I’ve just finished reading Superforecasting by Philip Tetlock. The title alone should be an irresistible hook for any trader, sadly experience and research shows that Day Traders are loathe to study and rather spend their time backtesting arrays of technical indicators.
Anyway, in the spirit of Superforecasting I’m going public with a forecast (see chart caption above) and at the same time posing a question about Trend Lines. First, the question.
In this chart the dashed line is a strict “higher lows” trend line, that hasn’t been fully tested. The dotted trendline skips the first low, a hideous spike that must have been caused by some rogue economic data or rumours, and forms a nice channel with the solid line above. The question is, “is the dotted line or the dashed line the correct one?” It’s a question of strictness that a hedgehog will answer without hesitation, but a fox (like me) has to write a blog post about it. Foxes and Hedgehogs are explained in Superforecasting.
The dotted line poses a problem, is that recent overshoot acceptable or does it indicate the up channel is broken? Bottom line, Long or Short here?
Getting back to the public forecast. I entered long 1.1243 on Wednesday. I could have closed yesterday and taken the rest of the week off. However, my forecast was for 1.1360 at 17:00 cet on Friday, my inner hedgehog is telling me to wait it out. Yesterday’s spike is really not helping, replies the fox. The main driver for my outlook was Powell’s testimony on Wednesday, the implications are still filtering through.
I haven’t done the full Brier score bit, I’m still new to Superforecasting. In the meantime, in the spirit of Niall Ferguson’s warning about impending hyperinflation, I’m moving my forecast to next Friday – it just needs more time, I’ll revise the target price later.
This is it, the big one, the Titanic of crypto coins, the De Havilland Comet, Apollo 11, Windows 10, Nelson Mandela, the Tesla Model 3. If this one doesn’t fly, it’s all over.
Facebook are launching Libra Coin. It isn’t owned by Facebook, it is owned by a consortium called The Libra Association (TLA, get it?). It is operated by Calibra, they have a wallet, an app, and an open development platform. It’s all detailed here.
This Time, it’s Different
The Bank of England has announced it will open up deposit facilities to tech companies, to extend the scope of their successful banking regulations. The Libra Crypto Coin will be underpinned by a fund made up of currencies, bonds and other assets, this fund will be allowed into the overnight deposit facility and will earn interest. That opens up the possibility that coin holders can earn interest. This is a new model of a crypto coin as a yielding asset with credible backing.
Being underpinned by a managed fund enables a stable exchange rate. As one asset in the fund declines, they move exposure to another, avoiding the volatility of Bitcoin. The launch value of a Libra, will be in the same region as $, €, and £.
Who is The Libra Association?
Based in Geneva, the members include Visa, Mastercard, Paypal, eBay, Spotify, Vodafone, Uber, Lyft, Coinbase, Union Square Ventures, Kiva microcredit, and Women’s World Banking. They plan to have 100 partner companies at launch, each paying $10 million for an equal seat on the board. This approach will help avoid the anti-trust accusations Facebook already faces around the world.
Tin Foil Hat Section
Facebook can bypass international banking, and perhaps more importantly, bypass Apple Pay and Google Search with their control of user data. In user data mining terms, actual spending data is the Gold Standard. The Libra data base is the holy grail of tech. It is a key selling point of Libra that the system is run by Calibra. Facebook, or any other partner, does not get transactional details tied to usernames. WhatsApp and Messenger will enable Libra coins as any app developer can, but the data is encrypted. Currency can be changed via the Calibra app, this adds to the deposit fund with it’s talent for bearing interest. Calibra will also hold client wallets, solving the lost password problem of Bitcoin. They then have the ability to refund losses, like China’s WeChat.
Can someone be “deplatformed” like they can on facebook or youtube? Where do the coins go in that scenario? If The Association has a policy on this point, they are keeping it to themselves.
The tiny fees, fractions of a cent, are just enough to deter spam and Denial of Service attacks (where a miscreant or competitor would automate millions of fractional transactions to slow the whole thing down to an unusable level).
Testnet, for developers, is already in Beta and available for use. There will be bonus payments for early adopter users, developers and node operators. Venture capitalists, like Andreessen Horowitz, a partner, are being encouraged to fund start-ups building Libra infrastructure.
There is no plan to vet developers, leaving a potential for scammers to target naive users or devise hacks. Facebook will bear the brunt of complaints as it is the de-facto face of Libra. A serious early security breach of Libra or Calibra would tarnish all crypto for good. Equally, any unsavoury behaviour at The Association could mark the end. The next 2 years are the defining period in the fate of crypto currency.
Is That all?
Libra can enable banking facilities for an estimated 1.7bn users who do not have access to banks now and provide an online identity. Where can you get Bitcoins? Where can you use them? The answers don’t trip off the tongue. The new kid sits alongside Facebook’s 7 million ad clients and 90 million small businesses. A decentralised replacement of Paypal, with a captive audience. It’s hard to imagine a more favourable scenario.
Small business and public operator take-up would be a major boost. There is a huge potential in micro transactions which drown in fees today, like Ad-Click payments. You can transfer a few cents, it can handle your transit pass, it can enable a global transit pass.
Some advantages of using credit cards are not yet addressed;
• it’s credit – even if you settle every month
• loyalty points and cashback rewards
• ubiquitous acceptance
• challenging fraudulent use – the card company block-and-phone-call manoeuvre every time you go abroad. They’ll need an app for that.
Some people will say “Cambridge Analytica” in reflex to any mention of Facebook. Fair enough but, Facebook still has over 2 billion users, most of them are outside US and EU and have never heard of Cambridge, or Analytica, or Collusion. Libra is coming, the only question is whether it will be the new Facebook or the new Google+.
[This post created June 2019 to preserve previous trade plan notes. Future notes will appear directly as blog posts]
Talk of backtracking the Fed rate hike policy should have boosted stocks but it hasn’t. This can only signal a steeper correction ahead. Key metrics for the rate hold:
• Inflation slips under 2%
• US Treasury yield curve inversion
• Excessive rate rises in commercial borrowing
• The outlook for the real economy deteriorates more significantly
Dot plot shows 1 or 2 rate rises in 2019 and none in 2020.
The dollar should fall in anticipation of EU hardening but they have backed off and US economics doesn’t look great. In a major stock correction dollar will rise. The new factor is “de-dollarising”. Emerging Markets, fed up of being at the whim of the US Fed, may sign up to the EU drive for increased reserve currency status. That would mean a US stock correction coinciding with a dollar sell off, a near-perfect storm of US recession that would dwarf the 2008 credit crunch.
The 2.9% inflation doesn’t translate into wage growth because the inflation is due to trade tariffs. Again, countering inflation with higher rates may not apply to a tariff-lead inflation. Highly leveraged corporates will be hit by rising borrowing costs eventually, rate hikes eat into profit margins.
The crossovers of cash rates with Bond Yields and Dividend Yields point towards a sell-off in both of those markets.
Debt ceiling vote. If the politics is truly confrontational, we can assume that Trumps wants a shutdown.
Borrowing Costs are generally on the rise. China has a problem, as do most G20 and EM countries. Dollar strength compounds the problem. This may be one reason for the Fed to slow down, though historically they have shown little concern for the effects of their policies on others.
Trade wars are a damp squib, not affecting markets, there remains a possibility of unexpected outcomes.
Small and Mid cap companies are already reporting earnings misses, these business are usually the canary in the coalmine for GDP.
Bond selling continues, the Fed is off-loading $50bn per month.
ECB monetary policies remains on track. EU inflation at 2.1%.
UK Parliament edges towards ruling out a no deal Brexit and this is boosting the Pound. Beware the Ides of March (the next vote is on 14th March).
Oil prices are now in the firm grip of Trump, Putin and Mohammed Bin Salman. Three individuals, rather than any nation or institution. This can only add to volatility. For the moment, Trump has pushed up output and brought down prices. Putin and MBS are struggling to balance budgets and have announced a bi-lateral supply deal. Saudis are looking for $70 at time of writing.
Gold could be in demand if countries, especially Emerging Markets, decide to move away from Dollar reserves. $1360 will be the next pivotal price on the weekly chart. “De-Dollarising” is appearing more frequently in the press, would also benefit Euro, Yen and Swiss franc.
I don’t use Trading Robots, Signal Generators or any of their friends or relatives. I see myself as a Discretionary Trader, I use a selection of economic fundamentals and price action based technical indicators.
However, in my early days I only used technical indicators and spent most of my time developing and testing robots. So, what you should be doing depends on your experience and whether you are a full time trader, like me.
According to Forex Live, if you are a part timer or beginner you should use a signal generator. Find a good one and get to the real issue of trading – can you, the frail human, follow the signals without overthinking and second guessing them. The full article is here : Why you should be using automated forex signals.
As sure as summer turns to autumn, the market domination by economists and monetarists gives way to party political supremacy. Regardless of affiliations we are grateful for the volatility we receive.
It is popular to speak out against the leader of the free world. Dick’s Sports is now anti-NRA and assumed to line up with the Democrats. This may lead to a red/blue wall of quotes alongside the familiar red/green. It isn’t hard to imagine Republicans boycotting Dick’s, where will they go? Has a niche opened up for an enterprising Republican gun seller? Perhaps that market is already saturated but the principle extends. We don’t yet have Republican doughnut shops or Democrat stationery stores. Opportunities abound.
The anticipated Whitehouse exodus is in full swing. The new hires are mouthy populists with no substance, experience or credibility. That is the consistency. Other consistencies may be more tradeable:
Republicans will push up oil prices to benefit their fracking and drilling wing. The USA has become a net exporter and is on target to pass Russia as the biggest oil producer this year. The next step will be the failure to sign off the annual Iran paperwork in May, then sanctions against Venezuela.
Gold market bulls have been hoping to cash in on volatility but the payday hasn’t come. Impending inflation often drives people to Gold but that isn’t a factor yet. We haven’t returned to pre-crisis lows either, it may still be inflated. Downside risk is Indian and Chinese attempts to get people to put money in banks rather than in gold. Jewellery and private investment makes up 68% of the world market. Upside risk would be a serious economic downturn, caused by trade wars perhaps. However, most analysts are only looking for market corrections at this stage.
Bonds can only continue downwards, Central banks have been the biggest buyers for 10 years, now the only question is how aggressively they will sell. It is a buying opportunity for pension funds and the like, cheap AAA+ assets don’t grow on trees. The questions is, do they have the nerve to buy in falling market? ‘Nerve’ isn’t traditionally the hallmark of a pension fund manager.
UK economic figures stand up surprisingly well given all the gloom in the press. Notably inflation and wage growth. The two things the Americans have been grappling with throughout 2017 remain strong in the UK. Wage growth is not stronger than inflation but inflation is set to fall, with the post Brexit devaluation priced-in, and GBP strength returning to the charts. GDP growth remains weak but this can only improve as Brexit uncertainties wane.
Phase 1 of the talks was signed off in December, analysts are pleasantly surprised to see that we are ready to begin Phase 2 in early 2018. The driver here is that the fiscal year of the UK ends on April 5th and many businesses set theirs to 31 March. A lot of investment has been held up pending clarity on Brexit. This March is the last budgeting round for Business prior to the March 2019 exit. If May & Co get it right they can trigger an avalanche of investment.
This sentiment is reflected in the markets, selling is yesterdays news, buyers now need an excuse to trigger. Politicians need to start talking about the big ideas of the trade deal; tariffs, regulatory equivalence, the customs border and the big one, Financial Services Pass-porting. The primary weakness in The UK right now is the government, they’ve had a quiet Christmas but have yet to show any mettle since the election disaster.
Grandstanding and Posturing in Brexit Talks Phase 2 will be much more exaggerated than in Phase 1. This signals a lot of market volatility in the near term but the end result should be a stronger pound, just on the basis that clarity is better than uncertainty. The actual outcome of the talks is largely irrelevant, barring some catastrophic walk-out or unexpected British success.
Interestingly, now that we can stand back and apply hindsight, the fractures of Brexit and the October Flash look less extreme. You might think the EURGBP chart is more illustrative, but it only confirms the fallacy:
Nothing happens in January. Nothing changes anyway, the stock markets will inflate, the pound will gyrate, bitcoin mania will maniate. It is a little reported fact that the most likely outcome of any scenario is that ‘it will probably stay the same’. It is the job of talking heads to feed us daily scenarios of unprecedented gains and catastrophic collapses, but those scenarios are rare – which is why they surprise us when they do happen. One of the tricks to trading successfully is to look for the most likely outcomes, not the most profitable. The most profitable outcomes are almost always built on hope and best cases, the most likely outcomes are where you make your, usually modest, daily gains.
If that’s too ethereal for you then ignore it, just get back to basics. If you have been profitable in Q4 of 2017 then keep doing whatever you did into Q1 of 2018, until the market outlook changes. In the other case, if you haven’t been successful, now do the opposite of what you’ve been doing.
QE policy questions are in the air; when will the Fed start selling bonds?, when will the ECB stop buying them? Both answers tell us when the EURUSD pair will rise again. The rise will be tempered by US interest policy, but it will rise. Other currencies have less of a counterbalance and will find it hard going against the big two this year.
If USD does win out and the OECD economic forecasts are right, expect commodity prices to gain. The consolidation of corn prices must be a portent of something. Unless everyone has finally agreed on one price for corn. Gold and Oil have come to this party early, wait and see if they’re staying or if they go out and come back in.
The only reason anyone is giving for buying Bitcoin is to make money, it’s speculation only. That’s how you know it’s in a bubble. Bubbles do two things, they inflate and they burst. Typically, professional traders will all sell together, causing the burst, and retail traders will be left holding the losses. Bitcoin evangelists will tell us there is another good reason to buy, Bitcoin is the future of money. So how is it different from normal assets?
Make a comparison with gold, there is a persistent fear that central banks will dump their holdings, collapsing the price. Or, a new gold field opens up and if it’s big enough, it collapses the price. That can’t happen to Bitcoin, according to the evangelists. There are 21 million Bitcoins and that number can not change. For that simple reason, the value of Bitcoin will keep going up, according to the evangelists. Demand is increasing but supply is fixed.
That still leaves the central bank dumping question. ‘Central banks don’t hold Bitcoin’, again the evangelists have the answer. What if we substitute ‘Central Bank’ with ‘Someone having Massive Bitcoin holding’? That person could dump their coins and collapse the market. Does such a person exist? Yes. Not one individual, but a small group of people. This group bought lots and lots of Bitcoin years ago, when it was cheap. Now these people are sitting on massive profits, which they will realise when they sell their coins. They know who they are, they talk to each other because they want to know before the others sell out and collapse the market.
Who is this cartel? It doesn’t matter according to the old poker maxim ‘if you don’t know who the patsy is in the game, it’s you’. Ok, the cartel is The Evangelists, the ones giving all the reasons why Bitcoin is the future of money. They have launched a Futures contract on CBOE, they are preparing ETFs next. All to make it easier for you to get into Bitcoin and inflate the price. They are stoking demand for a finite asset which they hold a big chunk of.
While it’s true no new Bitcoin mines can be found, there are other cryptocurrencies. Ethereum is quite well known. Dash, Litecoin, Peercoin, Quarkcoin, Stablecoin are among many more. The Japanese government is planning a cryptocurrency for use in the 2020 Olympic village. Ripple XRP is based on a transactional network infrastructure which already has the buy-in of some major banks. Some say that if cryptocurrencies are sustainable, governments will issue their own, collapsing the private ones like Bitcoin. When will this happen? At the latest I propose the Summer of 2020, around the time we get a new 100 metres champion.