Art and Crime

“They don’t understand the difference between art and crime.” –J S G Boggs

“I take them out into the real world and try to spend them, not as counterfeits, but as real works of art that ask us about the nature of money.”

“It’s all an act of faith.  Nobody knows what a dollar is, what the word means, what holds the thing up, what it stands for.  And that’s what my work is about.  Look at these things, I try to say.  They’re beautiful.  But what the hell are they?  What do they do? How do they do it?”

J.S.G. Boggs died in January of this year.  He was an artist who drew currency on fine paper on just one side, identical in size to the actual bill, with whimsical notations, like ‘In Fun We Trust’, or ‘JSG Boggs, Secret of the Treasury’.

He would spend his currency for goods and services.  For example, he would have an expensive meal in a restaurant, produce a nearly finished bill, take out his pens and ink the final flourishes, and then offer it as payment.  If there was hesitant concern, he would produce actual currency and say:

“It took me many hours to do it, and it’s certainly worth something.  I’m assigning it an arbitrary price that just happens to coincide with its face value- one hundred dollars.  That means, if you decide to accept it as full payment for our meal, you’re going to have to give me thirteen dollars in change.  So you have to make up your mind whether you think this piece of art is worth more or less than this regular one-hundred-dollar bill.  It’s entirely up to you.”

Perhaps Mr Bogg’s passing coincides with a turning point of sorts, as bitcoin has exploded this year, a ‘currency’ that is purely electronic blockchain.  At the time of his death in late January, Bitcoin was a little over $900.  On Friday it hit another new high, ending above $7300. The CME further legitimized Bitcoin by announcing plans to list a contract in Q4.

As an aside that is somewhat surprising, one would think in this era of plastic and electronic payments, that actual currency in circulation would have declined.  Not so.  According to the Fed website, there was around $1 trillion in outstanding currency in 2011.  Five years later, at the end of 2016, it was nearly 50% higher, at $1.463T.  Why?  Gresham’s law says that bad money (with the same face value but lower intrinsic value in the form of metal), drives good money out of circulation.  Will the value of the technology behind bitcoin, blockchain, lead to hoarding such that only the derivative trades?

The Federal Reserve’s goal is to depreciate the value of USD by 2% a year, that is, to attain 2% inflation.  The age old acronym for wealth preservation over time was SWAG.  Silver, Wine, Art and Gold.  All of limited supply which hold value relative to depreciating fiat currencies.  Of course, real estate would also be one of the key ingredients (perhaps SWAGGER?).  The point is that the wealth of our world now rests on a cloud-like edifice of electronic pulses.

It’s an act of faith.  What holds this thing up?

SP500 made a new all-time high this week.  As numerous articles have pointed out, the fundamentals are somewhat dubious.  For example, a piece titled ‘The Roach Motel’ [link at bottom] notes that 141 companies, about 30% of the S&P 500, had annualized 5-yr sales growth rates of 1% or less.  Of those, the average stock price gain was 68%. 106 companies had a stock price increase of >25% concurrent with FALLING revenue.  Avg amount of debt outstanding increased 70%. Etc. Of course, these stocks are all in the non-discriminatory basket of passive investing.  Everyone gets a trophy.

As the MacroTourist points out, it’s a lot like the late 1990’s.  He cites David Einhorn of Greenlight Capital: “What if equity value has nothing to do with current or future profits and is instead derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders.” [and I would add, from debt holders].   As Mark Cuban said in an interview with Kyle Bass, his biggest public holding is AMZN, because it’s like one big constant start-up, but with the added benefit of infrastructure and scale.  [Like shot after shot of dopamine].  He says that AI will be deflationary, displacing jobs and real estate, to which Kyle Bass replies “That’s not good.”  It’s as if Cuban ignores the secondary effects of disruptive changes while Bass harbors the negative undertow of potential societal stress.

Did a crack in the electronic AI armor come in the form of TSLA, which was over 375 in mid-Sept, and closed nearly 20% lower at 306 Friday?  Could equity holders begin to question whether today’s economic subsidy will be transformed by alchemy into honest bitcoin profits?

By the way, Boggs was arrested for counterfeiting, and much of his art (even though it was only drawn on one side and clearly different from actual currency) was confiscated.  How do you think the authorities are going to respond to the mathematical elegance of bitcoin?

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Market Notes

This week we finally had the announcement of the new Federal Reserve Chair, Jerome Powell (pictured below).  I couldn’t resist ‘borrowing’ the caption from my friend Art.

I often have said the markets test a new Fed Chair.  Has a nice ring to it, but Yellen never really faced a crisis.  Powell is coming in at a time of historic lows in volatility.  Can the suppression continue?

There was an absolute implosion of implied volatility associated with Powell’s announcement.  It’s as if the market, in some respects, has drastic and outsized reactions when low-probability economic events DON’T occur, and subdued reaction to geopolitical events that DO occur.   For example, it’s understandable that Powell would be associated with continuation of a low volatility, nauseatingly transparent Fed.  But was the unraveling of premium a puke of heavy bets that had been placed on Taylor? (Taylor’s odds were never that great).  N Korea’s nuclear test mountain is also on the verge of imploding and spewing contaminated waste into the atmosphere.  Yawn.

Let me just cite a couple of Friday to Friday ED straddle comparisons:  EDU8 9812^ from 29.5 (9815) to 26.5 (9814).  Longer dated straddles were down 4.5 to 5 bps.  EDU9 from 58.0 (9788) to 53.5 (9791.5).  EDU0 84.0 (9772.0) to 79.0 (9778.5).  0EH9 9800^ from 26.0 to 22.5.  2EZ9 9787.5^ from 20.0 (9782.0) to 15.0 (9786.5).  Implied vol in treasuries also crashed to new lows.  For example I marked FVZ7 117.25^ at just 1.9 vol even after taking out weekend decay, from a high of 2.7 in the middle of the previous week.

Ever see one of those PBS documentaries where an iron smith recreates a medieval sword using ancient methods?  He pulls out a glowing ingot from the furnace and through brute strength slowly pounds it flatter and flatter with a sledge hammer as orange fireworks of slag spark off.  That’s what they did to the treasury curve.  It’s like Hephaestus himself was overseeing the job.  Week over week change in 2/10, 82.7 to 71.9.  5/30 from 89.5 to 81.6.  Both at the lowest levels since 2007.  Dipped in water and back into the oven for Monday.

While Core PCE Prices yoy remain mired at 1.3, and Avg Hourly Earnings in Friday’s report were weak, there are a couple of rays of inflationary light.  Oil closed at a new high for the year with CLZ7 at 55.64, +1.74 on the week.  In spite of the beat down in silver Friday, the BBG Base Metals Index is back at the high of 2014, ending Friday at 206, vs the start of the year below 170.  Data like Consumer Confidence is at the highest since the year 2000.  ‘Underemployment’ is supposedly at the lowest level since 2006.

Going back to the image of the Bogg bill at the top, the script in the upper left, which normally says ‘This note is legal tender for all debts public and private’ instead says ‘Do you hear anything being said here, or am I empty now?  Is anybody home? Hello?’

Central banks of the world are trying to lessen the value of their currencies so that “debts, public and private” can be nominally serviced.  Is anybody home?

Posted on November 5, 2017 at 6:33 am by alexmanzara · Permalink
In: Eurodollar Options

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