Not only did the Fed go from zero MBS holdings in 2009 to holding about a 5th of the entire nearly $9 trillion dollar MBS market, it still buy tens of billions of dollars of MBS monthly through reinvestment of cash flows back into MBS purchases. This dramatically and synthetically misrepresents the bid for these things. There is no way the Fed will be able to cease these monthly deci-billion dollar purchases without pushing rates up dramatically. If that's true (and it is) then they definitely will have a problem unwinding that $1.8T basket without breaking the real estate market. This is undeniable. In the meantime, we're partying like it's 2007,er.. I mean 2017. There goes that 10 year real estate cycle...

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Two of the largest Chinese bitcoin exchanges, >OKCoin and Huobi's " style="border-width: 0px 0px 1px; border-color: initial; margin: 0px; padding: 0px; font-size: 17px; color: #408bfe; outline: 0px; font-family: ProximaNova, 'Helvetica Neue', Helvetica, Arial, sans-serif;">Weibo have announced a halt to margin trading in bitcoin, citing guidance from the PBoC. This was guidance, and not an official rule, according to Coindesk's reporting. I have commented on the liklihood of the PBoC cracking down on BTC as a workaround for capital controls, reference The Macro Truth About The Big Bitcoin Pop. As of right now, I have been proven correct.

Expect this action to reduce the volume of bitcoin trading in China. For one, the lack of access to margin may quell volatility on one hand, but also compress liquidity. Without the ability to charge for lending products, Chinese bitcoin exchanges may have to go for plain vanilla trading commissions (which they don't currently have). As a result, expect a move towards parity between Chinese and US/EU bitcoin exchange volumes.

China used to be the king!

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$CNY #Yuan leaking from China into $BTC #blockchain, nearly $20M per hour, showing power of public blockchain & #Bitcoin in capital controls

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Of course, there are other ways to attain leverage in bitcoin transactions, circumventing 3rd parties, hence eliminating central bank influence. It's called Veritaseum (see What is Veritaseum? A Layman's Explanation) and heralds P2P capital markets (see  through Pathogenic Finance (download the report  -->4.58 MB ) ).

Here's the quick video...

Bitcoin is a volatile asset. This is likely the reason why amateur investors see it as risky - it is. The issue is that you don't choose investments based solely on risk, or at least you shouldn't. You should choose on risk-adjusted return - or - the amount of return you get given the amount of risk you take to achieve said return. Using that metric, Bitcoin is the unparalleled king amount major asset classes over the last 7 years. In "Is Bitcoin Too Risky?" I measured the risk-adjusted return of Bitcoin and compared it against the S&P 500 and the British Pound.

Several clients have asked me how Bitcoin compares to other asset classes, so here we go. Below is BTC returns measured since 2011 and expressed through the Sharpe ratio, a formula that measures risk adjusted return. As you can see, BTC (bitcoin) is the third best performer out of the bunch. Pretty good, eh?

But... There's a problem with graphic above. You see, the Sharpe ratio penalized volatility (expressed as standard deviation) as risk. Some of us actually like upside volatility, and most of us dislike downside volatility. This is an example of Bitcoin's upside volatility (gains) that were actually penalized by the Sharpe ratio...

If we use a more refined method, such as the Sortini ratio, that only penalizes for downside volatility, we get a very different result...

Since 2011 (I know the charts say 7 years, but it's 6), Bitcoin has been no less than 9.5x greater than it's closest competitor (the LSE, which rates highly due to relatively low volatility) and clearly outclasses every other asset class and asset in the study.

The London Business School, the Financial Times and Money Magazine, among many other "so-called" professional finance types really need to subscribe to Reggie Middleton's BoomBustBlog in order to understand what this Bitcoin thing is really about.  

Next up, I'm going to show funds and professional investors how to add Bitcoin to your portfolio to juice your returns AND reduce your overall risk. Then we will work on customizing your risk-adjusted reward with Veritaseum smart contracts. Heady stuff! Stay tuned.

Subscribe to BoomBustblog. 

Learn more about programmable bitcoin "smart contracts" at Veritaseum:

• What is Veritaseum? A Layman's Explanation  
• The Onramp to Peer-to-Peer Capital Markets

Learn more about Reggie Middleton here...

...and Pathogenic Finance.

We sell computer peripherals, computer chips, electrical appliances and electronics to Mexico. Hypothetically, Mexico could put a border tax on these goods coming from the US and buy these products from China, Taiwan and Korea - who have become much more proficient at building these things at costs lower than that offered from the US. Eaxmples are:

1. Samsung
2. LG
3. Huawei, and their Hisilicon chips used in their midrange and high end smart phones. 

These will come directly out of the revenue streams of US manufactuers.

Then there's the immigrant deportation issue. Pushing deportation to Mexico would bite those industries that rely low cost immigrant labor. Examples include:

1. restaurant industry
2. construction
3. manufacturing
4. Home renovation

I've noticed a common thread with many pundits who have erroneously claimed that bitcoin does not have any intrinsic value. That thread is either a distinct lack of knowledge in valuation and/or a misunderstanding of what bitcoin is. Thus, first order of the day is to determine exactly what it is that we are discussing. 

What is Bitcoin?

Bitocin (with a capital "B") is protocol-based network. In that regard, it is similar to the Internet - another protocol based network. Bitcoin uses "consensus algorithms" that facilitate network participants in agreeing on the state of affairs in the network. In that regard, it is like a large digital democracy, cum global network computer. This global network computer needs applications to run on it (like the Internet). The first (popular) applications on the Internet were FTP and email. The first application on the Bitcoin network is also (thus far) the most well known. That application is a digital currency called bitcoin (with a lower-case "b"). It is "b"itcoin that many attempt to value and evaluate, but they don't realize it. Because of that misconception, they fail to see the whole value. You see, the full value of bitcoin cannot be separated from that of Bitcoin - at least for knowledgeable investors. See the video below at the 3:10 mark for an explanation.

What is the significance of differentiating between "b"itcoin and "B"itcoin?

You see, the network that "b"itcoin travels on, "B"itcoin, adds significant and material value. It allows bitcoin to be used on a fully automomous basis.

In addition to full autonomy, you can program bitcoins - so much so that you can cause a simple bitcoin transaction to behave as an equity/public stock sale or an interest rate swap or any swap-style transaction using any of over 30k active tickers found on Bloomberg, tracking the underlying basis point by basis point - all without counterparty or credit risk.

Here's a screenshot of our smart contract-enabled bitcoin wallet that is sitting on the same tablet that I'm using to type this article...

In case your wondering... Yes, Bitcoin can replace the prime brokerage function of an investment bank - without the balance sheet exposure. Here's a video of a simple Apple equity exposure trade.

Wow! I didn't know it could do all that? So, why isn't everybody using it?

Well, the FIRE (finance, insurance and real estate) industries are really trying to use it, but they are confused and compromised. They are confused because the word bitcoin has become anathema among the financial elite. Why? Well, because they believe what they read in the pop media and the pop media has attached bitcoin to drug dealing, child porn and all other sorts of underworld murky things (the same things that the USD and the EUR are used for more than any other currency). So, instead of doing their own independent investigation, they jumped to inaccurate conclusions.

But... The underlying technology behind "B"itcoin is so revolutionary, the FIRE sector decided to attempt to co-opt it for their own private label uses. These efforts go by many names, but the most popular are:

• Private Blockchains
• DLTs - Distributed Ledger Technology
• Federated Blockchains
• and the most realistic name of them all, distributed databases.

Now, this can be an entire article onto itself, so let's just suffice it to say that these efforts are doomed to mediocre success at best. Why, you ask? Because:

1. The purveyors of these technologies are generally consortiums of large players in the same industry who are direct and often fearsome competitors, and;
2. They simply can't benefit from the wide (and increasingly wider) adoption rate of Bitcoin.

Point one is plain on its face. Goldman Sachs does not share trade secrets with Morgan Stanley or JP Morgan. Point two is just as clear once obvious comparisons are made. If you remember when I said the Bitcoin network had some similarities to that other popular network - the Internet. If you were to purchase - of value - two versions of the Internet, one with 30,000 users (roughly the amount of clients of a major US money center bank), and one with 11 million users (the rapidly increasing number of clients for the Bitcoin public blockchain. Which would you consider more valuable? It's like choosing to buy JP Morgan's intranet, versus the entire World Wide Web!

Here are some videos to help drive this point home...

 You see, it's the network effect - that byproduct of Metcalf's law - that cements such significant intrinsic value within Bitcoin (in addition to all of the other stuff above).

How much of a value add is the network effect for Bitcoin? I decided to calculate it and plot it out for you...

With that understanding, one should surmise that we believe Bitcoin is a medium term "buy".

Here are some pricing and market depth metrics from today. We will happily assist subscribers in purchasing both bitcoin and bitcoin derivatives, as well as advising on trading, storage/security and strategy.

The next installment will illustrate how to bitcoin into your investment portfolio.

We are now offering consulting services for those institutions are HNW investors who wish to have a deeper dive into this topic, how to monetize it, and handheld guidance along the way.

 For the outline that we are working from, reference Is Time to Short America? Macro Risks + Unpredictable Administration / Geopolitical Uncertainty = ?. Two of the Trump administration's biggest selling points are protectionism and tax holidays. 

Protectionism

Trump has already authorized the building of an $18B dollar wall. This is a monumental undertaking which he already speculated would enrich certain manufacturing companies, reference Some of the Biggest Beneficiaries From Building a Mexican Border Wall May Be Mexican Materials Companies. As a matter of fact, some companies' share prices have already started moving in anticipation (chomping at the bit, so to say) or getting a chunk of that deal, look!

Do you know why number 6 on that list is moving so much? Take a guess! It's because the swimming among the many standing conflicts of interest in the Trump administration... (click any graphic to expand so you can see those little words)

Is his pick for Secretary of Transportation, Elaine Chao. Ms. Chao just so happens to be director on the board of Vulcan Materials. Helluva coincidence, eh?

I'll give you three guesses, and a bonus round if you still can't catch up, as to who will get a good portion of the $18B wall building businesses when it comes up to bid (or sole source, as it may be).

Trump also floated the idea of a tax holiday to repatriate foreign capital into the US to fill our coffers and provide capital for hew jobs and hiring. It sounds very good, except for two things:

1. It doesn't work like that,and 
2. it exacerbates the problem by making the rich people richer and the poor people poorer.

Now, rich people may like that concept - at least at first, and if they didn't think it through. Of course, once you start thinking, you realize the world (nor this country) can live solely off of financial assets. Somebody, somewhere has to work to build or make something of tangible value. Herein lies the rub. You have to enable workers to maintain a better then living wage, or the amount of time the capitalist class can take advantage of them is limited. Let's step through some historical facts and analysis, shall we?

So, if tax holidays don't work, and they have been proven not to work in the past, why in the world would Trump, et. al. recommend a tax holiday? The answer is quite simple - follow the money! These are the companies that have the highest holdings offshore, and the best tax/bailout deals with the government. I don't have time to get into the finance dudes, but the tech side drives the message home.

Now, does this answer the question as to why Trump will declare a tax holiday if it actually loses money for the American people and costs jobs? Of course it does, just look at the Secretary of Commerce nominee. He's the multi-billionaire, Wilbur Ross. Wilbur is a very, very connected man. Among those connections, he ran the Rothschild's financial arm as Chairman, CIO and Executive Managing Director.

The Rothschild's are one of the oldest money families in the western world,dating back to the 1760s. They control a lot! Now they control the US Presidency through Secretary of Commerce (the Democratic Party cannot block it).

What else does he control? Well, he's also Chairman and Chief Strategy Office of Invesco, Ltd. To put this into perspective, Invesco has over $2,000,000,000 of holdings of the yellow highlighted companies in just ONE (1) fund. There are at least 3 to 4 other funds that hold these stocks too. There's no conflict there, is it?

Now, to be fair, Mr. Ross has said he would divest of assets that pose a conflict, as I'm sure Ms. Chao has promised as well. Then again... That's what Donald said, wasn't it? Even if he does fully (operative word) divest his linkages and ability to bestow favoritism is not only extant, but strong and deep. Expect Goldman and Rothschilds to take issue in their divvying of the booty. I can go into Trump's wooing of the auto industry, and Mr. Ross's extensive auto industry businesses and connections, but I think you get the point. 

So, now you know why we can have a tax holiday and and build a wall, when neither is in the country's best interest. For those investors who have running less than $16B or so in AUM, there is actually a need for sustained economic activity uptick, and not the temporary trading spike to be had from these one time machinations. That, I'm afraid, will not happen if these policy proposals actually go through.

Tax holiday for corporate capital repatriation borne on faulty premise, one that history clearly illustrates:

1. The last tax holiday that we've had was in 2004, allowing U.S. multinational companies, allowing them to repatriate foreign profits at a 5.25% tax rate. Consequently, corporations repatriated $362 billion into the American economy. That is $456 billion in 2017. These funds were used primarily for paying dividends to investors, repurchasing shares, and M&A activity - basically, the acquisition of financial assets. In 2011, Senate Democrats, arguing against another repatriation tax holiday, issued a report asserting that the previous effort had actually cost the United States Treasury $3.3 billion, and that companies receiving the tax breaks had thereafter cut over 20,000 jobs.[2] A second repatriation tax holiday was defeated in the United States Senate in 2009.

We are wavering between moderately and strongly bearish in the medium term. We do acknowledge some trading spikes, hence we are researching long/short trades to minimize some of the risk. 

My next article will discuss the possibility of stagflation with plenty of data for paying subscribers. 

See also, Is the Trump Rally Over?