Market Thoughts for Week of 9/20/21

It seems everyone, including myself, is expecting a deeper pullback in stocks.  Usually, that means the opposite will happen, but sometimes the crowd is right.  It's plenty overdue and there's a lot of good reasons like seasonality, the China issues, Fed tapering, a huge jobs miss in either direction Oct 8th, mean reversion, Fib retracement etc..  If it happens, I'm thinking it will be a dramatic shaking of the leverage tree on the order of about 20% to ES 3640, which is the 38% retracement of the rally off the March lows, and then a V reversal into year end.   

It certainly could fall apart Sunday night, gap down and go, but with stocks you always have to ask yourself: what is the nastiest thing that could happen?  And that would be first a move up above the consolidation over the 50-day to lure in FOMO longs and shake out the shorts into the Fed on Wednesday, then a nasty reversal that sets off the down move and closes the week below where we are now.   It should be noted this could be wishful thinking because I'm currently flat equities hoping for a big down move to buy for a long-term hold.  If for some reason stocks hold up this week, it's probably cancel crash, which would suck because I don't know how anyone buys at this level. 

Daily ES.

Weekly ES.

Weekly Bonds.  Will it be a risk parity meltdown across the board if taper is announced?  Looks pretty head and shouldery in bond land.  The tricky part is if stocks meltdown, bonds could catch a bid, so I'd rather wait on this myself because if the risk parity meltdown happens, it will create a great opportunity to put it on since bonds have no chance of sustaining downside beyond the long-term trend line. 

Weekly Notes are looking like they want to go lower.  

TNX.  From yield perspective, it looks on the verge of a breakout.  1.429 is the level. 

Weekly Dollar.  If this breaks out and closes the week strong, it might test the long-term downtrend line.  You can't deny everything is setting up for tightening, and this seems like the week it's waiting for.  What do you say, Fed?  Gotta pull the bandaid sometime.   

Weekly Gold.  If the dollar jumps, gold likely dumps.  Triple bottoms usually don't last long.

Weekly silver is looking nasty.  I've been thinking for awhile if silver comes all the way to backtest the breakout of the $18/19 level it's a buy, but now that it might actually happen I'm second guessing myself because the metals suffer from so much supply from hedging, and I'd rather buy tech or crypto.  We all know the Fed will never be able to normalize, so maybe silver and gold come down and make a new base to jump from in anticipation of the next time the Fed is forced to capitulate.   

Weekly Apple is looking breakdowney. If everything blows up, I bet it will end during OPEX week in October with a V reversal. 

So here's the thing.  I've forced myself to transform into an equity bull.  And since I no longer put in the necessary screen time for short-term trading, I sent away for the PermaBull kit.  It comes with a Tom Lee poster and Jim Cramer mug.  And a t-shirt that says: I'm with them now (which could be a really bad sign, btw).  I've always loved tech, and while it's overdue for a whacking in the short-term, I look at the world and think it's all going to follow our lead and adopt developed world technology, meaning, globalization has expanded the TAM for tech in ways that aren't even close to saturated. And that's not even counting new tech. As far as I'm concerned the internet bull market from the 90s is still the "general conditions" of the world.  It's still evolving and expanding and penetrating markets.  It popped in 2000 from overzealous buying, popped in 2008 from housing shenanigans, drawdowns in 2018's volmagedon, Covid in 2020, but it's still the same bull market in tech.  

It's easy to fall into too much cynicism or focus too much on the end game problems caused by fiscal and monetary interventionism, but there's so much room for tech to penetrate developing worlds in the meantime, so I'm down with Cathie Wood and Elon Musk.  She's onto all the great new tech themes, and I think Elon and crew are going to figure out FSD.  I do think exponential trends need to be distinguished between physical and digital products, though, and between one company and its sector.  Meaning, physical products are more challenging to scale exponentially due to production limitations, but digital products are not, so Tesla's valuation is very dependent on them solving FSD using only vision and neural nets because that allows them to license their digital intelligence to every car that's made in the future, including a robotaxi network.  It's the digital tech that will scale exponentially.  Without that, it's hard to imagine they can scale their physical cars enough to justify being valued so much more than the rest of the sector. 

The other major limitation for Telsa is potential regulation, but a lot of that is optics.  Every accident of FSD is going to blow up in the media while 10x that many human accidents go unreported, so it's largely a case of public perception.  The future will look back and show an exponential trend of electric vehicles as a sector, but any single manufacturer within that sector is still limited by their production capacity.   

Cathie Wood takes a lot of criticism, but most of that is unfair.  She's investing in hyper growth companies, so the present day numbers are irrelevant.  She's literally the definition of "skating to where the puck is going."  Some people just overvalue the present and undervalue the future.  Michael Burry might be right for about a month, but then he's gonna get smoked. It's kinda like people who focus on Ethereum's present day network numbers and don't see how superior Cardano is in its design, so they can't project into the future and see how they'll surpass Ethereum in every metric.  

I must have spent well over 100 hours studying Cardano. There's not even a close second. They have over 100 peer-reviewed white papers about their design solutions.  They've solved staking without custody or slashing.  They've solved how to keep stake pools from centralizing.  They've solved stable deterministic fees.  They have a self-funding and voting mechanism, so in the future the stakeholders can find the optimal fee to incentivize validating, but not so high that it deters user growth.  They're making it interoperable with other chains, so developers from Ethereum can easily migrate, or be on both.  They're going to broaden the coding languages to those used by the majority of developers in the world outside of crypto.  The hydra rollout will make it nearly infinitely scalable.  And many of the most intelligent people in this space don't get it yet. Cardano could make this easier with a video that contrasts the pros and cons of their design decisions against other cryptos, but they will flip Ethereum within 2 years, Bitcoin within 5 years, and Apple within 10 years.  Hopefully, while they're all going UP.  If you've come to another conclusion, I would suggest spending more time studying what they are doing. 

This next pic is an example of a 24hr period of recent stats. Transaction volume: Cardano 14.9B, Ethereum 9.9B.  Active addresses: Cardano 148k, Ethereum 540k.  Fees: Cardano $14k, Ethereum $33M. 

Here's a link to their design rationale material: Cardano  

BTC Daily - probably needs to take out the recent low and fill out the triangle before going higher (if I'm right about the Bitcoin thesis being wrong, it could take a year or two for the other crypto ecosystems to develop enough for that to become obvious, so I hope in the meantime Bitcoin keeps trending up since the whole space still trades as one). 

ADA Daily.  I'm thinking ADA trades down to possibly double bottom around $2, but crypto is just as nasty as the ES, which means usually structure has to get penetrated to shake the tree before reversals happen.  $2 would be ~50% retracement of the rally from $1, and Bitcoin $40k would be ~50% of the rally from $29k to $52k.  Maybe the whole world goes risk off for a month.  

Another interesting development are the social tokens and how they could change the nature of employment.  When I've had time, I've noticed Raoul and the Real Vision crew do a great job staying on top of this constantly shifting landscape.  Here's an interesting video on DAOs and social tokens:  Realvision

The Universal Wallet

      This is a dualistic world where the answers are always in the synergistic balance of the middle. The realm of cryptocurrencies exists on the continuum of individuals on one side and the government on the other. The extremists on the individual side are the crypto anarchists who want total anonymity, no regulation, and pure decentralization of transactions where everyone is responsible for themselves. The extremists on the government side want to control and regulate every transaction and exchange, so they know exactly who is doing what for the purposes of taxation, tracking criminal behavior, and defending their sovereign currency. Both sides need each other. The crypto world has to accept that the government makes the rules. And the government has to accept that this innovation is the best hope we have to grow our way out of the systemic burden of debt.  

     What individuals want the most is privacy and freedom, which comes from the need for physical security in a world of survival after millennia of repressive power structures. Having anonymity is not a cloak to hide illegal activities, it’s a shield of protection from the overreach of government and the invasive power of big tech companies. 

     The government is tasked with the chore of protecting the individual, but the only method it has is the enforcement of laws, so it seeks awareness of what everyone is doing to maintain order, which creates a dynamic tension between both sides: the government wants information for control; and the individual wants privacy for freedom. These two diametrically opposed forces are colliding over the role of cryptocurrencies, and how they can be regulated, so here’s a pragmatic solution from the center. 

     The way to regulate cryptocurrencies and decentralized finance is not through enforcing onerous KYC data collection on the exchanges - it’s through the wallets. The solution is to verify the identity of a digital wallet owner through an encrypted KYC process that protects anonymity. For example, let’s say there’s a government database that contains our name, social security number, passport and/or driver’s license - anything needed to verify our identity, but each part is encrypted and broken into pieces on a decentralized protocol, so it’s nearly impossible to be hacked. 

     A universal wallet could be designed so the individual enters all their identifying information, so it can connect to the government database to assemble the pieces and verify the identity as real, but there’s no record kept that links this particular wallet to that particular person. It’s a one-way “read only” KYC process that has no memory - it just verifies and gives a “blue checkmark” to the wallet, which unlocks its full functionality, but the government database doesn’t retain any wallet information, and the wallet deletes the identifying information too. The database could limit the number of wallets to one, but the identity of the wallet owner would remain anonymous. 

     Then a law could be created that states all smart contracts and defi exchanges can only allow execution between two verified wallets. And the wallets could be programmed to only work with other verified wallets. Since all businesses will eventually take payment exclusively from digital wallets, this forces everyone, including criminals, onto the legitimate system, or they become exiled from the economy altogether. An unverified wallet could only be used with other unverified wallets, but those funds would never be able to access the verified system unless they get verified.

     By maintaining anonymity, there’s no need to trust the government isn’t overreaching with surveillance into our life. And from the government’s point of view, the wallets could be designed to keep track of every transaction like a bank statement, including realized and unrealized gains or losses for tax purposes. At the end of the year, anonymous wallets could automatically send tax information from capital gains to the identities in the government database, but it would be a “read-only” process that doesn’t remember the wallet. This way, the government gets its taxes, and they force everyone onto a verified system to prevent money laundering, yet the individual keeps their privacy and freedom. There could even be a banned substance/product list - like the materials needed to make a chemical bomb - so if any wallet purchases those things, a government agency is notified. Meaning, the only way for the government to have the right to see your transactions is through a warrant that needs proof of purchases from the banned list. Otherwise, they have no right to see what you’re doing. This is how you balance the privacy of the individual with the safety of the community. 

     The same process could be applied to internet browsing and social media. Our digital wallets will be the passport to login everywhere, so we need the ability to toggle on/off our identity for purposes of social media, yet maintain control over the privacy of the data collected for ad targeting. Personally, I like be targeted by ads for products I’m interested in, however, I don’t think Facebook or Google should connect any of that data with my identity, so the wallet could provide relevant businesses with whatever basic demographics I opt into, but not my identity, even if I turn on my name for my friends and family to see.  Essentially, the wallet should be designed to silo the identity of the individual from their demographics, browsing, and transaction history.  

     Obviously, there are nuances that would have to be solved, but this is the basic idea. The crypto world needs to move beyond the notion that somehow decentralized currencies are going to be integrated into everyday life without government regulations to enforce our laws. And the government needs to understand that individuals are tired of the invasive overreach of powerful institutions, so if they attempt to stifle this innovation with onerous control, all they will do is transform what could be a seamless transition into an ugly revolt. 

     All the government has to do is reiterate emphatically the US dollar is the only legal tender. As expressed below in “The Universal Bank,” we will have the fight over legal tender in ten years. Until then, blockchain can focus on the multitude of other innovations from supply chain tracking to microfinance to the creation of video game and virtual world economies, which is our only chance to grow out of this burdensome debt without a destabilizing devaluation of the sovereign currencies. 

     If a billionaire with political connections would like to develop a universal wallet, or the universal bank idea below, send me a message.

The Universal Bank

(~10-minute read) 

    In the future, our primary monetary relationship will be with an artificial intelligence that determines the amount of interest-free credit we can have based on our potential and projected earning power, so let’s examine how interest-free money would work for an individual, a business, and the government. 

The Individual

     The amount of interest-free credit will be restrained by the discretionary income of the individual, but what about teenagers in high school before they have a job and expenses? How would they position themselves to qualify for an interest-free college tuition? Could the system truly be designed to create equal opportunity for all?  

     Obviously, not everyone has the same starting point in life, or the same degree of intelligences and skills, but the additional challenges of growing up in an impoverished home - whether financial or psychological - or in a violent part of town, or the many other circumstances that create extraneous hardships is beyond the scope of this article, which will focus solely on merit. 

     Keeping track of a student’s performance through a combination of their grades and teacher assessments from kindergarten through high school would create an academic snapshot of each person’s intellectual and emotional aptitude, ambition, and discipline. Think of qualifying for interest-free credit for college as distinguishing yourself in the eyes of an artificial intelligence that is continually assessing your future ability to pay back the loan through feedback from the education system. 

     Another piece of an academic snapshot could include a psychometric personality test the A.I. analyzes to help project the future income potential of the individual. The overall assessment would qualify everyone for an amount of interest-free credit to use for college with a predetermined payment schedule that automatically garnishes their future paycheck at a reasonable pace that isn’t burdensome. Being able to open your digital wallet and see the amount of tuition you qualify for as it continually adjusts to your academic performance would inspire and motivate students from junior high school through university, particularly if it was contrasted to basic living expenses to display how much discretionary income they would have on the path they’re currently on, and what it would take to improve it.  

     Once an individual is in the workplace, their digital wallet would have several accounts of interest-free credit available to them based on their personal balance sheet for a house, a car, and credit cards. The available credit in each of these accounts would grow or shrink based on their real-time finances, and their wallet could project future credit based on increases or decreases in income and expenses. 

     If the person loses their job, payments could be automatically (and temporarily) frozen, or the repayment timeline extended, or even some degree of forgiveness if an unfortunate circumstance like injury or disability caused a loss of earning power, but since there’s no 3rd party issuers of the credit, or a predatory collection process, there’s no need for bankruptcy proceedings. You owe what you owe. The artificial intelligence will automatically extract it at a reasonable pace, and limit the possibility of exceeding the capacity to repay it.

     The credit in each account is created out of thin air but backed by their future labor, which is the exact same process as a bank loan today except without the bank. For those mired in double-entry bookkeeping, the debt is a liability for the individual and an asset on the ledger of the system itself, which acts as a universal bank. Every paycheck would be automatically garnished according to a predetermined formula to slowly pay off the loans over time. When the debt is paid off, it’s retired the same way debt is extinguished at a bank. 

     There’s literally no difference in the credit creation process except for the elimination of a middle man collecting interest, which also eliminates the interconnected chain of counterparty risk and exotic derivatives between mammoth centralized institutions using a common currency vulnerable to the boom/bust business cycles that cause a domino effect of credit impairment that puts the whole system at risk. With every individual creating their own credit it’s like millions of currencies backed by their houses, cars, credit card purchases, and labor, but siloed from each other, which eliminates the risk of credit contagion and “too big to fail” because there wouldn’t be any centralized institutions at the source of it. It’s simply transferring the power of currency creation from banks to individuals, who would be algorithmically restrained by their discretionary income. This is how you create the liquidity needed to replace our current system’s dependency on single sovereign currencies. The legacy banking system would dramatically shrink in size, so any distress it faced from defaults on its interest-bearing loans would truly be a tempest in a teacup. 

    I cannot overemphasize how transformative this would be.  

A Business

     The main difference with interest-free credit for a business is how the corporate legal structure protects an individual from the consequences of the business failing, much like a politician disconnected from the consequences of their spending, so a business would have to qualify for credit creation. I’m sure a mathematician could analyze the stats of thousands of businesses and develop a formula based on things like how long the business has been established and profitable, debt vs equity, market size, etc....to distinguish between Joe’s Rocket To Outer Space Inc., and Apple.   

    A startup or a growth company wouldn’t qualify because their business model is either unproven, unestablished, or has too much debt. One way to align the consequences of the people making decisions with their actions is requiring the board of directors to maintain 50% of their net worth in the company stock, and when it’s bought back, 50% in the company currency.  Allowing deeply established companies like Apple to create their own currency backed by their products and services supplements the liquidity of currencies created by individuals to transition the monetary system from dependency on single sovereign currencies to truly decentralized credit. The size of the stock market would dramatically shrink in size and it would free the overall economy from dependency on its performance. This would temper the boom/bust cycle from the extremes of mania and depression to a slow, steady, balanced growth. And it would relieve the Fed from its mandate drift of constantly juicing the stock market higher. 

     Most likely, there will never be a company that survives forever, so the entire point of having thousands of currencies is to diversify the risk from single government currencies that perpetually get diluted by politicians and central bankers whose actions aren’t linked to their consequences with currencies from as many viable sources of productivity as possible, so any failures of single businesses would be siloed and isolated from contagion because each currency would be like .1% (or less) of the savings and purchasing power in each person’s digital wallet.     

The Government

      The government doesn’t actually exist as an independent entity. It sits on top of the productive layer of the economy and extracts taxes from the profits of viable businesses to fund itself. Meaning, if you take the government away, the private sector still exists; but if you take the private sector away, the government does not because it's not self-sustaining. Sure, it could create its own currency, but without the ownership incentive to self-organize productivity, a government currency would have nothing sustainable to back it except the power to mandate its acceptance as legal tender and jail its citizens for disobedience - until it collapsed. 

     The reason capitalism works is because ownership stake incentivizes innovation, efficiency,  and hard work to compete for every penny of profit since the owner(s) get to keep the excess once all the expenses are paid. Ignoring the incentive of ownership stake is the main flaw of Modern Monetary Theory and why Socialism fails. For example, I know someone who was hired as the head of maintenance for a local school district. During his first year he thought he was doing a great job saving the department money, but at the end of the year when his boss found out how much money he saved them, he was told to spend the rest of their budget on anything or it would get cut the following year. That wouldn’t happen in a business with ownership stake, and it’s the perfect example of government waste. The MMT proposal of buckshot government spending to fill the bathtub of aggregate demand is not grounded in the personal incentives that create and sustain the price discovery of a productive free market economy. 

    The real question is not how a government currency would work - it’s why should the government create its own currency at all? When the incentives of politicians are to appease the voters, they’re actually incentivized to be fiscally irresponsible, so they need to be restricted in their ability to spend, or the public debt will continually expand until the currency collapses. 

     The answer is simple: all government spending must come from taxes. If it’s worthwhile and necessary spending, the bill will get passed. If a natural disaster or World War Three pushes us over the budget, THEN a bond with a specific purpose can be issued with a repayment schedule that extinguishes the debt after it’s paid. The public will recognize when emergency spending needs to happen. The public will recognize when a military intervention is in the best interest of the nation, so the money to fund it will come from savings and not the monetary debasement programs of the Fed that steals purchasing power from the masses. All spending should be extracted from the current generation of taxpayers and not foisted upon people who aren’t even born. And the idea that a government who issues its own currency can never default is disingenuous. If the principal is repaid with money that lost half its purchasing power, that’s a default.   

     Alternatively, once we have thousands of currencies to choose from, and the ability to reject the government currency at will, go ahead with MMT - let the politicians spend like drunken lotto winners; it wouldn’t matter because blank check MMT spending restrained by inflation would quickly hit its limit and force raising taxes to save the plummeting currency. It’s the choice of competing currencies that would restrict politicians from profligacy. If you allow individuals and businesses to create thousands of currencies, and every merchant and customer has the choice to save and transact in whatever ones they want as legal tender, the value of the government currency would be kept in check by the public’s willingness to hold it.  

Implementation

     This system would run as a layer two application on one, or multiple, decentralized crypto currencies. It wouldn’t even matter if it was a decentralized government blockchain if it had the right design because it’s the protocol in charge, but I suspect the coming FedCoin whitepaper will reveal a permissioned centralized ledger, which will be resoundly rejected as an extremist continuation of failing institutions. 

     The recent fuss over AML and KYC regulations is not even the warmup act. The real fight will be about the legal tender status of alternative currencies in developed world economies. The government simply cannot allow mainstream adoption of cryptocurrencies as legal tender because the value of the dollar would collapse. It’s literally a national security threat. There is no cryptocurrency, no matter how well designed, that will be allowed to slowly replace the dollar as legal tender in everyday transactions. The only way for an alternative system to be implemented is through the legislative process. And the only way to generate enough political pressure from the public to truly change the system is if the new way is so beneficial to the general population that they don’t have to be convinced to fight for it because they will do it naturally. 

     This is why none of the cryptocurrencies will succeed in mainstream monetary adoption without the system of interest-free credit I am proposing. Most people don’t care what currency they use in their daily life, nor do they care enough to learn why cryptocurrencies would benefit them, so they won’t fight for cryptocurrencies alone. That revolt would look like Occupy Wall Street. In contrast, everyone would fight for interest-free credit. That revolt would look like American Revolution 2.0. In fact, a change of this magnitude would likely require a constitutional convention, so other important amendments could be included like campaign finance reform, terms limits, and other fundamental changes to course correct a corrupt Congress.   

     First, this alternative system of interest-free credit needs to be created and implemented in the developing world (like Africa) where this technology is needed to create their cultures with property rights, fair elections, and a sound currency. Once the system is operating in real-time and proves the concept, it won’t be hard to find support to implement it everywhere. Do you know anyone who would like to not pay interest on their house, car, credit cards, and college loans? I’m thinking 7.9 billion people would be interested in that once the vision is expressed. 

I'll end with one of my favorite quotes:

     “If you want to build a ship, don't drum up the men to gather wood, divide the work and give orders. Instead, teach them to yearn for the vast and endless sea.” - Antoine de Saint-Exupery