Jamie Dimon Should Learn About Lemons

By Chris at www.CapitalistExploits.at

A tale of two James’.

What does this guy:

Captain James Cook

…have in common with this guy:

Two things:

  1. Same first name, and
  2. similar opportunities.

Let me explain.

Captain James was probably just another ruffian salty with poor hygiene and bad teeth. But you know what the catalyst to his fame was? And by extension what turned muddy old Britain into an empire?


You see, the thing holding back Captain Jamie from extended ocean going voyaging was a nasty disease called scurvy. We know now that Jamie was dead eager to get out there and bring nasty European diseases to natives in faraway lands and upon arrival announce, “By George it’s nice and lush here, we’ll take it.”

And so when Scottish physician James Lind figured out via controlled experiments that, in fact, a diet including vitamin C rich foods cured this pesky disease, the advantage presented to sailors was enormous. After all, those poor sods used to routinely lose up to 60% of their crews to scurvy on voyages.

Imagine setting out knowing such odds.

Da Gama, for instance, lost 116 if his 170 crew, and Magellan 208 of his 230. You’d have better odds skulling a bottle of Absolut and then playing chicken with Mack trucks on a freeway.

It took the Brits about 40 years to put this knowledge to good use, but it has been argued by historians to have been a catalyst to the founding of the British Empire. At the time, there were plenty other countries who could quite easily have stacked up some lemon juice in the hull, set sail, and begun planting flags. But they didn’t.

Isn’t that amazing? The bloody British Empire owes its fortunes to the humble lemon. And, by golly, old Jamie Cook took advantage of that didn’t he? And the rest, as they say, is now history.

And this brings me to the other Jamie.

You see, Jamie (the old Brit Jamie), used something quite revolutionary at the time to alter the course of history and become a major player in it.

And Jamie (the not so old yank), Captain of the JPM ship has a similar opportunity today.

It’s why he should learn about lemons.

It seems he knows little about modern day “lemons” and their properties. Here’s some major ignorance points he shared with us all on his views just recently.

I think Alex Gurevich said it best:

I was mentioning this all to my lovely wife the other night, and you know what she said?

She said that if he was a she (Jamie that is), he probably wouldn’t be so arrogant and may look at the manual. Which in this case is, of course, Satoshi’s white paper.

And, as usual, she’s right. When we got our last DVD thingy player she immediately pulled out the manual to learn about how it all works so that when she wants to, she’ll be able to play exactly what she wants without delay and mess and fuss.

Me? I stabbed away at the buttons, safe in the knowledge that even if I’m trying to get the Blu-ray to play, I’ll probably get the USB figured out, and who knows what excellent films are on the thumb drive I’ve shoved in there.

I console myself with the fact I’m male, and as such, reading the manual is against my religion. But I tend to make up for it by diving in and learning by doing.

Jamie, bless him, isn’t even prepared to do either, and that’s fine.

It just means that when Bitcoin hits another all time high and history books are written (by the robots, of course), he won’t even make the pages. He’ll simply be like all those other sailors in Portugal, Spain, France, and the Netherlands who, in the 1800s, were sailing around at the same time Captain James Cook was.

And you know what? We don’t know anything about them, and neither will future generations know anything about the present Captain of the USS enterprise JPMorgan’s Jamie “I don’t know isht about Bitcoin” Dimon.

And that’s probably how it should be.

– Chris

“Do just once what others say you cannot do, and you will never pay attention to their limitations again.” — Captain James Cook


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Warning: Danger Lurks Here

By Chris at www.CapitalistExploits.at

Take a look at the volume of stocks listed vs. indexes listed going all the way back to the days of bellbottoms, loud hair, and orange wallpaper.

Since 1995, the supply of stocks, particularly in the US, has been shrinking faster than Trump’s approval ratings. At the same time, the number of indexes have exploded like one of Kim’s shiny new missiles.


In a falling interest rate environment, the twin pressures of reduced returns and relative cost pressures have meant that investors, in order to make a buck, have flooded into the low fee structures offered by passive strategies. These include indexing, ETFs, and those truly insane creatures I’ve written about before: low volatility ETFs.

But what about those alpha generating hedge funds? Aren’t they meant to be smart and able to beat the market… any market?

Those alpha generating hedge funds have things called LPs. And though LPs may be smarter, and certainly wealthier than Joe Sixpack, they’re no less human. And human attention span and patience level has been in decline… correlated no doubt with the rise of social media and the Kardashian crowd. Like a virus, it infects everything.

As performance from hedge funds has been poor relative to the benchmarks, a self reinforcing situation where hedge funds, in order to ensure LPs don’t redeem, have landed up hugging the indexes.

This is the exact opposite of what hedge funds were meant to do, of course. In many cases, they themselves are simply buying the indexes, trying desperately to figure out how the hell they’re going to survive through the next quarter but determined simply NOT to underperform the index. It’s a losing strategy no matter how you slice and dice it.

For those hedge funds who refuse to chase the indexes… Well, they are now fighting the tidal wave of capital that has been shifting into passive investments, which forces those passive investments even higher.

This, in turn, leaves active hedge funds who refuse to get sucked in with increasingly substandard returns. They can explain until they’re blue in the face why certain indexes make no sense but when those indexes just keep rising day after day, month after month, it becomes a very tough stance to keep. Redemptions follow, and so by doing the right thing, they’re punished. And by doing the wrong thing (following the mob), they may get to stay alive just a little longer and this is what many have resorted to.

We all know that at some point there are no new buyers available to enter the market and hoo boy, do we then have a problem.

So… you either join the party or you leave the party.

The last to leave the party is Hugh Hendry and his baby Eclectica.

Hugh Hendry Murders His Hedge Fund

Og aye, tis tae tough

Hugh follows Eton Park and Perry Capital to name but a few more.

Paul Singer of Elliot Management fame put it well in his July investor letter to stakeholders.

“In a passive investing world, small shareholders have little-to-no voice and no realistic possibility of banding together, while the biggest shareholders have no (repeat, no) skin in the game so long as the money manager does not underperform the index.”

Make no mistake, the rise of passive indexing is a bubble in dumb money.

We have a situation where the market is becoming completely lopsided and increasingly so at a blistering pace.

If it gets anymore lopsided, it’s going to be upside down. What’s more, the market participants have no interest or even determination of valuations.

An index doesn’t give an isht what the P/E ratio of any stock included in the index is, and the investors buying it have even less idea. It doesn’t care if the aggregate of stocks sitting inside its womb are over or indeed undervalued. It’s just a dumb bloody index, and you can’t blame it anymore than I can blame my dog for not understanding Shakespeare.

Those investing in passive have done so partly due to relative fee differentials, partly due to performance. But now also dangerously so… due to increasing inflows, which have continued to push values higher.

Now, having markets or sectors get silly is obviously as normal as a peanut butter sandwich, and provided you’re aware of it, we’ve little to worry about.

But what’s more frightening than the Kardashians in skinny pants is that as capital has fed into passive, the usual countering forces (active managers) of the market have been leaving the party, which has left the passive world to increasingly swell like a neglected infected wound.

What we need to think about is that increasingly there is no active market to stabilise this. It’s akin to having a 5-year-old’s party, inviting a troop of the critters, and then promptly sending all the parents down to the pub for a few hours.

Just as short sellers provide a balance to a market so, too, active management (who incidentally typically have skin in the game) have always provided a stabiliser to the overall market. What happens when the stabilisers all leave the room?

We can see this manifesting itself in the volatility index. As more capital enters at a steady pace so, too, the volatility falls.

And here’s the thing. The algos constantly feed back the daily data to recalculate their probabilities (read this article on VAR shocks). Risk? Nah!

At the extreme of the passive world sits volatility.

Selling volatility works really well. Just ask Neiderhoffer who has made godawful amounts doing it over the years.

Look closely, though, and you notice that even Neiderhoffer, who knows what game he’s playing, blows himself up spectacularly from time to time… and I mean complete armageddon wipeout stuff. Until that blow up comes, though, you just keep plugging away at it day after day and it just keeps paying you… day after day. You make money, make money… and then, well…

It all turns to isht and blows up in your face.

My friend Mark Yusko from Morgan Creek Capital places capital with the smartest strategies and hedge funds – active capital.

Who’s willing to bet with me that over the next decade being long smart active strategies and short passive (low volatility ETFs) will be a winning trade?

Wow Poll - 27 Sep

Cast your vote here and also see what others think

– Chris

“What could be more advantageous in an intellectual contest – whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?” – Warren Buffett, 1985 Berkshire Hathaway Letter to Shareholders


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India Stack and Bitcoin (An Insider’s View)

By Chris at www.CapitalistExploits.at

Before the good stuff… the fun stuff.

Here’s a fan mail I received in response to this.

I guess he/she never made it as far as this part:

“Don’t get me wrong. I’m not against EVs, and I’m all for technological innovation.”

Though, in all fairness, it may be the collagen talking. Either way, definitely not an Insider member, otherwise he/she/it would be well aware of where we’re actually invested. Ha!

Dregs from the bottom of the barrel occasionally drift into my corner of cyberspace. That they respond like this must be due to this fascinating misconception that I give a damn.

Still, if we poke them hard enough in the chest, they’ll bugger off leaving us with the fine specimens that make up the overwhelming majority of our distinguished readership. Which brings me neatly to:

“Hi Chris,


I’m not sure if this gets to you or is stuck in the admin box.


Love your work, really enjoy it.


Your current one on the knock off effects of banning gasoline and diesel cars made me want to bring up another point that is seldom discussed when people talk about the future of EVs… the profitability of refineries when they don’t have a market for gasoline.


When a barrel of crude is refined, about half of its volume ends up as gasoline.  The other half ends up as diesel, jet fuel, bunker oil, chemical feedstocks, etc… Gasoline is great for running automobiles, but pretty lousy for any other industrial process.  Industrial processes such as mining, refining, transporting, and processing cobalt, lithium, and molybdenum into EV parts.  These processes depend on the other half of the barrel.


Driving away (pun intended) the demand for gasoline by mandating EVs means that refineries have half of their product become much less valuable.  I don’t have the research or know of who has done the research, but I wonder what such a move would mean for the price of diesel, jet fuel, bunker oil, chemical feedstocks, etc…?

Hope all is well, cheers!”

Fair points and worth thinking about.

For example. Do those industries taking up the “other half of a barrel” benefit? To what degree? For how long? And is the market pricing this?

All fun stuff which we spend all most of our time doing here.

Anyway, today I’ve got something special for you and it’s got nothing to do with EVs or gasoline.

Bitcoin and India Stack

It was Raoul Pal who first brought to my attention the incredible galactic sized project that is India Stack.

I’ve since spoken with quite a variety of people both in India and out in order to better understand the dynamics of what’s taking place in India. I think it provides a fascinating and illuminating view into how certain problems can be dealt with.

In particular (and I’ve not seen anyone mention this), the ability to recapitalise a banking system on the brink and to do so while transitioning over a billion citizens onto a digital system.

Pre-cash elimination, India’s banks were in a shocking state. What better way to “fix” them than to get the poor to bail them out.

Ever since man began forming communities, we’ve had a setup where those at the top manufacture ways and means to have those at the bottom pay for the things they want.

Kings told stories about their “divine rights”, people believed it, priests told stories about the church’s relationship with God, people believed it. And today politicians tell stories about “the greater good”… and people believe it. Some things never change.

Aside from the banking system being recapitalised…

It’s been fascinating to watch what was up until recently one of the world’s largest cash economies and where millions never even had a bank account suddenly goes digital.

So there were two steps here.

The first being the elimination of cash in the economy, and the second bringing online the digital platform otherwise known as IndiaStack, an open source platform where information is a utility.

The set of open API for developers includes:

  • The Aadhaar for authentication
  • The e-KYC documents that have been generated
  • Digital lockers
  • e-signatures (software based as against the present dongle based e-signs)
  • The Unified Payments Interface which rides on top of the National Payment Corporation of India’s Immediate Payment System.

You can check out a presentation which provides a decent overview of it here.

I’ve spoken with a lot of guys who see this as being a major boon for India’s economy, eliminating fraud, destroying swathes of bureaucracy, and bringing millions of people into the economy who previously never had access.

I don’t disagree with any of this, but what I wanted to do was to find someone who wasn’t very bullish, someone who would challenge some of these thoughts. And with that in mind, I found and spoke to Deepankar Kapoor.

Deepankar Kapoor – as you can probably infer from his name – is not only Indian but he’s also the founder of Bitcoinwiser, a well known face in the digital advertising industry in India with his most recent stint being as the Vice President & National Strategy Head at Ogilvy India.

He has 9+ years of full time recognised experience in digital business transformation of Fortune 500 brands and won many accolades throughout his career. Academically, he holds an MBA from University of Calcutta wherein he majored in Marketing [Forecasting & Econometrics], BMS from Symbiosis International University and a Diploma in Cyber Laws from the Government Law College, Mumbai. Additionally, he is a Google and Twitter Certified Professional.

You can listen to our conversation below. I apologise for the dodgy line at times – Kenyan Wi-Fi isn’t the best in the world.

And a Question for This Week

Wow Poll 21 Sep
Cast your vote here and also see what others think

– Chris

“Change is opportunity.” — Suresh Prabhu, Union Minister for Commerce


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Electricity YAY!

By Chris at www.CapitalistExploits.at

Britain to ban sale of all diesel and petrol cars and vans from 2040

So says the Guardian.

Which follows on from:

France to ban sales of petrol and diesel cars by 2040

This follows Norway, The Netherlands, Germany and now – the big Daddy…

China plans to ban sales of fossil fuel cars entirely

China is the world’s largest auto market, with 28.03 million vehicles sold last year, a boost in demand of 13.7 percent vs. 2015 sales numbers. The nation has already done a lot to incentivize manufacturers to develop and sell new EVs, including allowing foreign automakers to create a third joint venture with local automakers (a standard requirement for doing business in the country for auto OEMs) so long as it’s dedicated to the creation of EVs exclusively.

CO2 emissions from EVs are substantially lower than their fossil-fuel-guzzling cousins. And since most of us prefer swallowing our air without having to chew it first, the appeal is as easy to understand as Cameron Diaz in a bikini.

Here’s an excellent chart which you can go and play around with which shows vehicle emissions. The yellow are the EVs (click the chart):


Source: http://carboncounter.com

This news has tree-hugging beardies everywhere rejoicing because they will, once and for all, get rid of all those ghastly baby-seal-murdering bastard oil and gas executives.

Two Things Worth Thinking About Here

  1. If EVs take over the planet, prevent air pollution, cease the destruction of the short-eared owl’s habitat, and cure halitosis, surely more electricity will be required, no?
  2. And secondly, if the internal combustion engine is going to prop up landfills, then what exactly goes into making these EVs? Because being a simple guy I couldn’t help stop and do simple math. That is: if car (a) being satan’s transport (diesel, of course) is replaced with car (b) the unicorn rainbow (EV), surely there will be massive demand for all the stuff that makes up car (b).

So let’s tackle point number one.

Which is really to ask the question that Al Gore’s tribe never ask.

What is the main source of power for electric vehicles?

Is it?

  1. Rainbows
  2. Unicorn poop
  3. Fossil fuels

Here’s a hint from the U.S.

And from China:

And there’s your problem. Government agents have no clue what they’re talking about.

We can all switch to EVs but all we’re doing is swapping out fossil fuels from our gas tanks for fossil fuels at our power stations.

Who wants a nuke powered EV?

Beardies will be horrified by the fact that over in China this is where things are headed.

Though I can bet you this: Those Kardashian-watching, collagen-infested Californian rainbow lovers will be truly horrified if you explain to them that when they plug their Tesla into the power socket, it’s effectively getting 20% from truly deadly nuclear and in fact 88% of that power comes from filthy fossil fuels.

As for those fiendish Chinese, they understand that to move from air you chew to air you breathe they have to reduce the amount of coal they burn. Nuclear is the answer and so voila, nuke-fired cars.

There is more, though, and this brings me to point number 2. In order to get yourself a decent Duracell car, you need the darned battery to last long enough. Batteries being quite simply stored fuel.

Now, don’t tell Al Gore but when you build an EV and the attendant batteries to move the thing you need a lot of cobalt. There are other metals, but the typical EV needs about 15kg of cobalt, and so today I’m picking on cobalt. Here’s what a cobalt mine looks like. Shhh, they’re an environmental shocker!

DRC’s Katanga Mine

And guess who has all the cobalt in the world?

These guys:

And who’s in charge?

Mostly these guys.

Don’t get me wrong. I’m not against EVs, and I’m all for technological innovation. But when the narrative is so blind to realities, I realise – after my heart palpitations have subsided – that this is a good thing (even better than Cameron Diaz in a bikini).

You see, without rainbows and unicorn narratives paraded by men with strong jaws and the government agents with their tiny teflon-coated brains along with a bottomless pit of government money, we’d have a much more difficult time finding disconnected markets and mis-priced assets.

Right now the popular narrative is that if you’re an oil and gas executive, you made your money by pumping poison into the ozone layer and beating tramps to death with bay seal pups… and who the hell wants to invest in that?

If – on the other hand – you’re an executive producing batteries for “clean cars”… well, you may as well just be knighted right here and now. Chicken breasts we all know come from the supermarket shelf so it stands to reason cobalt, lithium, molybdenum all come from a similar supermarket shelf, across the street from Whole Foods and Tesco.

As I keep trying to educate my kids, there are just a few key things to remember in life:

  1. Focus on the facts and ignore the noise, and
  2. Don’t pee in the bath.

Which brings me neatly to the question for this week’s World Out of Whack:

Wow Poll - 13 Sep 2017

Cast your vote here and also see what others do

– Chris

“To question The Obvious and the given is an essential element of the maxim ‘de omnius dubitandum’ [All is to be doubted].” — Cristopher Hitchens



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By Chris at www.CapitalistExploits.at

When I set out over a year ago to just once a week highlight one element of absurdity (because it is absurdity which often leads to asymmetry and thus profits) on this ball of dirt we call home, it was inevitable that I wouldn’t have much trouble in finding things to jeer and laugh at.

With the torrent of rules and regulations, manipulations, and interventions that fill statute books each day… and with governments and central bankers doing what they do best (stupid things), it was a statistical certainty that I would reach a day when I looked around and finding far too much to show you my head would simply explode. And this week that day arrived…

And so… with an exploded head I’m useless to you.

So instead, I figured I’d go back and review all the voting on the
World Out of Whack posts I’ve done. And by George, there are a sh*tload. June of 2016 was when the fun began. I don’t know if I’ll get through them all but you never know unless you start so here’s the first three.

1. Bat isht crazy real estate

Vancouver real estate. Investors thought it was such a great idea… except you. Cos you’re smart. Well done!

Now a year on, Vancouverites would rather weld their children together with molten metal than dive in and buy.

There’s more, though. I threw some crumbs. Now, don’t say I don’t love you:

Side note: While the focus today is on overvalued RE markets, as an investor I can’t help myself from pointing out that with a P/E ratio of just 9x, Hong Kong’s equity markets are today the cheapest in the world, with the Hang Seng Index trading at the biggest discount to global shares in 15 years.


As a reference point consider that most major stock markets typically trade at a P/E of between 15-20x, so we’re looking at an equity market some 40-50% of its highs and an overvalued real estate market at the same time.

Here’s that undervalued market I was talking about:

I then mentioned those fiendish orientals… and why you should buy Bitcoin. This is a game not just for round eyes in Silicon Valley to play:


2. Next up was just after Brexit

…and we asked you:

Crikey… you lot are sharp. Certainly French elections registered as a crisis in confidence with the first time that an incumbent never even made it to the runoffs. Ha! Take that Hollande… and put it in your pipe and smoke it.

3. And then in the third issue of WOW, we covered global bond markets

We asked the question:

So that was published on 29th June.

Though gold is about where it was in June of last year, this question will only be answered in the next crisis… and I’m willing to put some shiny ones on you being right once again because I promise you this: In the next crisis, gold is likely to fair much better than trying to conjugate the modern day version of Julius Caesar’s paper.

And really… if there is one thing I’d like to get across, it is encapsulated in this wonderful chart below. Because once you realise this, you’ll begin to start thinking the right way:

Happy Wednesday!  

– Chris

“Never attribute to malice, that which can be reasonably explained by stupidity.” — Spider Robinson


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VAR Shocks!

By Chris at www.CapitalistExploits.at

How much money can you lose on any given day according to an entire squadron of dynamic variable factors?

It’s called value at risk (VAR), and because every hedge fund, investment bank, prop house, and algo firm wants to assess their own risk — while at the same time sneakily wanting to know how the rest of the market is assessing and quantifying their own risk — the models are all built on much the same inputs and, as such, are basically mirrors of each other.

So, you see VAR models eventually conform to the very thing they’re designed to protect us against. You see they are mostly like milk bottles — exactly the same, and they’re used widely, because they’re widely used.

Understand? Good!

Back when I had more hair… actually any hair, and I didn’t have to do 200 bloody sit-ups everyday just to keep flab from attaching itself to my stomach like some unwanted starved leech, I worked for a firm who, in order to protect their anonymity, I’ll just call PMJordan.

Anyway, while working at Lucifer, I worked on a project with the quants who built these VAR models.

These were very, very smart people. They were so smart that normal people had difficulty communicating with them.

One guy, who I’ll call “Frenchie” (to protect the anonymity of his origins), could explain parabolic curve theory to you with exquisite detail while simultaneously solving math problems in his head in mere seconds. Problems, I might add, which I would need a spreadsheet, half an hour, and intense frowning to complete.

What solidified my faith in his planet-sized brain was the fact that he was so awkward and almost completely incapable of social engagements. After the head of Lucifer in the London office addressed him, he promptly gazed up, flinched awkwardly, and stared out the window. Clearly a genius.

And “Frenchie” wasn’t the only one, because quants just like him can be found across the investment landscape developing VAR models and staring into space while their brains whirr and click away. But still, with all this brain power VAR models continue to be proven crap.

VAR models never managed to help those caught off balance when the CHF broke, and they never helped those caught off balance with Brexit.

Part of the problem, I suspect, is that in order to develop them you need a whopping great data set. Clearly the statistics based on data over, say, 10 years is better than that of 5, 100 better than 50, and so on.

One of my team here at Capitalist Exploits HQ referred me to the work of one Paul Schmelzing. Schmelzing is a visiting scholar at the Bank of England from Harvard University where he concentrates on 20th century financial history and he wrote an excellent piece on the history of bond bubbles going all the way back to the 1285. THAT’s a decent data set!

Probably the most important takeaway from Paul’s work — for me at least — is that at no period in history has there ever been the sort of bat sh*t crazy central bank intervention in the bond markets we’ve enjoyed in the last decade or so. VAR models don’t account for this.

That quite literally means that this time it is different.

I nicked this chart from Paul’s work. It provides us a clear picture over hundreds of years and thus puts things into perspective very nicely.

So here we sit in 2017 with some interesting data points, namely that back in July of last year the peak in the bond cycle was reached. Remember when I ranted about how bonds were trading as commodities?

Well, that was just one month after the peak in bonds. When we had over $13 trillion in bonds trading at negative yields.

This was the lowest level the risk free rate has ever reached in sovereign bond market history in 800 years.

This is one of the most remarkable bond bull market in all of recorded history. Lucky us!

Does this sound crazy? I think so.

How we got here? Fiscal expansion – the flip side of the bond bull market. Here we have the FED (US), the BOE (UK), ECB (EU), and BOJ (Japan).

There are a few things that turn any market. In the bond market, there are 3 that come to mind:

  1. Inflation is one of those things
  2. Geopolitical events are another
  3. Volatility is the third

Let’s look at all three.

Let’s take a look at unemployment rates — historically very closely tied with inflation. The second lowest rate since the late 60’s. Mmmm…

In the UK, we have to go back to the 70’s to find lower unemployment figures:

The EU is not faring as well but the trajectory and trend are clear:

And Japan? Same trend:

Where are you going with all this, Chris?

China just printed a 5.5% PPI number.

And over in the US….This just out from Bloomberg.

U.S. second-quarter growth was revised upward to the fastest pace in two years on stronger household spending and a bigger gain in business investment, putting the economy on a stronger track, Commerce Department data showed Wednesday.

  • Gross domestic product rose at a 3% annualized rate from prior quarter (est. 2.7%); revised from initial estimate of 2.6%
  • Consumer spending, biggest part of the economy, grew 3.3% (est. 3%), most since second quarter of 2016 and revised from 2.8%
  • Nonresidential fixed investment rose 6.9%, revised from initial increase of 5.2%
  • Corporate pretax earnings rose 7% y/y; up 1.3% q/q

And… our sauerkraut-eating, beer-swilling friends are experiencing the highest rate of accelerating inflationary growth in the last 23 years:

Our pasty friends in the UK? Bam!

Ok, so now we have all of this taking place.

Inflation being not so benign… central bankers actually getting what they want… while geopolitical risks, which I don’t have time to discuss here today but have written about extensively, are far higher than the market is pricing. And almost nobody seems to be paying much attention to them!

The connection between the structural political breaks and how these affect and feed both central bank policies and market participants behaviour is, I think, one of the most critical elements that bond investors are not considering.

Remember, both inflation or geopolitical shocks can impact the bond markets negatively. And what about the third one?

Volatility. Well, take a look for yourself.

Given that the treasury market volatility index just plunged again, the answer is that there are still trillions of dollars out there that believe in reward free risk. Are those planet sized brains building VAR models going to get it wrong again?


VAR Poll

Cast your vote here and also see what others think

– Chris

“Take calculated risks. That is quite different from being rash.” — George S. Patton



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China Launches Official Investigation Into US Intellectual Property Practices

By Chris at www.CapitalistExploits.at

Last week, China bypassed the World Trade Organisation agreements and using an old law officially launched a probe into Americas intellectual property practices.

China’s foreign affairs minister, talking of America, stated that:

“We’ve come to the conclusion that they’re in an economic war and they’re crushing us.”

Reiterating this stance, a Chinese Communist Party spokesman went on to say:

“The economic war with America is everything and we have to be maniacally focused on that.”



“If we continue to lose it, we’re five years away, I think, 10 years at the most, of hitting an inflection point from which we’ll never be able to recover.”

China’s president Xi Jinping explained things further:

“It’s my duty and responsibility to protect the Chinese workers’ technology and industry from unfair and abusive actions.”  


“We will stand up to any country that unlawfully forces Chinese companies to transfer their valuable technology as a condition of market access. We will combat the counterfeiting and piracy that destroys Chinese jobs.”

Actually, none of that happened. At least not that way around.

Think about it for a minute. Put the shoe on the other foot and it seems outrageous… because, well, it is.

Ok now I’ve just three things to say about this.

1. Whenever a government – who we should remind ourselves is not a producer but rather a consumer of resources – states that they are having “their” intellectual property stolen, this should make the private individuals, corporations stakeholders, and employees of those companies stand up and say: “Whoah! Hang on a second… You don’t own that. I do. What the hell?”

It’s a strange situation where the guy who got a C average in his high school finals and never made it into university but actually runs a business dealing with China can see it makes no sense but a politician with a degree from Oxford cannot.

When some Chinese company copies the iPhone, it’s not Washington’s IP they’re stealing. It’s Apple’s. Nobody wants Washington’s IP because raw sewerage isn’t valuable. That Washington lays claim to the IP of all US businesses should scare the isht out of any US-based company.

Which brings me to my second point…

2. Imagine you’re a US company with most of your value in your business being in IP. Now, imagine further that Washington brings about a trade war. What happens next?

Well, your product has just been cut off from THE world’s fastest growing consumer market in the world, and the decision as to whether or not you would participate in that market was just taken away from you whether you like it or not.

That’s all dandy if you’re 4. Parents need to make those calls for you until you’re emancipated. But you’re a grown adult entirely capable of making that judgement call all by yourself.  

A US-led trade war vs. China would be disastrous for tech firms targeting the world’s fastest growing consumer market.

A couple of reminders are worth looking at…

When I was explaining how China is increasing political global power, I mentioned that China is:

  • Asia’s largest trading partner
  • US largest trading partner
  • Germany’s largest trading partner
  • Australia’s largest trading partner
  • Russia’s second largest trading partner (after Germany)
  • Africa’s largest trading partner
  • South America’s largest trading partner

So you see the trend is most certainly established, and this trend is like a supertanker – difficult to turn around. It’s certainly a lot smarter to get on the right side of that trend than to fight it… which is impossible.

The other thing with IP is precisely what I was rabbiting on about in when discussing the coming financial disruption. You see, governments, and the nation state in particular, survives by commandeering assets. Don’t believe me? Stop paying your property tax and find out who exactly owns your house.

This sort of control is kinda easy when the assets are Billy’s steel factory but when it’s something like Vitalik Buterin’s Ethereum platform or Google or Baidu… or any number of the thousands of companies out there where IP forms the largest value component, then things get a wee bit trickier for the nation states.

Moving IP is really very easy. It involves cancelling your gym membership, downloading software onto an encrypted drive in the cloud, and booking a one-way ticket to someplace friendlier.

3. And the third thing… Ok, I lied. I’ve only 2 things to say, though I do think there’s a single reason for all this.

The Real Reason for This Stupidity

While it could backfire more spectacularly than a 50-year old Lada, it’s probably this:

Washington’s strategy to dealing with North Korea has been attempting to get Xi to do the dirty work on that snotty kid next door who’s making them look impotent. It’s silly as I mentioned last week when I explained how brain dead sanctions on young Kim really are, which is all the more reason why politicians will pursue it.

Let me make a suggestion, because let’s face it, I’m not here to do anything other than figure this stuff out and see where and why capital will flow in any particular direction.

Governments, most of them being more broke than Borris Becker after Forbes & Manhattan screwed him over, are coming for our assets. The toughest assets to actually seize are those that live in the “digital world”… which is to say their value is more often than not in intellectual property and as such they can “live” pretty much anywhere.

The Best Investment Tip You’ll Read All Year

If you’ve a business built on IP, then may I suggest that looking NOW, ahead of trouble, for the best domicile could well provide you with the best ROI you’ll ever get.

And I won’t charge you a cent for the advice, though you can send donations to Bitcoin Address: 1LNjVKrv8pT1n5SZxkhNpPN9JPWxMwnHmm

Seriously, though remember Zimbabwe, which I spoke about recently? Well, after Mugabe seized all the fixed assets, they found that without the intellect available (it’d fled) those assets became worthless. And while that’s the case the intellect has moved on. It now provides value in other countries, countries that are more receptive to value.


Wow Poll 23 Aug 2017

Cast your vote here and also see what others think holds more value

– Chris

“If protection of intellectual property begins to disappear, creative companies will disappear or never get started.” — Steve Jobs


Liked this article? Then you’ll probably like my other missives on

this topic as well. Go here to access them (free, of course).


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Ruskies, Sanctions, And Bitcoin – Coincidence?

By Chris at www.CapitalistExploits.at

Hands up if you’ve got kids.

This is how it works. And tell me I’m wrong.

Your progeny sees something, wants it, and whines asks for it. Could be an ice-cream, a fluffy toy, or that juicy sandwich you just prepared. Sometimes they get it, often they don’t. Time progresses and your tolerance regresses.

“Daddy, I want….”


“But you don’t know what I want.”

“The answer’s still no.”

It’s as automatic as your knee flex when Dr. Sergei brings out his little rubber hammer and pops you on the knee. Boing. No!

Automatic responses come from habit, and habit is, at least initially, a function of risk and reward.

This is bureaucracy in a nutshell.

Let me explain…

Take Mikhail, a middle aged bureaucrat, who, through a combination of lack of foresight and time working for the beast, has had all the life and common sense sucked right out of him. Innovation and risk are as foreign to Mikhail as sushi to a Masai warrior.

Mikhail’s job pays him to tick boxes and ensure all boxes are ticked. Mess it up and he get a pink slip and the money for his kids’ university and wife’s shoe fetish stops flowing. Risk. Pain.

Along comes Ivan with something out of the box. A new business, in a new industry. It doesn’t even fit in any of Mikhail’s boxes. Risk. Pain.

Dr. Sergei’s hammer. Boing. No!

Ever wondered why countries with high levels of bureaucracy never have much innovation?

Think about it…

If Mikhail says yes and it works out, Ivan gets a yacht and Mikhail gets to keep his pension. If he says no, he still gets his pension. If, on the other hand, Mikhail says yes and it fails and the finger pointing goes to him, he loses his pension. What would you do?

It’s all risk, no reward for Mikhail.

So along comes Bitcoin, and governments (not just the Ruskies) initially banned it.

The Problem with Bitcoin

It’s that nobody actually asked for permission from Mikhail. Permission wasn’t granted but then it was never needed. A protocol doesn’t give an “isht” about any central authority and can’t be argued with. That’d be like arguing with soil.

When Sophia in Moscow wanted to use Bitcoin, she did. And when Yoshiko in Tokyo wanted to, she did. A government that said no-no, bad, dangerous, scary, only to have the kids go ahead and play in the traffic anyway, looked awfully like a eunuch – impotent.

The about turn notably from both Japan and Russia isn’t because the paper pushers suddenly took a swig from the innovation and risk bottle but because they’re largely powerless to stop it.

Providing Authority After the Fact

Imagine your snotty little kid Johnny, rather than asking you for something, simply going ahead and taking it.

Imagine further that there was absolutely nothing you could do to stop him. Would it not, at least ostensibly, be far easier to turn around and just say, “Oh no, it’s OK. Johnny Snotnose has my blessing.”

After all, suggesting it’s not sanctioned would reveal a weakness, especially if you couldn’t bring out the cane for Johnny.

Weakness, as mentioned last week, is anathema to leaders who rule with fear.

And so it is that last month, at the St. Petersburg Economic Forum, Vlad met with Vitalik Buterin, developer of Ethereum, where reportedly the Russian President viewed the technology as a “promising tool to assist Russia in diversifying its economy beyond oil and gas”. According to a statement on the Kremlin’s website, Putin said:

“The digital economy isn’t a separate industry, it’s essentially the foundation for creating brand new business models.”

Now, before you sing with the choir of libertarians thinking Vlad just joined the ranks, just remember that along with all bureaucrats everywhere they will want their slice of the pie – a topic I discussed just the other day.


Far from banning Bitcoin and crypto currencies, Russia is now, via a politically connected (hey, this is Russia) oligarch, raising US$100m to mine crypto currencies.

Here’s a question for you: What does Russia have a lot of?

Vodka? Yes. Brides online? Yes. But get your head out of the gutter, what else?

Energy, very cheap energy.

Mining cryptos requires cheap energy, something Russia has a helluva lot of.

Sure, there are other countries out there with cheap energy such as Saudi Arabia, but the problem with the Middle East… actually there are a lot of problems with the Middle East, but just one of them is that it’s bloody hot.

This matters when you’re running servers, which give of more heat than one of their suicide bombers.

This makes mining farms in hot places an economically tough call. Russia, on the other hand, has both cheap bountiful energy as well as sub-zero temperatures. Perfect for crypto mining. Something you can do while swilling vodka and searching for a bride.

There is more…

Russia’s central depository is building its own crypto currency wallet:

“Russia’s National Settlement Depository (NSD), the central depository for Moscow Exchange, the largest exchange group in Russia, is developing a blockchain platform to provide deposit and settlement services for digital assets and cryptocurrencies.”

These are significant events because they signify that crypto currencies are not only now being taken seriously by business but increasingly by governments.

Enter Geopolitical Tensions

Washington being brilliant just sanctioned Russia and managed to piss of both Vlad and Angela in one fell swoop.

This after accusing Xi of being a naughty boy and now pressuring him to “do something” about young Kim. This is the sort of fragmentation I promised you last year was the future with the incoming “strong men”, and with fragmentation comes a deeper desire to de-risk one’s position.

Tell me, if you were Vlad or Xi sitting on a pile of Benjamins, would you feel more or less comfortable?

Yeah, that’s what I though, too.

Wiley buggers, those Ruskies.


Wow Poll 18 Aug 2017

Cast your vote here and also see what others think is going on

– Chris

“We can ignore reality, but we cannot ignore the consequences of ignoring reality.” — Ayn Rand


Liked this article? Then you’ll probably like my other missives on

this topic as well. Go here to access them (free, of course).


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South Africa To Crack Up?

By Chris at www.CapitalistExploits.at

Awwww! It’s true, though, provided what is shared is useful.

A fellow subscriber to the Capitalist Exploits community who asked to remain anonymous is a macro strategist with a strong interest in South Africa.

After my
article on that clown Mugabe and subsequently on South Africa mean reverting to the rest of the dark continent he reached out to me and shared something interesting, which I in turn will share with you. But first…

Some Cool Facts

I grew up gawping at maps of the world. Weird huh!

The biggest part of adventure is always the unknown and when I was 10 or so I didn’t know a whole lot about those different coloured blotches on the map.

By the time I packed my bags…(actually just one bag) and set out to experience my own adventures at the age of 18, a bunch of those blotches on the maps had already changed their shapes. My “old” map was probably from the 80’s. Macau was still administered by Portugal. And there was British Honduras, Hong Kong still administered by our tea-drinking friends, and Sudan was one place (no South Sudan).

In fact, looking at it now in the 50’s there were only 95 countries in the world. Today there are about 196. I say “about” because some like Taiwan aren’t recognised by certain countries but are by others.

The point is this. We’ve been moving consistently towards more decentralisation – a topic I covered recently when discussing the coming financial disruption and again when talking about how the economics of warfare have evolved. That same trend is in full swing in political systems.

Here’s just a sampling of the secession movements underway today:

  • Scotland from the UK
  • Venice from Italy
  • Quebec from Canada
  • Catalonia from Spain
  • Transnistria from Moldova
  • Basque from France

You can check out an entire squadron of secession movements globally at Wikipedia.

And so when the trend is your friend, betting on additional countries breaking up isn’t loony talk. It’s more probable than most would think:

And Now… As Promised

Hi Chris,


Here is the essence of the secession thesis for western SA.


First, here is the simplistic vision of western SA secession that misleads people into dismissing the idea.


South Africa is failing. The Western Cape is run by the competent DA.


People are ‘semigrating’ to the Western Cape.


Powerful political and business interests will begin to form a secession movement.


The DA will lead a secession government in a dramatic political breakaway referendum.


Timeframe next 5-10 years


The version above is unrealistic, politically infeasible and most importantly too fast.


A more plausible version:


The white tribe of Africa is a politically vulnerable and culturally persecuted, yet economically powerful, ethnic minority.


It’s only means of collective cultural survival is autocratic control (tried and rightly abandoned) or geopolitical self-determination.


Emigration is a dispersed, individual survival strategy used by whites since the 1980s, but there are numerous marginal factors limiting further emigration. These are:


– Many remaining whites are less internationally mobile (lacking passports, skills, or the means to move)


– Many remaining whites don’t believe they have a home outside of Africa or don’t want to leave Africa


– Offshore options are limited to (effectively) the Anglosphere which has cost-of-living and lifestyle tradeoffs that many white South Africans aren’t yet prepared to make. Offshore economies have numerous challenges of their own, like terrorism, asset bubbles, zero growth, unsustainable welfare, war risk etc.


For the above reasons, the ‘semigration’ trend from eastern to western SA is very hot and well under way. Internal data suggests this has ramped up significantly in the past 2-3 years. It is the relatively low-cost way to physically escape some degree of political marginalisation in eastern SA and move to what feels like a friendlier and more advanced country.


Secession thought of as a discrete political/geopolitical event is conceptually implausible in SA, but thought of as a step-by-step, cultural process over time, it becomes far more conceptually plausible. In SA, white South Africans are far down the track of mental secession. The next massive trend is semigration or ‘spatial secession’.


Once more and more people and capital congregate in the Western Cape, provincial political dynamics will begin to shift and agitate, not for secession, but for greater provincial autonomy, more national functions devolved to provincial/municipal level etc. The ruling national govt will deny this autonomy due to tax and realpolitik reasons, causing growing/festering political grievance in the WC.


If South Africa as a unitary entity fails and the currency craters, the geographic grievances will begin to escalate and accelerate, and WC politics will take on a quasi-autonomous characteristic. Local grievance parties that promise local voters greater autonomy will begin win votes.


The economic crisis in SA will become so acute that WC politics will leap into secession politics as an existential imperative, agitating for a referendum. During this whole process, I see whites coming under increasing political and security threat in eastern SA.


Whereas white Zimbabweans moved overwhelmingly to SA from 1980-now (some to UK, Oz, NZ, US of course), white South Africans do not have such an easy escape hatch. The escape hatch is either emigration or political self-determination in a new African state.


Eventually secession will be regarded by all major political groups as win-win. Whites and Coloureds tend to occupy their most historically legitimate region (Western and Northern Cape), and blacks tend to occupy the rest (blacks would be a large ethnic minority in WC). The black political elite will see it as a welcome defeat of expansionary ‘Great-Trek-Gold-Rush’ colonialism. Whites will have fortified their own African state.


I see this as a 15-30 year process. Obviously not inevitable, but you have ingredients for secession that Catalonia and Scotland simply do not have. You have a highly vulnerable ethnic minority group, but it is economically strong and internally mobile. Whites will not be able to tolerate isolated enclave living for long before moving to the Western Cape and joining a growing white community becomes a no-brainer. In addition, you have distinct ethnic groups (whites and coloureds) with a 400 year + historical settlement claim in western South Africa. In essence, this comes down to pure geo-ethnic survival which is what really lends the idea its power and again something the likes of Catalonia does not have.


Of course there are risks to this view. If the ANC is able to de-federalise and then control the Western Cape politically and turn it into an indistinguishable province from the rest of SA, this would be a major countervailing force. Also, since the secession movement could be easily tainted as racist (as opposed to legitimate ethnic self-determination), it could struggle to obtain the requisite international support it might need, even though ironically the “Cape Republic” would be more racially/ethnically diverse than eastern SA.


Anyhow, I’d appreciate your brief thoughts.

One thing I know for sure: The maps my kids are looking at today won’t be the same maps their kids look at.

Figuring out even just some of these pieces ahead of the hoi polloi and positioning to take advantage of such changes has in the past led to fantastic profits. The future is likely to be similar.


I can’t do a poll on this. It’s broader than Jabba the Hutt.

What area or region in your opinion has the highest probability of secession in the world today?

Let it rip in the comments section on the blog.

– Chris

“Own only what you can always carry with you: know languages, know countries, know people. Let your memory be your travel bag.” — Aleksandr Solzhenitsyn


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The Coming Financial Disruption

By Chris at www.CapitalistExploits.at

From the late 1700’s through the 1800’s the first industrial revolution brought immense benefits to the average Jack. Mass production of textiles, transportation, food, and beer meant that it was no longer just Lords and Ladies that could afford to get hammered.

Indeed, Jack and Jill too could fall down the hill after getting plastered without breaking the bank.

Those with capital owned the means of production. Stuff like mines, railroads, steel factories, and so forth as well as workers were paid to work the machines.

It was the machines which were valuable. And since they were immensely costly the power largely lay with the Lords and Ladies who had the capital available to purchase the machines.

Jack and Jill’s contribution, relative to the cost of the infrastructure such as mines, etc. was relatively small. The value assigned to the contributing parts looked something like this:

Very rough non-statistical representation for illustrative purposes. Dear quants, don’t get your knickers in a knot if not exact.

In a nutshell, life for Jack and Jill (labour/skill component), while better than pre industrial revolution, kinda sucked. Labour was expendable. Literally. Don’t believe me? Pick up a history book on the era. Nasty!

The second industrial revolution (also known as the technological revolution), which took place between the end of the 19th and beginning of the 20th century meant the Jack and Jill now had, amongst other things, electricity. This also meant they had lighting and telephones, and so now Jill could not only see Jack getting plastered at night but no longer had to wait 3 weeks to tell her mother all about it in a hand delivered letter but could pick up the phone and complain immediately about the drunken debauchery, too.

Wonderful stuff and certainly revolutionary. But like the first industrial revolution, it was still predicated on fairly expensive machinery. As such, those who had capital enjoyed the majority of the wealth. The Lords, Barrons, and so forth still had the upper hand.

The value pie looked a bit more like this:

And again… very rough non-statistical representation for illustrative purposes. Dear quants, don’t get your knickers in a knot if not exact.

The digital revolution, which started somewhere around the 1950’s, ushered in digital record keeping, computers, and finally provided the ability for Jack and Jill to watch drunk Russians falling over on Youtube, tell their friends on Facebook they’re just going to the loo, and upload pictures of their kids that nobody will ever look at… ever.

Importantly, the greatest component of value no longer lay in some unattainable (for Jack and Jill) expensive machinery. The cost of these “new” machines have fallen every day since, allowing more and more Jacks and Jills to attain a greater share of the pie.

The functions which could be performed with the new technology allowed for entire industries to be built, and with much less capital than in the first two industrial revolutions.

Labour and skills have become more valuable relative to the other components ever since.

Take a look at the most valuable companies in the world, and you’ll notice that within the ranks are companies which were started with close to zero capital. The idea and the skills to implement the idea were clearly far more valuable than any of the machinery or “hard assets” which form part of the business. Alphabet, Apple, Facebook, Alibaba – you get the picture.

The value pie looks a lot more like this:

The entire capitalist system has been undergoing these changes over time.

As the cost of labour has risen, so, too, have the parasites which leech off this component. In the early industrial revolution it was easy: tax the factories. Fixed assets could be seized for unpaid taxes and the parasites authorities could steal tax accordingly.

As the value pie changed with the labour/skill component being more valuable we saw taxation shift towards income tax and a host of obligations layered on business owners. Employee benefit schemes, healthcare plans, social security scams plans, etc.

Here’s What’s Coming Next

An entirely new structure whereby every value component of a business is tied to an outcome via smart contracts, and, instead of “from each according to his ability, to each according to his need” as that lunatic Marx wanted, we will have “from each according to his contribution”.

We’ve slowly been moving towards this rewards function for some time.

Things such as option pools for employees, vesting of equity based on hurdles being met, bonus pools, and so on but it wasn’t until blockchain technology arrived that we have had an entire architecture allowing for an entire contribution based economy to be built.

And if you think this is a bunch of mumbo jumbo bollocks then call me in 10 years time when your employment contract is being coded in a smart contract and you’re being paid in a digital currency that is directly tied to the outcomes of your work and the business you’re working for. A world where you’re rewarded for the products you buy (with a stake of ownership claim) and where you have a vested (literally) interest in the social media platforms you use.

Doubt me? It’s already happening.

The anonymous messaging service KIK is doing just that. They’re converting all of their VC funding which includes funding of $50m from Chinese internet giant Tencent into a cryptocurrency called Kin. Not only is this cryptocurrency clearly equity or quasi equity, the currency is being used to reward not only owners but developers and consumers.

In their own words:

“Kik is introducing an open source cryptographic token, named Kin, which is envisioned as a general purpose cryptocurrency for use in everyday digital services such as chat, social media, and payments.



Kin will be the unit of account for all economic transactions within the Kin Ecosystem, and it will serve as the basis of interoperability with other digital services. In character, Kin is a pure cryptocurrency of fixed supply. It is fractionally divisible and long-term noninflationary.



However, as described below, only a small portion of the Kin supply will become liquid in the near future, as most of the Kin supply is reserved for the Kin Rewards Engine. Like other cryptocurrencies, units of Kin are fungible and transferable, and they will be expected to trade on cryptocurrency exchanges.”

Here’s Kin’s website and for those of us who experience brain orgasms from revolutionary disruptive problem solving concepts go read the Kin whitepaper.

The internet, which is as good a metaphor as any other, is as much a collection of technologies as it is a collection of communities. The bones of it were built with DARPA and it was in 1980 that TCP/IP was adopted as the standard. in other words, it took a long time to get to what we have today.

But hell, here we are nearly 40 years later, and though I still can’t figure out how my toaster makes such crunchy lovely toast, what’s really changed my life is the internet. And I bet you this: not one person, even those who were building the pieces, could have envisaged what it would look like.

Today, blockchain technology is still considered by many to be solely for people who think it’s safe to let their children play with electricity (i.e. mad people).

Now, I’ve even tried to explain how revolutionary this is to my wife but she hit me over the head with a rolled up newspaper, and so instead I’m going to try my luck on you my readers.

Mark my words, this is going to have a similar impact to that of the internet and its implications threaten to be much broader and potentially more disruptive than even our wildest imaginations might be after a bottle of Kalashnikov vodka on an empty stomach. And yes, because the pie is going to change, taxation, too, is going to change.

– Chris

“If you want to succeed you should strike out on new paths, rather than travel the worn paths of accepted success.”  — JD Rockefeller


Liked this article? Then you’ll probably like my other missives on

this topic as well. Go here to access them (free, of course).


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