Monday, December 31, 2018

The Year In Space, plus, Tomorrow's Big Event (Dec. 31 - Jan. 1, 2019 Ultima Thule flyby)

First up, Gillian Tett at the Financial Times, December 19:

Space: the final frontier for finance
As a science-fiction-obsessed teenager in the 1980s, “outer space” conjured up images for me of astronauts, rockets, aliens and the novels of Arthur C Clarke.
Now the phrase is associated with something else: sovereign wealth funds, venture capital firms and Wall Street giants such as Goldman Sachs.

Yes, you read that right. This month, Washington’s commerce department held a flagship conference to discuss space exploration and development. Between debates about space debris, rocket launches and global positioning systems, there were also lively discussions about how to encourage pension funds to invest in space-related companies.

Analysts estimate that by 2040 the global space industry will swell from about $400bn to more than $1tn. While it has historically been the government that has propelled adventures in space, commerce secretary Wilbur Ross has said it is now time for the private sector to provide the engine of growth.
So the department is trying to deregulate the industry, making it easier for entrepreneurs to jump in, and to lure capital from venture capital firms, hedge funds, sovereign wealth funds and even mainstream pension funds.

“The space industry is on the verge of a revolution,” Ross told me in an interview, pointing out that companies such as Goldman Sachs and Bank of America have recently created dedicated teams to conduct financial research on the topic. He likens the sector to bioscience: a sphere that will produce big “hits” for investors over the long term, even if the short-term science seems risky.

Is this a good thing? I suspect that were you to ask those US astronauts who leapt into the history books five decades ago, they might wince. In their day, exploring the final frontier was considered a patriotic venture for the wider public good, best funded by national governments (or, in Europe, transnational ones)....MORE
From Geekwire, Dec. 27
Year in Space: From the Falcon Heavy’s first flight to the solar system’s last frontier
Launches, launches, launches! 2018 was a big year for liftoffs, particularly for SpaceX and its billionaire CEO, Elon Musk. The past year also saw a number of notable trips to interplanetary destinations, including the Martian surface and two asteroids. What’s up for next year? More of the same, only way different.

For more than two decades, I’ve been writing year-end roundups of the top stories in space science and exploration, with a look-ahead to cosmic coming attractions. 2019 could well bring about developments I’ve been predicting on an annual basis going as far back as a decade, such as the rise of commercial human spaceflight.

Other trends are easier to predict, because they’re based on the cold, hard facts of celestial mechanics. Check out these tales from 2018, expected trends for 2019 and my year-end space roundups going back to 2001 (with lots of failed predictions). Then feel free to weigh in with your comments to tell me what I missed.

Five space tales from 2018
Falcon Heavy takes flight: After years of development work, SpaceX’s super-powerful Falcon Heavy rocket made a spectacularly successful debut in February’s test launch, which sent billionaire CEO Elon Musk’s Tesla Roadster and a mannequin driver named Starman into an orbit stretching out beyond Mars. The Falcon Heavy can send big payloads almost directly out to geostationary orbit, which is a selling point for heavyweight satellite operators ranging from ViaSat to the U.S. military. But it won’t be certified to carry people to far-flung destinations. For that, Musk intends to turn to SpaceX’s Starship (see below).

Fresh and fading Mars missions: On the plus side, NASA’s InSight lander touched down on the flat plain of Elysium Planitia and started deploying scientific instruments to monitor Mars’ seismic activity and internal heat flow. On the potentially minus side, the solar-powered Opportunity rover fell out of contact this summer amid a planet-covering dust storm and hasn’t been heard from since. In the year ahead, NASA will either have an amazing comeback story to tell — or read the rites and declare an end to Opportunity’s 15-year mission on Mars. NASA’s plutonium-powered Curiosity rover, meanwhile, just keeps going and going....MORE
...Five space trends for 2019
New rides to space: Virgin Galactic’s first spaceflight provided a “million-dollar view” for its test pilots, but if all goes well, passengers could start enjoying the view next year, paying $250,000 (more or less) for the privilege. And that’s not all: Amazon billionaire Jeff Bezos’ Blue Origin venture is expected to start flying passengers as well on its New Shepard suborbital spaceship. SpaceX and Boeing are working on new rides as well. The current schedule calls for flights on SpaceX’s upgraded Dragon spacecraft and Boeing’s Starliner capsule to start heading to the International Space Station next year. That would mark the first crewed flights to orbit from U.S. soil since NASA retired its space shuttle fleet in 2011....
Finally, from, December 29:

How to Watch New Horizons' Ultima Thule Flyby on New Year's Day: A Webcast Guide
NASA's New Horizons spacecraft is about the make the most distant planetary flyby in the history of spaceflight, and you can follow the action live.
At 12:33 a.m. EST (0533 GMT) on Jan. 1, New Horizons will zoom past the small object Ultima Thule, which lies 1 billion miles (1.6 billion kilometers) beyond Pluto in the realm of icy bodies known as the Kuiper Belt.

The mission team will keep the public appraised of New Horizons' progress via a series of news conferences and updates over the coming days, all of which you can watch directly via the space agency, or via the Johns Hopkins University Applied Physics Lab, which manages the New Horizons mission for NASA. You'll also be able watch the events here at, courtesy of NASA TV and JHUAPL. [Ultima Thule Flyby! Our Full Coverage]

With NASA currently affected by a partial government shutdown, there was some early questions over how the agency would share New Horizons' Ultima Thule flyby progress with the public. But on Thursday (Dec. 27), NASA chief Jim Bridenstine assured the public the agency would webcast the historic event.

"Expect to see the @NASANewHorizons social media accounts continue to operate," Bridenstine wrote on Twitter. "The contract for these activities was forward funded. This applies to @OSIRISREx and NASA TV too. @NASA will continue to stun the world with its achievements!"

Here's the schedule:
Monday, Dec. 31:
— 2 p.m. to 3 p.m. EST (1900-2000 GMT): News conference previewing flyby science and operations
— 3 p.m. to 4 p.m EST (2000-2100 GMT): Q&A with the New Horizons team
— 8 p.m. to 11 p.m. EST (0100-0400 GMT on Jan. 1): Panel discussion about the exploration of small worlds; flyby countdown events; mission updates
Tuesday, Jan. 1
— 12:15 a.m. to 12:45 a.m. EST (0515-0545 GMT): Countdown to encounter; real-time flyby simulations
— 9:45 a.m. to 10:15 a.m. EST (1445-1515 GMT): Live coverage of New Horizons flyby signal acquisition
— 11:30 a.m. to 12:30 p.m. EST (1630 to 1730 GMT): Post-flyby news conference
Jan. 2
— 2 p.m. EST (1900 GMT): News conference on flyby science results
Jan. 3
— 2 p.m. EST (1900 GMT): News conference on flyby science results...

Meanwhile, at Existential Comics

Today's installment,

Existential Comics home

If You Think Equities Are Crazy Take a Look At This

Via FinViz:

We'll be back on Wednesday with more on where the opportunity might lie going forward, but for the month of December, ouch.
Down 10% on the day,  2.9720 -0.3310.
And we haven't even gotten to the widowmaker (shoulder season) yet.

"The Super Rich Are Investing In Magic Mushrooms And Fancy Batteries"

From ZeroHedge, Dec. 16:
At some point, the super rich reach a level of wealth where "traditional" boring investments like real estate, precious metals, equities and bonds all become a little too mundane. That’s generally when they find time for investing in things like art, collectible cars, fancy batteries and even psychedelic drugs. In fact, we recently wrote about the boom in insurance for items like whiskeys, which are also becoming popular collectible items, having recently priced at more than $1 million per bottle in auction.
But art has always been at the top of the list for those who simply have more wealth than they know what to do with. With the art market hot by virtue of the last decade of "prosperity", those selling high-priced pieces have enjoyed the benefits of a minimum price guarantee at many auctions, as there remains significant demand for these "alternative investments".
To keep business consistent, auction houses have negotiated with third parties to help guarantee bids for art that is put up for sale. And it’s great money, too: the guarantor on the sale of Leonardo da Vinci’s “Salvator Mundi” was said to make as much as $150 million, according to Bloomberg
Not surprisingly, the super rich are also collecting rare exotic vehicles, like Ferraris. The recent sale of a 1962 250 GTO went for a whopping $48.4 million. Only 36 of that particular model were made and the vehicle was also guaranteed by an auction house. Vintage automobiles reportedly returned 280% over the past 10 years according to the Knight Frank Luxury Investment Index. That's twice what the S&P returned in the same amount of time.

And with the marijuana game officially going mainstream, investors are now also looking toward the next "big thing": psychedelic drugs, including synthetic psilocybin (the active ingredient in magic mushrooms), which has been known to help alleviate depression and disorders like PTSD. With psilocybin finally being embraced in some large scale clinical trials, including one that recently launched in Europe and North America by Compass Pathways, large financial backers are starting to step up to the plate.

Mike Novogratz, an investor in Compass Pathways and famous bitcoin investor, told Bloomberg: “It just feels like a cultural shift going on. It’s been around for thousands of years; people kind of know its side effects.”

And if that wasn’t far enough off the mainstream, the wealthy are also investing in, well... batteries. Even though right now the lithium ion battery industry has very low margins, Citigroup estimates that “very efficient manufacturers will generate higher profit margins over time”. This has drawn in the attention of investors who hope to see the $22 billion industry swell to over $100 billion within the next six or seven years.

Citigroup is planning on offering a product that tracks the performance of seven stocks exposed to battery manufacturers and the mining of raw material that is used in the production of batteries. Citi's projections estimate that the portfolio could have a 36% average return over its first year. Buyers of the product would get their initial investment back at maturity while also collecting 70% of any performance gains. David Bailin, the unit’s chief investment officer told Bloomberg: "Clients can choose when to get in but won’t be taking a significant capital risk if the note-writer pays it off at maturity"....MORE

"The Datafication of Employment"

"Not only does this corporate surveillance enable a pernicious form of rent-seeking: it also opens the door to an extreme informational asymmetry in the workplace that threatens to give employers nearly total control over every aspect of employment.”
From The Century Foundation, Dec. 19:
How Surveillance and Capitalism Are Shaping Workers’ Futures without Their Knowledge
We live in a surveillance society. Our every preference, inquiry, whim, desire, relationship, and fear can be seen, recorded, and monetized by thousands of prying corporate eyes. Researchers and policymakers are only just beginning to map the contours of this new economy—and reckon with its implications for equity, democracy, freedom, power, and autonomy.

For consumers, the digital age presents a devil’s bargain: in exchange for basically unfettered access to our personal data, massive corporations like Amazon, Google, and Facebook give us unprecedented connectivity, convenience, personalization, and innovation. Scholars have exposed the dangers and illusions of this bargain: the corrosion of personal liberty, the accumulation of monopoly power, the threat of digital redlining,1 predatory ad-targeting,2 and the reification of class and racial stratification.3 But less well understood is the way data—its collection, aggregation, and use—is changing the balance of power in the workplace.

This report offers some preliminary research and observations on what we call the “datafication of employment.” Our thesis is that data-mining techniques innovated in the consumer realm have moved into the workplace. Firms who’ve made a fortune selling and speculating on data acquired from consumers in the digital economy are now increasingly doing the same with data generated by workers. Not only does this corporate surveillance enable a pernicious form of rent-seeking—in which companies generate huge profits by packaging and selling worker data in marketplace hidden from workers’ eyes—but also, it opens the door to an extreme informational asymmetry in the workplace that threatens to give employers nearly total control over every aspect of employment.

The report begins with an explanation of how a regime of ubiquitous consumer surveillance came about, and how it morphed into worker surveillance and the datafication of employment. The report then offers principles for action for policymakers and advocates seeking to respond to the harmful effects of this new surveillance economy. The final sections concludes with a look forward at where the surveillance economy is going, and how researchers, labor organizers, and privacy advocates should prepare for this changing landscape.

The Data Gold Rush
The collection of consumer data over the past two decades has enabled a rent-seeking bonanza, giving rise to Silicon Valley as we know it today—massive monopoly tech firms and super-wealthy financiers surrounded by a chaotic churn of heavily leveraged startups. The datafication of employment augurs an acceleration of these forces.

In the digital era, data is treated as a commodity whose value is divorced from the labor required to generate it. Thus, data extraction—from workers and consumers—provides a stream of capital whose value is infinitely speculatable. Returns on that speculatable capital concentrates in the hands of owners, with minimal if any downward redistribution.

Google offered consumers a product whose commercial purpose (mass data collection) was all but orthogonal to its front-end use (search). Likewise, the service provided by Uber’s workers (car service) is entirely secondary—and much less profitable—than the data they produce while providing it (a total mesh of city transportation logistics). Search and ridesharing aren’t the goals for these services; the goal is data—specifically, the packaging of data as a salable commodity and a resource upon which investors can speculate.

Crucially, data collection and analysis also provides firms with feedback mechanisms that allow them to iteratively hone their extraction processes. By constantly surveilling us, for example, Amazon gets better at recommending us products, Facebook at monopolizing our attention, and Google at analyzing our preferences, desires, and fears. As consumer data extraction constrains consumer choice and reifies inequities, data extraction in the workplace undermines workers’ freedom and autonomy and deprives them of (even more) profit generated by their labor.
Not only does this corporate surveillance enable a pernicious form of rent-seeking: it also opens the door to an extreme informational asymmetry in the workplace that threatens to give employers nearly total control over every aspect of employment.”
For the most part, these processes remain opaque—at least for most of us. The digital economy is a one-way mirror: we freely expose ourselves to powerful corporations, while they sell and manipulate the minute pixels of our identities in ways we’ll never know or imagine. A 2008 study found it would take 250 working hours to read every privacy policy one encounters in a given year4—which themselves are written in a legalese barely comprehensible to an educated person. As platforms and apps have proliferated, that hour count is likely much higher today. The content of those policies typically guarantees that users have no right to know (much less control) how their data is used. In the Wild West of datafied employment, transparency is even more rare. Most workers have scarcely an inkling that their data is being mined and exploited to generate profit for their employers.

In all, ubiquitous corporate surveillance creates a closed circle. Working people are surveilled as consumers and as workers—when they check Facebook in the morning, when they sit down at their desks, when they get home to shop online for a car loan. The data consumers and workers generate in consumption and in work generate profit for Silicon Valley firms and enable them to more efficiently extract data in the future. Rent-seeking via data accumulation is extremely lucrative for shareholders (who derive profit without paying labor), but deprives workers of compensation for the wealth they produce and concentrates wealth at the very top. The algorithmic means by which this system is fortified constrain and coerce workers and consumers alike.

How Surveillance Capitalism Paved the Way for the Datafication of Employment
A couple years ago, Shoshanna Zuboff coined the term “surveillance capitalism” to describe the business models of major technology companies such as Google and Facebook—the monetization of data generated by constant software surveillance.5 In her article “The Secrets of Surveillance Capitalism,” Zuboff outlines the development of a tech economy driven by targeted ad sales, which relied upon user data in order to better match products with their potential buyers. This business model shaped the practices and infrastructure of the companies that thrived during this era, prioritizing product design that enabled the extraction of the most data possible from each user over designs that protected user privacy or fulfilled the digital-age promise of free and open access to information, unfettered by gatekeepers....MUCH MORE

The Giant 200-Foot Wave at Trinidad, California

From Dr. Abalone, December 31, 2014:

One hundred years ago, on Dec. 31, 1914, the lighthouse at Trinidad Head was assaulted by a wave of monstrous proportions. Although the details are unclear, we know that the storm that produced the waves was unusual and that the wave was greater than 100 feet and perhaps much more. The only eyewitness was the keeper of the lighthouse at Trinidad Head at that time, Captain Fred Harrington, and here is his account of the notorious wave.
“The storm commenced on December 28, 1914, blowing a gale that night. The gale continued for a whole week and was accompanied by a very heavy sea from the southwest.  On the 30th and 31st, the sea increased and at 3 p.m. on the 31st seemed to have reached its height, when it washed a number of times over (93-foot-high) Pilot Rock, a half mile south of the head. At 4:40 p.m., I was in the tower and had just set the lens in operation and turned to wipe the lantern room windows when I observed a sea of unusual height, then about 200 yards distant, approaching. I watched it as it came in.  When it struck the bluff, the jar was very heavy, and the sea shot up to the face of the bluff and over it, until the solid sea seemed to me to be on a level with where I stood in the lantern. Then it commenced to recede and the spray went 25 feet or more higher. The sea itself fell over onto the top of the bluff and struck the tower on about a level with the balcony, making a terrible jar. The whole point between the tower and the bluff was buried in water.  The lens immediately stopped revolving and the tower was shivering from the impact for several seconds.
Whether the lens was thrown off level by the jar on the bluff, or the sea striking the tower, I could not say. Either one would have been enough....

That's a big wave.

Also at Dr. Abalone:
Cortes Bank: the Largest Wave on the Planet

St. Louis Fed: Does the Yield Curve Really Forecast Recession?

From the Federal Reserve Bank of St. Louis, Economic Synopses, November 30, 2018:
It's well known that in the United States recessions are often preceded by an inversion of the yield curve. Is there any economic rationale for this?

Most yield curve analysis refers to nominal interest rates. Economic theory, however, stresses the relevance of real (inflation-adjusted) interest rates. According to standard asset-pricing theory, the real interest rate measures the rate at which consumption is expected to grow over a given horizon.1 A high 1-year yield signals high expected growth over a 1-year horizon. A high 10-year yield signals high expected growth over a 10-year horizon. If the difference between the 10-year yield and 1-year yield is positive, then growth is expected to accelerate. If the difference is negative—that is, if the real yield curve inverts—then growth is expected to decelerate.

What is the economic intuition for these claims? One way to think about this is in terms of Friedman's permanent income hypothesis, which states that an individual's desired consumption expenditure today should depend not only on current income, but also on the likely path of his or her income over the foreseeable future.2 According to this theory, if people expect higher future income, then they will want to consume more today to smooth out their consumption. They can attempt to do so by saving less (or borrowing more). If a community is collectively "bullish" in this sense, desired consumer spending should rise in the aggregate and desired saving should fall, leading to upward pressure on the real interest rate.

Now, consider an economy that grows over time but where growth occurs unevenly (i.e., the economy alternates between high- and low-growth regimes). Imagine, as well, that the economy is occasionally buffeted by negative "shocks"—adverse events that occur at unpredictable moments (an oil price spike, a stock market collapse, etc.). In such an economy, recession is more likely to occur when a negative shock of a given size occurs in a low-growth state as opposed to a high-growth state.
Next, suppose that an inverted yield curve forecasts a deceleration in growth. Then the deceleration will entail moving from a higher-growth state to a lower-growth state. Suppose this lower-growth state is near zero. In this state, growth is now more likely to turn negative in the event of a shock. In this way, an inverted yield curve does not forecast recession; instead, it forecasts the economic conditions that make recession more likely.

How does this idea match with the data? The figure plots the 10-year to 1-year real yield spread along with the year-over-year growth rate of real per capita consumption (excluding durables).3
As is clear from the figure, the real yield curve flattened and inverted prior to each of the past three recessions. Consistent with the theory, consumption growth tends to decelerate as the yield curve flattens. This is true even in non-recessionary episodes. In particular, the consumption growth decelerations of 1985-86, 1988-89, and 2006-07 were each associated with or preceded by a flattening or inverted yield curve. Each of the three recessions occurred when consumption was growing at a moderate to low pace....MORE
The writer, David Andolfatto is Vice President of the Federal Reserve Bank of St. Louis.

See also his personal blog, MacroMania to which we add, when linking, the disclaimer:
Views should in no way be attributed to the Federal Reserve Bank of St. Louis, or to the Federal Reserve System. 
Neither should the blog be taken as an endorsement of the fashion sense of the Federal Reserve Economics Data clothing line:... 

Interpreting the Yield Curve: Counterintuitive Stimulative Effects of Rate Hikes

In Which Izabella Kaminska Claims She Will Be Returning to FT Alphaville

She says mat. leave is up but I'm thinking it's because the Costa del Sol is getting a bit chilly, down to the low 50's (F) for New Year's eve.
Here's the  communiqué:
We've been holding onto a couple pieces she sent in from Marbella or wherever it is she's been lounging about. First up, for the paper:

December 05, 2018
Google mistakenly floods internet with dummy ads
A Google worker with a fat finger has committed a classic mistake in fast-moving electronic markets: hitting the wrong key during a training exercise, in the process injecting a dummy advert into a huge number of web pages and apps.

The error, which happened late on Tuesday California time, saw the fake advert — a blank yellow rectangle — appear on many websites and in apps viewed in the US and Australia for a period of about 45 minutes.

The failure to prevent such a basic human error is a black eye for Google, which has led the automation of online ad placement and is widely recognised as the leader in applying artificial intelligence to how such markets work.

Google confirmed the mistake on Wednesday and said it would “honour payments to publishers for any ads purchased”. It would not comment on the scale of the problem, but one ad industry source put the potential cost at $10m.

The mistake happened when a group of Google advertising trainees were being shown how to use the electronic system, said one person familiar with the error. One of the trainees went further than intended and actually submitted a “buy” order. The mistake was not noticed by anyone at Google for three-quarters of an hour, a lifetime in online auction markets, despite the wide reach that the advert was given....MORE
And at FT Alphaville, Dec. 3:
The EU's General Data Protection Act (GDPR) was supposed to free us from data servitude. Everyone, we were told, would be entitled to their data privacy because the act was designed to “Protect and empower all EU citizens' data privacy”.

We've been living with the supposed benefits of GDPR since May 2018. But are we any better off?
Turns out, probably no.

After a rush of spammy emails from anyone and everyone you ever gave your email to asking you to opt in to their mailing lists, things have gone quiet. But they have not necessarily got any better. In reality, retailers and service providers still hold all the power in the data relationship.

Problematically, the legislation did little to force institutions into providing alternative versions of their services that aren't based on data harvesting. As it stands, we're politely warned that x business model depends on your data, so please accept the T & Cs to carry on. With full awareness of this disclosure most of us have little choice but to “Accept” if we're to go on with consuming that provider's services. Most of the time there are no other options, since so many online service providers are monopolies — and there's almost nobody out there who doesn't take advantage of data in some way to enhance their business models.

And so, here we are. Something covert has been made overt. And that's about it.
We're still being data-mined — we're now just voluntarily signing up for the Faustian data pact instead.
But it gets worse.

In some cases GDPR is now forcing consumers to give up even more of their personal data than they would have before just to get the same services.

Take the online shopping market as an example.
Most retailers have always offered two types of checkout service for online purchases. Registered or guest, with the data-discrete inclined to use the latter.

Historically, there has never been any discrimination between these two options. Whether you sign out as a guest or signed-in as a registered client, the assumption is you are entitled to all the same consumer protection rights and service qualities offered by the retailer in general.
But with GDPR something has changed. And consumers are only now beginning to cotton on.
Take this personal story about an experience with John Lewis as an example.

In a bid to hasten a back-to-work transition from maternity leave, a relatively urgent purchase of a playpen was needed. (Because how else can you write a story about GDPR while supervising a 10-month-old?)...

She then declares jihad on John Lewis and, let's just say, this headline from 2015:
Uh Oh, I Think Izabella Kaminska Is Channeling Queen Boudica, And She is Not Amused
was child's play—so to speak—in comparison.

Equities: Investor's Business Daily on the Current State of Play

It was back on October 4th that  we intro'd a couple links with:

Readers may have noticed a change in the sources we've been going to after the close the last few days. It's because the current environment has the potential to get out of hand, so more IBD and ZH, fewer cat videos....

That was a pretty good time to get hyper-focused:

And since it served us well, let's keep it rolling on into the new year.
From IBD, December 31:

7:27 am ET
Dow Jones Futures Jump, But Here's A Stock Market Rally Reality Check 
Dow Jones futures jumped Monday morning, along with S&P 500 futures and Nasdaq futures, on China trade deal hopes after President Donald Trump cited "big progress." A stock market rally attempt is underway, but it's still a bear market for now. Still, be ready by watching top stocks such as Broadcom (AVGO), (CRM), Starbucks (SBUX) and Merck (MRK). Steer clear of Apple (AAPL) and other broken-down former leaders. Apple stock has lost one-third of its value and needs serious repair.

Dow Jones Futures Today
Dow Jones futures climbed 1.05% vs. fair value. S&P 500 futures advanced 1%. Nasdaq 100 futures popped 1.05%. Remember that Dow futures and other overnight action don't necessarily translate in actual trading in the next regular stock market session. That's been especially clear during the bear market

Dow Jones futures presage New Year's Eve, the last stock market trading day of 2018. It's also in the midst of a stock market rally attempt. A follow-through day could come as soon as this week to confirm the new market rally. But it hasn't happened yet.

Trump Touts 'Big Progress' In China Trade Deal Talks
President Donald Trump tweeted Saturday that he had a "long and very good" phone call with Chinese President Xi Jinping, citing movement toward a "comprehensive" China trade deal.  The U.S. and China are working toward a trade deal, but Trump's tweet could be "overstated," a source told the Wall Street Journal. U.S.-China trade talks resume in Beijing in early January. The China trade war is a major wild card for the stock market and global economy heading into 2019. A positive outcome could be a big lift to global stock markets.
Separately, the partial government shutdown is in its second week, with no signs of a compromise on border wall funding.

Stock Market Rally: 2 Days Isn't A Bull Market
Two up days, a mixed day and positive Dow futures are not a bull market. The stock market had to bounce at some point. The S&P 500 index fell 1.5% or more for four straight days through Christmas Eve. The prior two times the benchmark gauge had done that, it rallied at least 5% the following session. On the day after Christmas, the S&P 500 index rallied 5%, its best gain since March 2009.
Most of the greatest one-day gains come in stock market corrections or a bear market. Those are often bear traps to lure investors back in before the stock market correction tumbles to new lows.

Where Is The Stock Market?
Last week's two days of stock market gains wiped out ... two days of stock market losses. Forget the 50-day or 200-day moving averages, the Dow Jones, S&P 500 index and Nasdaq all hit resistance at the 10-day line Friday. None have closed above that short-term line since early December, though Dow Jones futures suggest another attempt in Monday's stock market. The major stock market averages have struggled to hold above the 10-day since early October, when the bear market got underway.

Will Big Money Confirm Stock Market Rally?
Will mutual funds and other big institutions put serious money into the stock market? That's what it'll take to trigger a follow-through day to confirm the new stock market rally. Then you want to see the major indexes and leading continue to gain ground, especially because the last two confirmed stock market rallies fizzled almost immediately.

Follow The Major Indexes And Top Stocks
Pay close attention to the major averages and leading stocks. Read the Stock Market Today and The Big Picture to stay in sync with the market. A follow-through day could come any time. You have to be ready to change on a dime.

A large number of top stocks are near potential buy points or close to being close. There are a slew of software names, including Salesforce stock, Atlassian (TEAM), ServiceNow (NOW), Workday (WDAY) and more. Some payment stocks, notably PayPal (PYPL) are acting well, along with a few chipmakers such as Broadcom stock as well as restaurants such as Chipotle Mexican Grill (CMG) and Starbucks stock. Don't forget drug and medtechs, including Merck stock, the top Dow Jones performer in 2018....MORE

Matt Taibbi: "The Malaysia Scandal Is Starting to Look Dire for Goldman Sachs" (GS)

From Rolling Stone:

A pioneering twist on third-world corruption might be the biggest scandal the Vampire Squid has ever faced
Goldman Sachs, which has survived and thrived despite countless scandals over the years, may have finally stepped in a pile of trouble too deep to escape.

There’s even a Donald Trump angle to this latest great financial mess, but the outlines of that subplot – in a case that has countless – remains vague. The bank itself is in the most immediate danger.
The company’s stock rallied Thursday to close at 165, stopping a five-day slide in which the firm lost almost 12 percent of its market value. The company is down 35 percent for the year, most of that coming in the past three months as Goldman has been battered by headlines about the infamous 1MDB scandal.

Just before Christmas, Malaysian authorities filed criminal charges against Goldman, seeking a stunning $7.5 billion in reparations for the bank’s role in the scandal. Singapore authorities also announced they were expanding their own 1MDB probe to include Goldman.

In the 1MDB scheme, actors tied to former Malaysian Prime Minister Najib Razak allegedly siphoned mountains of cash out of a state investment fund. The misrouted money went to lavish parties with celebrity guests like Alicia Keys, a $35 million jet, works by Monet and Van Gogh, property in New York, Los Angeles and London, and (ironically) the funding of the movie The Wolf of Wall Street. 

The cash for this mother of all bacchanals originally came from bonds issued by Goldman, which earned a whopping $600 million from the Malaysians. The bank charged prices for its bond issuance that analysts believe were suspiciously high – like a massage price that suggests you’re probably getting more than a massage. 

Najib lost re-election in May, ending a 61-year reign for his party. National anger over 1MDB was a major reason for his downfall. The prime minister was allegedly central to the scam, which involved luring investors to national development projects that mostly never took place.
His election loss was a turning point. Until that time, international authorities had been unable to obtain cooperation from the Malaysian government, which under Najib insisted no crime had been committed.

Najib was one of the first world leaders to congratulate Donald Trump on his win in 2016. At least at one time, the two men were pals. They golfed together once at the Trump National Golf Club in Bedminster, New Jersey. Najib even claimed he had an autographed photo on his desk from Trump reading, “To my favorite Prime Minister. Great win!” Trump  hosted Najib at the White House last year, thanking the soon-to-be-ousted leader for “all the investment you’ve made in the United States.” Najib appeared to stay at one of Trump’s hotels on that trip.

On November 30th of this year, the Justice Department filed a civil forfeiture suit targeting more than $73 million funneled into the country by 1MDB players. There is email evidence the money may have been intended to help influence the Trump administration to drop the case.
But Najib’s electoral loss changed the picture. With his ouster, the new Malaysian government was suddenly eager to help outside investigators.  

“It completely reversed the situation,” says John Pang, a former policy adviser to the prime minister’s office in Malaysia. “Before, you essentially had the victim saying there was no crime. Now, you had the Justice Department meeting with a 1MDB task force in Kuala Lumpur.”

The change resulted in a string of new indictments, suits and prosecutions surfacing in the second half of 2018. At year’s end, Goldman is known to be under investigation in the U.S., Singapore and Malaysia, while 1MDB probes are ongoing in at least 10 countries. Goldman has seen two ex-employees criminally charged in the U.S. since the summer, one of whom pleaded guilty.  
What really set Wall Street afire was a pair of fall revelations. On November 8th, the Wall Street Journal reported longtime Goldman CEO Lloyd Blankfein – who stepped down on October 1st to “pursue other interests” – met on more than one occasion with one of the most infamous figures in the 1MDB scandal, Low Taek Jho, better known as “Jho Low.”

In that same week, Bloomberg reported Blankfein was an “unidentified high-ranking executive” in court filings associated with the case.

This was devastating news. The key question about 1MDB had always been whether the thefts were the actions of a few “rogue” bankers in a foreign outpost, or if the scam snaked higher.
The mere mention of Blankfein’s name in conjunction with a 1MDB court filing sent Goldman’s share price into freefall.

The closing price of Goldman stock on November 8th was $231.65. By November 12th, after investors had a weekend to digest the WSJ and Bloomberg articles, it had fallen to $206.05, reaching a low of $151.70 before bouncing back up a bit this week.   

Goldman has been forceful in addressing the charges that Blankfein met with Low. Reached for comment this week, the bank said it has identified three meetings at which Low might have been present, but has only been able to confirm Low’s presence at one.

“Mr. Blankfein had an introductory, high-level meeting in December 2012 with the CEO of Aabar, which was an existing client of the firm,” says company spokesman Michael DuVally. “At Aabar’s request, Mr. Low accompanied the CEO to that meeting.”

Duvally insists, however, that the firm has no evidence of any contact more extensive than that.
“Mr. Blankfein does not recall any one-on-one meeting with Mr. Low, nor have we seen any record to suggest such a meeting occurred.”

In December, outside analysts predicted the bank might need to set aside $1 billion or more for penalties. The company is having ongoing conversations with the Justice Department, but has not discussed numbers yet. 

In addition to the Malaysian action seeking $7.5 billion, the company is facing two more class-action lawsuits filed by investors, and a significant amount of negative press.
For all that, the scandal is still not well understood. 1MDB was a twist on third-world kleptocracy, one that exposed a new flaw in the global financial system.

Dictators have always plundered national riches. But they could only steal assets that existed. For instance, in former Zaire, now the Democratic Republic of Congo, Mobutu Sese Seko shifted profits of mineral sales to private accounts. In the Philippines, Ferdinand and Imelda Marcos swiped proceeds of sales of sugar, tobacco, bananas, coconuts and everything else they could get their hands on. Saddam Hussein stole oil revenues.

Malaysia is rich in copper, timber and oil. But Najib and his cohorts didn’t have to steal any of those resources.

“He didn’t steal diamonds or bananas. He stole debt,” says Pang. “This is something completely new. And he couldn’t have done it without a bank the size of Goldman.”...

If interested see also:
September  29
"The Billion-Dollar Mystery Man and the Wildest Party Vegas Ever Saw "
December 2016
The 1MDB Fraud as told by the FBI
August 2018
Questions America Wants Answered: Was Leo DiCaprio’s ‘Wolf of Wall Street’ Paid for With Stolen Money? 

Sunday, December 30, 2018

Everybody's 2019 Investment Outlook: Seriously, Everybody—ABN AMRO to Zurich

I have never seen anything like this collection in one place.
From Peter Sullivan:
HT: ValueWalk

note: all the outlooks were put together before the  Christmas week action and are subject to change e.g.
ZeroHedge, December 30, 11:10 am 
Goldman Slashes US Growth Forecast, Now Sees Just 1.2 Rate Hikes In 2019

Yields and Eurodollars and The Dreaded Full Frown

Two from Alhambra Investments, first up, Mr. Frowny Face in toto:

 Chart of the Week: The Dreaded Full Frown
December 28th, 2018
I’m going to break my personal convention and use the bulk of the colors in the eurodollar futures spectrum, not just the single EDM’s (June) contained within each. The current front month is January 2019, and its quoted price as I write this is 97.2475. The EDH (March) 2019 contract trades at 97.29 currently and it will drop off the board on March 18.

Three-month LIBOR was fixed yesterday at a fraction higher than 2.80%, meaning that if it stays around or above that level someone is losing money on it. The futures price isn’t directly translatable but back-of-the-envelope it works out to an expectation for 3-month LIBOR on that date in March to be less than what it is fixed now.

In other words, the market is seriously betting LIBOR is coming down not two years from now but in the short run. That expectation only grows the further out in time (down the curve).

Inversion, as noted earlier today, had been limited to more distant years centered around 2020. The eurodollar curve now sports inversion from the front month all the way out to September 2020. This is not a curve, not a normal one anyway, it is a clear signal of trouble right in front of us.
In fact, almost the entire curve is currently below yesterday’s 3-month LIBOR. But strong economy or something. They really don’t know what they are doing. Central banks are not central.
Happy New Year Jay Powell, the curve sarcastically frowns upon your ridiculously overoptimistic forecasts. From here on, you are going to want to avoid taking any advice from Bill Dudley on the topic of eurodollar futures and inversions.
And a question:

Yields Falling, Who Could Be Buying Without QE’s?
December 28th, 2018
In the US Treasury market, the situation has been a little different. The BOND ROUT!!! theory posits that without the Fed to buy up additional supply, yields as a technical factor have to rise putting more upward pressure on rates than already exists from a booming economy. Add to that foreign selling in 2018, it left many expecting an epic selloff. Any day now.

The common battle cry was “who is left to buy up all these UST’s?” The answer, as always, is the banks themselves.

The ECB’s end to QE hasn’t sparked the same worries. A lot of it has to do with similar misperceptions about how bonds work, only in Europe particularly Germany the magnitude is checked. Europe’s central bank went further and ate up a huge chunk of government bond supply during its LSAP run.

That left a smaller float for the private markets, therefore more margin for bond demand even as the ECB exits the auctions. Still, yields were supposed to rise across Europe even Germany if not to the same extent as what was figured for the US BOND ROUT!!!
While the ending of QE will put some upward pressure on yields, low supply from Germany’s robust economy is likely to act as a counterweight, keeping that risk in check.
“For some time now, we have observed a big disconnection between real Bund yields and real economic activity,” said Chiara Cremonesi, a fixed-income strategist at UniCredit. “The scarcity of German paper — and of safe eurozone government paper in general — triggered by QE will remain a key driver of Bund performance next year, and in our view will slow down the increase in real Bund yields towards positive territory.” 
As usual, that’s not what happened up to and including the robust Germany part. The ECB will begin 2019 without any QE but things in Europe are not consistent with how it was supposed to go at its end. At least the mainstream gets that part right, meaning if QE had worked (anywhere) economies would actually be booming and yields would be uniformly upward if to varying degrees.

Instead, yields are falling pretty much everywhere – the mysterious, confounding “strong worldwide demand for safe assets” has returned with a vengeance. There’s supposed to be nobody left to buy up these things, and yet “someone” remains out there in the markets with a voracious appetite for the most liquid assets. Might be a clue or something...MUCH MORE
He raises a really really good point.

Ledgers and Innovation in Banking

From 15MB:
I was flicking through the New Scientist magazine from 29th November 1956 when I came across a very interesting article on the digitisation of banking, a subject of great current interest. The article has a very useful diagram for those of us who wonder how exactly it is that banks manage customers’ accounts using computers.
How things work at banks
I don’t know which bank this is, probably TSB, but in any case it is what the article says about digitisation that I found interesting. Apparently, it’s all to do with something called “ledger management”. The article gives a helpful example, explaining how “when a bank clerk first accepts a cheque, he prints on it with something like a typewriter a note of the amount in magnetic ink, all subsequent operations—sorting, listing and entering in ledgers—can be done without human assistance”.

Reading further on, I discovered that you can have different kinds of ledgers that work in different ways. The author notes that this is only one way of “ledgering automatically” and that the “choice of a system depends on how far was is prepared to go: whether automatic book-keeping is to be done only at head office, whether in this case the accounting for all the branches, or whether branches will have their own equipment or to be grouped around sub-centres”. The same centralisation versus decentralisation of ledgers argument continues to this day.

The article continues by noting that banks do not seem to be making as much of this interesting new technology as they might and that “what may prove to be more serious is the determination to cling to time-honoured procedures”. Well, yes indeed. This is just what Anthony Jenkins meant when he said that banks had yet to be disrupted by new technology (shortly before he was fired as Barclays CEO). And if you think those “time-honoured procedures” are fading, you’re dead wrong, since 95 percent of ATM transactions still pass through COBOL programs, 80 percent of in-person transactions rely on them, and over 40 percent of banks still use COBOL as the foundation of their systems.

There’s no point using blockchain, or any other shared ledger technology, to implement these existing processes. The way forward, in banking at least, is to use the new technology to implement new ways of doing businesses. There’s a good argument for thinking that the central co-ordination mechanism for these new ways of doing business might well be trust. Speaking at Davos, way back in 2015, Marc Benioff (the CEO of Salesforce) said that “Trust is a serious problem, we have to get to a new level of transparency – only through radical transparency will we get to radical new levels of trust.”
I could not agree more. I think he is absolutely spot on. This is why I have been focusing on the use of new technologies (and specifically biometrics, blockchains and bots) to create a different kind of financial services infrastructure. I spoke about this earlier in the year and the Digital Jersey Annual Review [YouTube, 24 minutes] and have pushed a similar message out to a number of different audiences since then....MORE

"Chinese schools enforce 'smart uniforms' with GPS tracking system to monitor students"

From the ABC, December 28:
Two children wearing smart uniforms sit on a bench.
Photo Facial recognition ensures that each uniform is worn by its rightful owner
Chinese schools have begun enforcing "smart uniforms" embedded with computer chips to monitor student movements and prevent them from skipping classes.
Eleven schools in the south-west province of Guizhou have introduced the uniforms, which were developed by local tech firm Guizhou Guanyu Technology.

As students enter the school, the time and date is recorded along with a short video that parents can access via a mobile app.

Facial recognition further ensures that each uniform is worn by its rightful owner to prevent students from cheating the system.

Skipping classes triggers an alarm to inform teachers and parents of the truancy, while an automatic voice alarm activates if a student walks out of school without permission.

A GPS system tracks student movements even beyond the school grounds.

The two chips — inserted into each uniform's shoulders — can withstand up to 500 washes and 150 degrees Celsius, the company told state media Global Times.

Alarms will also sound if a student falls asleep in class, while parents can monitor purchases their child makes at the school and set spending limits via a mobile app, according to the company's official website.

The company released a public statement via popular Chinese social media site Weibo saying the uniforms "focus on safety issues", and provide a "smart management method" that benefits students, teachers and parents....MUCH MORE

Counterfeit Your Way to Control of the Central Bank

From Cabinet Magazine:

Break the Bank
 An official five-hundred-escudo bill printed by Waterlow & Sons, London, in 1922. Courtesy Mike Jowett.
As long as reputable sovereign and financial entities have issued value-bearing notes, disreputable personages have attempted to imitate them for nefarious purposes. At times the counterfeiters have been nearly as productive as the legitimate mints. In the mid-nineteenth century, some 40 percent of all American currency was fake. But “fake” here is a relative term. With literally thousands of currencies circulating at the time, legal tender in Cincinnati might be little more than tinderbox fodder in Columbus. National currencies, too, often ended up stoking the auto-da-fé; those of the French Bank Royale, the Continental Congress, and the Confederate States are only the most notorious examples. Under such turbulent circumstances, the difference between value and valuelessness, between “real money” and ornate scrap paper, does not admit of definite boundaries.
Perhaps no one has challenged this distinction more effectively than the forgotten Portuguese entrepreneur and swindler Arturo Alves Reis. The latter epithet, though certainly apt, fails to capture the true essence of his crimes, which were both outlandishly reckless and touchingly devoid of malice. Producing wealth ex nihilo, Alves Reis was as much alchemist as con man. His specialty was spinning fictions that opened out onto the real, then closed behind him once he passed through. His career began early. Just after his twentieth birthday, in 1916, Alves Reis lit out for the Portuguese colony of Angola to make his fortune. In addition to a plump new bride, he brought with him a homemade diploma from the nonexistent Polytechnic School of Engineering of Oxford University.
This diploma certified his mastery of the subjects of geology, geometry, theoretical and applied physics, metallurgy, paleography, and mathematics, as well as civil, mechanical, and electrical engineering. The sole genuine mark on the document was a notary seal. As the only Oxford graduate in Angola, Alves Reis soon found himself running the country’s rail system, an occupation he discharged with considerable alacrity, diagnosing mechanical failures in engines he had never seen before. Such success must have encouraged him: told by real engineers that some new equipment was too heavy for the trestles, he tested it himself, bringing his infant son along in flamboyant demonstration of his self-confidence. In short, Alves Reis did his invented alma mater proud.
Nest egg in pocket, Alves Reis returned to Lisbon in 1923 and went into business in a curiously non-specific way, buying and selling, exporting and importing whatever came his way. He soon met with his second opportunity to use fiction in pursuit of the real. Learning that a controlling interest in the Royal Trans-African Railway Company of Angola could be had for a mere forty-thousand dollars (which represented only a fraction of its cash reserves), Alves Reis engineered a “leveraged buy-out” avant la lettre: He kited a US check to buy the company, raided their coffers, and wired forty-thousand dollars of their own money to New York before the boat bearing his check could arrive at dock. An efficient scheme indeed, but when some influential members of the railway’s board ratted him out, he was tossed into an Oporto jail. A gross error on the part of the Portuguese authorities: they gave Alves Reis time to think. And what he thought about was the Bank of Portugal.

Reading through the bank’s bylaws, Alves Reis made some interesting discoveries. First, it was semiprivate; the government held only a minority stake in the operation. Second, it had the exclusive right to issue Portuguese bank notes. Last but not least, no one was in charge of monitoring duplicate serial numbers. After fifty-four days of confinement, he emerged from jail with an utterly ludicrous plan the likes of which no self-respecting criminal could ever have conceived. It was not so much half-baked as inherently inedible. Alves Reis cobbled together a contract that specified that he, as a supposed agent of the Bank of Portugal, was authorized to request the printing of five million dollars in Angolan currency to be paid to an “international group of investors” in exchange for a loan to the Angolan government for the same amount in British sterling.
After a night of cutting and pasting, Alves Reis took his contract over to a notary, whose assistant stamped his signature without a second glance. He then obtained the seals of the French, German, and English consulates, each attesting to the authenticity of the notary’s signature. The bureaucrats’ complicity seems to have had no more ulterior a motive than that they enjoyed stamping things.

With contract in hand, Alves Reis now rounded up his consortium of “international investors.” He basically chose the only foreigners he knew, but he could not have done better had he gone straight to central casting at Warner Brothers (indeed, the entire secondary cast of Casablanca could have found roles in a film version of this scheme).
His co-conspirators were: Antonio Bandeira, a Portuguese diplomat posted in Holland, with the obligatory pile of gambling debts; his corrupt, skirt-chasing younger brother José, who had done time for grand larceny; a social-climbing Dutch importer named Karl Marang; and Adolf Hennies, an ostensibly respectable German financier with a shady background in war profiteering. Believing Alves Reis to be the front man for a cabal of corrupt officials out to shore up both their own and Angola’s finances, the group vowed complete secrecy as a requisite to participation in the scheme. ...MORE

The Australian Competition and Consumer Commission Wants to Curb Digital Platform Power

From the media and marketing mavens at Mumbrella, Dec. 12:

ACCC wants to curb digital platform power – but enforcement is tricky
The recent ACCC report acknowledges Google and Facebook each possess substantial power in Australia. But what next? Katharine Kemp explores the findings in this crossposting from The Conversation. 
We need new laws to monitor and curb the power wielded by Google, Facebook and other powerful digital platforms, according to the Australian Competition and Consumer Commission (ACCC).
The Preliminary Report on the Digital Platforms Inquiry found major changes to privacy and consumer protection laws are needed, along with alterations to merger law, and a regulator to investigate the operation of the companies’ algorithms.

Getting the enforcement right will be key to the success of these proposed changes.

Scrutinising accumulation of market power
The report says Google and Facebook each possess substantial power in markets such as online search and social media services in Australia.

It’s not against the law to possess substantial market power alone. But these companies would breach our November 2017 misuse of market power law if they engaged in any conduct with the effect, likely effect or purpose of substantially lessening competition – essentially, blocking rivalry in a market.

Moving forwards, the ACCC has indicated it will scrutinise the accumulation of market power by these platforms more proactively. Noting that “strategic acquisitions by both Google and Facebook have contributed to the market power they currently hold”, the ACCC says it intends to ask large digital platforms to provide advance notice of any planned acquisitions.

While such pre-notification of certain mergers is required in jurisdictions such as the US, it is not currently a requirement in other sectors under the Australian law.

At the moment the ACCC is just asking the platforms to do this voluntarily – but has indicated it may seek to make this a formal requirement if the platforms don’t cooperate with the request. It’s not currently clear how this would be enforced.

The ACCC has also recommended the standard for assessing mergers should be amended to expressly clarify the relevance of data acquired in the transaction as well as the removal of potential competitors.

The law doesn’t explicitly refer to potential competitors in addition to existing competitors at present, and some argue platforms are buying up nascent competitors before the competitive threat becomes apparent.

A regulator to monitor algorithms
According to the ACCC, there is a “lack of transparency” in Google’s and Facebook’s arrangements concerning online advertising and content, which are largely governed by algorithms developed and owned by the companies. These algorithms – essentially a complex set of instructions in the software – determine what ads, search results and news we see, and in what order.

The problem is nobody outside these companies knows how they work or whether they’re producing results that are fair to online advertisers, content producers and consumers.

The report recommends a regulatory authority be given power to monitor, investigate and publish reports on the operation of these algorithms, among other things, to determine whether they are producing unfair or discriminatory results. This would only apply to companies that generate more than A$100 million per annum from digital advertising in Australia.

These algorithms have come under scrutiny elsewhere. The European Commission has previously fined Google €2.42 billion for giving unfair preference to its own shopping comparison services in its search results, relative to rival comparison services, thereby contravening the EU law against abuse of dominance. This decision has been criticised though, for failing to provide Google with a clear way of complying with the law.
The important questions following the ACCC’s recommendation are:
  • what will the regulator do with the results of its investigations?
  • if it determines that the algorithm is producing discriminatory results, will it tell the platform what kind of results it should achieve instead, or will it require direct changes to the algorithm?
The ACCC has not recommended the regulator have the power to make such orders. It seems the most the regulator would do is introduce some “sunshine” to the impacts of these algorithms which are currently hidden from view, and potentially refer the matter to the ACCC for investigation if this was perceived to amount to a misuse of market power.

If a digital platform discriminates against competitive businesses that rely on its platform – say, app developers or comparison services – so that rivalry is stymied, this could be an important test case under our misuse of market power law. This law was amended in 2017 to address longstanding weaknesses but has not yet been tested in the courts....MUCH MORE

How Huawei Took Over the World

From the Wall Street Journal, December 25:
Founded in 1987 by former army engineer Ren Zhengfei, Huawei Technologies Co. is a Chinese colossus. The world’s largest supplier of telecom equipment and the No. 2 maker of mobile phones, its technology touches virtually every corner of the globe, and its massive R&D budget has made it a leader in 5G technology. Yet it has long faced scrutiny. Here’s how it found success.
Dialing Up
Huawei’s carrier business—which supplies the nuts and bolts of the telecommunications market to networks around the world—has always been the company’s heart and soul. Its enterprise business, which includes cloud computing, and its consumer businesses, selling smartphones and other gadgets, are growing fast.
Huawei got its start supplying telecom gear to rural areas of China, which remains its biggest market. Huawei later spread to other developing markets before capturing a significant share of Europe’s telecom market. A security center that scrutinizes its telecom equipment helped win over U.K. authorities, but it remains effectively locked out of the U.S., where it is considered a security threat, which Huawei denies. It still operates in more than 170 countries and employs 180,000 people.
In its early days, Huawei was accused of stealing technology. Now it has the biggest R&D budget of any tech company in China, last year pouring $13 billion last year into developing its own technologies, outpacing Intel Corp. and spending almost as much as Google parent Alphabet Inc. Huawei says that 80,000 people—45% of its employees—work on R&D. They make chips, design phones and work on 5G technology.

Huawei in 2015 became the world’s biggest maker of networking equipment—gear like base stations, routers, modems and switches. Its rise has alarmed some officials in Washington, who say its products could be used to spy on Americans and allies. Washington has never proved the claims and Huawei has long denied them.

Huawei doesn’t just dominate in telecom equipment—it wants to sell you the phone that connects to that equipment, too. Earlier this year, it surpassed Apple Inc. to become the world’s No. 2 vendor of smartphones world-wide, behind only Samsung Electronics Co. Devices like the P20 feature top-of-the-line photography, helping shake the image of Chinese-made gadgets as cheap knockoffs....

Australian LNG export value to hit A$50 bln in FY18-19

Becoming an industry unto itself.
From LNG World News:

The value of Australian LNG exports are forecast to hit A$50.4 billion ($35.7 billion) in 2018-2019 as export volumes rise along with the prices. 
According to a report from the Australian government’s Office of the Chief Economist, the value will jump almost A$20 billion compared to the financial year 2017-18 when it reached A$31 billion.
The value is expected to remain at the A$50 billion mark for the FY2019-20.

Australia expects to overtake Qatar as the world’s largest explorer during the FY2019-20 when exports are forecast to hit 78.3 million tons, up from 61.7 million tones in 2017-2018.
This represents a 1 percent forecast increased compared to the volumes forecasted in the September report.

Higher export volumes will be driven by the Wheatstone, Ichthys and Prelude LNG projects, the report shows....MORE

Saturday, December 29, 2018

Longread: "The Five Eras of Financial Markets"

An overview of equity market history by some folks who are good at sweating the details. Unlike the intro to the University of Chicago's ProMarket piece  "How Politicians Intensify Financial Cycles: 300 Years of Pro-Cyclical Regulation" I don't have to get all pedantic and point out problems in the introduction:
Be careful with this piece. I didn't have time to check all the details the writer musters to his argument but am pretty sure there are a couple errors in this bit:... 
I hate doing that, really try not to, but after the egregious misstatements ProMarket did a good job so, as the man said "Whaddya gonna do?"

From Global Financial Data:
Global Financial Data has produced indices that cover global markets from 1601 until 2018.  In organizing this data, we have discovered that the history of the stock market over the past 400 years can be broken up into four distinct eras when economic and political factors affected the size and organization of the stock market in different ways.  Politics and economics define the limits of financial markets by determining whether companies can exist in the private or the public sector, by controlling the flow of capital in financial markets, and by determining the level of regulation that companies face in maximizing their profits.

The first era covers the period from 1600 until 1815 when financial markets funded government bonds and a handful of government monopolies. The British East India Company was established in 1600.  For the next 200 years, financial markets traded a very limited number of securities.  After the bubbles of 1719-1720, shares traded more like bonds than equities. Investors were more interested in getting a secure return on their money than investing for capital gains.

The second period from 1815 until 1914 was one of expanding equity markets, globalization of financial markets, and a reduction in the importance of government bonds relative to equities. This changed in the 1790s when first canals, and later railroads changed the nature of financial markets forever. Investors discovered that transportation stocks could provide reliable dividends as well as capital gains.  For the next hundred years, investors had the opportunity to invest in thousands of companies that could generate capital gains as well as dividends. Financial markets became globalized and the transportation revolution enabled the global economy to grow.  By 1914, capital flowed freely throughout Europe and the rest of the world, enabling investors to optimize returns globally.
The era of globalized financial markets came to an end on July 31, 1914 when the world’s stock markets closed down when World War I began. During the war, capital was directed toward paying for the war. Attempts to restore globalized financial markets after the war failed. Financial markets operated on a national level, not on an international level.  Before World War I, markets provided similar returns because they were integrated.  After the war, national equity market returns diverged because capital was unable to flow to the countries with the highest rates of return. After World War II, Europe nationalized many of its main industries and the United States regulated industries.  
It wasn’t until the 1980s that equity markets became globalized once again when deregulation and privatization swept over the world’s stock markets. The poor performance of markets and the economy in response to the OPEC Oil Crisis of the 1970s brought the role of government in regulating the economy into question.  Privatization swept over the capitalist economies, and the former Communist countries opened stock markets and began to integrate with the world’s financial markets. The global market capitalization/GDP ratio increased dramatically.  There is no definitive date when this transition occurred, so the bottom of the bear market in bond and equities in 1981 is used as the starting point of this new era.

How long the fourth era will last before we move into a fifth era will depend upon technology. The fifth financial era will begin when financial markets reach singularity, where the national markets in financial assets merge into one market and financial markets are not just global, but singular.  All financial assets will trade 24 hours a day over computer networks that are connected to every corner of the globe. Markets have almost reached that point in the foreign exchange market, and it is only a matter of time before the market for financial assets reaches that point as well.

The First Era: Monopolies and Funds
A Financial Revolution occurred in 1600 when the Dutch East India Company and the English East India Companies were established.  The Dutch East India Company was founded in 1601 and continued to operate until 1799.  The English East India Company was established in 1600 and reorganized three times before the fourth East India Company was established in 1657. That company lasted until 1874.  
Before 1600, merchants had created “shares” in voyages that ships made to the far east.  By investing in several ships, merchants could reduce their risk. The innovation of the Dutch East India Company was to vest ownership in the company, and not in individual voyages.  This provided economies of scale and by creating perpetual life for the corporation, allowed capital from one voyage to be reinvested in other voyages. What is important about the Financial Revolution of 1600 was that it established the principal of founding corporations that could issue shares which did not expire. Shareholders could buy and sell their shares to others, and receive dividends if the company was profitable.
Nevertheless, the Dutch East India Company made several mistakes which future companies learned from. The Dutch East India company allocated its shares by municipality, which limited trading in its shares. The company did not raise additional equity capital by issuing new shares, but borrowed money which increased its debt-to-equity ratio and eventually ended up bankrupting the Dutch East India Company.  Moreover, dividends were often paid in kind.  Instead of receiving cash dividends, shareholders would receive cloves brought back from the West Indies.  Merchants were happy to receive payment in kind and sell the cloves, but investors preferred cash payments.

A second wave of incorporations occurred in the 1690s following the Glorious Revolution of 1688, during which English parliamentarians overthrew King James II and established a constitutional monarchy in England. This not only brought a Dutch ruler to London, but also brought Dutch capital and Dutch financial knowledge. 
In 1688, Amsterdam financial markets were more sophisticated than London’s. Joseph de la Vega’s Confusion de Confusiones was published in 1688 to show the Jewish community of Amsterdam the inner workings of stock markets.  When the William Phipps treasure-seeking expedition of 1687-1688 paid a 10,000% dividend to shareholders, it encouraged other corporations to be established for investors to profit from. 
In 1694, John Houghton began writing articles on share trading and in January 1698, the Course of the Exchange began its regular bi-weekly publication, publishing trade prices collected from London coffee houses. A similar publication for Amsterdam was the Amsterdamsche Courant which published share prices fortnightly beginning in 1723. Les Affiches de Paris began publishing the price of shares traded in Paris in 1745. By the middle of the 18th century, the growth of the financial press reflected the growing interest in financial markets. Between these three publications and others, GFD has been able to put together data on share prices from 1601 until 1815.
The 1600s and 1700s were a period of continual war in Europe and the debt of the English, Dutch and French rose as a result. Governments in the Netherlands and Great Britain began issuing debt that had longer maturities, in some cases creating annuities that provided annual payments as long as someone was alive.  These debt instruments eventually were converted into perpetuities which never matured just as shares of stock in the East India Company or the Bank of England never matured.  Given the choice of obtaining a perpetuity that paid a fixed yield from a government and variable dividends from a corporation, most investors chose to invest in the government security. 
The key event for financial markets was the bubbles of 1719-1720. The market cap of British equities steadily rose from 1688 until 1720 as is illustrated above. The Dutch, French and British governments all issued large amounts of debt to fight the War of the Spanish Succession between 1701 and 1713.  John Law offered the French government a way of converting their debt into equity in the French East India Company.  In Britain, investors were allowed to convert their debt into shares in the South Sea Company. Enthusiasm for the shares drove prices of the stocks to unsustainable levels, but after the crash in 1720, companies were restricted from raising additional capital and few companies issued new shares for the rest of the 1700s.

Investors wanted a reliable cash flow, and after the bubbles of 1719-1720, only the largest monopolies backed by the government were seen as reliable enough to warrant investment.  Most financial capital went into government bonds. Even the few companies that survived the bubble behaved more like bonds than equities, changing little in price. Between 1688 and 1789, British government debt grew from £1 million in 1688 to £244 million in 1789 and to £745 million in 1815. During that same period of time the market capitalization of British shares grew from £1 million in 1688 to £30 million in 1789 and £60 million by 1815.  The market cap of shares, which was equal to outstanding government debt in 1688 shrank to less than 10% of government debt by 1815. Because of its reliability in payment, Britain was able to increase its debt to levels twice GDP by 1815, while the yield on the debt declined, falling from 8% in 1701 to 3% in 1729 when the annuities were introduced.

The Second Era: Globalization
The process of globalization began in the 1780s and continued to grow until 1914. The Bank of Ireland and the Grand Canal went public in 1783-1784, and government debt from the major European powers traded on the Amsterdam stock exchange in the 1780s. However, the Napoleonic Wars bankrupted most of Europe. During the Napoleonic Wars, the Dutch West India Company and Dutch East India Company as well as the French East India Company were all driven into bankruptcy while the Netherlands, France, Austria, Russia, Spain, Sweden and the United States all defaulted on their debt. Britain was the only country that didn’t default.  French and Dutch debt was reissued at a loss to bondholders, but British debt continued to pay on time attracting more investors to British government debt.

It cannot be understated how much equity markets were transformed between the late 1700s and the early 1800s. Before 1815, British financial markets were primarily geared toward issuing bonds, or “the Funds” as they were called, to investors who wanted consistent, reliable dividend and interest income from their investments.

In the 1790s, things started to change.  The first canal bubble occurred in the 1790s as dozens of canals in the midlands of England issued shares to raise capital to build canals across Britain.  In 1789, Alexander Hamilton reorganized the finances of the United States and the Bank of the United States was founded in 1791, issuing $10 million in capital to investors. The Bank of the United States was followed by the incorporation of dozens of other banks and insurance companies that raised capital in the United States. The Federal government and state governments all issued new debt....