Tag: U.S. Securities and Exchange Commission (page 1 of 5)

“This Just Feels Like Death”: Analysts Flee Research Positions Amid MiFID II Changes

For the past couple of months, we’ve frequently shared our views that Europe’s MiFID II regulations, which force investment banks to charge for equity research instead of “giving it away” in return for trading commissions, could be a wake up call for 1,000’s of highly paid research analysts who were about to have their true ‘value add’ subjected to a market bidding test.  Here are just a couple of examples:

Now, per a note from Reuters, it seems that a growing number of equity research analysts are finally waking up to the fact that hedge funds don’t really have a burning desire to drop $400,000 per year on reports drafted by a 23-year-old recent college grad that do little more than summarize free SEC filings.  Who could have known?

Having covered financial stocks at big and small banks for more than two decades, David Hilder was accustomed to the ebb and flow of Wall Street job cuts and hiring sprees.


But he threw in the towel as an analyst last year after deciding customers simply will not pay what it costs to produce research in the years ahead, especially after a regulation called MiFID II upended the pricing model.


“It certainly seemed that the difficulty of being paid for research was going to increase, not decrease,” said Hilder, who is now trying to reinvent himself as an investment banker.


Many share Hilder’s grim outlook. Reuters spoke to dozens of current and former analysts who moved to independent research shops or investment firms, joined companies in industries they covered, or have launched new careers or are considering doing so, after nearly a decade of cost-cutting that is likely to accelerate under MiFID.


Not surprisingly, a study from Frost Consulting recently found that major global investment banks have slashed their equity research budgets by more than half, from a peak of $8.2 billion in 2008 to $3.4 billion in 2017.  And, as we noted back in the summer, McKinsey & Co. thinks the pain is just getting started and that banks will have no choice but to fire a ton of equity research analysts who write a bunch of stuff that no one ever reads…which seems like a reasonable guess.

Europe’s impending ban on free research will cost hundreds of analysts their jobs with banks set to cut about $1.2 billion of investment on the area, according to a report by McKinsey & Co.


The consultancy estimates the $4 billion that the top-10 sell-side banks currently spend on research annually is likely to fall by 30 percent as clients become pickier about what they pay for, McKinsey Partner Roger Rudisuli said in an interview. Investment banks’ cash equity research headcount has fallen 12 percent to 3,900 since 2011 compared with as much as 40 percent in sales and trading, leaving the area facing “big cuts” to catch up, he said.


“Two to three global banking players will preserve their status in the new era, winning the execution arms race and dominating trading in equities around the globe,” McKinsey said in a report Wednesday, which Rudisuli helped write. “Over the coming five years, banks will need to make hard choices and play to their strengths. Not only will the top ranks be thinned out, there will be shakeouts in regional markets.”

Meanwhile, in light of the MiFID II writing on the wall, Evercore ISI analyst Glenn Schorr admits that his research has become a bit morbid of late…

Evercore ISI analyst Glenn Schorr recently titled a research note “Writing My Obituary,” with a follow-up called “Stay of (my) Execution.”


“For the last few years, it’s been all about morgue humor like ‘flat is the new up’ and ‘no bonus, but at least you get to keep your job,’” said one former analyst who recently left a large bank but would not be quoted by name to avoid upsetting former or future employers.


“Contrast that with Silicon Valley,” he continued. “It’s not even the money; it’s the optimism that I envy. Those guys are building a brighter future and this just feels like death.”


Sean McGowan spent 25 years covering consumer stocks at small and mid-size brokers before losing his job early last year amid broad cost-cutting.


“The more I started to do research on the impact of MiFID and what was likely to happen to the industry, the more I realized that going back to that world would be like swimming upstream,” said McGowan. “A lot of the jobs on the sell-side are going to disappear and inevitably some of the more enjoyable parts will be peeled back. I don’t want to haggle someone about the price of a phone call.”

Of course, the inevitable result of these changes is that the world’s hedge funds will have employ their “buy the fucking dip” strategies without the support of 50 research analysts…maybe just 20 instead.


Ethereum Proposes ‘Guidelines’ To Stop ICO-Related Fraud

It looks like Ethereum’s developers and entrepreneurs have finally recognized the perils of being associated with the massively fraudulent ICO market.

ICOs have exploded since the beginning of the year as companies equipped with little more than a white paper sketching out some grandiose (and often highly improbable) killer app that somehow incorporates a monetized token trading on a blockchain much like bitcoin. So far, these offerings have raised more than $3 billion this year, and many of them are built on top of Ethereum’s platform, which enables the creation of decentralized “smart contracts” that can carry out higher level functions beyond simple transfers of value.

Last year, the collapse of the DAO – a kind of crowdfunded project meant to provide early stage financing to blockchain startups – sent the price of ethereum spiraling lower. Apparently, Ethereum’s top people are afraid the collapse of the ICO market might be even more damaging, CoinDesk repors.

"Grotesque" might not be the word you'd think ethereum developers would ascribe to today's ICO scene.


But that's exactly how some of the platform's ardent supporters described the current state of affairs. At Devcon3 in Cancun, Mexico, last week, developers were decidedly unenthusiastic when approached for thoughts about the new funding method, some going so far as to allege that many projects that use it to raise money are little more than "scams."


Even Fabian Vogelstellar, the developer behind the technology standard that helped make ethereum tokens so easy to launch, was keen to join the ranks of ICO critics, echoing remarks made by a colorful cast of commentators as diverse as MIT Media Lab Director Joi Ito and the "Wolf of Wall Street" Jordan Belfort.


"The problem right now is that too many people outside of the blockchain space focus on tokens and ICOs; frankly speaking, it's the least interesting part of ethereum." 

The tone of these remarks stands in stark contrast to the optimism about ICOs , which just earlier this year were being hailed as a groundbreaking tool for capable of revolutionizing how companies raise money.

Etherscan CEO and founder Matthew Tan went so far as to call ICOs ethereum's "killer app," a statement that aligns with the more than 10,000 token projects launched to date – 13 of which have eclipsed $100 million in total market value, according to Etherscan data.


It's an interesting take seeing how ICOs are typically touted as a means to circumvent traditional fundraising methods. But, du Rose's sentiments hint at a crucial criticism: that many ICOs are simply executing incorrectly. 

The criticism comes as regulators in US, China and many other major markets for cryptocurrencies have taken steps to curb or regulate the markets. The SEC has been slowly clarifying its stance toward ICOs since this summer, when it first declared – in a finding about the DAO fiasco – that ICOs are securities that must be registered with the SEC and subject to US securities laws.

To their credit, Ethereum developers have suggested some helpful “guidelines” of their own.

Here’s Jack du Rose, co-founder of ethereum startup Colony:

Ethereum developers largely believe that, at the very least, the individuals or company behind an ICO should have a prototype to prove their idea could theoretically work in practice. For instance, ethereum-based casino game platform FunFair launched an ICO over the summer, but only after releasing several prototypes.


And FunFair founder and CEO Jez San Obe had strong words about issuers that do it differently.


"You should have a product before you ICO, you should know how to run a company, you shouldn't have an anonymous team and you should release a prototype first," he told CoinDesk.

It’s something that, in conventional markets, should go without saying. But ICOs are anything but conventional. So Ethereum’s developers reminded investors and the companies doing the offering not to "risk other people's money on something, when there’s a reasonable likelihood we'd be prosecuted."

Issuing  a token before the product is not only foolish from a regulatory standpoint, but also "incompetent and greedy."

Du Rose also insisted that ICOs be reserved for companies building a product that is decentralized, like the ICO being used to finance it.

"For a token to be interesting … it should be a totally decentralized protocol, not just glitter on top of a centralized company with its own revenue models," du Rose said.


In this way – although probably curiously for some – Giveth founder Griff Green pointed to The DAO as an ICO success story. Though its code had a bug that led to millions of dollars in ether being stolen from users, it was at least decentralized, said Green, who was the community organizer of the project.


He thinks about The DAO in a more abstract way, though, saying that, in the future, people will be able to launch their own cryptocurrency to push against the power of the banks.


"The power of creating currency is unfathomable. Banks are in a really good spot today. They have a lot of money and a lot of power. They can create money out of nothing. Instead, with ICOs, you can give that power to every person," Green said.

While regulators, investors and – increasingly – the general public believe the ICO space is fraught with bad actors, some crypto investors see this as the beginning of a learning process. ICOs could still revolutionize corporate fundraising, they believe, the market just needs to work out the kinks first.

"What I've seen is kind of unsurprising," said DappHub software engineer Andy Milenius. "People's first experience with an idea is allowed to be wrong."

As we've reported, two of the world's largest ICOs have already hit the rocks this year.

And we imagine those won't be the last…


Icahn Subpoenaed Over Biofuel Policy, RINS Tumble

This just might spoil what has so far been a strong year for Carl Icahn. Bloomberg is reporting that the FBI has issued subpoenas for information on Carl Icahn’s possible lobbying to change biofuel policy while serving as an informal adviser to President Donald Trump, according to regulatory filings.

Icahn, who briefly served as an adviser to the president and who was once suspected of being a possible pick for Treasury,  announced in August that he was no longer serving as an adviser to the president regarding regulatory reform. In his curiously worded letter, he specified that he “never had a formal position” in the White House.

The Attorney’s office for the Southern District of New York is “seeking production of information” pertaining to Icahn’s activities regarding the Renewable Fuel Standard, according to a Form 10-Q that Icahn Enterprises LP filed on Friday with the U.S. Securities and Exchange Commission.

The investigators also want information on Icahn’s role as an adviser to the president, the document says.

“We are cooperating with the request and are providing information in response to the subpoena,” Icahn Enterprises said in the filing. “The U.S. Attorney’s office has not made any claims or allegations against us or Mr. Icahn."

Neither Icahn nor the DOJ commented for Bloomberg. The news immediately hit shares of Icahn Enterprises.

The price of Renewable Identification Numbers, or RINs, the credits used to show compliance with the biofuel mandate have been volatile in the past year, Bloomberg says. The RIN tracking ethanol consumption, for example, tumbled some 35% in one day after it was reported that Icahn struck a deal for changes with segments of the ethanol industry. That deal never resulted in policy changes.

Icahn, the majority owner of independent oil refiner CVR Energy Inc., has been criticized for pushing for regulatory reforms that would benefit his business interests. Specifically, he wanted the Environmental Protection Agency to change who must comply with annual biofuel quotas, shifting the burden away from fuel refiners.

The US Attorney also sent subpoenas to CVR Energy for information on its activities, as well as those of CVR Refining and Icahn, according to a separate filing by that company.

Icahn’s role was a controversial one from the start, one reason he was passed over for Treasury Secretary – because he said he’d be unwilling to part with his business interests. Some criticized him for his adviser role, accusing him of self-dealing.

The value of Icahn’s stake in the Texas refiner increased by $491 million between Nov. 8 and Aug. 2, to about $1.4 billion, a period running from Trump’s election to the day before reports surfaced that the Trump administration was set to reject the bid to relieve refiners of their burden to satisfy annual biofuel quotas.

Since the headlines hit the price of RINs have tumbled 4.5%…


Bezos Calls The Top? Sells $1.1 Billion Of Amazon Stock At Record Highs

Is the world’s richest man starting to get a little concerned that his $90 billion fortune in Amazon stock might just be fully valued?  Well, judging by his SEC disclosures from last Friday, Bezos provided investors with roughly 1.1 billion reasons why the answer to that question may be a resounding ‘yes’.

As Bloomberg points out, Bezos sold a total of 1 million Amazon shares over the course of three days last week netting roughly $1.1 billion in proceeds.  The sale represented just 1.3% of Bezos’ total stake in Amazon and leaves him with 16.4% of the company’s shares outstanding.


Of course, the stock sales came after Amazon beat earnings estimates the week prior (see: Amazon Soars Above $1,000 After Smashing Expectations) and pushed the stock to new all-time highs.  As an added benefit, the move also once again thrust Bezos ahead of Bill Gates on the Billionaire leader board.

Of course, Bezos previously reported that he would sell $1 billion a year in Amazon stock to fund his Blue Origin LLC, the rocket company fueling his dream of sending people into space.  That said, this was Bezos’ second $1 billion sale in a matter of 6 months so perhaps Blue Origin just needed a little extra cash this year?

Then again, maybe this is just ‘tax planning’ or ‘diversification’ or any of the many other excuses executives give for selling their own stock…certainly it has nothing to do with Amazon’s 282x P/E ratio…


Insider Trading Inc: Beat The Market, Work For The SEC

It’s often said in financial markets that correlation does not mean causation. On some occasions, however, denying the causation seems so outlandish to be, frankly, preposterous. As a case in point, Institutional Investor (II) discovered a newly published academic work investigating the investment returns of SEC employees. It turns out those guys are surprisingly good.

According to II, employees at the Securities and Exchange Commission may benefit from divesting companies ahead of investigations, research shows.

Employees at the U.S. Securities and Exchange Commission earn investment returns similar to the insider traders they prosecute, according to new research from Columbia University and Arizona State University.

Why aren’t we surprised. No matter, II continues…

A portfolio mimicking trades made by SEC employees between 2009 and 2011 earned excess risk-adjusted returns of about 4 percent a year for all securities, with abnormal gains jumping to 8.5 percent when only stocks of firms based and registered in the U.S. were tracked, found Shivaram Rajgopal, a professor of accounting and auditing at Columbia’s business school, and Roger White, an assistant professor at Arizona State University’s W.P. Carey School of Accountancy, in a paper published this month.


Rajgopal and White said the excess returns seemed to be primarily due to employees selling stocks ahead of bad news revelations. SEC employees, they explained, are required to divest their holdings in companies they are assigned to investigate.


“We are concerned that such a policy is tantamount to forcing employees to sell stock on non-public information given that virtually all investigations initiated by the SEC are private,” the authors wrote…


By comparison, a portfolio mimicking U.S. corporate insider trades earns lower risk-adjusted abnormal returns of about 6 percent a year, according to the research paper.

Hold on a minute…let’s recap.

SEC employees do twice as well by trading domestic stocks that happen to be located in their jurisdiction and the main source of these gains results from employees being forced to sell stocks they are investigating.

Firstly, we doubt there’s much “forcing” occurring. In fact, we’d love to be privy to some of the conversations around the inverse Chinese Walls water coolers at the SEC.


Secondly, are we meant to believe that, in general, individual SEC employees are running portfolios where performance benefits significantly from selling long positions in companies that, by a strange quirk of fate, they subsequently find themselves investigating?


Thirdly, when the report discusses selling, does that include shorting?

When II called, the SEC press department, the latter “didn’t immediately provide comment”. Probably nothing. Anyway, back to the report and II remarks on the difference in performance between buy and sell trades put on by the SEC’s trading gurus.

The study was based on trading data for 3,500 SEC employees provided by the regulator to the authors under a Freedom of Information Act request. Although these employees earned abnormal returns from selling stocks, Rajgopal and White said they “seem no different from naïve individual investors in terms of the securities they pick to buy” — suggesting excess returns were not the result of investment skill. “If SEC employees are simply good stock pickers, given their background and experience, we would expect to observe abnormal returns on their buys as well,” they wrote in the paper.

“Naïve” is something we suspect these people are not. But what do these seeming correlations mean? II comments on Shivaram and White’s conclusions.

Though Rajgopal and White acknowledge there is not sufficient evidence to conclude that abnormal returns are the result of SEC employees trading on non-public information, they argued that the current trading policy for employees should be reassessed. “Even an appearance of financial impropriety potentially undermines the credibility of the SEC with its stakeholders,” they wrote, suggesting that the issues they highlighted could be solved by prohibiting employees from trading in individual stocks. “While potentially draconian, such a policy is the simplest way to abrogate the concerns of even the most cynical observer,” they said.

So, there you have it, insufficient evidence of causation.


Sorry, Paris: SEC Warns Celebrity Endorsements Of ICOs Could Be Illegal

The SEC’s crackdown on ICOs has finally brought it to Hollywood.

The agency – which in a ruling issued over the summer legally qualified ICOs as securities – said today that celebrities who endorse token sales might be violating so-called “anti-touting” laws if they don’t state what compensation they received, if any.

As we’ve pointed out numerous times, celebrity endorsements of ICOs have become something of a punchline in recent months as Floyd Mayweather, Paris Hilton, Jamie Foxx, Dennis Rodman and many, many others have embraced the trend.

In some cases, the celebrities apparently experienced a twinge of regret and deleted their endorsements from their social media platforms, like Hilton did with Lydian Coin – a company that has few to recommend it aside from an indecipherable White Paper and a CEO who pled guilty to beating his girlfriend.

More broadly, regulators from Canada to China to Singapore are cracking down on ICOs to try and protect gullible investors. Most have taken a similar approach to the SEC by declaring the tokens to be securities subject to securities laws and regulations that generally prohibit outright fraud.

Of course, that the SEC would issue this “quick clarification” is hardly a surprise. Fortune raised the legality issue surrounding celebrity ICO endorsements in an article published in September, two months after the SEC delivered its “warning shot” across the bow of the ICO market.

“Aside from pure in-game token situations, companies really need to think of these as securities,” says Jeffrey Neuburger, who advises clients about ICOs at the law firm Proskauer in New York.


Neuburger adds that those promoting the securities, including Mayweather, could face serious consequences, especially if the company in question has not been truthful in the course of the token offering.


“If they know something is not right and they endorse it, there could be all sorts of fallout, including SEC action and even criminal charges if there is evidence of fraud,” he says.


There is no evidence that the companies endorsed by Mayweather, whose publicity firm did not respond to a request for comment, have done anything wrong. Nonetheless, he may be deemed among those responsible if the SEC decides the firms engaged in the illegal sale of securities.

Despite the international crackdown, the ICO market is still chugging along. The token sales have already raised more than $3 billion this year despite troubles at one of the largest and most high-profile ICOs. Given that these types of questionable endorsements were fairly widespread prior to the SEC’s latest warning, we imagine this is yet another “warning shot” – putting celebrities on notice that, should they choose to endorse one of these products, their promotional posts must be clearly identified, and the endorser must make any pertinent disclosures regarding compensation.

We imagine they will do the right thing.

* * *

Read the SEC’s warning below:

SEC Division of Enforcement and SEC Office of Compliance Inspections and Examinations

Nov. 1, 2017

Celebrities and others are using social media networks to encourage the public to purchase stocks and other investments.  These endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.  The SEC’s Enforcement Division and Office of Compliance Inspections and Examinations encourage investors to be wary of investment opportunities that sound too good to be true.  We encourage investors to research potential investments rather than rely on paid endorsements from artists, sports figures, or other icons.  

Celebrities and others have recently promoted investments in Initial Coin Offerings (ICOs).  In the SEC’s Report of Investigation concerning The DAO, the Commission warned that virtual tokens or coins sold in ICOs may be securities, and those who offer and sell securities in the United States must comply with the federal securities laws.  Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.  A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.  Persons making these endorsements may also be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.  The SEC will continue to focus on these types of promotions to protect investors and to ensure compliance with the securities laws.

Investors should note that celebrity endorsements may appear unbiased, but instead may be part of a paid promotion.  Investment decisions should not be based solely on an endorsement by a promoter or other individual.  Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws.  Conduct research before making investments, including in ICOs.  If you are relying on a particular endorsement or recommendation, learn more regarding the relationship between the promoter and the company and consider whether the recommendation is truly independent or a paid promotion.  For more information, see an Investor Alert that the SEC’s Office of Investor Education and Advocacy issued today regarding celebrity endorsements.  


US Futures Rebound After Disappointing Chinese, European Data

Yesterday’s sharp Chinese selloff is now a distant memory after the BTFDers emerged, and this morning U.S. equity futures are once again levitating as the FOMC begins its two-day policy meeting, following an uneventful BOJ announcement on Tuesday morning which left all QE parameters unchanged. Asian stocks traded mixed steady while European shares climb.

The key event overnight was the BOJ meeting, in which the central bank maintained QQE with Yield Curve Control and kept NIRP unchanged at -0.1% as expected. The decision to keep QQE with YCC was made by 8-1 vote, with Kataoka the sole dissenter again who suggested the BoJ needs to buy JGBs so that 15yr yield stays below 0.2%, while Kataoka also commented that the BoJ should ease if domestic factors lead to delays in reaching the inflation target. In terms of changes to its outlook forecasts, the BoJ raised FY 17/18 Real GDP growth forecast to 1.9% from 1.8%, while it cut Core CPI forecasts to 0.8% from 1.1% for FY 17/18 and to 1.4% from 1.5% for FY 18/19

Asian shares rose in afternoon trading, with the MSCI Asia Pacific Index gaining 0.1 percent to 168.29 and ignoring the overnight miss across the board in Chinese PMIs


… Confirming China’s economy is rolling over…



… supported by tech stocks as companies including Sony and Nintendo boosted their forecasts. Samsung gave the biggest boost to the regional gauge and South Korea’s benchmark after announcing a revamp of its executives. Japan’s Nikkei closed just barely lower, technically only its second down day in October, with SoftBank weighing on the index after talks to merge its Sprint unit with T-Mobile US were said to be in peril. Samsung Electronics closed at a record after nominating its Chief Executive Officer Lee Sang-hoon as its next board chairman, along with other management changes, hours after detailing a boost in shareholder payouts. The company’s plans, along with a pledge by South Korea and China to move beyond a year-long dispute over Seoul’s decision to deploy a U.S. missile shield, helped lift the Kospi Index to a new all-time high (remember the North Korea nuclear armageddon threat? Neither does the market).

“South Korean equities gained led by the Korea-China agreement on the Thaad issue and also because of Samsung Electronics’ announcement,” said Min Byungkyu, a global market analyst at Yuanta Securities Korea. Technology stocks rose the most among sub-indexes on the regional gauge, with Nintendo soaring after nearly doubling its annual profit forecast and Sony and Denso Corp. climbing after both companies boosted earnings outlooks. In India, Axis Bank surged after a report that Bain Capital plans to invest in the lender.

Speaking of China, the slump in Chinese government bonds is close to an end, with sentiment set to stabilize as the central bank boosts cash injections, analysts said The yield on the benchmark 10-year government bond fell 3 basis points to 3.90% on Tuesday, halting a four-day increase of 20 basis points that took it to the highest level in three years. The People’s Bank of China injected funds for a fourth day on Tuesday, adding a net 230 billion yuan ($35 billion) in the period.As a result, the SHCOMP halted the recent slump, rising just under 0.1% to 3,393.

In Europe, traders ignored the miss in euro-area inflation data in stride as closed German markets due to a local public holiday has led to a muted European session. The euro-area’s unemployment rate inched lower in September as the economy expanded for an 18th consecutive quarter, but consumer inflation unexpectedly slowed in October, complicating the European Central Bank’s task as it considers tightening policy.

Oil and gas stocks led gains in the Stoxx Europe 600 Index as crude hovered near a six-month high. Most European stocks climb, led by oil and gas sector; FTSE 100 rebounds after BP (+2.6%) earnings and buyback announcement. European energy names lead the way higher in the wake of BP’s earnings (+3.3%) which have subsequently supported the index. Financial names have seen slight underperformance after BNP’s (-3.2%) weak earnings which has also subsequently seen the CAC modestly underperform its  peers. Elsewhere, UK gambling names have been granted some reprieve after the UK government’s crackdown on fixed-odd betting terminals does not appear to be as bad as some had initially feared.

Treasuries and core European bonds were mostly steady. Earlier a note of caution had crept into markets in Asian hours following a drop in China’s factory gauge, and equity benchmarks in that region were mixed. Japanese stocks ended the day slightly lower after the Bank of Japan maintained its key policy rate and target for the yield on 10-year government bonds, while showing concerns remain on the inflation outlook.

The yield on 10Y TSY rose less than one basis point to 2.37%. Germany’s 10Y yield decreased less than one basis point to 0.37%, the lowest in two weeks. Britain’s 10Y yield dipped one basis point to 1.335%, the lowest in more than a week.

American tax reform also remains a key theme, with lawmakers said to be considering a phase-in plan. The indictment of former Trump campaign aides in Robert Mueller’s investigation of Russian meddling in the U.S. election, however, may pose a danger to the White House as it tries to push tax cuts though Congress. Fed and BOE rate decisions this week remain in focus for FX, with major currency pairs trading in tight ranges; GBP/USD continues to trade with an upside bias due to positioning into BOE announcement.

West Texas Intermediate crude fell less than 0.05 percent to $54.14 a barrel. Gold decreased 0.1 percent to $1,275.55 an ounce.  Oil is poised for its second monthly gain for the first time this year.

Economic data include employment-cost index, Chicago PMI and consumer confidence. Mastercard and Pfizer are among companies reporting earnings today

Bulletin Headline Summary from RanSquawk

  • European bourses trade higher with energy names topping the leaderboard after earnings from BP
  • EU inflation fell short of expectations but little reaction for EUR with markets already braced for a softer print given German readings yesterday
  • Looking ahead, highlights include US APIs

Market Snapshot

  • S&P 500 futures up 0.2% to 2,573.25
  • MSCI Asia up 0.1% to 168.30
  • MSCI Asia ex Japan up 0.3% to 550.81
  • Nikkei unchanged at 22,011.61
  • Topix down 0.3% to 1,765.96
  • Hang Seng Index down 0.3% to 28,245.54
  • Shanghai Composite up 0.09% to 3,393.34
  • Sensex down 0.06% to 33,245.25
  • Australia S&P/ASX 200 down 0.2% to 5,909.02
  • Kospi up 0.9% to 2,523.43
  • STOXX Europe 600 up 0.08% to 394.22
  • German 10Y yield fell 0.8 bps to 0.359%
  • Euro down 0.06% to $1.1644
  • Brent Futures down 0.4% to $60.67/bbl
  • Italian 10Y yield fell 10.0 bps to 1.582%
  • Spanish 10Y yield fell 1.8 bps to 1.477%
  • Brent Futures down 0.3% to $60.70/bbl
  • Gold spot up 0.05% to $1,276.96
  • U.S. Dollar Index down 0.04% to 94.52

Top Overnight News

  • The Bank of Japan left its massive monetary-stimulus program unchanged even as it trimmed its inflation forecasts, signaling further divergence ahead from its global peers
  • France’s economy extended its run of growth into a fifth quarter, marking its best streak in more than six years; the 0.5% expansion in the three months through September, compared with an upwardly revised 0.6% the previous three quarters, was supported by corporate and household investment while trade weighed on growth
  • Catalan leader Carles Puigdemont kept his followers guessing as to the next step in his pursuit of an independent republic, after fleeing to Belgium where he’s expected to emerge on Tuesday
  • China’s official factory gauge fell to 51.6 in Oct., vs. 52 forecast in Bloomberg survey, and five-year high of 52.4 in Sept., with new orders and prices leading the decline, as officials increasingly prioritize a campaign to clamp down on polluting industries and rein in debt
  •  White House Downplays Mueller Indictments; Apple Escalates Qualcomm Dispute; Ex-Third Point Partner Drawing SEC Probe
  • Congress will put Facebook, Twitter and Google under a public microscope Tuesday about Russia’s use of their networks to meddle in the 2016 election, a day after Special Counsel Robert Mueller’s criminal investigation disclosed its first indictments and guilty plea
  • Apple Inc. is designing iPhones and iPads for 2018 that don’t use components from Qualcomm Inc. amid an escalating dispute between the companies
  • House tax writers have completed about 90 percent of the tax bill they plan to release this week, Ways and Means Chairman Kevin Brady said Monday — but the last part may be the hardest
  • SoftBank Group Corp.’s talks to merge U.S. unit Sprint Corp. with T-Mobile US Inc. have hit a serious snag throwing the deal into jeopardy after months of talks
  • The Bank of Japan left its massive monetary stimulus program unchanged even as it trimmed its inflation forecasts, signaling further divergence ahead from its global peers
  • Treasury Secretary Steven Mnuchin put to rest for now the idea bubbling in the $14.2 trillion Treasuries market that the government might introduce ultra-long term debt sales
  • The old recipe of using bonds to hedge against risks from equity holdings may not be a winner anymore, and investors would be better off with a more complex approach that relies on multiple tactics, according to Pacific Investment Management Co. analysis

A cautious tone persisted in Asia as the region digested softer than expected Chinese PMI data and a dampened lead from the US where reports suggested corporate tax cuts could be gradual. ASX 200 (-0.2%) was indecisive and failed to maintain early energy-led gains, while Nikkei 225 (unch) was kept grounded by a firmer JPY and with SoftBank among the worst performers on reports it plans to abandon merger talks between its unit Sprint and T-Mobile US. KOSPI (+0.9%) gained after reports China and South Korea agree to resolve THAAD-related dispute and with Samsung shares buoyed by record quarterly profits, while Shanghai Comp (+0.1%) and Hang Seng (-0.3%) initially weakened following the miss on Chinese Manufacturing PMI and with some of the big 4 banks pressured post-earnings; the mainland pared losses heading into the clsoe. Finally, 10yr JGBs were relatively flat with only minimal gains seen amid a risk averse tone in Japan and after an unsurprising BoJ policy announcement where dovish dissenter Kataoka suggested more easing.

Top Asian News

  • China Factory PMI Falls From Five-Year High on Pollution Cleanup
  • BOJ Keeps Stimulus Unchanged as It Trims Inflation Outlook
  • China, South Korea Agree to Shelve Thaad Missile Shield Dispute
  • Macau Casinos Emerge From Rut as October Revenue Hopes Brighten
  • Indian Billionaire Fund Says Bank Boost to Help Clear Loans

With Germany on vacation today, European bourses have started the session on the front-foot (Eurostoxx 50 +0.2%), albeit modestly so. In terms of sector performance, energy names notably lead the way higher in the wake of FTSE-heavyweight BP’s earnings (+3.3%) which have subsequently supported the index. Financial names have seen slight underperformance after BNP’s (-3.2%) lacklustre earnings which has also subsequently seen the CAC modestly underperform its peers. Elsewhere, UK gambling names have been granted some reprieve after the UK government’s crackdown on fixed-odd betting terminals does not appear to be as bad as some had initially feared. A really low key final business day of October in the sovereign bond markets, thus far. Turnover has been extremely light, even allowing for Germany’s Reformation holiday with Bund volume on Eurex around 100k lots (at writing). The German benchmark has also been very rangebound, albeit mainly on the plus side of a 162.64-162.83 trading band, and it appears that many are sitting tight ahead of the key risk events later this week. Indeed, UK Gilts are even more contained within 124.37-54 parameters, awaiting BoE ‘super Thursday’ when a widely anticipated first rate hike in a decade comes with an uncertain vote split, policy meeting minutes, forward guidance and the latest QIR. US Treasuries largely consolidating on Monday’s decent gains made on risk aversion and month end positioning, which saw the 10 year yield retreat clearly below 2.40%, ahead of the FOMC, new Fed chair announcement and monthly jobs report.

Top European News

  • Standard Chartered Retail Banking Chief Karen Fawcett to Retire
  • Ryanair Chief Seeks Solution to Pilot Crisis as Earnings Slide
  • Davis to Brief Cabinet on Brexit Amid Plans to Ramp Up Talks
  • MiFID Investment Research May Face VAT Hit From U.K. Taxman
  • BNP Slides as 3Q Earnings Miss Estimates on Weaker CIB Revenue
  • WPP Lowers Revenue Forecast as Ad Industry’s Woes Deepen

In FX, trade has been particularly tentative thus far with the BoJ only causing a modest uptick in USD/JPY towards 113.00 after the Bank stood pat on rates as expected with 1 dissenter suggesting the need to buy 15yr JGBs to keep yields below 0.2%. EUR saw little in the way of a reaction to the latest miss on expectations for Eurozone inflation (Y/Y 1.4% vs. Exp. 1.5% and core 0.9% vs. Exp. 1.1%) with markets potentially already braced for a lacklustre figure  given yesterday’s German prints.

Commodities continue to trade in a particularly tight range with WTI crude futures consolidating around USD 54/bbl. Elsewhere, the metals complex has been relatively non-committal ahead of this week’s FOMC and NFP, while copper lacked impetus overnight amid a cautious risk tone and after weaker than expected PMI data from its largest consumer China.

Looking at today’s key data, notable data includes the flash October CPI print for the Euro area and France, the advanced Q3 GDP report for the Euro area and consumer confidence for the UK for October. In the US the Q3 employment cost index, October Chicago PMI, October consumer confidence and the August S&P/ Case-Shiller house price index is amongst the data due. Onto other events, the ECB’s Visco and Padoan are also due to speak while UK Brexit Secretary David Davis is questioned by the House of Lords EU Committee about the state of Brexit talks. BP and BNP Paribas are amongst the companies reporting results.

US Event Calendar

  • 8:30am: Employment Cost Index, est. 0.7%, prior 0.5%
  • 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.4%, prior 0.35%; YoY NSA, est. 5.93%, prior 5.81%; US HPI YoY NSA, prior 5.94%;
  • 9:45am: Chicago Purchasing Manager, est. 60, prior 65.2
  • 10am: Conf. Board Consumer Confidence, est. 121.3, prior 119.8; Present Situation, prior 146.1; Expectations, prior 102.2

DB’s Jim Reid concludes the overnight wrap

The bond bullish/bearish switch that has alternated at regular intervals over the last few weeks has firmly switched to bull mode since the ECB meeting less than 72 business hours ago. Yesterday this got an additional boost by good news from the Peripherals, weaker German inflation, a former Trump campaign manager charged in connection with the Russia probe and reports that the US corporate tax rate may only be lowered in increments over 5 years.

In the US, House tax writers are discussing a phase-in approach for corporate tax cuts, allowing the tax rate to gradually fall from 35% in 2018 to 20% by 2022 (ie: -3ppt per year), as per Bloomberg. The plans are not yet final and when asked, House Ways and Means Chairman Brady only said “we want to get the growth up front”. Treasury secretary Mnuchin noted “the objective is not to have that phase in, but we will see how that goes”. Looking ahead, the Ways and Means panel is expected to release the draft bill this Wednesday for further debate.

Staying in the US, Bloomberg reported that three people have been indicted by Robert Mueller’s Special Counsel in relation to potential Russian influence on the 2016 US presidential election, including: 1) President Trump’s former campaign chairman (Paul Manafort) for conspiracy and money laundering (receiving payments from Ukrainian political parties and then laundered some of the payments back into US, 2) Ex-foreign policy adviser to Trump (George Papadopoulos), who reportedly lied about the timing of his contacts with foreign nationals, where he communicated with an overseas professor during the campaign (March 2016), who told him about Russians possessing “dirt” on Hillary Clinton in the form of “thousands of emails” and 3) a business partner of Mr Manafort. Elsewhere, President Trump tweeted “sorry, but this is years ago, before Paul Manafort was part of the Trump campaign”. However, the indictment noted Manafort’s illegal acts lasted into early 2017.

It’s too early to know if there’s are any ramifications for politics or even the tax reforms but the guilty plea by George Papadopoulos, who served as a foreign-policy adviser to President Trump during the campaign suggests the Investigators may have someone who appears to be fully cooperating. This could potentially have a material impact.

Turning to Catalonia where tensions have cooled. The Spanish government retook control of the Catalan region yesterday with little resistance and the ousted Catalan President Puigdemont has reportedly fled to Brussels, potentially seeking asylum while other party members will continue with the  new election scheduled for 21 December. Puigdemont is expected to make an address later today. Elsewhere, El Mundo reports that opinion polls conducted early last week (before independence was declared) show that support for Catalan independence fell to 33.5% in the region. As a reminder, El Mundo also reported yesterday that opinion polls suggest Catalan secessionists could win 65 seats in a new election, but fall short of the 68 seats needed for new majority. The Spanish markets responded favourably, with the IBEX up 2.44% and 10y yields down 9.3bp. To put the mini bond rally in context, Spanish 10y yields are now the lowest since early September and 20bp lower than the day after referendum took place (1 October) and 15bp lower than the day before last week’s ECB meeting.

Staying in government bonds, core European bond yields fell c2bp yesterday (Bunds -1.6bp; Gilts -1.4bp; OATs -2.9bp) while UST 10 fell 3.8bp driven by the aforementioned factors. Peripherals outperformed with 10y yields down 9-12bp  (Spain -9.3bp; Italy -10.4bp; Portugal -11.9bp), with Italian bonds likely supported by S&P’s credit rating upgrade late last Friday, where it lifted the country’s rating 1 notch higher to BBB, citing strengthening economic outlook, an  uptick in employment and a stronger banking sector.

This morning, the BOJ voted 8-1 to retain its monetary stimulus policy, with the new board member dissenting. As our Japanese economist expected, the BOJ has trimmed its near term core inflation outlook to 0.8% for 2017  (-0.3ppt) and 1.4% for 2018 (-0.1ppt). However, the outlook for 2019 remains unchanged at 1.8%. In China, the October manufacturing PMI was softer than expectations at 51.6 (vs. 52), but remember that last month’s reading of  52.4 was the highest since 2012. This morning, Asian markets have followed the negative lead from the US and are trading slightly lower. The Nikkei (-0.24%), Hang Seng (-0.08%) and Shanghai Comp. (-0.25%) are down slightly, but the Kospi is up 0.66%, after China and South Korea agreed to restore bilateral relations and put aside a yearlong disagreement over the deployment of a US missile shield.

Recapping other market performance from yesterday now. US bourses softened from their record highs with the S&P and Dow both down slightly (-c0.3%), while the Nasdaq was broadly flat (-0.03%), partly aided by Apple where its shares rose 2.25% following reports of strong demand for its new iPhone X. Indeed my devise won’t be shipped for 4-5 weeks!!! Within the S&P, modest gains in the real estate and tech sectors were more than offset by losses from health care and t elco stocks (-1.41%), with the latter partly impacted by reports suggesting the merger between Sprint and T-Mobile may not occur. Core European markets were little changed, with the Stoxx 600 and DAX  up 0.1% while the FTSE dipped 0.23%. Elsewhere, Spain’s IBEX led the gains (+2.44%) as tensions cooled in the region, while Italy’s MIB also rose 0.39%.

Turning to currencies, the US dollar index fell 0.38%, while the Euro gained 0.37% and Sterling rose 0.61% ahead of the BOE rate meeting this Thursday where the majority expect a rate hike (85.9% odds per Bloomberg). In commodities, WTI rose slightly (+0.46%) while Iron ore fell (-2.21%) for the fourth consecutive day. Elsewhere, both precious metals (Gold +0.23%; Silver -0.07%) and other base metals were mixed but little changed (Copper +0.28%; Zinc +0.57%; Aluminium -0.22%).

Away from the markets, Treasury secretary Mnuchin has backed away from the notion of issuing US treasuries with ultra-long maturities. He noted “we’ve done a bunch of research…at least for now, we don’t see a lot of demand for it” and that “if we could issue ultra-long bonds at the same yield as 30-year bonds, it makes a lot of sense”, but “if it turns out there’s a big premium….there’s no reason for us to do that”.

Turning to Brexit, perhaps in a bid to fast track progress before the big EU summit on 14 December where EU leaders may give the green light to start talks on trade and transition deals, the UK PM May and Brexit Secretary Davis are seeking to change the timing and structure of the negotiations with the EU, from four day sessions held once a month to more regular and ongoing talks as it may help both sides to make the necessary compromises. We shall find out more today as Mr Davis is scheduled to speak to the cabinet.

The latest ECB holdings were released yesterday. Net CSPP averaged €352mn/ per day last week (€367mn before April 2017 and €321mn since then, i.e. -12.3% since QE trimming). Net PSPP averaged €2,286mn/per day last week (€3,178mn before April 2017 and €2,440mn since then, i.e. -23.2% since QE trimming). This left the CSPP/PSPP ratio at 15.4% last week (13.5% over last 4 weeks vs. 11.5% before QE was trimmed in April 2017). We still think the ECB will likely keep CSPP relatively unscathed when they halve their APP in January.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the macro data was a bit mixed. The September PCE Core was in line at 0.1% mom and 1.3% yoy. On a six-month annualized basis, core inflation is running slightly higher at 1.5%, but still remains below the Fed’s target of 2%. Elsewhere, personal spending grew at the fastest pace since 2009 up 1% mom (vs. 0.9%) and outpacing an in line personal income growth of 0.4% mom. Finally, the October Dallas Fed manufacturing activity index was above expectations at 27.6 (vs. 21 expected) – marking the highest reading since March 2006.

In Germany, October CPI was lower than expected, at -0.1% mom (vs. 0.1% expected) and 1.5% yoy (vs. 1.7% expected) – the lowest annual rate since November 2016. The September retail sales was in line at 0.5% mom, but datarevisions to prior readings meant annual growth was higher at 4.1% yoy (vs. 3% expected). In Europe, the final reading of consumer confidence was in line at -1, while the business climate confidence (1.44 vs 1.4 expected) and economic confidence (114 vs 113.3 expected) both beat expectations, the latter is now at the highest level since January 2001. In the UK, the September mortgage approvals was broadly in line at 66.2 (vs. 66k expected). Over in Spain, 3Q GDP was in line at 0.8% qoq, leaving a solid through year growth of 3.1%. Elsewhere, October Spanish inflation rose 0.6% mom, leading to an annual reading of 1.7% yoy (vs. 1.7% expected).

Looking at the day ahead, notable data includes the flash October CPI print for the Euro area and France, the advanced Q3 GDP report for the Euro area and consumer confidence for the UK for October. In the US the Q3 employment cost index, October Chicago PMI, October consumer confidence and the August S&P/ Case-Shiller house price index is amongst the data due. Onto other events, the ECB’s Visco and Padoan are also due to speak while UK Brexit Secretary David Davis is questioned by the House of Lords EU Committee about the state of Brexit talks. BP and BNP Paribas are amongst the companies reporting results


Tax Turmoil & China Contagion Slam US Stocks, Treasury Yields Tumble

Is it the bears turn now?


Chinese bonds and stocks were ugly overnight as the calm of the congress came to an end…


Small Caps were slammed today – worst day since August. Nasdaq managed to scramble back to green in the last few mins, but failed to hold it…


Small Caps (and the rest of the market) are catching down to their decoupled volatility markets…


As hope for meaningful tax-reform disappeared ("gradual" was the key word that disappointed markets…


Total chaos reigned in telecoms with rumors about Softbank sending Sprint/T-Mobile tumbling then rebounding…


Financials extended their losses from Friday and continued to catch down to the flattening yield curve…


Treasury yields extended Friday's declines – this is now the biggest 2-day drop in 10Y yields since June…


The long-bond was rallying all day but yields extended their drop when Tresury Sec Mnuchin commented that ultra-long issuance lacked demand…


The Dollar Index extended Friday's losses…


Dollar weakness prompted gold strength…


WTI clung to gain today (as RBOB leaked lower) amid more jawboning from OPEC/Saudis…


Bitcoin hit a new record high at $6300…


And finally, the most extreme positioning ever…

"probably nothing"



Overstock Shares Pop As Company Sets Date For ICO

Shares of cryptocurrency pioneer Overstock.com climbed more than 5% on Tuesday after the company revealed that it will launch an ICO on Nov. 1 using its proprietary tZERO platform, a strategy that will allow Overstock to raise capital without diluting its float.

As far as we can tell, the Overstock ICO would be the first conducted by a large, publicly traded US company, and could potentially open the door for other corporations to utilize the ICO as an alternative means of raising capital.

The offering will will run through Nov. 15, Overstock said.

Overstock grabbed headlines last week when shares of the “obscure e-commerce stock” soared 14% to their highest level in four years, purportedly driven by excitement surrounding the company’s blockchain investments. The share-price pop occurred as IBM and JP Morgan Chase & Co. revealed they were working with banks to create blockchain-based platforms to facilitate global payments.

Similarly, its shares soared in September after the company unveiled what it billed as the “first SEC-compliant” trading venue for ICO tokens. In a ruling issued over the summer, the SEC declared that all digital tokens must be treated like traditional securities and registered with the agency.

The company also revealed Tuesday that it has developed a blockchain-based tool aimed at curbing “naked” short selling – when brokers allow investors to bet against a stock without first obtaining shares to borrow and sell. Like the ICO, this tool will operate atop the company’s tZERO blockchain platform. According to Overstock’s Medici Ventures unit, which developed what it’s calling the “Digital Locate Receipt” tool, the DLR will allow short sellers to more easily locate shares to borrow and sell short.

Overstock CEO Patrick Byrne has spent decades fighting naked short selling, even instigating a feud with the SEC ten years ago over his claims that naked short sellers were illegally targeting his company.

As CoinDesk points out, the DLR, which is expected to be formally revealed at the Money 20/20 conference in Las Vegas this week, is designed to be a blockchain-based versions of Regulation SHO "locates," which were introduced in 2005 to cut down on investors trading against other people’s stocks during off-hours trading. The regulation was meant to give stock owners the assurance that they could reap rewards from this off-hours trading by formally lending the stock – and thus to discourage short sellers from merely promising to borrow the stocks that they wanted to bet against.

Overstock’s ICO will add to the more than $3 billion raised by ICOs since the beginning of the year. However, the ICO market – which has been widely acknowledged as a cesspool of fraud and abuse – has recently encountered some notable setbacks. For example, Tezos, one of the highest selling and most hyped ICOs of the year, recently disclosed that progress on its promised product has stalled, meaning investors likely won’t receive their Tezos tokens by the company’s year-end deadline.

Elsewhere, crackdowns on ICOs in the US have led to the first civil actions against alleged fraudsters using the technology to solicit money from gullible investors.

But given Overstock’s longtime involvement in the space, it’s ICO will likely attract a modest amount of attention.


World Stocks At All Time Highs After Nikkei’s Record Winning Streak; Euro Slides With Spain On Edge

In an otherwise quiet session, Sunday’s convincing election victory for Japanese Prime Minister Shinzo Abe’s ruling coalition, which gave it another constitution-changing supermajority, pushed the Nikkei to the highest level since 1996, after a record 15 consecutive days of gains – the longest winning streak on record – and sent world stocks to new all-time highs on Monday.

Over the weekend, Japan’s Abe was re-elected and his coalition reinvigorated by an increased share of the vote. Common “hot takes” are that this means: further stimulus for Japan; Governor Kuroda is now more likely to serve another term at the BoJ; and therefore a weaker JPY. On the flip side, just as many argue that this is simply an extension of the status quo – USDJPY is little changed so far, after rising briefly above 114.

That said, it appears that the BOJ’s relentless buying of anything that isn’t nailed down has started to trickle down: corporate Japan is having its best year for earnings since 2000, with the country getting the most EPS upgrades since 2010.

Meanwhile, in Europe an escalation of Spain’s constitutional crisis weighed on the country’s banks. S&P index futures are modestly green, and set for another record high in the cash index, while stocks in Asia and Europe were mixed after an early push higher, on concerns over the outcome of the Catalonia independence crackdown.

Still, it could be worse: “At this moment you’ve not got contagion from Spain to the broader European market. It’s seen as a national and localized issue,” said Pierre Bose, head of European equities strategy at Credit Suisse.

Among the other key developments over the weekend, Spanish PM Rajoy invoked article 155, in which he plans to dissolve Catalonia government and curb its authority, while he also seeking to call elections within 6-months. Voters in Italy’s Lombardi and Veneto regions overwhelmingly voted for more autonomy from Rome.  UK Brexit Sec Davis said on Friday that the UK doesn’t want a ‘no deal’ outcome on Brexit, but added that the UK will be ready if it occurs.  Markets are bracing for the European Central Bank to signal baby steps away from its ultra-easy monetary policy stance this week and for the U.S. Federal Reserve to hike rates in December.

“Now there’s a renewed mandate for quantitative easing, which means a weaker yen and stronger Japanese government bond prices. It also has a significant spillover for other developed markets,” said Peter Chatwell, head of euro rates strategy at Mizuho.

In macro, the dollar strengthened while 10-year Treasury yields hovered near 2.40% on optimism Trump is close to pulling off a tax overhaul and may announce the next Fed chief as soon as this week. The Bloomberg dollar index DXY extended gains from Friday when it closed above its 100-DMA for first time since March. Late last week, Trump said he’s considering Stanford University economist Taylor – the most hawkish candidate – and Governor Powell for top job at the Fed, while indicating Chair Yellen remains in the running.

“The U.S. dollar is finding fresh yield support on optimism over a deal to cut corporate taxes and the perception that John Taylor remains a strong contender for Fed chair,” Sean Callow, an FX strategist at Westpac told Bloomberg. “The 2.40 percent level remains critical for the 10-year Treasury note, so the dollar is not yet off to the races.”

The USD/JPY rose to a fresh 3-month high after Japan’s ruling coalition retained its two-thirds lower house majority in Sunday’s election, ensuring continuity of BOJ’s loose monetary policies; it traded above 114 in the early part of the session, before sellers stepped in to fill the gap. Meanwhile the euro weakened a second day as investors waited for the next big development in Spain, where Catalan separatists are planning their response after Prime Minister Mariano Rajoy moved to stamp his authority on the region.

Major Asia-Pac indices were mixed although Japan stocks rose again by 1%, after the blowout win by PM Abe’s ruling bloc at the snap election. Nikkei 225 (+1.1%) led the region after the ruling coalition gained a supermajority at Sunday’s election, which keeps Abenomics firmly in place and paves the way for possible constitutional changes. Japan’s Topix index also climbed 0.8%, cementing a rally to the highest since mid 2007. Australia’s ASX 200 (-0.2%) failed to hold onto initial gains and a mixed tone was observed in Chinese markets, in which the Shanghai Composite (flat) ignored a significant liquidity operation by the PBoC; there were strong gains in consumer and healthcare firms although trading volumes remained thin as investors awaited policy cues from a party congress and fresh data showed growth in new home prices slowed to a crawl in September. The Hang Seng (-0.7%) underperformed on technical selling after it met resistance around 28,500. 

Stoxx 600 rose 0.4%, powered by the slumping Euroe even as the IBEX 15 once again lagged peers in early European trading, led lower by banking stocks after Spain moved to take full control of Catalonia over the
weekend, while Catalan officials state that they will not follow orders from Madrid and meet Monday to prepare their reply to Rajoy. Elsewhere, major EU bourses have been
oscillating between gains and losses amid quiet newsflow. The biggest losers are Spanish banks, with  BBVA down 1.8%, Sabadell down 1.4%, Bankia down 1.2%, CaixaBank down 1.1%. As Bloomberg notes, Sabadell is down 9% since Catalan referendum on Oct. 1, CaixaBank down 10%, IBEX down 2.1%; Stoxx 600 is up 0.5% over same period.

Concerns about Spain weighed on rates, with the yield on 10-year Treasuries was unchanged at 2.38 percent, after rising to 2.40%, the highest in more than 15 weeks. Germany’s 10-year yield fell two basis points to 0.44 percent, the biggest fall in a week.

London copper traded steady after Chinese authorities reaffirmed that the country’s economy was on track to achieve the official growth target, while a firmer dollar nudged gold down 0.4 percent to $1,275.60 an ounce. Oil prices edged ahead on supply concerns in the Middle East and as the U.S. market showed further signs of tightening while demand in Asia keeps rising. West Texas Intermediate crude declined 0.1 percent to $51.79 a barrel. Gold decreased 0.4 percent to $1,275.31 an ounce, the weakest in more than two weeks.

This week is heavy on potential investor catalysts, from the election in Japan to the boiling Catalonia crisis and very different moves toward autonomy in parts of Italy. Away from politics central banks loom large, with a pivotal European Central Bank meeting due and the possible unveiling of President Donald Trump’s pick for Fed chair. Traders will also be watching U.S. growth data and Trump’s efforts to overhaul America’s tax code. U.K. Prime Minister Theresa May is likely to make a statement to Parliament on Monday on the progress of Brexit talks following the latest European Union summit. The U.S. economy probably expanded at about a 2.5 percent annualized pace in the third quarter, restrained in part by the effects of two hurricanes, economists forecast the government to report on Friday. The European Central Bank holds a policy meeting on Thursday at which it’s expected to announce its stimulus plan for 2018.

It’s the biggest week for earnings, with Amazon.com Inc., Alphabet Inc., Microsoft Corp., Facebook Inc., and Twitter Inc. set to report among tech names; we also get General Motors Co., Ford Motor Co., Volkswagen AG and Boeing Co. headline cars and planes. Fast food giant McDonald’s Corp., Coca-Cola Co. and brewer Heineken NV join European banks including UBS Group AG, Deutsche Bank AG and Barclays Plc. Today, the key names set to report are Kimberly-Clark, Halliburton, State Street Corp, Franklin Financial Services, NBT Bancorp, Majesco. So far in the earnings season, about 17% of S&P 500 companies have reported results. Of them, 76% have posted better-than-expected profits, vs 73% in the third quarter of 2016. In absolute terms, earnings are up 6%, vs analyst forecast for 2.6% growth in profits.

Market Snapshot

  • S&P 500 futures down 0.02% to 2,573.50
  • STOXX Europe 600 up 0.07% to 390.40
  • MSCI Asia up 0.09% to 167.01
  • MSCI Asia ex Japan down 0.2% to 549.58
  • Nikkei up 1.1% to 21,696.65
  • Topix up 0.8% to 1,745.25
  • Hang Seng Index down 0.6% to 28,305.88
  • Shanghai Composite up 0.06% to 3,380.70
  • Sensex up 0.03% to 32,398.63
  • Australia S&P/ASX 200 down 0.2% to 5,893.96
  • Kospi up 0.02% to 2,490.05
  • German 10Y yield fell 1.6 bps to 0.436%
  • Euro down 0.3% to $1.1746
  • Brent Futures unchanged at $57.75/bbl
  • Gold spot down 0.4% to $1,275.42
  • U.S. Dollar Index up 0.2% to 93.92
  • Italian 10Y yield rose 1.3 bps to 1.774%
  • Spanish 10Y yield fell 2.1 bps to 1.642%

Top Overnight News

  • A day after his election victory, PM Abe pledged to seek a broad consensus on revising Japan’s 70-year-old pacifist constitution and reiterated there was no fixed schedule for change
  • President Trump is close to pulling off a tax overhaul and may soon select the next Fed chief
  • U.K.’s PM May seemed disheartened, discouraged during a dinner with EU Commission President Jean-Claude Juncker in Brussels last week; she “begged for help,” telling Juncker of the risk she took when giving up hard Brexit plan and asked for a two-year transition period, Frankfurter Allgemeine Sonntagszeitung reports
  • May’s battle to get her Brexit legislation through Parliament hit a new roadblock as the Labour Party threatened to unite with Tory rebels, eclipsing the small victory she brought home from a summit of European leaders
  • Catalan separatists meet Monday to craft their reply to Prime Minister Rajoy after he announced a barrage of measures to stamp his authority on the rebel region
  • Leaders of two regions in Italy’s wealthy north claimed victory in referendums Sunday to demand more autonomy from the state, in a ballot that could strengthen the anti-immigrant Northern League party ahead of national elections early next year
  • Hedge funds are finding betting on West Texas Intermediate crude more attractive again, with total positioning on the U.S. benchmark increasing to the highest in almost a year
  • Catalan separatists meet Monday to craft their reply to Prime Minister Rajoy after he announced a barrage of measures to stamp his authority on the rebel region
  • The U.S. has been disappointed this year at China’s lack of progress in pursuing market-oriented reforms, said a senior administration official, ratcheting up the pressure on the world’s second-largest economy ahead of Trump’s visit there next month.
  • U.S. President Donald Trump Says Facebook Was on Clinton’s Side
  • Apple Sourced 100% IPhone and IPad Chip Orders to TSMC

The major Asian indices were mixed after the momentum from last Friday’s fresh record levels in the S&P 500, DJIA and Nasdaq Comp gradually dissipated, although Japan remained buoyant after the firm win by PM Abe’s ruling bloc at the snap election. Nikkei 225 (+1.2%) led the region after the ruling coalition gained a supermajority at Sunday’s election, which keeps Abenomics firmly in place and paves the way for possible constitutional changes. In Australia, the ASX 200 (-0.2%) failed to hold onto initial gains and a mixed tone was observed in Chinese markets, in which the Shanghai Comp. (Unch) ignored a significant liquidity operation by the PBoC, while the Hang Seng (-0.7%) underperformed on technical selling after it met resistance around 28,500. Finally, 10yr JGBs were flat with demand dampened amid the heightened risk appetite in Japan and an absence of a BoJ Rinban announcement. Japanese PM Abe’s LDP led ruling coalition won a supermajority at Sunday’s election, as unofficial results showed the ruling bloc is set to win 312 of the 465 seats or over two-thirds of seats in the lower house. Chinese China House Prices YY (Sep) 6.3% (Prev. 8.3%); PBoC injected CNY 110bln via 7-day reverse repos and CNY 90bln via 28-day reverse repos. PBoC set CNY mid-point at 6.6205 (Prev. 6.6092)

Top Asia News

  • Abe Placed to Lead Japan Through 2021 After Big Election Win
  • China Vows No Return for Shuttered Steelmakers as Curbs Hit Home
  • Deripaska’s En+ Group Targets $8.5 Billion Valuation in IPO
  • Toshiba Sees 110 Billion Yen Loss on Tax Impact of Chip Sale
  • Noble Group Warns of Loss Topping $1 Billion as Vitol Buys Unit

In Europe, the IBEX is once again lagging peers in early European trading, after Spain moved to take full control of Catalonia over the weekend, while Catalan officials state that they will not follow orders from Madrid. Elsewhere, major EU  bourses have been oscillating between gains and losses with newsflow on the quieter side. The 10 year German benchmark had been initially firmer amid the latest Spanish-Catalan developments and reports that 2 Italian regions are also keen on gaining more autonomy. Political instability in the region is also underpinning French OATs, as core bonds benefit from a degree of safe-haven positioning and spreads to the periphery re-widen. However, the prime focus and market driver this week will be Thursday’s ECB policy meeting and the much hyped/eagerly awaited QE tapering announcement. Although much of the early morning gains have been pared given the slight move higher in equities.

Top European News

  • Catalan Separatists Plot Response to Spain’s Shock and Awe
  • Italy Real Estate Stocks Rise on Report of Budget Measures
  • Spire Rejects Bid From Holder Mediclinic for Rest of Shares
  • U.K. Car Dealers Skid on Pendragon’s Consumer Confidence Warning
  • Linde Drops Tender Threshold, Extends Deadline for Praxair Deal

In FX, the greenback remains undecisive, as the anticipation of the announcement of the new Fed Chair continues to loom over markets, with reports stating that Powell, Taylor and Yellen are all still in the frame. The DXY trades below 94.00, struggling to find any real direction, with its major pairs seeing the same subdued, range-bound trade. The headline news over the weekend was Japanese PM Abe winning the supermajority, as flows flooded into the Asian stock market, with risk flow causing some selling in JPY. USD/JPY gapped higher, briefly spiking through 114.00. GBP grinded higher throughout the Asian session, however did later run into resistance at around 1.3228 (last Thursday’s high) In turn, GBP tripped through 1.32 to move to a low of 1.3164. Risks continue to remain to the downside with the outcome of Brexit still very much unknown.

In commodities, WTI and Brent crude futures slightly firmer with prices aided by another drop in the Baker Hughes rig count, showing a 3rd straight weekly loss. Gold decreased 0.4 percent to $1,275.31 an ounce, the weakest in more than two weeks.

It is a fairly light start to the week for data with mostly second tier releases including China property prices data for September, Eurozone consumer confidence for October and UK CBI business optimism and total orders data for October. Perhaps the most significant event will be a likely statement from UK PM Theresa May to Parliament on the progress of Brexit talks following the EU summit.

US Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, est. -0.1, prior -0.3

DB’s Jim Reid concludes the overnight wrap

The main event of the week is undoubtedly Thursday’s ECB
blockbuster meeting where DB currently expect a cut in purchase at the start
of 2018 from EU60bn per month to EU30bn and for this to be confirmed for
9 months. The consensus seems to have migrated lower towards EU25-30bn
over the last month and from a 6 to a 9 month extension. However with
reinvestments expected to be EU15bn per month on average next year, this could
yet lead to a number at the lower end of expectations if the ECB focus on this.
Our rates strategists think an explicit mention of gross purchases from the ECB
could be quite hawkish as it would acknowledge the reinvestment issue that
would naturally keep policy looser if they recycled all proceeds.

Another hawkish signal could be mention of an explicit end date for purchases
but this is not expected at the moment. Nevertheless our strategists think the
current market pricing of the first rate hike being pushed back to early 2020 is
too far. They think it’s more likely to be between Q2 and Q3 2019. Elsewhere for
credit investors it’s unlikely they’ll explicitly mention the specifics of the CSPP/
PSPP split but we think there’s a good chance that when the data comes through
in early 2018 it will show no or limited CSPP tapering relatively to PSPP.

The one thing about highlighting this as a blockbuster meeting is how much is
already priced in? We’ve had a number of credible yet unconfirmed press stories of late detailing quite specific behind closed doors ECB discussions. So a lot has
been flagged and we may have to have a deviation from the above (e.g. an end
date to purchases or rolling in reinvestments to the tapered amount) to make
a big impact.

Also in terms of the impact on rates, the US seems to be a bigger swing factor of
late. Bond yields seemed to have gone up and down like a yo-yo since Warsh’s
name was first seriously mentioned with regards to being Fed Chief c.3 weeks
ago. The range has been less than 20bps for 10 years over this period but Warsh
and averagely hourly earnings sent them first higher, before CPI then sent them
lower before serious mention of Taylor last week and the passing of a budget at
the Senate late on Thursday night sent them back towards the top of the recent
range as we ended last week. Indeed Friday saw core 10y bond yields from
around the globe jump by 5-7bps (UST: +6.6bp; Bunds +5.7bp; Gilts +5.3bp)
while changes at the 2y part of the curve were more modest at c2-5bp (UST:
+4.6bp; Bunds +1.5bp; Gilts +2.2bp). 10yr USTs have consolidated for now and
kicked off the week fairly flat in the Asian session.

Turning to the weekend news now. In Spain, tensions have increased. At a press
conference on Saturday, Spanish PM Rajoy formally invoked the Constitutional
power from Article 155 and outlined a range of measures to retake control of
the region, including: i) seeking to dismiss Catalan President Puigdemont and
his cabinet, ii) dissolving the Catalan parliament with plans to call new regional
elections within 6 months, and iii) assume control of the regional police force and
publicly funded media outlets. PM Rajoy noted “no government in no democratic
country can accept that the law is ignored”. In response, Puidgemont said “the
Catalan institutions and the Catalan people can’t accept this attack” and El
Confidencial reported that Party leaders in the Catalan Parliament are scheduled
to meet today to discuss next steps, with suggestions that Puidgement is
considering a formal declaration of independence with calls for an election this
week. On the other side, the proposed measures by PM Rajoy requires approval
from the Spanish Senate, which is expected to meet this Thursday afternoon
with voting on the final measures on Friday (10am local time).

For those who missed it, DB’s European economists considered to what extent
tensions around the situation in Catalonia could weigh on Spanish growth
and confidence. While their conclusions were fairly benign absent a serious
escalation, they find it prudent to consider the relevant risk channels and
vulnerabilities were the current situation to weigh on Spanish growth or investor

Over in Japan’s general election, according to NHK tallies on Monday morning,
PM Abe and his coalition partner have achieved a two third majority win by
securing at least 312 of the 465 seats. The win by PM Abe is broadly in line
with polls in the lead up to the election and could lead to a continuation of
accommodative monetary policy along with potential changes towards higher
sales tax and the approval of gambling resorts. This morning in Asia, markets
are trading a bit mixed, with the Nikkei leading the gains, up 0.93%, but the ASX
200 (-0.01%), Kospi (-0.03%) and Hang Seng (-0.65%) are down slightly as we
type with the HK market impacted by weakness in property developer stocks as
recent data showed home prices fell last month in cities including Beijing (-0.6%
mom) and Shanghai. Elsewhere, the JPYUSD has weakened 0.19%.

Across the pond, President Trump has signalled Ms Yellen is still in the race
for the next Fed Chair, noting “most people are saying it’s down to two (Taylor
& Powell). I also met with Janet Yellen…I really like her a lot”, so “I have three
people that I’m looking at” and “I will make my decision very shortly”. Earlier
on Friday, Bloomberg reported VP Mike Pence and Treasury Secretary Munchin
were advocating Taylor and Powell to Mr Trump. Elsewhere, Ms Yellen defended
the use of QE noting “the US economy is much stronger today than it would have
been without the unconventional monetary policy tools deployed by the Fed…”

We should get the announcement by the end of next week on the Fed Chair
appointment. Back to this week, the other main highlights are the first look at
Q3 GDP for the UK (Wednesday) and US (Friday), while the flash global PMIs
for October tomorrow will also be closely watched as ever. Brexit will never be
too far from the spotlight while in China the CPC wraps up and in Germany the
Bundestag will convene for the inaugural session following the election. Earnings
season ramps with 186 S&P 500 companies due to report, including some of the
tech heavyweights, and 107 Stoxx 600 companies. For the full week ahead and
easy to read cutout of all events see our new “Next Week… This Week” document
published every Friday. The week ahead at the end has the main text from it.

Quickly recapping markets performance from last Friday. US bourses
strengthened to new record highs with the S&P (+0.51%), Dow (+0.71%) and
Nasdaq (+0.36%) all up modestly. Within the S&P, gains were led by financials
(+1.16%) and industrials, with only real estate and consumers staples stocks
mildly in the red. The latter was impacted by Procter & Gamble which fell 3.65%
post result. European markets were broadly higher, but little changed with Stoxx
600 (+0.26%), DAX (+0.01%) and FTSE (flat) up slightly.
Turning to currencies, the US dollar index gained 0.47% following the approval
of the US FY18 budget resolution, while the Euro fell 0.57% but Sterling gained
0.24%. In commodities, WTI oil rose 0.64%, while precious metals (Gold -0.75%;
Silver -1.3%) and other base metals trended slightly lower (Copper -0.53%; Zinc
-0.43%; Aluminium -0.46%).

Turning to currencies, the US dollar index gained 0.47% following the approval
of the US FY18 budget resolution, while the Euro fell 0.57% but Sterling gained
0.24%. In commodities, WTI oil rose 0.64%, while precious metals (Gold -0.75%;
Silver -1.3%) and other base metals trended slightly lower (Copper -0.53%; Zinc
-0.43%; Aluminium -0.46%).

Away from the markets and onto the US tax reforms where Republicans were
reasonably upbeat on the various weekend talk shows. The Director of White
House’s office of Management and Budget (Mick Mulvaney) said approving
the tax bill “by December is realistic” and that economic growth “…ought to
be growing about 3% a year”. Elsewhere, Senate Majority leader McConnell
signalled the tax cuts may not add to the federal budget deficit, noting “….that’s a
rather conservative estimate of how much growth you’ll get out of this pro-growth
tax reform”, although refrained from discussing the details of the tax plan as “it’s
going to be hashed out in the open.” Looking ahead, the tax writing committee
plans to release draft legislations by early November for further debate.

Back onto Brexit, ahead of PM May’s statement on the progress of Brexit. UK’s
shadow Foreign Secretary Thornberry noted on Sunday that a no-deal Brexit “is
a serious threat to Britain”. That said, UK’s International trade secretary Fox
was more circumspect, noting that “if we have no deal and we trade on current
WTO terms”, which is similar to how the EU trades with the rest of the world on
most cases, then “it’s not exactly a nightmare scenario”, although conceded
that “I would prefer to have a deal, because it would bring greater certainty”.
Elsewhere, Communities Secretary Javid signalled more fiscal spending may
be possible, noting “we can sensibly borrow more to invest in the infrastructure that leads to more housing” and that while deficit is important, “investing for
the future, taking advantage of low interest rates, can be the right thing if done
sensibly….”. It seems to us the momentum is pointing towards more fiscal policy
across the world at the moment.

Onto macro data from last Friday which was relatively sparse. In the US, the
September existing home sales was slightly above consensus at 5.39m (vs.
5.3m expected) along with the monthly budget statement at $8bln (vs. $6bln
expected). Note that our US economists’ bottom-up tally of 3Q inflation-adjusted
output points to less of a drag on the economy from hurricane-related disruptions
than originally anticipated. Hence, they have revised up their 3Q real GDP
growth forecast by 70bp to 2.7% versus consensus of 2.5%. In Canada, the
September CPI was slightly lower than expected at 0.2% mom (vs. 0.3% expected)
and 1.6% yoy (vs. 1.7% expected).

In Germany, September PPI was higher than expected at 0.3% mom (vs. 0.1%
expected) and 3.1% yoy (vs. 2.9% expected). Elsewhere, the Eurozone’s August
current account balance was $33.3bln, slightly higher than last month after it
was revised higher by c6bln to $31.5bln. In the UK, September public and private
sector net borrowing were both modestly lower than expected at 5.3bln (vs.
5.7bln expected) and at 5.9bln (vs. 6.5bln expected) respectively, however, after
adjusting for prior downward revisions of c1bn, this month’s underlying reading
was more in line with consensus.

It is a fairly light start to the week for data with mostly second tier
releases including China property prices data for September, Eurozone consumer
confidence for October and UK CBI business optimism and total orders data for
October. Perhaps the most significant event will be a likely statement from UK
PM Theresa May to Parliament on the progress of Brexit talks following the EU


7 Thoughts On Blockchain, Cryptocurrency, & Decentralization After Another Three Months Down The Rabbit Hole

Authored by Lou Kerner via HackerNoon.com,

Everyone’s ADD, including me. I get attracted by shiny objects. I first noticed Bitcoin as a shiny object in mid-2013. I went down the rabbit hole far enough for The Wall Street Journal to call me “Wall Street’s Bitcoin expert” while they live blogged a Bitcoin conference call I hosted. I invested in ChangeTip. I bought and sold BitcoinWallet.com. Unfortunately, by late-2014, nine months in to a severe Bitcoin price decline, my focus wandered to new shiny objects.

Fast forward to 2017, and my mind wandered to a new shiny object, ICOs. Once again, I got the four smartest people I could find on the topic, and held a conference call on June 29th during which I had my crypto epiphany.

Crypto is now so shiny, so luminous, I can’t divert my eyes. I’m living and breathing crypto 24/7. Reading every thoughtful post I can find. Meeting anyone thoughtful on the topic. Holding more crypto conference calls. And writing and writing on crypto, because that’s the best way to learn.

After 3 months going down the rabbit hole a second time, here’s what I learned…

1. I’m A One Eyed Man In The Land of Other One Eyed People

We’re still so early, that much about what people are saying and writing about crypto is more theory than fact. Lots of people (including me) compare the the crypto bubble to the Internet bubble. But the parallels between the development of crypto and the development Internet are everywhere I look. Take this snippet from Wikipedia’s “History of the Internet’’:

“With so many different network methods, something was needed to unify them. Robert E. Kahn of DARPA and ARPANET recruited Vinton Cerf of Stanford to work with him on the problem. By 1973, they had worked out a fundamental reformulation, where the differences between network protocols were hidden by using a common internetwork protocol…..”

As a non-techie, that sounds exactly like a paragraph I read yesterday on Medium. But an important difference about the evolution of crypto and the evolution of the internet is how public crypto’s early evolution is. There were maybe a few thousand people who cared about what Cerf was doing in the early days of the Internet. So it was done out of the public’s eye. It wasn’t until 1994, 21 years after Cerf’s 1973 solution, that Netscape introduced it’s browser, and most people learned about the internet.

Crypto is evolving in its early days in a public way, so it’s messy, and theoretical, and dense. So if you feel like you don’t really understand crypto, join the crowd. Neither of us would have understood much if we sat in the room with Vint Cerf in 1973.


Another sign that it’s early is that foundational parts of crypto theory like Joel Manegro’s Fat Protocol post , which has been repeated ad infinitum, is being questioned and rethought by Teemu Paivinen, Jake Brukhman and others (h/t Yannick Roux).

2. Bitcoin Is A Confidence Game, Utility Tokens Are Awesome But Legally Challenging, Security Tokens Are Going To Be Huge

The chart below provides a simple way to think about the three types of cryptocurrencies.

On the currency side, while Bitcoin is a crypto leader in payments, it’s rise in it’s value has little to do with the currency applications of Bitcoin, and all to do with it being a store of value. Therefore, Bitcoin is simply a confidence game as are ALL store of values. As with other assets, the higher Bitcoin’s value goes, the more confident investors become, which is another factor driving bubbles. After being used as a store of value for thousands of years, it’s easier to believe in gold as a store of value (hence the rocks have a total market cap/are storing over $7 trillion in value vs. $75 billion for Bitcoin today). I believe Bitcoin will continue to gain share of value storage. I’m a HODLer.

Utility Tokens like Civic which provide a digital good in return for the token (in Civic’s case they provide businesses and individuals the tools to control and protect identities) are an exciting new way to fuel ecosystems. However, in the SAFT White Paper published by Cooley and Protocol Labs last week, a whole section is titled “Pre-functional Utility Token Sales Are More Likely to Pass the Howey Test”, which is another way of saying the SEC is likely to deem them a security. Hence they propose the SAFT as an instrument to address this risk.

The third type of token are Security Tokens, which are similar to shares, as they convey ownership interests. The cool thing about Security Tokens is that they’re liquid (assuming there’s someone who wants to buy them and security laws are addressed), and companies can access a global investor base when raising capital/doing an ICO. While most of the ICOs to date have been Utility Tokens, because of the massive advantages that Security Tokens have over traditional capital raising, I think the total market cap of all security tokens will be much larger than the total market cap of all utility tokens.

3. Blockchain Technology Is Going To Be A Disruptive Force Across Industries

This post in Blockchain Hub gives a great detailed overview of the three types of blockchains? – ?public blockchains (like Bitcoin and Ethereum), federated blockchains (like R3 and EWF), and private blockchains (e.g. platforms like Multichain).

This post by CB Insights highlights 30 industries that blockchain could transform, and the companies leading the disruption.

This TED Talk is the best explanation of why Blockchain is going to change the world (spoiler alert… it’s about trust).

4. DECENTRALIZATION Is Potentially The Most Disruptive Force

Blockchains, cryptocurrencies, together with other smart contracts are enabling Decentralization, which is the REALLY disruptive thing.  The chart below is widely known in crypto. It’s often disparaged as too simplistic to be meaningful, but I find it helpful.

Governments and businesses have largely functioned via centralization. Someone or some organization sits in the middle, making the rules, and taking a toll (either taxes or fees) for providing a function. We can now leverage technology, take out the middleman, and enable highly functional decentralized entities (like bitcoin).

Take life insurance. I believe, in the future, through smart contracts and the blockchain, decentralized structures will provide life insurance, saving buyers of life insurance the $10’s of billions of tolls (sales commissions, profits, …) that insurance companies takes for sitting in the middle.

ICOs are funding a growing list of real-world decentralized companies. Augur is building a decentralized prediction market. PROPS is a decentralized economy for digital video. OpenBazaar is a decentralized peer-to-peer marketplace. Aragon is a decentralized provider of tools to enable more efficient decentralized companies.

Decentralization is the lens through which I now look at everything. It’s the most important thing I’ve learned about over the last three months.

It seems to make sense that, all else being equal, the industries most at risk for disruption from decentralization are where the middlemen charge the highest tolls. Below is a list from Forbes of the 10 industries with the highest net margins in 2016:

Even though investment managers are getting disrupted by ETFs and robo -advisors, they’re still churning out nice margins. Certainly my own industry (venture capital) is at risk:

But I don’t think VCs aren’t going away anytime soon, particularly VCs that focus on crypto and invest in ICOs. In addition, ICO investors see name VCs as a positive signal (e.g. Filecoin). So VCs may be diminished, but the good ones will adapt and innovate.

To learn more about decentralization, read Vitalik’s “The Meaning of Decentralization” which goes in to the the three different dimensions of decentralization:

5. It’s A Bubble….So What

The biggest sign that it’s not a bubble, is that almost everyone says it’s a bubble. By way of background, I’m a VC and former Wall Street equity analyst, and I think it’s a bubble because I see ICOs trading at 50X-100X+ what I think they would be valued at if they were funded by VCs or traded publicly. And history says it’s not different this time. Here’s a great book on the last 800 years of people saying “it’s different” this time to justify lofty valuations.

I say “so what” because I believe in Amara’s Law: We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run. This is part of the reason we get bubbles. We get overexcited about a new technology and we drive up prices beyond any reasonable valuation. Bubble’s go on for years. The internet bubble lasted 5+ years.

But the more important part of Amara’s law is that we underestimate the effect of a technology in the long run. The internet is more impactful, and a greater wealth creator than anyone imagined. The internet brought us $3 trillion of wealth just in FAMGA. What’s the value to be created from crypto, blockchain, and decentralization? Today, the cryptocurrency market cap is around $150 billion. Could that figure go down 78% like the NASDAQ did in the 30 months after it peaked on March 10th, 2000? Sure. And that would be painful. But I’m playing the long game. It was a good strategy with the internet, and it should be a good strategy today with crypto.

6. Governance Is The Biggest Risk To Bitcoin

Regulatory risk is obviously significant on a country-by-country basis, or within the U.S. on a state-by-state basis re all cryptocurrency. We’ve seen what happened in China. Korea and other countries are also clamping down. In the U.S. the SEC DAO Report was a big step forward for ICOs given the incredible amount of detail and guidance the SEC gave in the report, without it being an enforcement action. Crypto’s next on the SEC agenda on October 12th. But at the end of the day, governments are going to do what’s in their best interests.

While there is significant regulatory risk, I believe governance is the greatest risk to Bitcoin and other decentralized entities. Bitcoin is essentially governed by exit (h/t Ari Paul). While there’s a consensus mechanism, if people don’t like the consensus, they have three choices. They can 1)suck it up, 2) they can sell their bitcoins and leave, or 3) they can take the open source code and fork it. Forking comes with both technical risk and community risk. The Segwit2X debate, which could result in a hard fork November 18, is just the latest example of Bitcoin’s risk from governance by exit. The Balkanization of Bitcoin won’t be a good thing for the community.

7. Don’t Hate The Haters. Love The HODL’ers

After Jamie Dimon said “Bitcoin is a fraud”, my Twitter stream was filled with Dimon haters. I read what he said, which brought nothing new to the conversation other than his opinion, and moved on. Maybe Dimon doesn’t even believe what he’s saying. Maybe he’s just talking up his own book. I don’t know, I don’t care, and I won’t spend time defending the industry from haters or dissecting the reasons the haters hate (unless they’re bringing something new to the conversation).

I want to spend my time preaching to the choir. I want to spend my time learning from, helping, and investing in the believers. As an industry, we have a lot of work ahead of us to achieve the massive world-changing potential of blockchain, cryptocurrency, and decentralization. I’m getting to it.


Trump To Recall Up To 1,000 Retired Air Force Pilots In Revised 9/11 Executive Order

In an unexpected development, President Donald Trump has signed an executive order allowing the Air Force to recall up to 1,000 retired pilots to address what the Pentagon has decribed as "an acute shortage of pilots," Fox News reported.

The order, which Trump signed Friday, amends an emergency declaration signed by George W. Bush in the days after the Sept. 11, 2001 terror attacks. The Air Force is only allowed to recall up to 25 pilots under current law. The order signed by Trump temporarily removes that cap for all branches of the military.

A Pentagon spokesman, Navy Cmdr. Gary Ross, said in a statement that the Air Force is currently "short approximately 1,500 pilots of its requirements." That number includes approximately 1,200 fighter pilots.

"We anticipate that the Secretary of Defense will delegate the authority to the Secretary of the Air Force to recall up to 1,000 retired pilots for up to 3 years," Ross said.


"The pilot supply shortage is a national level challenge that could have adverse effects on all aspects of both the government and commercial aviation sectors for years to come."

Currently, the Air Force has no plans to take advantage of the recall.

“The Air Force does not currently intend to recall retired pilots to address the pilot shortage. We appreciate the authorities and flexibility delegated to us,” Ann Stefanek, an Air Force spokeswoman, told Fox News.

Now, the question is, will the order inspire some retired pilots to come out of retirement voluntarily, like this guy.

Read the full text of the order below:

By the authority vested in me as President by the Constitution and the laws of the United States of America, including the National Emergencies Act (50 U.S.C. 1601 et seq.), and in furtherance of the objectives of Proclamation 7463 of September 14, 2001 (Declaration of National Emergency by Reason of Certain Terrorist Attacks), which declared a national emergency by reason of the terrorist attacks of September 11, 2001, in New York and Pennsylvania and against the Pentagon, and the continuing and immediate threat of further attacks on the United States, and in order to provide the Secretary of Defense additional authority to manage personnel requirements in a manner consistent with the authorization provided in Executive Order 13223 of September 14, 2001 (Ordering the Ready Reserve of the Armed Forces to Active Duty and Delegating Certain Authorities to the Secretary of Defense and the Secretary of Transportation), it is hereby ordered as follows:

Section 1. Amendment to Executive Order 13223. Section 1 of Executive Order 13223 is amended by adding at the end: "The authorities available for use during a national emergency under sections 688 and 690 of title 10, United States Code, are also invoked and made available, according to their terms, to the Secretary concerned, subject in the case of the Secretaries of the Army, Navy, and Air Force, to the direction of the Secretary of Defense."

Sec. 2. General Provisions. (a) Nothing in this order shall be construed to impair or otherwise affect:

the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b) This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c) This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.


Air Force To Recall Up To 1,000 Retired Military Pilots After Trump Unexpectedly Revises Sept 11 Executive Order

In an unexpected development, President Donald Trump has signed an executive order allowing the Air Force to recall up to 1,000 retired pilots to address what the Pentagon has decribed as "an acute shortage of pilots," Fox News reported.

The order, which Trump signed Friday, amends an emergency declaration signed by George W. Bush in the days after the Sept. 11, 2001 terror attacks. The Air Force is only allowed to recall up to 25 pilots under current law. The order signed by Trump temporarily removes that cap for all branches of the military.

A Pentagon spokesman, Navy Cmdr. Gary Ross, said in a statement that the Air Force is currently "short approximately 1,500 pilots of its requirements." That number includes approximately 1,200 fighter pilots.

"We anticipate that the Secretary of Defense will delegate the authority to the Secretary of the Air Force to recall up to 1,000 retired pilots for up to 3 years," Ross said.


"The pilot supply shortage is a national level challenge that could have adverse effects on all aspects of both the government and commercial aviation sectors for years to come."

Currently, the Air Force has no plans to take advantage of the recall.

“The Air Force does not currently intend to recall retired pilots to address the pilot shortage. We appreciate the authorities and flexibility delegated to us,” Ann Stefanek, an Air Force spokeswoman, told Fox News.

Now, the question is, will the order inspire some retired pilots to come out of retirement voluntarily, like this guy.

Read the full text of the order below:

By the authority vested in me as President by the Constitution and the laws of the United States of America, including the National Emergencies Act (50 U.S.C. 1601 et seq.), and in furtherance of the objectives of Proclamation 7463 of September 14, 2001 (Declaration of National Emergency by Reason of Certain Terrorist Attacks), which declared a national emergency by reason of the terrorist attacks of September 11, 2001, in New York and Pennsylvania and against the Pentagon, and the continuing and immediate threat of further attacks on the United States, and in order to provide the Secretary of Defense additional authority to manage personnel requirements in a manner consistent with the authorization provided in Executive Order 13223 of September 14, 2001 (Ordering the Ready Reserve of the Armed Forces to Active Duty and Delegating Certain Authorities to the Secretary of Defense and the Secretary of Transportation), it is hereby ordered as follows:

Section 1. Amendment to Executive Order 13223. Section 1 of Executive Order 13223 is amended by adding at the end: "The authorities available for use during a national emergency under sections 688 and 690 of title 10, United States Code, are also invoked and made available, according to their terms, to the Secretary concerned, subject in the case of the Secretaries of the Army, Navy, and Air Force, to the direction of the Secretary of Defense."

Sec. 2. General Provisions. (a) Nothing in this order shall be construed to impair or otherwise affect:

the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b) This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c) This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.


In The Shadows Of Black Monday – “Volatility Isn’t Broken… The Market Is”

Authored by Christopher Cole via Artemis Capital Management,

Volatility and the Alchemy of Risk

The Ouroboros, a Greek word meaning ‘tail devourer’, is the ancient symbol of a snake consuming its own body in perfect symmetry. The imagery of the Ouroboros evokes the infinite nature of creation from destruction. The sign appears across cultures and is an important icon in the esoteric tradition of Alchemy. Egyptian mystics first derived the symbol from a realphenomenon in nature. In extreme heat a snake,unable to self-regulateitsbody temperature,will experience an out-of-control spike in its metabolism. In a state of mania, the snake is unable to differentiate its own tail from its prey,and will attack itself, self-cannibalizing until it perishes. In nature and markets, when randomness self-organizes into too perfect symmetry, order becomes the source of chaos.

The Ouroboros is a metaphor for the financial alchemy driving the modern Bear Market in Fear. Volatility across asset classes is at multi-generational lows. A dangerous feedback loop now exists between ultra-low interest rates, debt expansion, asset volatility, and financial engineering that allocates risk based on that volatility. In this self-reflexive loop volatility can reinforce itself both lower and higher. In a market where stocks and bonds are both overvalued, financial alchemy is the only way to feed our global hunger for yield, until it kills the very system it is nourishing.

The Global Short Volatility trade now represents an estimated $2+ trillion in financial engineering strategies that simultaneously exert influence over, and are influenced by, stock market volatility. We broadly define the short volatility trade as any financial strategy that relies on the assumption of market stability to generate returns, while using volatility itself as an input for risk taking. Many popular institutional investment strategies, even if they are not explicitly shorting derivatives, generate excess returns from the same implicit risk factors as a portfolio of short optionality, and contain hidden fragility.  

Volatility is now an input for risk taking and the source of excess returns in the absence of value. Lower volatility is feeding into even lower volatility, in a self-perpetuating cycle, pushing variance to the zero bound. To the uninitiated this appears to be a magical formula to transmute ether into gold… volatility into riches… however financial alchemy is deceptive. Like a snake blind to the fact it is devouring its own body, the same factors that appear stabilizing can reverse into chaos. The danger is that the multi-trillion-dollar short volatility trade, in all its forms, will contribute to a violent feedback loop of higher volatility resulting in a hyper-crash. At that point the snake will die and there is no theoretical limit to how high volatility could go.

Thirty years ago to the day we experienced that moment. On October 19th, 1987 markets around the world crashed at record speed, including a -20% loss in the S&P 500 Index, and a spike to over 150% in volatility. Many forget that Black Monday occurred during a booming stock market, economic expansion, and rising interest rates. In retrospect, we blame portfolio insurance for creating a feedback loop that amplified losses. In this paper we will argue that rising inflation was the spark that ignited 1987 fire, while computer trading served as explosive nitroglycerin that amplified a normal fire into a cataclysmic conflagration. The multi-trillion-dollar short volatility trade, broadly defined in all its forms, can play a similar role today if inflation forces central banks to raise rates into any financial stress. Black Monday was the first modern crash driven by machine feedback loops, and it will not be the last.

A reflexivity demon is now stalking modern markets in the shadows of a false peace… and could emerge violently given a rise in interest rates. Non-linearity and feedback loops are difficult for the human mind to conceptualize and price. The markets are not correctly assessing the probability that volatility reaches new all-time lows in the short term (VIX<9), and new all-time highs in the long-term (VIX>80). Risk alone does not define consequences. A person can engage in highly risky behavior and survive, and alternatively a low risk activity can result in horrible outcomes. Those who defend and profit from the short volatility trade in its various forms ignore this fact.  Do not mistake outcomes for control… remember, There is no such thing as control… there are only probabilities.

The Great Snake of Risk

A short volatility risk derives small incremental gains on the assumption of stability in exchange for a substantial loss in the event of change. When volatility itself serves as a proxy to size this risk, stability reinforces itself until it becomes a source of instability. The investment ecosystem has effectively self-organized into one giant short volatility trade, a snake eating its own tail, nourishing itself from its own destruction. It may only take a rapid and unexpected increase in rates, or geopolitical shock, for the cycle to unwind violently. It is not wise to expect that central banks will save financial markets if inflation begins to rise.

At the head of the Great Snake of Risk is unprecedented monetary policy. Since 2009 Global Central Banks have pumped in $15 trillion in stimulus creating an imbalance in the investment demand for and supply of quality assets. Long term government bond yields are now the lowest levels in the history of human civilization dating back to 1285. As of this summer there was $9.5 trillion worth of negative yielding debt globally. Last month Austria issued a 100-year bond with a coupon of only 2.1%(6) that will lose close to half its value if interest rates rise 1% or more. The global demand for yield is now unmatched in human history. None of this makes sense outside a framework of financial repression. 

Amid this mania for investment, the stock market has begun self-cannibalizing… literally. Since 2009, US companies have spent a record $3.8 trillion on share buy-backs(7) financed by historic levels of debt issuance. Share buybacks are a form of financial alchemy that uses balance sheet leverage to reduce liquidity generating the illusion of growth. A shocking +40% of the earning-per-share growth and +30% of the stock market gains since 2009 are from share buy-backs. Absent this financial engineering we would already be in an earnings recession. Any strategy that systematically buys declines in markets is mathematically shorting volatility. To this effect, the trillions of dollars spent on share buybacks are equivalent to a giant short volatility position that enhances mean reversion. Every decline in markets is aggressively bought by the market itself, further lowing volatility. Stock price valuations are now at levels which in the past have preceded depressions including 1928, 1999, and 2007. The role of active investors is to find value, but when all asset classes are overvalued, the only way to survive is by using financial engineering to short volatility in some form.

Volatility as an asset class, both explicitly and implicitly, has been commoditized via financial engineering as an alternative form of yield. Most people think volatility is just about options, however many investment strategies create the profile of a short option via financial engineering. A long dated short option position receives an upfront yield for exposure to being short volatility, gamma, interest rates, and correlations. Many popular institutional investment strategies bear many, if not all, of these risks even if they are not explicitly shorting options. The short volatility trade, broadly defined in all its forms, includes up to $60 billion in strategies that are Explicitly short volatility by directly selling optionality, and a much larger $1.42 trillion of strategies that are Implicitly short volatility by replicating the exposures of a portfolio that is short optionality. Lower volatility begets lower volatility, rewarding strategies that systematically bet on market stability so they can make even bigger bets on that stability. Investors assume increasingly higher levels of risk betting on the status quo for yields that look attractive only in comparison to bad alternatives. The active investor that does his or her job by hedging risks underperforms the market. Responsible investors are driven out of business by reckless actors. In effect, the entire market converges to what professional option traders call a ‘naked short straddle’… a structure dangerously exposed to fragility.

Volatility is now at multi-generational lows…

Volatility is now the only undervalued asset class in the world. Equity and fixed income volatility are now at the lowest levels in financial history. The realized volatility of the S&P 500 Index collapsed to all-time lows in October 2017. The VIX index also touched new lows around the same time. Fixed income implied volatility fell to the lowest level in its 30year history this past summer. The forward variance swap on the S&P 500 index is now priced lower than the long-term average volatility of the market. In theory, volatility has nowhere to go but up, but lacks a catalyst given the easy credit conditions, low rates, and excess supply of investment capital.

Whenever volatility reaches a new low the financial media runs the same cliched story over and over with the following narrative 1) Volatility is low; 2) Investors are complacent; 3) Insert manager quote saying “this is the calm before the storm”. Low volatility does not predict higher volatility over shorter periods, in fact empirically the opposite has been true. Volatility tends to cluster in high and low regimes. 

Volatility isn’t broken, the market is…

…the real story of this market is not the level of volatility, but rather its highly unusual behavior. Volatility, both implied and realized, is mean reverting at the greatest level in the history of equity markets. Any short term jump in volatility mean reverts lower at unusual speed, as evidenced by volatility collapses after the June 2016 Brexit vote and November 2016 Trump US election victory. Volatility clustering month-to-month reached 90-year lows in the three years ending in 2015.

Implied volatility has also been usually reactive to the upside and downside. In 2017, the VIX index has been 3-4x more sensitive to movements in the market compared to the similar low-volatility regime of the mid-2000s and the mid-1990s (see red line in right chart).

What is causing this bizarre behavior? To find the truth we must challenge our perception of the problem… What we think we know about volatility is all wrong. Modern portfolio theory conceives volatility as an external measurement of the intrinsic risk of an asset. This highly flawed concept, widely taught in MBA and financial engineering programs, perceives volatility as an exogenous measurement of risk, ignoring its role as both a source of excess returns, and a direct influencer on risk itself. To this extent, portfolio theory evaluates volatility the same way a sports commentator sees hits, strikeouts, or shots on goal. Namely, a statistic measuring the past outcomes of a game to keep score, but existing externally from the game. The problem is volatility isn’t just keeping score, but is massively affecting the outcome of the game itself in real time. Volatility is now a player on the field. This critical mis-understanding of the role of volatility modern markets is a source of great self-reflexive risk. 

Today trillions of dollars in central bank stimulus, share buybacks, and systematic strategies are based on market volatility as a key decision metric for leverage. Central banks are now actively using volatility as an input for their decisions, and market algorithms are then self-organizing around the expectation of that input. The majority of active management strategies rely on some form of volatility for excess returns and to make leverage decisions. When volatility is no longer a measurement of risk, but rather the key input for risk taking, we enter a self-reflexive feedback loop. Low volatility reinforces lower volatility…  but any shock to the system will cause high volatility to reinforce higher volatility.

Self-Cannibalization of the Market via Share buybacks

The stock market is consuming itself…literally. Since 2009, US companies have spent over $3.8 trillion on what is effectively one giant leveraged short volatility position. Share buybacks in the current market have already surpassed previous highs reached before the 2008.

Rather than investing to increase earnings, managers simply issue debt at low rates to reduce the shares outstanding, artificially boosting earnings-per-share by increasing balance sheet risk, thereby increasing stock prices.

In 2015 and 2016 companies spent more than their entire annual operating earnings on share buybacks and dividends. Artemis isolated the impact of the share buyback phenomenon on earnings, asset prices, and valuations since 2009 and the numbers are staggering.

The later stages of the 2009-2017 bull market are a valuation illusion built on share buyback alchemy. Absent this accounting trick the S&P 500 index would already be in an earnings recession. Share buybacks have accounted for +40% of the total earning-per-share growth since 2009, and an astounding +72% of the earnings growth since 2012. Without share buybacks earnings-per-share would have grown just +7% since 2012, compared to +24%. Since 2009, an estimated +30% of the stock market gains are attributable to share buybacks. Without share buybacks the S&P 500 index would currently trade at an expensive 27x earnings. Not surprisingly, a recent study found a positive relationship between insider equity sales and share repurchases, supporting the idea that buybacks are more about managerial self-interest than shareholder value.

Share buybacks financed by debt issuance are a valuation magic trick. The technique optically reduces the price-to-earnings multiple (Market Value per Share/Earnings per Share) because the denominator doesn’t adjust for the reduced share count. The buyback phenomenon explains why the stock market can look fairly valued by the popular price-to-earnings ratio, while appearing dramatically overvalued by other metrics.  Valuation metrics less manipulated by share buybacks (EV/EBITDA, P/S, P/B, Cyclically Adjusted P/E) are at highs achieved before market crashes in 1928, 2000, and 2007. Buybacks also remove liquidity. Free float shares and trading volume in the S&P 500 index have collapsed to levels last seen in the late-1990s, despite stock prices more than doubling.

Share buybacks are a major contributor to the low volatility regime because a large price insensitive buyer is always ready to purchase the market on weakness.

The key periods are the two to three weeks during and after earnings announcements, when the SEC mandated share buyback blackout period officially ends. The largest equity drawdowns of the past few years (August 2015 and January-Feb 2016) both occurred during the share buyback blackout period. Both times the market rallied to make back all losses when the buyback restriction period expired. The S&P 500 index demonstrates an unusual multi-modal probability distribution during years with high buyback activity. The market flips between a positively or negatively skewed return distribution based on whether the regulatory share repurchase blackout period is in effect. In addition, 6 of the top 10 multi-day VIX declines in history, all 4+ sigma events, have occurred during heavy share buyback periods between 2015 and 2016. Share buybacks result in lower volatility, lower liquidity, which in turn incentivizes more share buybacks, further incentivizing passive and systematic strategies that are short volatility in all their forms. Like a snake eating its own tail, the market cannot rely on share buybacks indefinitely to nourish the illusion of growth. Rising corporate debt levels (see below) and higher interest rates are a catalyst for slowing down the $500-800 billion in annual share buybacks artificially supporting markets and suppressing volatility.

Global Short Volatility Trade

The short volatility trade is any strategy that derives small incremental gains on the assumption of stability in exchange for substantial loss in the event of change, whereby volatility is a critical input to the allocation of risk. Short volatility can be executed explicitly with options, or implicitly via financial engineering. To understand this concept, it is helpful to decompose the key risks. The investor holding a portfolio of hedged short options receives an upfront premium, or yield, in exchange for a non-linear risk profile to four key exposures 1) Rising Volatility; 2) Gamma or Jump Risk; 3) Rising Interest Rates; 4) Unstable Cross-Asset Correlations. Many institutional strategies derive excess returns by implicitly shorting those exact same risk factors despite never trading an option or VIX future.  As of 2017, there is an estimated $1.12 to 1.5 trillion USD(2) of active short volatility exposure in domestic equity markets.

In this paper we will focus on short volatility in US equity markets, however the short volatility trade, in all its forms, is widely practiced across all major asset classes. In world of ultra-low interest rates shorting volatility has become an alternative to fixed income. For the first time in history the yield earned on an explicit short volatility position is competitive with a wide array of sovereign and corporate debt (see below).

Explicit Short Volatility are strategies that literally sell options to generate yield from asset price stability or falling stock market variance. The category includes everything from popular short volatility exchange-traded-products to call and put writing programs employed by pension funds. Despite the headlines, this is the smallest portion of the short volatility trade. Explicit short volatility contains upward of only $60 billion in assets, including $45 billion in short volatility pension put and call writing strategies, $8 billion in short volatility overwriting funds, $2 billion in short volatility exchange traded products, and another $3 billion in speculative VIX shorts.  Explicit short volatility strategies are active in the short term, fading short and intermediate volatility spikes. Volatility spikes that mean revert quickly help the performance of these strategies (August 2015). Explicit short volatility is most harmed by an extended period of high volatility that fails to mean revert, such as in 1928 or 2008, or a super-normal volatility spikes such as the Black Monday 1987 crash.

Implicit Short Volatility are strategies that, although not directly selling options, use financial engineering to generate excess returns by exposure to the same risk factors as a short option portfolio. Many investors, and even practitioners, are ignorant or in denial that they are holding a synthetic short option in their portfolio. In current markets, there is an estimated $1.12 to $1.42 trillion in implicit short volatility exposure, including between $400 billion in volatility control funds, $400 to $600 billion in risk parity, $70-175 billion from long equity trend following strategies, and $250 billion in risk premia strategies. These strategies are similar to a short option position because they produce efficient gains most of the time, but are subject to non-linear losses based on variance, gamma, rates, or correlation change. The strategies tend to have longer time horizons for rebalancing than explicit short volatility. In practice, exposure to equities is reduced based on the accumulation of variance over one to three months. 

The next few pages will focus on some of the hidden risks in the short volatility trade, both explicitly and implicitly.

Gamma Risk

Imagine you are balancing a tall ruler vertically on your palm. As the ruler tilts in any one direction, you must to overcompensate in the same direction to keep to the ruler balanced. This is conceptually very similar to a trader hedging an option with high gamma risk. The trader must incrementally sell (or buy) more of the underlying at a non-linear pace to rehedge price fluctuations.

A short gamma risk profile is not unique to option selling, and is a hidden component of many institutional asset management products. The portfolio insurance strategy credited with causing the 1987 Black Monday Crash is a classic example of a short gamma profile gone awry. When large numbers of market participants are short gamma, implicitly or explicitly, the effect can reinforce price direction into periods of high turbulence. Risk parity, volatility targeting funds, and long equity trend following funds are all forced to de-leverage non-linearly into periods of rising volatility, hence they have synthetic gamma risk. At current risk levels, we estimate as much as $600 billion in selling pressure would emerge from implicit short gamma exposure if the market declined just -10% with higher vol. Many of these strategies rely on accumulation of one to three month realized variance to trigger that de-leveraging process. Hence the short gamma buying and selling pressure operates on a time lag to the market. During the drawdowns in the fall of 2015 and early-2016, share buybacks helped the market rebound quickly minimizing the effect of ‘short-gamma’’ de-leveraging. This further emboldened explicit short volatility traders to continue to fade any volatility spikes.

If the first leg of a crisis is strong enough to sustain a market loss beyond -10%, short-gamma de-leveraging will likely kick-start a second leg down, causing cascading losses for anyone that buys the dip. 

Correlation and Interest Rate Risk

The concept of diversification is the foundation of modern portfolio theory.  Like a wizard, the financial engineer is somehow able to magically reduce the risk of a portfolio by combining anti-correlated assets. The theory failed spectacularly in the 2008 crash when correlations converged. You can never destroy risk, only transmute it. All modern portfolio theory does is transfer price risk into hidden short correlation risk. There is nothing wrong with that, except for the fact it is not what many investors were told, or signed up for.

Correlation risk can be isolated and actively traded via options as source of excess returns. Volatility traders on a dispersion desk will explicitly short correlations by selling the variance of an index and going long the weighted variance of its constituents. When correlations are stable or decreasing, the strategy is very effective, but when correlations behave erratically large losses will occur. The graph to the right shows the collapse of correlations between normal and stressed markets. 

Many popular institutional investment strategies derive excess returns via implicit leveraged short correlation trades with hidden fragility

Risk parity is a popular institutional investment strategy with close to half a trillion dollars in exposure. The strategy allocates risk and leverage based on variance assuming stable correlations. To a volatility trader, risk parity looks like one big dispersion trading desk. The risk parity strategy, decomposed, is actually a portfolio of leveraged short correlation trades (alpha) layered on top of linear price exposure to the underlying assets (beta). The most important correlation relationship is between stocks and bonds. A levered short correlation trade between stocks and bonds has performed exceptionally well over the last two decades including in the last financial crisis. From 2008 to 2009 gains on bonds offset losses in the stock market as yields fell. To achieve a similar benefit in a crisis today, the 10-year Treasury Note would need to collapse to from 2.32% to -0.91%. This is not impossible, but historically there is a much higher probability that bonds and stocks rise or fall together when rates are this low.

The truth about the historical relationship between stocks and bonds over 100+ years is illuminating (please see our 2015 paper “Volatility and the Allegory of the Prisoner’s Dilemma” for more detail). Between 1883 and 2015 stocks and bonds spent more time moving in tandem (30% of the time) than they spent moving opposite one another (11% of the time). Stocks and bonds experienced extended periods of dual losses every 50 years.  It is only during the last two decades of falling rates, accommodative monetary policy, and globalization that we have seen an extraordinary period of anti-correlation emerge. At best the anticorrelation between stocks and bonds may cease to be a source of alpha, and at worst it may the driver of significant reflexive losses. 

Volatility Risk

With interest rates at all-time lows shorting volatility has become an alternative to fixed income for yield starved investors. The phenomenon is not new to Japan. For nearly two decades banks packaged and sold hidden short volatility exposure to Japanese retirees via wealth products called Uridashi. Uridashi notes pay a coupon well above the yield earned on Japanese debt based on knock-out and knock-in levels to the Nikkei index. In 2016 there was an estimated $13.2 billion USD in Uridashi issuance. Now that low rates are global the short volatility trade is expanding to retail investors beyond Japan.  In the US short volatility has emerged as a get-rich-quick scheme for many of these smaller investors. The short VIX exchange traded complex, at approximately $2 billion in listed assets, is the smallest but most wild segment of the global short volatility trade.  In the past you had to be a big Wall Street trading desk (‘Bear Stearns’) or hedge fund (“LTCM”) to blow yourself up shorting volatility. Not anymore. The emergence of listed VIX products democratized the trade. A story in the New York Times details the exploits of an ex-Target manager who made millions shorting a 2x leveraged VIX ETP. Such stories harken back to the dotcom bubble of the late 1990s when day-traders quit their jobs to flip internet stocks before the crash. 

When everyone is on one side of the volatility boat, it is much more likely to tip over. Short and leveraged volatility ETNs contain implied short gamma requiring them to buy (sell) a non-linear amount of VIX futures the more volatility rises (falls). The risk of a complete wipe out in the inverse-VIX complex in a single day is a very real possibility given the wrong shock (as Artemis first warned in 2015). The largest one day move in the VIX index was the +64% jump on February 27, 2007. If a similar move occurred today a liquidity gap would likely emerge.

The chart above estimates the volatility notional required for a +60% shock in the VIX given supply-demand dynamic over the past five years. For a +60% move in VIX we estimate ETPs would be required to buy $138 million in vega notional in the front two contracts alone, equivalent to 142k VIX contracts(12). This is over 100% of the average daily trading volume.  In this event, inverse-VIX products will experience an “unwind event” resulting in major losses for scores of retail investor. Those shorting leveraged VIX products will have unmeasurable losses. The products are a class-action lawsuit waiting to happen.

Shadow Risk in Passive Investing 

Peter Diamandis, the entrepreneur and founder of the X prize, said it best, “If you want to become a billionaire, find a way to help a billion people”. The purpose of efficient markets is to allocate capital to institutions that add the most value. In a market without value, the only thing left to do is to allocate based on liquidity. The massive stimulus provided by central banks resulted in the best risk-adjusted returns for passive investing in over 200 years between 2012 and 2015. Today investors are chasing that historical performance. By the start of 2018, 50% of the assets under management in the US will be passively managed according to Bernstein Research. Since the recession $2 trillion is assets have migrated from active to passive and momentum strategies according to JP Morgan.

Passive investing is now just a momentum play on liquidity.  Large capital flows into stocks occur for no reason other than the fact that they are highly liquid members of an index. All stocks in the index go up and down together, regardless of fundamentals. In effect, the volatility of the entire stock market can become dominated by a small number of companies and correlation relationships. For example, the top 10 stocks in the S&P 500 index, comprising only 2% of index membership, now control upward of 17% of the variance of the entire market. The largest 20 companies, or 4% of companies, are responsible for 24% of the variance.

The shift from active to passive investing is a significant amplifier of future volatility. Active managers serve as a volatility buffer, willing to step in and buy undervalued stocks when the market is falling, and sell overvalued stocks when the market is rising too much. Remove that buffer, and there is no incremental seller to control overvaluation on the way up, and no incremental buyer to stop a crash on the way down.

Shadow Risk in Machine Learning

Let’s pretend you are programmer using artificial intelligence (“AI”) to develop a self-driving car. You “train” the AI algorithm by driving the car thousands of miles through the desert. AI learns much faster than any human, so after a short period, the car able to drive at 120 miles per hour with perfect precision and safety. Now the car is ready for a cross-country trip. The self-driving car works flawlessly, driving with record speed through the city, desert, and flatlands. However, when it reaches the steep and twisting roads of the mountain the car drives right off a cliff and explodes. The fatal flaw is that your driving algorithm has never seen a mountain road. AI is always driving by looking in the rear-view mirror.

Markets are not a closed system. The rules change. As machines trade against machines, self-reflexivity risk is amplified. 90% of the world’s data across history has been generated over the last two years. It is very hard to find quality financial data at actionable time increments going back past 20 or even 10 years. Now what if we give all the available data, most of it extremely recent, to a machine to manage money? The AI machine will optimize to what has worked over that short data set, namely a massively leveraged short volatility trade. For this reason alone, expect at-least one major massive machine learning fund with excellent historical returns to fail spectacularly when the volatility regime shifts… This will be a canary in the coal mine.

Conceptual Mistakes in Shorting Volatility

“I can’t wait for the next crisis because I can sell volatility at even higher levels!” said one institutional asset manager at a conference. This is a commonly held but very dangerous assumption. Many investors compare shorting volatility to selling insurance. The option seller collects an upfront premium with frequent gains but large negative exposure to uncommon events. It is typical to erroneously conclude that selling volatility can never lose money if you keep systematically rolling the trade forward. The flaw in this logic is the assumption risk events are independent and probabilities consistent. In markets this is never the case.

Let’s play a game. You get to bet on a rigged coin with a 99% probability of landing on heads in your favor. If the coin lands on heads, you win +1% of your bankroll, but if it lands on tails, you lose -50%. Do you play? Yes, the game has a positive expected return, and given the law of large numbers you will always succeed if you keep playing. Consider that if the probabilities decrease to a 98% success rate, the game becomes a net loser. Remarkably, a 1% change in probability is the only thing that separates a highly profitable strategy from cataclysmic loss (see the statistics below). Small changes in probabilities have an outsized effect on the profitability of any strategy with small frequent gains and large infrequent losses.

The coin game is similar to a systematic short volatility strategy, except in life you never know which coin, positive or negative, you are betting on at any given time. Worse yet, in self-reflexive markets the probabilities between coin flips become correlated based on outcomes. For each loosing coin flip, the likelihood for another loss increases and vice versa! You start with 99% odds and a positive expected strategy, but after the first loss, the odds reduce to 90%. After two losses in ten, the odds fall to 50%.  It is not the first loss, or leg down in markets that hurts you, but rather the second and third. Systematic short volatility without accounting for shifting probabilities is akin to doubling down at a casino into bad odds. Don’t fool yourself… this is exactly how financial crises develop.

Shorting volatility, in of itself, is not necessarily a bad thing if executed thoughtfully at the right margin of safety. In our 2012 paper “Volatility at World’s End” we correctly argued, against our self-interest, for the overvaluation of portfolio insurance in what we coined a “Bull Market in Fear’ between 2009 and 2012. At the time tail risk hedging was very popular and investors shorting volatility had a high margin of safety.  For the reasons detailed in this paper, we believe the exact opposite today.

Intrinsic Value and Volatility

This past summer the ever-wise Jim Grant of Grant’s Interest Rate Observer asked for my thoughts on the low volatility regime. In the middle of my explanation on the short volatility trade, out of nowhere, Jim says, “What does any of this have to do with intrinsic value?” I was floored… I honestly didn’t know how to answer his question. The truth… the short volatility trade is about the absence of value. In a bull market, when investors can’t find value in traditional assets, they must manufacture yield through financial engineering. In a mania the system begins to devour its own tail.

The difference between risk and outcomes…

Imagine your friend invites you over for dinner. In his dining room is a barrel of highly explosive nitroglycerin.

You: “What is that barrel of explosive nitroglycerin doing in your living room!”


Friend: “Oh that, no big deal.” 


You: “It’s DANGEROUS! That could blow up the entire block!!! Where did you even get that?”


Friend: “Calm down,  the bank pays me good money to store it here, it’s the only way I can afford the mortgage."


You: “WHAT! ARE YOU CRAZY? All it takes is a small fire to set that thing off!”


Friend: “What fire? There is no fire. Look, it’s been here for five years without a problem.”

Risk alone does not guarantee any outcome, it only effects probabilities. The global short volatility trade, in all of its forms, is like a barrel of nitroglycerin sitting in the market portfolio. It may or may not explode. What we do know is that it can potentially amplify a routine fire into an explosion. The real question is what causes the fire?

The death of the snake…

Volatility fires almost always begin in the debt markets. Let’s start with what volatility really is. Volatility is the brother of credit…  and volatility regime shifts are driven by the credit cycle. Volatility is derived from an option on shareholder equity, but equity itself can be thought of as a perpetual option on the future success of a company. When times are good and credit is easy, a company can rely on the extension of cheap debt to support its operations. Cheap credit makes the value of equity less volatile, hence a tightening of credit conditions will lead to higher equity volatility. When credit is easily available and rates are low, volatility remains suppressed, but as credit contracts, volatility rises.

In the short term we do not see the credit stress required for a sustained expansion of volatility, but this can change very quickly. Storm clouds are gathering around 2018-2020, as rising interest rates, rich valuations, and corporate debt roll-overs all converge as potential triggers for higher stress and volatility. The IMF warned that 22% of U.S. corporations are at risk of default if interest rates rise. Median net debt across S&P 500 firms is close to a historic high at over 1.5x earnings, and interest coverage ratios have fallen sharply.  Between 2018-2019 an estimated $134 billion of high yield debt(16) must to be rolled-over, presenting a catalyst for higher volatility in the form of credit stress.

Reflexivity in the Shadow of Black Monday 1987

Thirty years ago, to the day, financial markets around the world crashed with volatility never seen before or equaled again in history. On October 19th, 1987 the Dow Jones Industrial Average fell more than -22%, doubling the worst day from the 1929 crash. $500 billion in market share vaporized overnight. Entire brokerage firms went bankrupt on margin calls as liquidity vanished. It was not a matter of prices falling, there were no prices. You couldn’t exit a position. Trading desks refused to pick up the phone. Black Monday appeared to come out of nowhere as it occurred in the middle of a multi-year bull market. There was no rational reason for the crash.  In retrospect, financial historians blame portfolio insurance, ignoring the role of interest rates, inflation, and the Federal Reserve. The demon of that day still haunts markets, and 30 years later the crash is still not well understood. Black Monday 1987 was the first post-modern hyper-crash driven by machine feedback loops, but it all started in a very traditional way.

Be careful what you wish for… Today every central bank in the world is trying to engineer inflation, but inflation was the hidden source of the 1987 financial crash. At the start of 1987 inflation was at 1.5%, which is lower than it is today! From 1985 and 1986 the Federal Reserve cut interest rates over 300 basis points to off-set a slowdown in growth. That didn’t last for long. Between January and October 1987 inflation violently rose 300 basis points. Nominal rates jumped even higher, as the 10-year US treasury rose 325 basis points from 6.98% in January 1987 to 10.23% by October 2014. The Fed tried to keep pace by raising rates throughout the year but it was not fast enough. The quick increase in inflation was blamed on the weak dollar, falling current account balance, and rising US debt-to-GDP levels. None of this hurt equity markets, as the stock market rose +37% through August 25th, 1987. Then the wheels fell off.

First the fire, then the blast…

In 1987 portfolio insurance was a popular strategy ($60 billion in assets) that involved selling incrementally greater amounts of index futures based on how far the markets fell (see short gamma risk above). The WSJ ran an article on October 12th that warned portfolio insurance “could snowball into a stunning rout for stocks”. Nobody paid attention.

Although equity markets continued to rise into the summer, the credit markets began to suffer from a liquidity squeeze.

The spread between interbank loans and Treasury Bills spiked 100 basis points in the month of September alone, and then rose another 50 basis points in October leading up to the crash. Corporate yields exploded 100 basis points the month leading up to the Black Monday crash, increasing of over 200 basis points since earlier in the year.  By the late summer the equity markets got the memo. Between August 25th and October 16th, the S&P 500 index fell 16.05%. S&P 100 volatility moved from 15 in August to 36.37 on October 16th.  That was just the beginning. 

On Black Monday the market lost one fifth of its value and volatility jumped to all-time highs of 150 (based on VXO index, predecessor to the VIX index). In total, from August to October 1987 the market lost -33% and volatility exploded an incredible +585%.

Black Monday is best understood as a massive explosion that occurred within a traditional fire. Rising inflation started a liquidity fire in credit, that spread to equities, and reached the nitroglycerin of computerized trading before exploding massively. Central bankers were not able to cut rates at the onset of the crisis to stop the fire due to rising inflation. The same set of drivers exist today, but on steroids. Higher rates combined with $1.5 trillion in selfreflexive investment strategies are a combustable mix. It is important to realize that the 1987 Black Monday crash was comparable to any other market sell-off until it wasn’t. The only difference… in 1987 volatility just kept going higher and markets lower. The chart above shows the movement in volatility leading up to crises in 1987, 1998, 2008, 2011, 2015. The point is that if you are a volatility short seller, how do you know whether you will get a 2015 outcome, when markets rallied, or a 1987 outcome? You don’t! In 1987 inflation started the volatility fire, but program trading amplified that fire into a cataclysmic conflagration. The $1.5 trillion short volatility trade, in all its forms, can play a very similar role now if rising inflation causes tighter credit conditions, but also limits central banks from reacting.

Melt-up Risk

Never underestimate the will of global central banks to risk overvaluation in asset prices to achieve inflation.  For this reason, a speculative melt-up in prices on par with the late 1990s dot-com bubble is possible if policy makers support markets perpetually amid low inflation and growth. In fact, one legitimate argument for raising rates is simply so they can lower them before the business cycle turns. High volatility and high equity returns often coincide in the final phases of a speculative market. Very few investors realize that between 1997 and 1999 the stock market experienced both rising volatility and returns at the same time.

For example, during this period the S&P 500 index was up close to +100% but with over five times the volatility we are experiencing today. The recent stock market bubble in China also was an example of high volatility and high returns. Yes, stocks are overvalued, but if rates stay low coupled with dovish monetary policy and supply-side tax reform it could touch a frenzy in speculation. For this reason alone, sitting on the sidelines presents business risk for professional managers.

How does an investor survive the Ouroboros?

The markets are not correctly assessing the probability that volatility reaches new all-time lows in short term (VIX <9 in 2017), and new all-time highs in the long term (VIX > 80 in 2018-2020) 

Reflexivity in both directions is very hard to conceive. Volatility is low and can go lower this year absent any catalyst. Rising interest rates, wage inflation, and credit issuance are very real catalysts in the long-term. Between 2018 and 2020 high yield issuers will re-test markets by rolling over $300 billion in expiring debt.

U.S. average hourly earnings are rising at fastest pace since pre-recession putting pressure on inflation. If these debt-roll overs occur into rising inflation and higher rates this could easily be the fire that sets off the global short volatility explosion. 

If you are going to short volatility, do it with a long-volatility mindset, namely a limited loss profile. Short-dated VIX put options that payoff with the VIX below 10 are currently 5-10 cents. Forward variance out one year is cheap and should be bought into any period of rising interest rates, inflation, or credit stress.

Fixed income volatility is at all-time lows at a time when the Federal Reserve is raising rates

Something must give, inflation or deflation, but you don’t have to be smart enough to know what if you bet on the volatility of fixed income.

Active Long Volatility and Stocks will outperform over the next five years

Long volatility is a bet on change, as opposed to direction. At a time when central banks are removing stimulus, the world has never been more leveraged to the status quo. For this reason, long volatility combined with traditional equity exposure is an effective portfolio for the new regime.  Historically a 50/50 combination of the CBOE Long Volatility Hedge Fund Index and the S&P 500 Index outperformed the average hedge fund by +97% since 2005. The inclusion of long volatility reduced equity drawdowns from -52% to -15% in 2008 while improving risk-adjusted returns. 

The value-add of active long volatility management is to minimize losses in stable markets while making portfolio changing returns in the event of a market crash. The smart long volatility fund can offer protection at a limited or even positive cost of carry.  The combination of active long volatility and equity has historically protected a portfolio from a deflationary crash like 2008, but can also profit if high volatility and high equity returns co-exist in melt-up like 1997-1999.  Long volatility may be your only line of defense if stock and bonds decline together. At this stage in the cycle, you want to position yourself on the other side of the global short volatility trade

*  *  *

Risk cannot be destroyed, it can only be shifted through time and redistributed in form. If you seek total control over risk, you will become its servant.

There is no such thing as control…

there are only probabilities.


The World’s Largest ICO Is Imploding After Just 3 Months

Earlier this summer, Tezos smashed existing sales records in the white-hot IPO market after the company’s pitch to build a better blockchain for cryptocurrencies made it one of the buzziest ICOs in the world. As we noted at the time, the company capitalized on that buzz by courting VC firms and other institutional investors with a $50 million token pre-sale. After the company opened up selling to the broader public, demand soared as investors greedily bought up tokens in spite of glitches that threatened to derail the sale early on. By the end of its weeks-long token sale in July, Tezos had sold more than $230 million.

Now, Tezos is proving that authorities in the US and China were on to something when they decided to crack down on the ICO market, which has become a cesspool of fraud and abuse. To wit, the company's management revealed this week that progress on its vaunted product has stalled as it has struggled to recruit engineering talent, and an acrimonious dispute between several of the company’s leading figures has spilled out into the open.

As WSJ’s Paul Vigna reports, “a battle between the founders of the company and the head of the Swiss foundation they installed to give it more independence has put most trading of Tezos coins on ice, possibly until early next year.”

The shakeup started after Tezos founders Arthur and Kathleen Breitman reported the delays in a blog post published Wednesday. But even more alarming, the pair accused Johann Gevers, the head of a Swiss foundation which oversees their funds, of attempting to overpay himself using the massive pot of investor capital – despite the fact that the company will likely blow through its promised deadline of allocating tokens to buyers by December (the tokens have yet to be created).

In early September we became aware that the president of the Tezos Foundation, Johann Gevers, engaged in an attempt at self-dealing, misrepresenting to the council the value of a bonus he attempted to grant himself. We have been working with the Tezos foundation to resolve the matter and have advocated for his removal from the foundation council. We are confident in the council’s ability to handle this sensitive matter with care and diligence. In the meantime, Johann’s operational role in the foundation has been suspended, pending an investigation by the council’s auditor.

The news sent Tezos futures contracts trading on BitMex, an exchange known for its cryptocurrency futures products, tumbling more than 50% as traders unwound bets the project would be launched before the end of the year, as Bloomberg pointed out.

Tezos’s struggles underscore the biggest flaw in the ICO market: Investors keep throwing capital at companies hoping to luck into the next bitcoin, even though most companies don’t have a working product and many have relied on “white papers” fleshing out their ideas to market their tokens, a strategy that has been surprisingly (or perhaps unsurprisingly) successful. To wit, ICOs have raised more than $3 billion this year according to Bloomberg, far surpassing Pitchbook analysts’ expectations for $1.7 billion by the end of the year.

The ICO was run by the Tezos foundation, which is based in Zug, Switzerland. Most ICOs are built on top of Ethereum’s platform. However, the impact on ether tokens was fleeting, with ether seeing a slight dip before moving higher early Thursday.

Under Swiss law, the Tezos foundation is supposed to be independent of the company that owns the nascent Tezos software. Because of this, the foundation holds all of the funds raised, which have mushroomed to more than $400 million in value because the contributions were made in two cryptocurrencies – bitcoin and ether – which have appreciated sharply in the past few months. But the battle between the Breitmans and the Gevers is threatening to derail the whole project, according to Reuters.

Reuters is also reporting that the Breitmans, who first opened a corporation in Delaware to work on the Tezos code, failed to make certain regulatory disclosures made necessary by Arthur Breitmans’ employment at Morgan Stanley.

Reuters reviewed a copy of a “Tezos Business Plan” from early 2015, which listed Breitman as chief executive. The plan projected that if the company survived 15 years, it would be worth between $2 billion and $20 billion. The budget called for paying Breitman $212,180 in salary by year three. In August 2015, Breitman, who was still working at Morgan Stanley, set up a company in Delaware called Dynamic Ledger Solutions Inc, or DLS, to develop Tezos. He listed himself as chief executive.

The U.S. Financial Industry Regulatory Authority (FINRA) requires registered securities professionals to provide prior written notice to their employer to conduct outside business activities if there is “reasonable expectation of compensation.” According to FINRA records, Breitman was registered and did not report any “other business activities.” Morgan Stanley and FINRA declined to comment.

Reuters also revealed that Tezos exaggerated its progress in its early days, following a seed investment by noted VC and blockchain enthusiast Tim Draper.

In pitching the story to Reuters, John O’Brien, a principal of Strange Brew, had made claims about Tezos’ progress. He wrote: “The applications of Tezos, ranging from derivatives settlement to micro-insurance, are real and recognized by industry giants. Ernst & Young, Deloitte, LexiFi, etc. have adopted Tezos in their development environments and labs.”

On Oct. 3, a spokeswoman for the accounting firm Ernst & Young told Reuters: “The statement is not correct. EY has not adopted Tezos.” A spokesman for Deloitte said Tezos’ code is “one of many technologies we’re considering” with blockchain, but it’s “still early stage and we haven’t used the technology for a client project.”

With the SEC already having filed the first civil charges against a man who launched two ICOs that the agency claims were completely fraudulent. If Tezos were the subject of regulatory action – the company’s founders said they chose to base the project in Switzerland because it didn’t have “too much oversight” – or even if it were to collapse in a heap of broken promises, its collapse has the potential to crash the whole ICO market.

Kathleen Breitman

Then again, given the resilience of other cryptocurrencies, it’s difficult to discern whether Tezos might become the ICO equivalent of Mt. Gox, or whether it will ultimately be remembered as a blip.

At this point, only one thing is certain: Tezos investors who’d hoped to receive their coins by the end of the year are bound to be disappointed.