. Last year, US companies spent $806bn on share buybacks, a record.

In the first quarter, Apple alone spent $23.8bn on share buybacks. The iPhone maker has ramped up its programme in recent years after Carl Icahn, the activist investor, urged the company to use its burgeoning cash piles to buy back its own stock.




The concentration of the stock market is creating “superstar” firms like Facebook, Google and Amazon that increasingly dominate their industries, according to Goldman Sachs analysts.

“Across industries …firms have captured increasing market share, translating their competitive advantage into higher margins and outperformance during the past three years,” said Ryan Hammond, a Goldman analyst.

The torrent of initial public offerings in the US this year is no counterpoint. Instead, these listings reflect an increasingly prominent function of public markets — acting as an exit valve for private investors and start-up founders. Highly anticipated IPOs such as ride-hailing rivals Uber and Lyft had already reached sky-high valuations through multiple private rounds of fundraising, and have performed indifferently since listing.

“There starts to become a point where those valuations become out of sync with public markets,” said Macie House, a managing director at Baird in Portland, Oregon. “Investors are being a little more selective and companies are being more cautious in determining their pricing range.”

June’s public debut of Slack may provide a template. The messaging platform completed a “direct listing” where its shares are listed on an exchange but the business does not raise any money in doing so. The company had already attracted $1.2bn through private investors, including a $427m fundraising round in August.

“The IPO of today has less upside opportunity than it did 15 years ago,” said Wayne Wicker, Washington, DC-based chief investment officer of ICMA-RC, a US pension fund. “The private equity groups are keeping these companies private for longer so you don’t have a thousand embryonic companies rising up. They emerge as large companies when they list.”

Storytime with the Fed

Low inflation means the Federal Reserve is changing whom it listens to

It also means lower interest rates




HEAVEN HELP anyone who complains of a labour shortage to Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. “We just don’t have enough people to build,” said the head of an affordable housing organisation in Aberdeen, South Dakota, on July 11th. A local wind-turbine maker grumbled about his struggles to expand his headcount. Mr Kashkari showed little sympathy: “If you pay more they will come,” he says.

Mr Kashkari has been sceptical of such pleading for years, convinced that the labour market could be hotter. His doubts appear to have spread. When testifying to Congress on July 10th Jerome Powell, the Fed’s chairman, said that “while we hear lots of reports of companies having a hard time finding qualified labour, nonetheless we don’t see wages really responding.”

It may seem strange that anecdotes would matter to monetary policymakers, given the swathes of statistics at their disposal. But the Fed devotes a non-trivial amount of energy to gathering them.

Eight times a year they are compiled in a publication known as the Beige Book, based on interviews with business folk and “community contacts” across America.

Since 1983 the Beige Book has been released two weeks before each meeting of the Federal Open Market Committee (FOMC). The gap, according to the Minneapolis Fed, was supposed to send the message that the information was not timely, and therefore “did not have a major influence on policy.”

Still, financial analysts pour over every new edition. Anecdotes from the Beige Book pepper the minutes of each FOMC meeting. And although weathered economists will say that data and models determine policy, the stories are supposed to serve as reality checks.

For years the Beige Book has revealed that workers are neither as abundant, nor as cheap, as employers would like. When complaints of shortages started popping up in it in 2011, they were laughable. (The unemployment rate was then above 8%.)

But they became more plausible as unemployment fell. And when theory and data pointed to fears that a burst of inflation was round the corner, gripes from business owners reinforced the view that a rise in interest rates would be necessary to get in front of it.
“Those anecdotes did matter,” says Tim Duy of the University of Oregon, adding that “they matter less now.” This is because the inflation that was supposed to arrive in 2018 never did. As unemployment sank below 4%, wage growth remained in line with the sum of inflation and productivity growth. That has raised doubts about whether the labour market is as hot as people thought. On July 10th Mr Powell quipped that “to call something hot, you need to see some heat.”


Signs of coolness have been around for years, in the data and in the Beige Book. In September 2017 contacts in New England reported that they were adapting to the “tight-supply landscape” by expanding online, building stronger relationships with job-market candidates, and “active community engagement”. In October 2018 some businesses reported “non-wage strategies” to recruit and retain workers, such as flexible work schedules and longer holiday time. If employers were really so desperate for workers, Mr Kashkari has argued, they should be bidding up their price.

The voices found in the Beige Book are skewed towards businesses, who will tend to prefer an abundance of workers and resent the hassle of having to train up less-qualified recruits. The lack of excessive wage pressure and muted inflation have allowed a new set of stories to become more prominent.

As part of recent “listening sessions”, union leaders and local development organisations have shared their tales about how the hot economy is forcing employers to pull in some of America’s most marginalised workers. In a speech on July 16th Mr Powell said he had heard “loud and clear” about the benefits of the long recovery for low- and moderate-income Americans. Previously the most prominent stories supported interest-rate increases. The newer ones highlight the risks of killing off the expansion.

If inflation were rising above the Fed’s 2% target, its leadership would be picking different tales to emphasise. And if, as investors expect, the Fed cuts interest rates at its next meeting on July 30th and 31st, Mr Powell will probably cite uncertainties about trade and global growth, as well as a downward drift in inflation expectations. (The latest Beige Book, published on July 17th, contains plenty to support him.)

But if Mr Powell wants some more anecdotes, he could pick them up from the rest of Mr Kashkari’s trip. A breakfast to discuss substance abuse included complaints from participants that, despite a local unemployment rate of merely 2.7%, employers were still being far too sniffy about hiring ex-felons. “They can stack shelves,” said one reproachfully. Such stories might mislead and they can easily be cherry-picked. But at the moment these anecdotes seem to be carrying more weight than complaints from employers.

Why Policymakers Should Fear Libra

It is currently unclear how popular Libra, Facebook's proposed new global cryptocurrency, might become, and what problems this may cause. But inflation – and policymakers’ reduced ability to control it – has to figure prominently on the list of possible risks.

Kaushik Basu

basu45_GettyImages_facebookthumbsupbomb


MUMBAI – Facebook’s new global digital currency, Libra, which the company plans to launch as early as 2020, could transform the world. But no one – including the founders of this ambitious economic engineering project – can fully anticipate the currency’s possible ramifications. And monetary policymakers should be especially worried, because they may find it much harder to control unemployment and inflation in a Libra world.

In the first quarter of 2019, Facebook had 2.38 billion monthly active users. If even a fraction of them begin to use Libra to carry out financial transactions, buy and sell products, and transfer money, the new currency would quickly gain wide acceptance. Already, the Libra Association, a Geneva-based not-for-profit group that will operate the digital currency, counts companies such as Uber, eBay, Lyft, Mastercard, and PayPal among its founding members. Libra could, therefore, become a dominant global currency – but one run by a corporation, not a central bank.

Although Libra is based on the same blockchain technology as other cryptocurrencies, it is expected to be much more efficient. Facebook promises that the Libra system will be able to process 1,000 transactions per second, be user-friendly, and have a transaction cost of virtually zero.

Not surprisingly, the Libra announcement has prompted a flurry of meetings in central banks, at the Bank of International Settlements, and in other multilateral organizations. Some commentators have welcomed the proposed new private money, while others want governments to stop Libra before it gets off the ground.

Critics of the initiative have several concerns, including the computing power needed to manage the currency, the privacy of users’ data, and the possibility that the new money will nurture illicit activities and markets. But much more attention needs to be devoted to analyzing how Libra could dramatically change global monetary policymaking.

Most institutional structures and systems in the world economy – barter, banking, paper money, financial markets, and so on – emerged through slow, evolutionary processes. Deliberate attempts to establish entirely new systems have usually given rise to unanticipated challenges.

The creation of the euro was one such planned act of economic engineering that had unforeseen consequences. In my book An Economist in the Real World, I discuss how bond yields diverged across the eurozone after the collapse of Lehman Brothers in 2008, causing the European sovereign debt crisis that continues to trouble the world economy today. Ultimately, the crisis stemmed from flaws in the eurozone’s design (a monetary union without an adequate common fiscal policy – a problem that has yet to be addressed).

At this stage, one can only speculate about the problems Libra may cause. For example, if Libra becomes popular, people will exchange their national currencies – dollars, euros, renminbi, and rupees – for the new digital coin in order to buy and sell the many products that will be priced in it. Many users may then choose to keep Libra instead of exchanging it back for their own currencies. Facebook or the Libra Association will therefore continue to hold their national money and earn income on it by investing Libra users’ money. They will also be tempted to issue extra Libra to earn seigniorage in the same way that central banks do on the national currencies they issue.

Inflation – and policymakers’ reduced ability to control it – has to figure prominently on the list of possible risks. Usually, when inflation picks up, central banks take steps to control it. They raise policy rates and increase reserve ratios to help mop up some of the money in circulation. But the effectiveness of such policies could be vastly diminished if one of the biggest money-creating authorities is a private organization. And Libra itself could create some inflationary pressures because it is an effective addition to liquidity.

In recent times, high inflation has been seen only in developing economies; thus there is a tendency to presume that advanced economies are immune. It is therefore sobering to recall that the two most devastating cases of inflation in history were in relatively rich countries: Hungary in 1946 and Germany in 1923. In Germany, what cost one mark at the start of the inflationary surge cost 100 sextillion marks (one with 23 zeroes after it) barely a year later.

Despite these risks, calling for an immediate halt to Libra may not be the right move. For starters, it is unclear which existing law could be used to stop the proposed currency. At one level, Libra is not very different from the legally valid coupons that people acquire with their dollars when entering an amusement park, and then use to pay for food and rides. And in a globalized world, a country that rejects Libra may find itself gradually isolated by others that take to it.

Policymakers must urgently consider what kind of world private digital money could create.

We may then need new laws and global treaties to mitigate potential negative fallout and curb the power of the organizations that run these new currencies.


Kaushik Basu, former Chief Economist of the World Bank and former Chief Economic Adviser to the Government of India, is Professor of Economics at Cornell University and Nonresident Senior Fellow at the Brookings Institution.


Silver Price Forecast: What The Next Silver Rally Should Look Like
Chris Vermeullen    
  

silver coins


It is time to explore the details of our Gold vs. Silver ratio research and to start to understand the potential for profits within this move in precious metals.  The first part of our research article highlighted the Gold vs. Silver ratio and why we believe the “reversion process” that is taking place in price could be an incredible opportunity for traders. 

Historically, when the Gold vs. Silver ratio reaches an extreme level, and precious metals begin to rally, a reversion within the ratio takes place, which represents a revaluation process for silver prices compared to gold prices.  This typically means that the prices of silver will accelerate to the upside as the price of gold moves higher – resulting in a decrease in the ratio level.

This reversion process related to precious metals pricing is an opportunity for traders to take advantage of an increased pricing advantage to generate profits.

For every drop of 5.0 points in the gold/silver ratio, the price of Silver should increase by 6.5% to 7.5% to the price of Gold.

This research is based on our belief that Gold and Silver will continue to rally and potentially enter a parabolic upside price advance soon.  If this takes place and precious metals begin to skyrocket higher, the ratio level will react in a hyperactive “reversion process” where Silver may move higher at a rate that is substantially faster than Gold.  This is the process that we are exploring and our researchers are attempting to shed some insight into this event.

I believe a reversion process has already begun to take place within the precious metals market.  We believe this reversion process is about to explode as a dramatic revaluation event unfolds over the next 12+ months.  This process will become more evident to traders as the price of Gold continues to rally towards the $1750+ level and as the price of Silver explodes higher in larger and larger advances.

Gold / Silver / US Dollar Ratio Chart

This Gold/Silver/US Dollar ratio chart is the basis of our analysis for the reversion process event and the associated revaluation event.  Our previous analysis suggests Gold prices will attempt a move to levels above $1650 to $1700 on the next breakout move higher.  This next upside price move will expose the price reversion event for all traders to witness and we have mapped out the expected Silver price advantage for all traders going forward.


 

Gold/Silver Ratio – Silver Price vs Ratio Level

We put together this reference table to assist all traders in understanding just how important this move could be to them.  This reference table shows the current Gold/Silver price levels (in GREY) as the ratio levels change from 88 to lower levels. 





If the price of Gold were to stay at the same $1426 level while Silver rallied to prompt an 82 or 77 ratio level, the price of silver would move from the current price of $16.19 to $17.39 or $18.52 in order to reflect this decreased ratio level.  That represents a 7.5% to 14.3% price increase.

Yet if the price of Gold advances to $1650 or $1750 while the ratio level drops to the 82 or 77 ratio level (because Silver advances fast than Gold), then the price of Silver would move from the current price of $16.19 to $20.12 to $22.73.  That move represents a 24.2% to 40.3% price increase in Silver when Gold increased only 15.7% to 22.7%.

What If Silver Advances Quicker Than Gold?

If Silver prices advances even faster than our “what if” scenario, above, and Gold continues to advance as we expect, the increased price reversion process taking place in Silver as a process of this revaluation event could result in a 70% to 110% fast price advance in Silver than the price advance that takes place in Gold. 

We believe the next upside price leg in Silver will target $19.50 to $22.75.  This target range supports the highlighted area on our Ratio table (below).  In other words, we believe the ratio level will attempt to quickly move toward the 70 to 77 level as Gold prices rally over the next few months.  This would push silver up into the $22.50 to $25 price level very quickly.

What If Gold Rallies Faster Than Silver?


If Gold were to rally above $1950 on an extended upside price advance before August or September, we believe the reversion process would become extremely hyperactive in nature and the price of Silver could push well above $29~34 per ounce – may be even higher.

This declining ratio level acts as a turbo-boost for the price of Silver as Gold continues to advance.  The recent rotation to the downside suggests the ratio relationship between Gold and Silver has already stated a reversion process – the only question is “where will it end?”.  Our researchers believe it will stop where it stops and we believe the 65 level on the Ratio chart is just the initial target for this first upside leg. 

Imagine where Silver could go if the ratio level fell to levels below 40 and gold rallied to $2500 or more?  Ok, stop imagining and take a look at this second extended ratio table.




Pay attention to the fact that Silver could rally more than 300% if Gold moves up above $1750 and the Gold/Silver ratio drops below the 55 level.  If Gold were to continue to rally and the Gold/Silver ratio continued to fall, Silver could rally well above $50 over the long run.

Silver Price Range As Gold/Silver Ratio Move To the Average

We've attempted to graph the ranges of the expected move in Silver into segments based on the Gold/Silver ratio to assist traders in understanding just how powerful this setup really is.  Imagine what it would take for Gold to move up to levels above $1750 (which is our expected target for the next leg higher) and for Silver to rally into the 55 to 65 ratio level.  If that happens, the expected target price for Silver would be somewhere between $30 and $40 – more than 100% higher than the current price of Silver.

If you think $50 is unimaginable or unrealistic, we've just shown you why it is possible these levels could be reached before the end of 2019 or in 2020.  If you have not grasped the reality of what is likely to unfold over the next 6 to 12+ months in the global markets and that precious metals are the setup of the decade, then pay attention to the fact that gold and silver are poised for moves ranging from 40% to 240% over the next 12+ months depending on the scale and scope of this move.

Our current objectives for the ratio levels are still 55 to 65 within this next move higher where Gold will target $1750.  Beyond that level, we'll have to update you as the price continues to explore new highs.


Concluding Thoughts 


In short, don't miss the trade of the decade. These opportunities for skilled technical traders over the next 16+ months is incredible.  Huge price swings, incredible trends, big rotations and we could see nearly 300%+ profits to be had if you know what to trade and when.  These types of opportunities are perfect for skilled technical traders like us and we want to help you prepare for and trade these opportunities.

This bear market for stocks and the new bull market for metals has been a long time coming, but finally, almost all the signs are showing that it’s about to start. As a technical analyst since 1997 having lost a fortune and making a fortune from bull and bear markets I have a good understanding of how to best attack the market during its various stages.

Be prepared for these incredible price swings before they happen and learn how you can identify and trade these fantastic trading opportunities in 2019, 2020, and beyond with our  Wealth Building & Global Financial Reset Newsletter.  You won’t want to miss this big move, folks.  As you can see from our research, everything has been setting up for this move for many months – most traders/investors have simply not been looking for it. 

Buttonwood

Russia is heaven for bondholders and hell for stockpickers

Never mind the property rights, enjoy the fiscal discipline



A VISITOR TO Moscow inquiring about the outlook for Russia’s economy will often be met with answers that take a detour into the country’s past. Ask, for instance, why Russia runs such conservative budgetary and interest-rate policies and you may be told that the trauma of default in 1998 bred a strong desire for low debt and low inflation. Ask why property rights are weak and you may be taken further back, to the end of serfdom in 1861. Until then many Russians did not even own their own souls.

Not all investors are history buffs. But looking at Russia through the lens of risk and reward they see a dichotomy. On the one hand, the emphasis the authorities place on controlling public debt and curbing inflation makes it an attractive place for bond investors. Russia is fixed-income heaven. On the other, the economy lacks dynamism, in large part because the venturesome cannot lay secure claim to their investments. For equity investors, Russia can be hellish.

Start with its charms for bond investors. Their aim for their money is to get it back with interest. They would also like it to retain its purchasing power. Their big concerns, aside from default, are inflation and (unless they are buying hard-currency bonds) devaluation. So there is much to like about Russia. The public-debt burden is light, at below 20% of GDP. True, a lot of tax revenue is tied to the vagaries of oil prices. But Russia now has a fiscal rule. Its budget is based on an oil price of $40 a barrel. Any excess revenue goes into a reserve fund. Last year the budget was in comfortable surplus.

By stopping the government from overspending, the fiscal rule also helps keep a lid on inflation. The Kremlin allows the central bank to set monetary policy without meddling, to meet a goal of inflation of 4%. The bank’s governor, Elvira Nabiullina, is admired for her professional competence—and also for persuading Vladimir Putin, Russia’s president, to allow the rouble to drop in 2014. Inflation has since come under control. She has cut interest rates slowly, to 7.5%.

For bondholders this is wonderful: decent yields, low debt and stable inflation. The rouble is steady. American sanctions, imposed after 2014 in response to Russia’s military intervention in Ukraine, led many affected Russian firms to pay down foreign debt. Sanctions act like a global-capital quarantine. And Russia runs a biggish current-account surplus.

But Russia is a more hazardous place for equity investors. A stock ought to be a claim on a company’s assets. A quick survey of modern history throws up reasons to doubt that such claims are secure. In 2003-04 the state seized Yukos, a giant oil company. More recently a dispute over oil assets between Rosneft, the state-backed firm that absorbed Yukos’s assets, and Sistema, a big conglomerate, rattled investors and gutted Sistema’s share price.




Yet for the intrepid, Russian stocks still have appeal. For a start, they are cheap. MSCI’s Russia index has a price-to-earnings ratio of six, compared with 12 for its broader emerging-market index. That kind of value is bait for stockpickers, who hope to sort good long-term bets from the ones that might turn ugly. They cautiously avoid firms such as Gazprom, a state-owned gas producer, that are instruments of the Kremlin’s strategic goals. (American sanctions have made it unwise to hold such stocks in any event.)

Instead they go for well-run firms with strong consumer brands, such as Sberbank, Russia’s biggest bank, or Yandex, its internet-search firm. The state is unlikely to mess with firms on which the economy’s day-to-day stability depends.

Give Russia some credit, say boosters. Macro-stability is not a given. Central banks have come under political attack in other emerging markets—India, South Africa and Turkey—and now in America, too. Optimists say that plans to cut red tape and increase public investment will lift Russia’s GDP growth potential.

Still, for the unwary investor, Russia is a snare. Even old hands can be caught out. Michael Calvey, the American boss of Baring Vostok, a private-equity firm, was arrested in February amid a conflict with an investment partner who has connections to the security services. Despite testimonials from the boss of Sberbank and the founder of Yandex, Mr Calvey remains under house arrest.

Realists say it is the big-picture stuff that holds the economy back. Establishing the rule of law and property takes political will. But it takes time, too. In the early 1990s a prominent Western economist was asked how Russia could become a thriving market economy. His advice? “Get yourselves another history.”

This Is No Time To Let Down Your Guard

by: The Heisenberg
 
 
Summary
 
- Mercifully, the Fed will go silent ahead of the July FOMC meeting, giving markets a welcome reprieve from incessant rate cut banter.

- That said, the ECB is on deck, which means that while earnings "should" dominate this week, monetary policy will still be in the news.

- Corporate bottom lines are still healthy in the US, but the outlook is cloudy.

- Watch for any FX "manipulation" allegations around the ECB meeting.

- And don't get too complacent.


The Fed is in the blackout window ahead of the July FOMC, and mercifully so.
 
As we saw on Thursday, the market is exceptionally sensitive to communications around the likely scope of the forthcoming rate cut (i.e., "Will it be 25 bp or 50?"). John Williams's fumbled effort to extoll the virtues of "going big" (so to speak) out of the gate when operating near the zero lower bound underscores the notion that, for the time being  we've reached the point of diminishing returns for Fedspeak. An insurance cut is coming, recent data (e.g., the June jobs report and a hot read on core CPI) aren't going to deter the Fed, there's a case for 50 bp predicated on academic literature but 25 bp is more likely - we all get it. Further elaboration isn't necessary.
 
With the Fed's lips zipped, the market will focus on earnings and geopolitics, and I just wanted to make a few quick points for readers here ahead of what promises to be an interesting week.
 
First, a simple observation: Waiting on dips to buy and hedging downside risk hasn't worked all that well since the May selloff. Although US equities are coming off their worst week since May, the average drawdown recently has been shallow indeed.
 
  (Heisenberg)
 
 
That is a simple chart, and purposefully so. The last several times things have looked like they look now, trouble was in the offing.
That doesn't mean things have to go "wrong" anytime soon, and, indeed, there are a variety of factors which argue for more gains. For instance, there's some remaining scope for re-leveraging/re-risking by systematic investors. According to JPMorgan's Marko Kolanovic, systematic equity exposure sits at roughly 60%, and absent an external volatility shock, will likely rise further. Additionally, dealers' gamma profile should keep things "pinned", as it were. Here's a short expert from Kolanovic's latest:
 
How stable is the current low volatility regime? Current dealer positioning in option makes them heavily long gamma (e.g. call – put gamma exposure is over $40bn per 1%). Long gamma exposure keeps volatility suppressed and would only change below ~2940 in SPX Summer also tends to have seasonally lower volatility.

From a simplistic, fundamental perspective, valuations are getting stretched again. Bloomberg's blended forward P/E multiple is sitting near levels on par with September, on the eve of the October selloff. That said, Goldman on Friday argued that if you look back more than four decades at the relationship between price/book and return on equity, the S&P's current P/B multiple of 3.5X isn't stretched. Here's a short excerpt and one visual from the relevant note:

S&P 500 ROE increased by 30 bp to 18.9% during 1Q 2019, the highest level since 1998. Higher margins, lower taxes, and higher leverage all contributed to higher profitability during 1Q, while higher borrow costs and lower asset turnover reduced profitability. Excluding the Financials sector, S&P 500 ROE remained flat during 1Q at an all-time high of 22.2%.

 
The bank goes on to write that there are only two sectors which stand out as detached from the historical relationship between P/B and ROE. Specifically, only Consumer Discretionary and Utilities have P/B multiples that aren't justified by expected profitability. While Info Tech does trade in excess of 7X on a P/B basis, the sector boasts the highest ROE on the S&P.
That said, there are problems. The outlook for corporate profitability in the US is cloudy. Since "peak profits" during Q3 2018, analysts have warned that the waning of the fiscal impulse was set to collide with a trio of margin headwinds: Rising wage costs, higher interest rates and the effect of tariffs. All of that, combined with tough YoY comps, explains why some are pessimistic about corporate bottom lines, especially considering where we are in the cycle.
 
For their part, Goldman calls the near-term ROE outlook for Info Tech "bleak", as consensus sees just 2% topline growth for the sector in Q2 against 212 bp of margin compression. For the broader market,  the good news is that while wage inflation and tariff worries are likely to weigh further on profitability, borrowing costs are set to fall. "Since 2000, every 20 bp decline in the 10-year US Treasury yield has corresponded with a roughly 10 bp increase in S&P 500 ROE excluding Financials", Goldman notes.
 
So, there's some context for this week's big slate of earnings reports, which, of course, includes several tech giants.
 
But while key corporate results and the absence of Fedspeak will give investors a chance to focus on company-specific news flow, central banks won't be missing from the headlines. The ECB is on deck this week and, as you're probably aware, another easing package is imminent.
 
While it's possible the Governing Council will cut rates at the July meeting, it's more likely that the ECB will use this meeting to lay the groundwork for September, when a more comprehensive package will be announced ahead of Christine Lagarde taking the reins from Mario Draghi.
 
Draghi's comments in Sintra last month were variously described as a "whatever it takes 2.0" moment, and you're encouraged to recall that Donald Trump was not particularly enamored with the prospect of more ECB easing. Specifically, the president took to Twitter to call out "Mario D." and subsequent tweets raised the specter of outright US FX intervention to weaken the dollar in the event Fed cuts are offset by dovish policy turns on the part of America's largest trading partners.
 
The Fed's dovish pivot in 2019 has not succeeded in pulling the rug from beneath the dollar. The greenback's resilience is the product of a concurrent dovish tilt from the FOMC's global counterparts, still high US rates on a relative basis and the strength of the US economy (juxtaposed with weakening growth and a fairly deep manufacturing slump abroad).


(Heisenberg)
 
 
The president's verbal interventions are losing their ability to impact the market (see visual below) and, so, analysts at every major bank have weighed in recently on the prospects for active intervention by Steve Mnuchin.
 
(BofA)
 
 
Why does this matter in the week ahead? Well, the point is that you want to watch for how the FX market and, perhaps just as importantly, how President Trump, responds to the ECB statement and any verbal cues from Draghi.
 
Meanwhile, both domestic political developments and geopolitics have the potential to make waves.
 
Robert Mueller testifies on Capitol Hill this week, and I don't think I have to explain why every financial news network in America will be running a split-screen on those proceedings alongside their market coverage. Additionally, the situation in the Gulf got considerably more tenuous on Friday afternoon, when Iran seized a UK tanker.
 
When it comes to volatility, you'll note that the VIX is actually higher now than it was when the majority of S&P levels above 2,400 were crossed.
 
 
 
(Heisenberg)
 
 
That said, considering the bevy of potential catalysts from earnings to geopolitical tensions to fraught domestic politics to the prospect of renewed trade escalations, a 14-handle VIX seems a bit sanguine.
 
As Goldman put it last week, "the combination of [event risk] and weakening economic growth seem incongruous with very low vol."
 
In other words, this is no time to let down your guard. Even as you won't be subjected to any Fed speakers.