Daniel Goldman

Penguinism and Atheism

By Daniel Goldman Leave a Comment Aug 6

In this post, I will talk about Penguinism and atheism and why many Penguinists do not hold a position in either direction regarding a god’s existence.

I have come across many theists and atheists alike who seem to think that if you don’t believe a god exists, then you must believe that there are no gods. Penguinism teaches us that neither Sq’wak, The Divine Penguin, nor YHWH, the evil usurper, are gods. They are both natural entities. A god, in general, must be above/beyond natural order. And Penguinism itself holds no position on the matter.

But only claims of existence suffer burden of proof! Unfortunately that is not the case. Both claims of existence and claims of nonexistence suffer burden of proof. I won’t go into too much detail here, because I have addressed the issue in depth elsewhere. However, ideas like “you can’t prove a negative” are not valid rebuttals that can be used to avoid suffering burden of proof.

But aren’t gods impossible? It is a common belief that a god is impossible, because a being cannot be omniscient, omnipotent, and omnibenevolent, as assuming any two of those omnis leads to the third omni being false. However, there are a number of issues with this view, and these issues make the “hypothesis” in works like “The God Delusion” straw man arguments.

The simplest issue is that a god does not have to follow strict omnis. A lot of theists believe that god can only do that which is consistent with its nature. It cannot therefore create a box that it cannot lift. Likewise, a lot of theists believe that a god can only know that which can be known. A god which knows all possible outcomes, and their probabilities, but not which outcome will be realized, is still for all intents and purposes, is omniscient.

The second issue is more complicated. Strict omnipotence is internally inconsistent. A strict omnipotent being could do something which is impossible to do. Yet most arguments used to attack god claims assume that strict omnipotence is a property that something could have. Similar issues exist with the other two strict omnis. The moment we assume, for the sake of argument, that any one of these properties can indeed be a property of something which is real, we have to relax consistency.

This issue gets into one of my areas of interests, nonstandard mathematics. One field of nonstandard mathematics is inconsistent math. In this field, we no longer assume that every theorem is consistent: some theorems can be both true and false at the same time. There are a number of good articles covering inconsistent mathematics. Here is one. The point is that, for inconsistent theorems, we can no longer use proof by contradiction. So omnipotence leading to a lack of omniscience does not necessarily present a problem: we could be dealing with a bizarre reality where something can be omniscient and not omniscient at the same time.

But isn’t god evil? This is another interesting point. A god which allows suffering is not immediately evil. For one, a god may not be able to prevent suffering, or might not be able to do so without costing something even more important. For instance, it may be less benevolent to never allow existence in the first place, than allow existence where suffering could occur.

There are exceptions. The actions of YHWH, as discussed in The Basics of Penguinism, are evil. Why? YHWH seeks to punish those who do not obey, for all eternity. A punishment, for it to be good, must serve a corrective purpose, otherwise it’s just an act of revenge. A punishment also should not be more severe than the transgression. Eternal punishment cannot serve a corrective function, as it is eternal. Human actions are also seemingly finite, and so the punishment is well beyond the severity of the transgression. A being that willfully and knowingly issues such punishment is reasonably considered evil.

Summary. So in summary, Penguinism is not a theistic religion, nor does it assert that there are no gods. There may be a god, such as “El” but Penguinists just don’t generally hold a position in either direction.

The post Penguinism and Atheism appeared first on The First Church of Penguinism.

Terra Tech: 10 Months Later

By Daniel Goldman Leave a Comment Jan 29

About ten months ago, I wrote about Terra Tech. What has changed since then? Revenue is better, margins are better, and marijuana politics are mixed.

Fundamentals

Annual

 201120122013201420152016
Revenue-$552,579$2.13M$7.09M$9.98M$25.33M
Gross Income-$100,866$88,918$152,992$1.02M$2.57M
Gross Margin - 18.25% 4.17% 2.16% 10.22% 10.15%
SG & A$7,497$1.07M$3.58M$18.3M$9.83M$20.72M
Net Income-$28,985-$5.84M-$6.15M-$21.89M-$9.23M-$26.92M
Net Margin - -1057% -289% -309% -92% -106%

Revenues have been increasing significantly. 2016 saw an almost 200% increase in the top line. While I am not too concerned about margins at the moment, considering just how much is being spent on growing the business, I did want to include gross margin and net margin calculations in this update. Obviously net margin is still incredibly negative, but in the last two years, it has settled down to about -100% which is a heck of a lot better than the first four years. For gross margin, 10% is still quite low. I would like to see gross margin increase to about 20 – 30% but at least it is in the double digits.

Quarterly

 3/31/20166/30/20169/30/201612/31/2016 3/31/2017 6/30/20179/30/2017
Revenue$1.55M$9.7M$6.95M $7.13M $6.82M $7.84M $10.12M
Gross Income$133,974$1.26M$1.32M -$530,621 $359,063 $1.51M $2.33M
SG & A$2.05M$5.08M$6.01M $7.2M $6.39M $6.03M $6.24M
Net Income-$4.13M-$4.93M-$5.59M -$12.27M -$10.11M -$453,769 -$7.79M

There’s a fairly straightforward positive trend in the growth of revenue. Q4 2017 was a very nice sales quarter. However, I am waiting to see how new legalization trends affect Q1 2018 and how federal crackdowns might affect sales trends.

Stock Movement

Terra Tech’s stock experienced a significant amount of volatility towards the end of 2016 into 2017, which also caused a spike in trading volume, but has settled down to the low 30 cent range for now. The stock is currently trading above its 50, 100, and 150 SMA, however, I am not going to make any guesses on its short term price movement.

Politics

Jeff Sessions has been trying to double down on his threat to enforce federal anti-marijuana laws. However, even as he issues his warnings, more states are working towards legalization. California’s recreational marijuana laws are now going into effect. New Jersey is working to quickly implement recreational weed legislation. With states surrounding New York moving to legalize, it seems like it is only a matter of time before New York follows. With so many states legalizing, and with federal laws threatening the people of those states and marijuana revenues in those states, there will be more and more impetus for congress to act to fully legalize marijuana on the federal level. This situation is doubly true because of the threat from Sessions. That is why I still see his threat as being bullish for marijuana companies, at least in the long run.

Future Expectations

A lot will depend on exactly what Sessions and congress does. The non-cannabis area of Terra Tech may help buffer them from the full effects of the Jeff Sessions threat. In terms of revenue, since they now have a temporary license to sell to adults in CA, I do expect the top line to expand even further in Q1 of 2018. They are however still pushing to expand and that means a lot of their revenue will go back into growing the company. TRTC is not currently interested in profits. It is interested in growth.

Related Industries

Terra Tech sees itself popping up in the news in some rather “odd” places. In one article, it was mentioned alongside Taco Bell. However, that makes sense. “Munchies” may very well fuel a boom in fast food and fast casual restaurants, the latter being something I am very interested in watching. However, even among traditional fast food companies, we are seeing an effect from marijuana legalization. Jack in the Box has said that it is planning to release munchie themed meals. Even if other larger companies do not follow along, the increased in sales from cravings may help boost sales.

Disclaimer

And for the usual disclaimer, I do own shares of TRTC and some other marijuana stocks. These stocks are penny stocks in a high risk sector and therefore are all buyer beware. Do you own research, make sure you only risk what you’re willing to lose.

The post Terra Tech: 10 Months Later appeared first on Trading Politics.

Bitcoin: A Major Asset Bubble

By Daniel Goldman Leave a Comment Dec 25

A bubble is “when the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely…” This commentary is going to be expanded as time goes on. But I wanted to quickly put something out into the world to explain my concerns with bitcoin and other high risk asset classes.

First, when I say that a sudden collapse is likely, it does not mean that one is imminent. It means that there is a high probability of it occurring. There are ways in which a bubble can end, besides in a crash. Speculation can die down slowly and allow the price to level off or drop slowly. Or the reasonable valuation of the asset can rise due to changes in supply and demand. Either of these situations would cause the bubble to end without a crash.

Bitcoin

It is argued that $BTC is not in a bubble. One argument used is that people have been claiming that it has been a bubble for a long time, and yet even new adopters have been profiting substantially. But as I said in the very beginning, a bubble just implies a high probability of crashing. A bubble can last for a very long time before it does, if it ever does at all. Many argue that the $USD is in a bubble, by the same people who profess that bitcoin is going to continue to grow and grow and grow. I agree that the dollar is a bubble. It has yet to crash, but that does not mean that it is not a bubble. The stock market has been argued to be in a bubble. Again, I agree. Months ago I wrote an article about how stocks were overvalued. Since then, stocks have continued to climb higher, but this climb has just resulted in greater risk.

What makes $BTC a bubble? Aside from the rapid spike in price, the high volatility associated with rampant speculation are to blame. Much of the exchange volume is due to speculation, and very little is due to use. This result has been caused by the inherent deflationary nature of the cryotoasset.

Stocks

One reason why I think $BTC and other cryptoassets are growing in price so much is because people who would normally be shorting the market are instead putting their money into $BTC et al. Because of the “BTFD” mentality, shorting stocks right now isn’t getting anyone anywhere, but most traders do not want to just leave their money on the sidelines. Because of the cryptoasset bubble, even though there is a lot of risk, the reward seems much better than stocks, and so money is flowing into the cryptoasset market. However, that also means that once things start to go south with the stock market, money very well may flow out of bitcoin and others and into short positions in stocks. Now, some of the long positions may transition to bitcoin or another cryptoasset, which may buffer the price, but it is hard to tell. What I do expect is a waterfall effect for the S&P 500 and other indices.

Conclusion

People can certainly profit during a bubble. A bubble may never really burst. However, the risk is great, and that point should be made clear. Also, the way in which the cryptoasset markets, precious metals markets, and stock markets are interacting, make the risk for stocks even greater.

Further Reading

  • Gold vs Bitcoin
  • Investing 101

The post Bitcoin: A Major Asset Bubble appeared first on Trading Politics.

Investing: Human Capital

By Daniel Goldman Leave a Comment Dec 14

One of the most important aspects of investing is improving your own “human capital” through education. The more you know, the better off you are.

Your knowledge, skills, and work ethic, and social network all help determine how successful you will be over the course of your life. Of course, luck is always involved, but as Branch Rickey said “luck is the residue of design.” Setting yourself up to be able to take advantage of opportunities, and noticing those opportunities when they arise, is really important.

Economics

Economics is essentially the study of “choice.” Having a solid understanding of economics comes in handy. Microeconomics addresses concepts like opportunity cost, utility, etc and helps us make personal decisions, while macroeconomics addresses GDP, monetary theory, etc, and helps us understand the decisions that governments make. Coursera offers courses in both microeconomics and macroeconomics.

Just a warning with these two courses. Both show a clear bias towards Keynesian economics, although the proctor does a fairly decent job at explaining multiple competing theories, and it is not too off putting.

Corporate Finance & Markets

Now, if beyond investing in yourself, you decide to invest in someone else’s business, either through a startup or through publicly traded companies, you’ll probably want to have a solid grasp of the basics of corporate finance, as well as the nature of the global capital markets. Understanding the difference between book value and market value, knowing basic ratios which help identify how profitable a company is, etc will help you select specific companies. And knowing how equity markets, debt markets, etc all interact with one another, and how companies use these different markets will further help you understand the ups and downs of your investments.

Again, Coursera has some useful courses on these topics. In this case, they’re part of a five course specialization.

Learning Probability Theory

I added this one because of a conversation with an author on Seeking Alpha. Fear and Greed Trader argued that the “naysayers” have been wrong. It is true that we have been calling for a correction or collapse of the markets. However, at least when I address such matters, I am addressing probabilities.

One might argue that since a major correction has not happened in a long time, it will not be likely to happen. Or someone might argue that if a correction has not happened in a long time, it is long overdue and must happen soon. However, in many ways, when a correction happens is largely independent of what has happened in the past. We can only look at the conditions of the markets now. The same is true in the opposite direction. It similar to arguing with someone who has had a winning steak while playing slots. They may argue that since they’ve had a winning steak, they are likely to keep winning. But if you understand probability theory, then you know that this is not the case.

Skills

There’s nothing wrong with simply investing in stocks. However, maybe you don’t want to just profit off of someone else’s work and imagination. Maybe you want to profit off of your own. In that case, you’ll want to gain a marketable skill, or set of skills. Programming is a big one these days, and if the project is small enough, you can even handle the entire thing yourself. If not, a skilled programmer should at least be able to produce a proof of concept, which can then be used to convince investors to get involved.

Two skill sets which should be strengthened, regardless of profession are writing and interpersonal skills. If you’re looking for investors, you’ll want to be able to write up a proper business plan in order to pitch the idea. And similarly, you’ll want to be able to draw people in and convince them of the profitability of your idea. And the idea of interpersonal skills leads us to the next investment.

Networking

It’s difficult to be successful on your own. Spending time building your network is often key to being successful. Now, you might think that you can just rely on your friends when you need something, but that’s not true. Think about it. Suppose you’re looking for a new idea to invest in. Asking your friends probably won’t help that much. If they knew someone with a novel idea, you probably would know that person already too. Or let’s say you’re looking for an open position for a job. Again, if your friends know about the option position, odds are you would too.

That’s why acquaintances, or what’s known as “weak ties” in social network theory are often at least as valuable, if not more valuable, than strong ties like friends and families, even though friends and family are going to be more likely to take on risk for you. So it’s always a good idea to get out there, meet people, and keep track of contacts. Keep a solid contact list, which includes not only how to contact the person, but some basic information so you remember who they are.

Disclaimer: I am not a professional investment adviser. I offer no warranty on this information. Any risk taken is your own.

Further Reading

  • Investing 101
  • Investing: Less than $10K
  • Understanding Social Networks: Theories, Concepts, and Findings Kindle Edition

The post Investing: Human Capital appeared first on Trading Politics.

Investing 101

By Daniel Goldman Leave a Comment Dec 14

I find it interesting how foreign things like stocks and investing are to so many people. So I decided to write Investing 101 as a primer for anyone interested in learning a bit more. I will add more to this primer over time, as readers ask specific questions that they want answered.

Investing

There are a few things that we need to get out of the way, before we can go onto specifics about investing. First, investing is not about getting rich quick. Investing is about putting money into an asset, and allowing it to grow over time. Removing any money from a portfolio after less than three years is not really investing. Second, even a properly maintained portfolio goes up and down in value during certain periods of time. The higher the desired growth rate, the more volatile the portfolio is going to need to be.

Profit

I have a rule for both investing and trading. Essentially it is “do not count your chickens before they are hatched.” More specifically, do not consider any growth in portfolio value profit, until you have used that profit. I am not suggesting that you should go out and spend all your profits right away, but rather that you can never really say how much you have made.

You can only say how much you have spent. I could have an account that goes up by $1,000,000 over the course of a few years. But that portfolio could end up crashing. I could buy the next big thing (like bitcoin), but hold it too long and end up sitting on something worthless. Sure, there are assets that have a longer track record, and diversification helps to reduce the risk of loss, but it is the use that you have been able to derive from something that determines what it was worth.

Margin

I’m going to address the concept of a margin account before getting into anything else, because understanding margin accounts will be useful in later discussions. A margin account is essentially a line of credit that a broker provides. The credit is secured by your positions. Usually the margin account is roughly 2:1. If you purchase $1,000 worth of stock, you’ll only have to pay $500. The other $500 will be on margin. Of course, you will be charged interest for this loan.

More importantly, while a margin account can double your profits, it also doubles your risk. Suppose a stock that you purchased goes up by 5%. Now, you only paid $500 for that stock, but you have $1,000 worth of it. So after the 5% increase, you’ll have $1050 and you’ll have made a profit of $50. But that’s a 10% profit on the $500 you actually paid. But if that stock drops by 5% and you now only have $950, your loss is 10%! So you have to be careful when using margin. The real power of margin is that it helps protect you from the T+3 rule, which I’ll get to in a bit.

Stocks

Stocks are instruments which carry ownership in a company. When you purchase 100 shares of stock in say IBM, you are becoming a part owner of IBM. This gives you rights to the profits and equity in the company. In general, being an owner also gives you the rights to vote on certain matters, such as selecting members of the board of directors, mergers, etc. That isn’t always the case however. Some corporations have multiple classes of stock.

Most people buy and sell common stock. Some companies however also provide “preferred stock.” This class of stock usually gives the investors first dibs on profits, and on recovering losses in the case of a business failure. In general, preferred stock offers a fixed dividend rate, which can be substantially higher than the dividend rate of common stock. In fact, common stock might not offer any dividends in some cases. But in return, preferred stock usually doesn’t convey voting rights. So there’s a trade off. You can get a higher rate of return, but you have no say in what the company does.

ETFs and Mutual Funds

An ETF or “exchange traded fund” is purchased and sold on an exchange in the exact same way as a stock. However, unlike a stock, you are not purchasing equity in any company.

There are options to automatically get a high degree of diversification. You can purchase an ETF (exchange traded fund) or mutual fund, which track key indexes like the S&P 500. That’s not a bad idea. However, it gives you no experience on picking and choosing stocks!

T+3 and Freeriding

Margin isn’t actually the only loan that your broker can or does give you. Stock transactions take three days to clear. Therefore, buying and selling the same stock repeatedly, within a three day period, means that you’re selling a stock that actually isn’t yours yet, with money that isn’t yours yet. That’s called “freeriding.” If you accidentally violate these rules, you’ll end up being locked out of using any uncleared funds to purchase new stock.

But you can get around the freeriding problem by opening a margin account. Since the margin account is a true line of credit that you’re receiving from the broker, you don’t have to worry about whether or not funds have cleared or not.

Investing vs Trading

As I mentioned earlier, investing is not trading. Investing in stocks and trading stocks are two very different methods of generating income. Investing in stocks is relatively easy, requires very little money to start, and carries relatively low risk. Trading is difficult, requires a lot of money to start, and carries a very high risk. If you are buying stock and are holding onto it for the long run, hoping for it to grow, you are investing. If you are buying and selling stock, based on how you think the stock’s price is going to trend in the near future, you are trading, not investing. For a beginner with little money, I suggest sticking to investing.

Day Trading

Day trading is a special form of trading, and it requires a fairly large amount of money to start. It also carries more risk than pretty much any other stock transaction. A day trade is defined in terms of a round trip. A day trade occurs when you buy and sell the same stock in a single day. If you perform more than 4 of these trades in a five business day period, you will be classified as a pattern day trader. But you cannot actively be a pattern day trader unless you have at least $25,000 in a margin account.

Now, while day trading is incredibly high risk, I’m going to tell you something that you probably won’t hear from most professional investors, traders, or advisers. Day trading is not a zero sum game. The usual claim is that day trading requires someone to lose in order for someone else to win. If one person is making money, someone else is losing it. The problem is, this reasoning happens to rely on a flawed assumption: day traders are buying and selling from each other. But current research suggests that this isn’t the case. You can read more on the source of income for day traders, here.

Risk and Diversification

Diversification helps reduce the amount of risk you take on when investing. However, not all risk can be diversified away. There are two main types of risk: systemic risk and unsystemic risk. Systemic risk is the risk due to fluctuations in the market and economic system as a whole. See Market Cycles Definition | Investopedia. Unsystemic risk is risk due to individual businesses. For instance, Chipotle stock has been hard hit because of a recent E. coli outbreak. That can be diversified away.

But it takes about 20 stocks, properly diversified, to eliminate unsystemic risk: risk not due to overall fluctuations in the market. That means, with a normal broker, like TDAmeritrade, you’re spending $9.95 x 20 or $199, just to purchase the stocks. Now, if you’re investing more than $10,000 at a time, that’s 2%, which isn’t great, but can be managed. And if you are investing more than $10,000, it might be better to go with a company like TDAmeritrade or Interactive Brokers, as they have a lot more options. Especially since you don’t need more than 20 stocks to properly diversify and any more than that and you risk over-diversification (The Dangers Of Over-Diversifying Your Portfolio).

One way to diversify a portfolio is through the permanent portfolio method. This method uses 25% cash, 25% gold, 25% long term bonds, and 25% diversified stocks.

Brokers

Robinhood

Robinhood is a relatively new platform for investing. Its services are limited, and it can only be accessed through the Robinhood App, but there are no fees for basic transactions. This is helpful for those who are only purchasing a small amount of stock at a time.

Motif Investing

If you want a little more control and a slightly better selection, you can use Motif. With Motif Investing you can purchase a collection of 30 stocks, called a motif, for a single fee of $9.95. You can also sell or restructure that same Motif for the same price. That’s really quite useful. It means you can pick and choose a fair number of stocks, properly diversify, and not have to take a huge hit. In fact, it even reduces the problem of over-diversification, which is primarily that it costs more to handle 30 stocks, usually, than 20. It doesn’t however eliminate the added complexity of researching an addition stocks however.

TDAmeritrade

TDAmeritrade is useful for investors with more experience and more money. While they are much more expensive than either Robinhood or Motif, they offer greater choice and tools. Not only can you buy and sell stocks and mutual funds, but you can also purchase bonds, futures, options, and trade on the foreign exchange market. They also have great research tools and tools for day traders.

Interactive Brokers

IB is probably my favourite broker for larger accounts. While a person needs to put a minimum of $10,000 into the account to start, IB has access to pretty much everything that TDAmeritrade has and more. They have access to stocks, bonds, forex, options, and so on, and allow you to trade in multiple currencies and on multiple exchanges in a number of different countries. If you are looking to diversify into foreign assets, IB is probably the way to go. Additionally, IB has some nice features like a secured credit card which can directly utilize your margin. This feature of course puts your assets at some risk, so it should be used carefully, but it also provides a very low interest rate because any debt you accrue is secured by your assets.

Education

Improving your own “human capital” will aid you greatly in any endeavor, including investing in various markets. Some people disagree, but I think a solid background on finance and economics is very useful when investing. As such, I would suggest a basic finance course, which would allow you to understand a corporation’s balance sheet and profit and loss statement, along with a macroeconomics course, which will give you an idea of how to analyze information coming out about economic policy and conditions.

Coursera’s “The Language and Tools of Financial Analysis” course is a fairly decent option for learning about corporate finance and their “Principles of Macroeconomics” course provides a good introduction to that topic.

Practice

There are a number of companies which offer practice accounts. Papermoney, through TDAmeritrade’s thinkorswim is one of them. Using these practice accounts, you can play around with a virtual account, using real time market data. You can practice investing, or even day trading, without having to worry about losing any money.

Disclaimer: I am not a professional investment adviser. I offer no warranty on this information. Any risk taken is your own.

Further Reading

  • Investing: Human Capital
  • Investing: Less Than $10K
  • Investing: When is Technical Analysis Useful?
  • Gold vs Bitcoin
  • Investopedia

The post Investing 101 appeared first on Trading Politics.

A Flock of Black Swans

By Daniel Goldman Leave a Comment Nov 17

Black Swans do not seem like something we have to worry about, but they are incredibly dangerous, especially when there is a whole flock of them.

North Korea’s threat of war, Spain’s treatment of Catalonia, and its potential wider effects on the European Union, risk of whether or not key legislation is going to get passed, and Trump’s legal issues are all separate low probability events that when coupled represent significant overall risk to the markets.

Black Swans

Black swans are extremely rare events. But just because the probability of any specific black swan event occurring is low, does not mean that the probability of some black swan event occurring is low.

What we really want to know is the probability of at least one of these events occurring. Mathematically, the probability of at least one event, P(at least one), equals 1 – P(none). As we include more possible black swans, that second term gets smaller and smaller, and the probability of at least one black swan event occurring goes up.

We can get very specific by making some assumptions. Suppose that we have four different once in ten year events that would be bad for the market. It may seem like we do not have to worry about them very much for a while, but the probability of at least one of those events occurring in the next year is 33%.

Systemic Risk

But what makes the situation worse is that the market bubble (yes; stocks really are overvalued, even though the market can still go higher) is built on so much interconnected risk. I have written about some of this before. For instance, a lot of the increase in the the S&P 500 and other indices are due to rising profits in the banking industry, and bank profits are largely dependent on the market going higher.

ETFs

The influx of money into index funds like SPY have boosted more than just the sectors that are seeing growth, since you purchase all stocks in the S&P 500 index when you purchase SPY. This drives much of the market higher.

Margin

Another issue is that a lot of buying has been on margin. Every dip people are buying up stocks, and a lot of that purchase is debt based. This analysis of margin debt, while admitting that the peaks and troughs are not enough to use as a forward indicator, show high levels of margin debt when compared to historical levels. A sharp drop in the S&P 500 and other stocks would result in a sell off as margin calls are initiated.

Consumer Credit

But that is not the only debt that his propping up this bubble. The most November 2017 consumer credit report puts September’s provisional outstanding credit growth rate at 6.6% p.a. Total outstanding consumer credit is now $3.79T and it continues to grow at a rate far faster than the rate of inflation. That means that a lot of this recovery is dependent on debt, and it means that reduction in ability to pay debts would have a significant impact on bank profits, which again are largely responsible for market gains.

Volatility

Finally, XIV may be indirectly driving the market higher, or at least preventing it from dropping. The buy the dip extends to XIV because it has done so well as a profit making system. That in turn suppresses the VIX which bolsters the S&P 500. While it is unlikely, a large drop in XIV could result in it being shut down, and at that point, VIX would see a massive spike and the floor would fall out from under the S&P 500.

Summary

While the odds of any specific black swan event occurring is low, the more types of black swans there are flying around out there, and right now we have a lot, the more likely it is that at least one of these events will be triggered. Maybe North Korea will follow through on its threats. Maybe the Catalonian crisis will get out of hand. Perhaps tax reform will fail. Or maybe we will see legal action brought against Trump. Or perhaps something completely different will trigger a major stock sell off. Do not assume that just because a single event occurs with very low frequency that some major event is not right around the corner. Furthermore, we need to recognize that a major sell off can be far more devastating due to the increased systemic risk generated by ETFs, the co-dependence between the markets and the banking industry, and the recent way in which people are trading volatility as a real asset class. While none of these conditions implies that a meltdown is imminent, they do increase the probability of one occurring and increase the probability of it being extremely severe.

The post A Flock of Black Swans appeared first on Trading Politics.

Morning Snapshot 7/24/17

By Daniel Goldman Leave a Comment Jul 24

This is a very quick analysis based on last week’s closing signals. First, (SPY) is not showing all that much direction, at least on the daily time scale. It could go either way. The Russell 2000 (IWM) is signaling a strong downward movement. Friday’s candlestick sets up a new resistance level at 1452. Look for confirmation of a downward trend today.

The S&P 500 is showing continued positive movement on the weekly time scale, but last week’s candlestick was much weaker than the prior week’s. The Russell 2000 finished last week off fairly weak. I would not call it a traditional shooting star doji, but it is close. At the very least it is showing increased consolidation.

Risk appetite is still fairly strong, based on the extended risk appetite index. However, both gold (GLD) and usd/jpy (FXY) is on the downtrend, with the yen reaching a ten handle last night. However, VIX is still near record low, which is signaling limited expectation of volatility in the short term.

Market Snapshot Image

Watching

There’s a fair amount of information coming out this week. One that everyone will be watching is the GDP estimate for Q2. The Atlanta Fed’s GDP Now estimate has been declining, more or less consistently, since the first estimate for Q2 was released. It is now holding at around 2.5%. Consumer confidence data is going to be released on Tuesday, although the perception of the economy and how it is actually doing seem to be fairly disconnected right now. We also have the FOMC announcement on Wednesday, even though it is not expected that there will be any change in rate policy.

The post Morning Snapshot 7/24/17 appeared first on Trading Politics.

Market Snapshot 7/14/2017

By Daniel Goldman Leave a Comment Jul 14

Market snapshot for 7/14/2017: SPX hitting resistance while risk appetite and perception are potentially nearing a reversal.

Sometimes it helps to look at more than one metric when analyzing future market direction. It is still hard to make any short term predictions, but SPX does seem to be hitting resistance. This trend could go either way, but VIX and my extended risk appetite index seem to be doing a u-turn. This could suggest at least a short term decline in SPX.

The post Market Snapshot 7/14/2017 appeared first on Trading Politics.

Deflationary Cryptoassets

By Daniel Goldman Leave a Comment Jul 13

Cryptoassets are an emerging class of assets with a lot significant potential for wealth generation and preservation. Involvement in the “Cryptocurrency Ecosystem” requires a fair amount of knowledge about underlying block-chain technology, but it also requires significant understanding of monetary theory. $BTC, $LTC, $ETH, and many other cryptoassets have a hard cap. Once reached, no new coins are created. This drives the already speculative asset class towards even higher rates of deflation.

Asset Comparison

This natural deflation makes “cryptoassets” like $BTC interesting speculative vehicles, but it is problematic if the desired goal is widespread adoption of the asset as a currency. Consider the following thought experiment. Suppose we have two assets, A and B, where A holds its value at a roughly constant level and B is deflationary.

Given the option, a rational person would spend A first. A week from now, a unit of A will still be worth the same. A unit of B will be worth more, on average, and so if a person spent B instead of A, there would be an economic loss. This means that consumers, businesses, etc, while probably having little issue with accepting B, will not be willing to use B for purchases, payroll, and other expenses.

This drives B out of circulation as hoarding increases. That further drives up the market price of B as the available supply continues to decrease. Of course, while someone might prefer to be paid in units of B, very few would say no to money and so A will be the asset that is actually traded around. To be a form of currency, an asset must be used as an intermediate item of exchange. In the thought experiment, B is driven away from being a currency while A is pushed through circulation.

Consequences

Therefore deflationary assets make poor currency. They are at best investments, and at worst, high risk speculative vehicles. That is the case for the major cryptoassets. The risk stems from the fact that miners are needed to maintain the security and stability of the underlying block-chain. Right now, miners are making their money through payments for generating new coins, but once the hard cap is reached, the only source of revenue will be transaction fees.

Transaction Decline

Transaction fees are more or less capped. A person will not pay significant more for a transaction just because the asset is worth more. If a person is willing to pay 1% for a transaction now, they will not pay 10% just because the asset has increased in value. They are still spending more value. Therefore a declining number of transactions resulting from the deflationary nature of the asset class will result in declining transaction revenue. This will push miners out of the market and make transactions more difficult, while also creating voluntaries in the block-chain. At best, this will mean that it will be difficult and expensive to make transactions. At worst, this will result in a collapse of the block-chain itself.

Investment Strategy

For the time being, hard capped cryptoassets will likely continue to be reasonable speculative vehicles. But there is likely to be fluctuations in which assets are popular and it is unlikely that any of these assets will become used as a broadly accepted currency. For long term investments, seek out stable cryptoassets without a hard cap or ones that have hard caps that are so large that they will not be reached any time soon. $LTC is further away from the hard cap than $BTC, but not by much. $DOGE is a fun cryptoasset without a cap and it is being used on a day to day basis by its fans, but past scams related to the currency have driven down widespread acceptance. I personally am still looking for the best solution.

Further Reading

  • Gold vs Bitcoin

Donations always accepted: Donations

The post Deflationary Cryptoassets appeared first on Trading Politics.

Watching S&P 500 Financials

By Daniel Goldman Leave a Comment Jul 12

I am still concerned about the financial sector in the long run. As I mentioned in “Breaking Down Bank Earnings,” a lot of the movement in the S&P 500 has come from the financial sector (XLF), and profits for the financial sector have been coming from this inflated bull market. This, along with the interconnectedness that (XLF) has with the broader market, largely through (SPY) constitutes a lot of systemic risk.

However, while there is a lot of risk, especially in the long run, the financial sector is bordering on another move higher. It depends on whether or not it can break through a key resistance level. If it does move higher, it could take the rest of the market with it.

As you can see, the $SP500#40 has been moving sideways, within a channel between roughly 380 and 420 for quite some time now. I am waiting to see if there is a significant break above 420.

The post Watching S&P 500 Financials appeared first on Trading Politics.

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