Author: DigestAdmin

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

OCTOBER 18 , 2017

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

This week and next week in  IntelDigest, we move on to Part Two of our essay on  Cryptocurrencies;  we use the shorthand designation, Cryptos, to refer to these digital currencies.

In earlier issues this month, we covered the underlying technology for most digital currencies, known as Blockchain. We have outlined the workings of the Blockchain technology … a decentralized “distributed ledger” system … and some of its game-changing potential.  The development of Cryptocurrencies is the first and most obvious use of the technology;  and, Bitcoin is its first “killer app.”

Ascension of Bitcoin

One view of all  Cryptocurrencies  is that they are “Peer-to-Peer Money,” meaning that they represent value which can be transferred directly between Buyer and Seller without intervention of a government entity.  As these currencies are not created or controlled by any government, they cannot be manipulated by central banks in any country.

In the past, a transaction required a bank or other institution as an intermediary.  The intermediary would verify the transaction, which would add a level of trust and credibility to the transaction.  But, Cryptos have the potential to disrupt and revolutionize the old system, which removes the middleman entirely.  Instead, digital transactions are made peer-to-peer.

From one viewpoint, Cryptos act to democratize finance.  No central authority, such as a government or central bank, issues Bitcoin or any other Cryptos.  One can transfer Bitcoins across borders in an instant.  Only a limited number of Bitcoins can ever be issued.  The price of Bitcoin is set by the marketplace.

Bitcoin upends conventional forms of money, while disrupting the authority of governments and financial institutions over all things monetary.

Is Bitcoin Money?

The definition of money comes from Aristotle in the 4th Century B.C., who stated that the five characteristics of good money are:  Durability, Divisibility, Convenience, Consistency, and a Store of Value in and of itself.  On that basis, he determined that Gold and Silver were best suited for use as “money.”

How does Bitcoin fare in such an analysis?

Cryptos, including Bitcoin, are durable, as long as computers are still in use and operational.  They are not as solid as physical metals, but they pass the durability test, barring a complete collapse of civilization.

Cryptos are definitely and almost infinitely divisible, with greater accuracy than physical metals.

Cryptos have the potential to be very convenient, as one can use a variety of devises, from the smallest smartphone to the largest computer, to process transactions.  At this time, only a small percentage of the world population uses Cryptos.  But, that changes every day.  Convenience will only increase with every user … individual and business … which adopts and accepts the use of Cryptos in commerce and investing.

Cryptos also pass the consistency test.  For example, every Bitcoin is exactly like every other.

Is Bitcoin a store of value in and of itself?  It certainly has established value … volatile as it is has been to date … so that it is the equal of many fiat currencies around the world. Bitcoin is designed to have a limited, predetermined supply; the number of Bitcoins is restricted by computer code.  In this way, Bitcoin is more like Gold, and the exact opposite of fiat currencies (such as the U.S. Dollar), which can be devalued by central banks as easily as printing more bills.

Bitcoin, as the first and foremost of the Cryptos, has proven to be easily transferable, and gaining in usability on a daily basis as more merchants accept Bitcoin for goods and services. Bitcoin can be easily traded across the globe and outside any banking system.

So, this is the use value of Bitcoin.  It allows one to transfer something that is accepted as money outside of the banking system, and outside of fiat money currencies.

Global Acceptance

At this time, only about 25 million out of the 7 billion people on the planet own Cryptos;  however, the utility of Cryptos should make them very popular, both in the developed world (which embraces technology) and in the Third World (where smartphones are more and more ubiquitous).

In many Third World countries, the fiat currencies issued by governments are unreliable within the country, and worthless outside.  That is why billions of people have heretofore preferred U.S. Dollars.

Considering the utility, easy transferability, and privacy which owners of Cryptos enjoy, Bitcoin has the potential to be very big in the Third World, and gain very fast acceptance around the world.  Other Cryptos will likely follow close on its heels.

Valuation

With increased acceptance, the likelihood grows for higher Bitcoin valuations.  At this time, Cryptos are like the Wild West, and should be considered more of a speculation than an investment.  However, many people have made extremely large gains by speculating in Bitcoin and its newer cousins.

Cryptos are the first application of Blockchain technology, and will have staying power because they compare well to government fiat currencies.  The existence of Cryptos and their advantages calls attention to problems in world monetary systems.  The likely result will be Cryptos and Gold rising, while many fiat currencies, including the U.S. Dollar, fall.

Those who have stepped forward to speculate on Cryptos already equate Cryptos to more established currencies.  They weigh the value of  Bitcoin vs Dollar vs Gold.  Which is likely to move higher in the coming years?  Which will suffer a greater impact when inflation returns?  If Bitcoin (and Gold) has a limited supply, but the government can print trillions of Dollars whenever it wants to, which is the more valuable asset?

As the Crypto industry becomes more stable and mature, and gains wider credibility and acceptance, Cryptos will become ripe for investment.

Next Week in IntelDigest

We will discuss the specifics of speculating in digital currencies:  what is a Crypto Exchange account, how and where to open accounts to effect transfers, how to establish a “wallet” to keep control of your currencies.  We will discuss the safest bets among the 1,000+ digital currencies now in the marketplace.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

OCTOBER 11 , 2017

 

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

 

This week in  IntelDigest, we continue Part One of our essay on Cryptocurrencies;  we use the shorthand designation, Cryptos, to refer to these digital currencies.  As we reported last week, the underlying technology for most digital currencies is known as  Blockchain.

Although purchasing any digital currencies, such as Bitcoin, should be considered very speculative at this time, Blockchain technology has great and widespread promise for the future, so we consider this technology as suitable for investment.

We continue the discourse on Blockchain in this issue;  next week, we will go on to Part Two to discuss digital currencies.

What is Blockchain?

Simply put,  Blockchain is a form of “distributed ledger” system … a decentralized database which records each transaction.  Records of transactions and payment details are spread across a massive public database.  The process is transparent, and transactions are verifiable.  There is no centralized database;  rather, the records appear on thousands (or millions) of databases.  As a result, no one can hack or change the records because they are “backed up” in multiple locations.

 

Ascension of Blockchain Technology

When Blockchain burst onto the scene just a few years ago, the immediate question was:  Will this new technology upend traditional financial institutions, such as multinational banks, credit card and merchant payment networks, and money-transfer companies?  The answer is:  Yes, it has that potential.  As a result, many of these “legacy” institutions are exploring ways to leverage the Blockchain.

They are attracted by the potential for lower processing costs and stronger security for a range of transactions, from equities trading and securities clearing/settlement procedures to cross-border payments.

 

High-Profile Adopters

The biggest names in finance are not ready to overtly commit to the Blockchain and Cryptocurrencies, but their actions speak volumes.  Several of the largest institutions … including Bank of America and Goldman Sachs … have filed patent applications in the space.

Even members of the “Old Guard” understand that companies must innovate in the 21st Century if they want to succeed.

The number of merchants and credit card companies which enable Bitcoin transactions grows on a weekly basis … this now includes American Express!

Central banks around the world are making initial infrastructure investments to support cryptocurrency payments.  Considering that central banks are most threatened by the emergence of decentralized cryptocurrencies, it is telling that even they are willing to adopt … and profit from … a technology with such a potential for disruption.

 

Uses of Blockchain

The developer of Blockchain, Nicolas Cary, espouses his belief that this technology can improve society through global, transparent digital payments and IoT applications (the Internet of Things).  Cary is the co-founder of Blockchain.info.

Blockchain technology has the potential to alter the nature of every transaction in the world, by eliminating the middleman in many business relationships.  Cary describes Blockchain as a “… live spreadsheet available for all the world to see.”  This “distributed ledger” includes all information on a transaction, available equally to all parties in the transaction, and fully encrypted.

Blockchain offers transparency, security, and a permanent, unalterable record.  This allows the parties to transactions to deal directly with each other, without middlemen, in an environment of trust.

Consider the process of buying a house.  If real estate transactions were moved to a Blockchain, Buyer and Seller could complete the transaction without brokers or lawyers or a title company.  Using Blockchain would save a large portion of transaction costs, which currently amount to 8-11% of a typical transaction.

Viability of Blockchain

Cary estimates that the size of the entire Blockchain universe today is roughly $160 Billion, equivalent to the market capitalization of Cisco Systems (CSCO).  And, Blockchain is still in its infancy.

One can compare Blockchain and Cryptocurrencies to the Internet in its infancy.  The World Wide Web was the Coolest New Thing in the 1990s, and has grown into an industry worth many Trillions of Dollars.  A few companies are, individually, worth more than One-half-of-$Trillion each … Amazon, Apple, Facebook, Google (Alphabet), Microsoft … and are in a race to see which can reach One Trillion Dollars first.

There is currently over $150 Trillion in money in the world.  If Cryptocurrencies can grab even a small percentage of that market in the next few years, then Cryptos will be a multi-Trillion Dollar market by 2020.

 

Challenges

The challenges facing Blockchain and Cryptos begin with:

* Development of the Blockchain application

* Adoption by the legacy financial institutions

* Government intervention

Recently, the Chinese government closed a Bitcoin trading platform;  the new Cyber Unit of the U.S. Security and Exchange Commission (SEC) charged two Bitcoin-based initial coin offerings (ICOs) with fraud;  and, the U.S. Office of the Comptroller of the Currency recommended regulation of Bitcoin companies, exchanges and trading platforms.

Meanwhile, other jurisdictions … such as Hong Kong, Singapore, Dubai and Luxembourg … have embraced Cryptos as the wave of the future.

The Best Case Scenario … taking the long view … is that decentralized Cryptocurrencies offer a viable alternative and competitor to fiat currencies (established by government decree, such as the Dollar, Euro, et al) and commodity currencies (such as Gold).  And, governments adopt Blockchain technology, for efficiency and keeping up with innovation;  as a result, public money … and public expenditures … become more transparent and easily auditable by any citizen.

 

Next Week in IntelDigest

Blockchain is the wave of the future.  We will discuss the economic opportunities in Blockchain next week, as well as the prospects and dangers of speculation in Cryptocurrencies, which now number almost 1,000 and have attracted investments of up to $200 Billion!

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

OCTOBER 4 , 2017

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

We turn to the hot topic of  Cryptocurrencies  in the next few issues of  IntelDigest.  We will divide the subject into two parts, distinguishing the “investable” segment of this new concept from the “speculative.”

Everyone has heard of Bitcoin by now, but many do not yet understand how Bitcoin works.  Hopefully, we can clear up the matter somewhat.  Today, we will discuss the underlying technology, known as  Blockchain.  This is a technology which has great and widespread promise for the future, which is why we refer to it as “investable.”

Many believe that the  Blockchain  technology could be the most important technological development since the invention of the Internet.  Blockchain  has the potential to change the manner of transmitting documents, the method of selling and recording real estate, registering the transfer of stocks and bonds, and tracking business inventory.  In other words,  Blockchain  could be a “Game Changer” in many ways.

In the coming weeks, we’ll write about the various digital currencies, including Bitcoin, which are created through Blockchain  technology;   we will use the shorthand name, Cryptos, to refer to the currencies.  This is truly the “Wild, Wild West” … investment in  Cryptos  is extremely speculative.  However, those who have the stomach for taking a wild ride can make a good deal of money through speculation.

What is Blockchain?

Simply put,  Blockchain  is a form of “distributed ledger” system … a decentralized database which records each transaction.  Records of transactions and payment details are spread across a massive public database.  The process is transparent, and transactions are verifiable.  There is no centralized database;  rather, the records appear on thousands (or millions) of databases.  As a result, no one can hack or change the records because they are “backed up” in multiple locations.

The Blockchain and Cryptocurrencies

A cryptocurrency (Crypto) is a digital currency which operates outside the control of any government or central bank.  This means that a Crypto cannot be manipulated by central banks, such as our Federal Reserve or other central banks around the world.

Historically (at least, in modern history, since the development of banking systems), all financial transactions took place through an intermediary, such as a bank.  The bank would verify the transaction, adding a certain level of trust.

Cryptocurrencies would completely revolutionize the traditional systems, cutting out the middleman entirely. Digital transactions are made peer to peer, without the middleman.

Blockchain  is the backbone of all cryptocurrency transactions.  Within the Blockchain, transaction records and payment details are spread across a massive public database open to all Crypto “Miners” in the network.  “Miners” are people and organizations which operate powerful supercomputers, each competing to confirm and authenticate each transaction in the network.

A Miner is paid if its computer program validates the transaction first;  in these early days of Cryptos, Miners have been paid primarily in Bitcoins.  Verified transactions are added to the Blockchain database.  Then, the next round of money transfers can be authenticated by Miners.  This process is ongoing.

The process is transparent and immediately verifiable.  The computer programs of the Miners confirm transactions and reset every 10 minutes.  Each 10-minute group is called a block.  Each proceeding block is also verified by the mining software and then linked to the last block … creating a chain.

As there is no centralized location where transactions occur, the process has the advantage of airtight security.  Everyone involved in creating a unit of Crypto holds a copy of the Blockchain.  Essentially, the Blockchain has copies in thousands of locations.  A hacker could not change a record when it is reflected and “backed up” on multiple servers.

Ascension of Blockchain Technology

When  Blockchain  burst onto the scene just a few years ago, the immediate question was:  Will this new technology upend traditional financial institutions, such as multinational banks, credit card and merchant payment networks, and money-transfer companies?  The answer is:  Yes, it has that potential.  As a result, many of these “legacy” institutions are exploring ways to leverage the  Blockchain.

They are attracted by the potential for lower processing costs and stronger security for a range of transactions, from equities trading and securities clearing/settlement procedures to cross-border payments.

According to a recent Morgan Stanley Research report, these initial efforts by the legacy institutions to test the viability of the  Blockchain  as a settlement and payment alternative constitute the first critical step toward adopting the technology, which will be followed by broader socialization within the industry, and regulatory scrutiny.

The Structure of the Blockchain

The value to financial institutions of the  Blockchain technology is in its structure.  The core benefit is the decentralized ledger technology, which logs transactions outside of existing centralized technological infrastructure. By creating a shared permanent record of every transaction between multiple parties,  Blockchain  creates an ever-expanding transaction record that is irrefutable in its accuracy and reliability.

Blockchain  also has the potential to improve efficiency.  By using the technology to streamline multiparty reconciliations during settlement and clearing, financial institutions could see lower costs and fewer failed transactions.

Drawn by these potential cost and capital efficiencies, interest among financial organizations has risen sharply.

According to Betsy Graseck, the Global Head of Banks and Diversified Finance Research at Morgan Stanley, “… several consortiums led by incumbents with high market share have emerged to test proof-of-concept Blockchain technologies, particularly in international payments and securities clearing and settlement.”

Significant Hurdles Remain

Even if these tests are successful, some obstacles remain, including the cost of development and deployment.  The key question, according to Ms. Graseck at Morgan Stanley, is:  “Will the benefits exceed the costs and risks of implementation, particularly relative to simpler alternatives, such as updating legacy infrastructure?”

Other concerns involve the sheer volume of the computer records, and interoperability between  Blockchain  protocols and legacy systems.  The need for computing power, bandwidth, and storage will grow exponentially.  And, programming interfaces will have to be developed or adapted to ensure that all of the various Blockchains can talk to each other

Next Week, in IntelDigest

Despite the obstacles, the  Blockchain  is the wave of the future.  We will continue with the discussion of the Blockchain  next week, then move on to Cryptocurrencies, which now number almost 1,000 and have attracted investments of up to $200 Billion!

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

SEPTEMBER 27 , 2017

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

In the last six weeks of IntelDigest, we have focused on the economy and the current market environment for investors. We will wrap up that discussion in this issue.

In October, we will address:  Investor Psychology and Tactics, the Long-Term Market Outlook, the Debt Cycle, Autonomous Vehicles, and Cryptocurrencies.

 

Market “Melt Up”

In several issues, we have discussed the “melt-up in earnings” which has provided buoyancy for the stock markets.  With Interest Rates remaining at historically low levels, we expect the markets to remain strong for several more months.  So, we tightened up the Stop Losses in our own portfolios, and prepared to ride the last few months of the Bull Market.

We have also discussed the arguments for investing in Gold … both the long-term fundamentals and current trends.  Feel free to look over that information in the  IntelDigest  Archive.  See the September 13 and 20 issues.

 

Opportunities for Gain

Where can one make new investments at this late stage of the game?  We have been concentrating on a few sectors:

* Industrial and Precious Metals
* Agricultural Land
* Pipelines and Refining
* Clean Energy
* Japan
* Defense Spending
* Data and Networking

See the September 6 issue for detailed analysis of these investment theses.

 

Amazon

We will complete the discourse on  Investing  with a few words on the special case of Amazon (Amazon.com).  Amazon is special because it has pioneered a new form of business, which some have called “bizarro capitalism.”  And, Amazon is becoming a behemoth

Amazon is a leader among 21st Century companies which effectively use technology to reduce labor costs.  Add in the ability over the last ten years to access capital at virtually No Cost because interest rates are ultra-low.  The result is a business model unlike anything the world had ever seen before.

These are companies with massive scale and massive sales growth … and virtually Zero profit.

Over the last few years, Amazon has grown its revenues by almost 100%, with no increase in profit margins.  With its immense scale and almost no profit, Amazon has been able to grow faster and faster, and expand into all kinds of new businesses.

Amazon does not have to worry about cash flow to support investment in new lines of business;  in the current environment, the cost of capital is virtually Zero.  So, even though Amazon’s profits over the last three years total only $3 Billion, it has been able to invest $17 Billion in growing its core business and building new businesses.

It is a “for-profit” company which doesn’t have to earn a profit because there has been almost unlimited amounts of investment capital available, essentially for free.

 

Expanding Its Reach

Everyone recognizes that Amazon dominates retail online.  It accounts for approximately 43% of all online sales in the U.S., and for more than 50% of all e-commerce growth.  And, the company aggressively pursues growth opportunities in new lines of business.

This year, Amazon acquired Whole Foods, the upscale grocer (so upscale that many referred to Whole Foods as “Whole Paycheck”).  When the acquisition was announced, the stock prices of competing grocery chains took a dive, and for good reason.  An Amazon move into the $800 Billion supermarket industry promises to revolutionize the grocery-shopping experience.

Upon taking control, Amazon slashed prices by as much as 43%!  This was the equivalent of Amazon declaring war on the likes of Kroger, Costco, and Walmart!

As explained by an industry expert, Mark Baum, who is a senior vice president at the Food Marketing Institute:

“Price was the largest barrier to Whole Foods’ customers. Amazon has demonstrated that it is willing to invest to dominate the categories that it decides to compete in.  Food retailers of all sizes need to look really hard at their pricing strategies, and maybe find some funding sources to build a war chest.”

Look at it this way:  Whole Foods is already a profitable enterprise, so Amazon starts out making money in the supermarket business.  Traditional grocers already operate on razor-thin profit margins.  How will they survive if Amazon chooses to slash prices further and operate Whole Foods at a loss?

Amazon also seeks to dominate the growing grocery-delivery market, which is a high-growth segment of the grocery industry.  In addition, the company announced plans to integrate its Prime membership program … already claiming an estimated 85 million customers … with a Whole Foods rewards program.  Along with new lower prices, these strategies could attract millions of new customers to Whole Foods … and drive additional sales of Amazon’s existing products.

Traditional grocers should be plenty worried.

As stated, Amazon has been a pioneer and a dominant actor in a whole new way of doing business, and it is becoming a behemoth.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

SEPTEMBER 20 , 2017

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

Last week, we discussed the current trends in the Gold market.  In this issue of  IntelDigest, we’ll talk about longer-term issues in Gold investing.

Political Considerations

As we stated in the February 22 issue of  IntelDigest:

Inflation in the economy and a weakening of the U.S. Dollar are primary stimulants of the price of Gold.  There is a looming battle between the Trump Administration and The Federal Reserve over Inflation …

The Fed wants to keep Inflation in check;  typically, The Fed will opt to raise interest rates fast enough to moderate Inflation, which adds strength to the U.S. Dollar.  The Trump Administration, on the other hand, wants a weaker dollar to help U.S. exports and create U.S. export-related jobs.  Donald Trump has railed against several of our trading partners … China, Germany, Japan … assailing them for using cheap currencies to hurt U.S. workers.  He is determined to fight back with a weaker U.S. Dollar.

A weaker Dollar will translate to Higher Gold Prices.  Gold is both a Hard Asset and a form of money, like the Dollar, Yen, Euro, Chinese Yuan.  When the Dollar is weak, the price of Gold (as measured in Dollars) rises.

How will Trump “trump” The Federal Reserve?  He will be in a position this year to appoint up to four of the seven members of the Federal Reserve Open Market Committee.  It is a sure bet that the “reconstituted” Open Market Committee will side with the President.

The resulting weakening of the Dollar will be good for Gold investments.

Fundamentals

We have addressed the fundamentals of Gold investment in prior issues.  The basic arguments are:

1.   Ultra-low … even negative … interest rates around the world, and enormous amounts of public and private Debt, all propel investments in Gold.

2.   Gold is a traditional safe haven in times of insecurity;  it can provide insurance against cyber and political risks.

3.   Demand for Gold is growing in the marketplace, from Russia and China to western markets, while supply has been dormant because new mining projects were delayed or closed down over the last few years, when the gold price was receding from its 2011 highs.

4.   Only a strong U.S. Dollar has kept the value of Gold and Silver from rocketing higher in the last two years.

5.   Historically, Gold has done well when “real” interest rates have fallen.  “Real” interest rates refers to the return one can receive when inflation is factored in.  For example, in the 1970s and 2000s, inflation was high, essentially wiping out any return from normal interest rates on fixed income investments, as well as yields on equities.  Gold performed very well then, because the return from normal investments dropped to zero or went negative.

There are also a number of  International Factors  which affect the Gold market.

The “Gold Season”

We are now at the time of year which leads to important holidays in several cultures, characterized by giving gifts of jewelry, most made of Gold and Silver.

Two countries which generate 50% of global Gold demand … India and China … celebrate major holidays in the fall and winter.  In October and November, India celebrates Diwali, the Festival of Lights, followed by India’s wedding season, when it is auspicious to give Gold to the bride.

Then comes Christmas in the West, followed by the Chinese New Year and Valentine’s Day.

Seasonal jewelry demand makes August to February the best time of the year for Gold and Silver.

Shanghai Gold Exchange

China is the top consumer, importer, and producer of Gold in the world.  China probably has the largest Gold reserves of any country, as it has acquired massive amounts of Gold in the last decade, much of it secretly.  But, government actions are opaque, so outsiders can only make estimates of the reserves.

China is set on dominating the Gold market.  It established the Shanghai Gold Exchange in 2002, and would now like to make it the center of Gold trading and pricing for the world. China has proposed that the Shanghai market would set the price on the basis of ACTUAL PHYSICAL GOLD, not on paper futures contracts.

Increased activity in the Shanghai Gold Exchange would be a significant factor in propelling growth in the Gold market.

Islamic Law Changes

Another development is a change in Islamic law which would allow massive investments in Gold by Muslims around the world, who number 1.6 Billion.

Some interpretations of Islamic law prevent Muslims from investing in trades considered “immoral,” such as alcohol and tobacco; this ban has included investment in Gold bullion as a tradeable commodity for the last few decades. As a result, approximately 23% of the population of the world has stayed out of the Gold market.

Now, however, the Accounting and Auditing Organization for Islamic Financial Institutions is working with the World Gold Council to set a standard allowing Gold trading by Muslims.  If the pent-up demand by this group of investors is unleashed, Trillions of Dollars could soon pile into the Gold market.

Peak Gold

Peak Gold is the theory that the production of new Gold is shrinking around the world.  Declines in new Gold discoveries have coincided with a surge in the costs of mining exploration.  This has resulted in a reduction in mining operations and a steady decrease in Gold production.

Goldman Sachs has warned that there are “only 20 years of known mineable gold reserves.”  Blackrock, the largest asset manager in the world, has also warned about “Peak Gold,” and asserts that Gold production is likely to decline by 20% per year for the foreseeable future.

There is no way to predict if Peak Gold is a concept which will last for years, or if new technologies or discoveries will change the dynamic.  But, for now, the production of Gold is decreasing at the same time that Gold demand is expected to soar.

Global Insecurity

As we stated in the July 26, 2016 issue of  IntelDigest:

Gold is a traditional safe haven in times of insecurity;  it can provide insurance against cyber and political risks.  And, there are good, old-fashioned fundamentals at work …. demand for gold is growing in the marketplace, from Russia and China to western markets, while supply has been dormant because new mining projects were delayed or closed down over the last few years, when the gold price was receding from its 2011 highs.

Deflation

Despite deflationary forces in the world economy over the last eight years … which would adversely affect the price of Gold … we have always been confident that governments will succeed in forcing Inflation, primarily because they have no choice.  Deflation makes the real value of debt go up. Deflation destroys tax collections … when prices and wages go down in deflation, governments collect less tax.  If the value of debt goes up and tax collections go down, then economies collapse.

Governments can’t allow that.  So, they will do whatever they can to produce inflation.  Some economists posit a theory that governments will be forced to go to an extreme to produce inflation, and do so by setting the price of gold at $5,000 per ounce, or even higher.  The Gold market has been manipulated for several years to keep the price of Gold down;  it would be easy to change direction and manipulate the price up.

Effects of Interest Rates

Traditionally, gold prices have tended to go down when interest rates go up, mainly due to carrying costs.  Gold pays no interest, so it has a negative carry.  Compared to bonds, money market funds, and dividend-paying stocks … which have traditionally paid out a return of 4-5% or more … Gold was at a disadvantage.

However, we are in an environment where bond and money market yields are close to Zero.  Many government bonds around the world now trade at Negative interest rates; taking inflation into account, Cash has a negative interest rate as well.

For the first time in history, Gold has a positive carry compared to cash and government bonds.  Central banks, investment banks, and large money managers have bought significant amounts of Gold over the last few years, pushing up the prices of Gold, gold funds, and mining companies.

Even if The Fed raises short-term rates, we expect that Gold will rise even faster!  Any hike of U.S. interest rates will attract hundreds of billions of Dollars from foreign investors seeking yield;  this money will likely flood into U.S. bonds.

As the U.S. bonds are bid up, their yields will come right back down again.  And, as these yields go lower, the positive carry of Gold will become more pronounced, likely leading to a rally in Gold.

Gold Market Manipulation

Other than the strong US Dollar of recent years, the price of Gold has been held back by suspected market manipulation. Investors have been frustrated as Gold fundamentals continue to improve, but the market price of Gold is repeatedly knocked back by manipulation in the paper Gold market, specifically Comex gold futures contracts.

The Comex Gold and Silver markets have been described as “absurdly leveraged paper-trading cesspools, where deep-pocketed players … routinely drive prices down for profit.”

Whenever Gold displays some upward price momentum, hedge funds with short positions can sell tons of “Gold” (really, just paper contracts) in the futures market.  This forces many Gold traders to sell their leveraged long positions.  Momentum trades follow on the automated Globex trading system.

The short traders can then close out their positions with a nice profit, while holders of physical Gold are left to shake their heads.  Many suspect that the short traders often work at the behest of a government or international financial organization to hold down the price of Gold.  The bottom line is that the price of Gold is repeatedly held back.

This manipulation of the futures market has motivated million of investors to take refuge in various forms of physical Gold, and the opening of numerous physical gold exchanges and physical gold vaults.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

SEPTEMBER 13 , 2017

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

Continuing our discussions of short-term investment prospects at this late stage of a long-term Bull Market, we expect that the equity markets will continue to “melt up” in these last few months of the year, before beginning a “melt down” in 2018.  In recent issues of  IntelDigest, we have pointed to areas of investment where our analysis shows room for growth over the balance of this year:

Opportunities for Gain

* Industrial and Precious Metals
* Agricultural Land
* Pipelines and Refining
* Clean Energy
* Japan
* Defense Spending
* Data and Networking

In this issue, and again next week, we will update our analysis of the Gold market, and where Gold and other Precious Metals are expected to go over the next year or two. Today, we will discuss the current trend in Gold.  Next week, we’ll discuss longer-term fundamentals of the Gold market, and its challenges.

Come October, we will turn to the reasons for the expected “melt down” to come, and how to protect ourselves from that downturn.  For now, we will stay invested, and pay attention to our Stop Losses.

Precious Metals

As we stated last week:

“Precious Metals, such as Gold, Silver, and Platinum, have been rising steadily against most currencies in recent years. The current slide of the US Dollar has brought Gold close to a 5-year high.”

The Gold “Trend”

The strong US Dollar from mid-2011 to the beginning of this year has been a major “headwind” holding back the value of Gold here in the United States.  That is unwinding now.   Aside from the occasional temporary correction, the Dollar is expected to gradually lose strength with respect to other stores of value, including precious metals and strong foreign currencies.

We have expounded many time in  IntelDigest  on the importance of Interest Rates.  The U.S. economy continues to grow, but not at a rate which would justify large rate hikes by The Federal Reserve.  We expect no more rate hikes this year.  In addition, the size of the National Debt is so massive that raising the rate of interest on U.S. government obligations would be suicidal for the federal budget.

So, if there is no substantial rate hike on the horizon, and the US Dollar continues to lose value (even at a gradual rate), the value of Gold should continue to rise over the next few years.

The 2017 Gold Run

The precious metal has run up 17% this year, moving from $1,125/oz to $1,350/oz, before retracing to its current level at approximately $1,325.  Gold prices are up over 5% in just the last month.

Gold has always been considered a “safe-haven asset,” or disaster insurance.  During times of trouble, Gold prices tend to rise.  Recent headlines regarding tensions with North Korea, major storm damage, domestic political missteps, and trade controversies with other countries have helped to push the metal higher.

Investor money has been pouring into Gold stocks and exchange-traded funds (ETFs), such as the SPDR Gold Trust (GLD), which is up 17% this year.  As reported recently in Bloomberg:

“ETF buyers are building their holdings, joining hedge funds that have boosted their net-long position in bullion futures by almost nine-fold since early July.  Through Tuesday, assets in gold-backed ETFs tracked by Bloomberg posted the biggest three-day gain since February.”

Gold has been building momentum.  The last time that Gold broke out of a long slump (five years or more) versus the stock market was the late 1990s.  Gold had underperformed stocks for six straight years from 1994 to 1999.  Gold fell 26% during that slump, very similar to its price action since 2011.

Within two years after that slump, in 2001, Gold began a streak of 12 years of positive returns.

Another catalyst for higher prices is a technical gauge referred to as the “rolling five-year return.”  From a technical perspective, the down market for Gold over the last five years should be followed by a “reversion to mean.” When long-term rolling returns for Gold are extremely low, they tend to revert to higher returns in the near future.

We haven’t seen this technical pattern since the early 2000s, which led to one of the best opportunities to buy Gold in history.  The recent price movements and the underlying geopolitical and economic concerns add up to a bullish sign for Gold prices.

Next week, we’ll talk about fundamentals and long-term prospects for owning Gold.

InnOvation Capital & Management, LLC

 IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

SEPTEMBER 6 , 2017

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

We continue to discuss short-term investment prospects in this issue of  IntelDigest.  We expect that the equity markets will continue to “melt up” in these last few months of the year, before beginning a “melt down” by next year.

As reported in earlier issues, we believe that the single most important factor supporting stocks is Interest Rates….

While ultra-low rates have done immense damage to fixed-income investors over the last several years, investors in equities have done very well. There have simply been no easy options for investors, so they have invested heavily in stocks and stock funds …..

There is no chance of large or frequent increases in interest rates at any time in the near future. So, we expect that stocks will continue to be the “only game in town” for the remainder of this year.

We will concentrate on the “melt up” over the next few weeks, discussing opportunities for gain in the short-term. Later in the year, we will turn to the reasons for the expected “melt down” to come, and how to protect ourselves from that downturn.  For now, we will stay invested, and pay attention to our Stop Losses.

Opportunities for Gain

Where can one make new investments at this late stage of the game?  We have been concentrating on a few sectors:

* Industrial and Precious Metals
* Agricultural Land
* Pipelines and Refining
* Clean Energy
* Japan
* Defense Spending
* Data and Networking

Industrial and Precious Metals

Improvement in the global economy has created an uptrend in most commodities, including industrial metals.  The price of copper has risen by 50% in the last year.  Prices of nickel, zinc, palladium, and others have also been in an upswing.

Rare Earth Minerals and similar strategic metals have also risen.  These elements are fundamental components in many electronics products and military systems, and there is a geopolitical angle here.  Most of these metals are found in China.  If fighting breaks out over North Korea, or if there is a trade war with China, the prices of such metals will rocket higher.

Precious Metals, such as Gold, Silver, and Platinum, have been rising steadily against most currencies in recent years. The current slide of the US Dollar has brought Gold close to a 5-year high.

Agricultural Land

Farmland continues to get more and more expensive.  Higher land values have been supported by ultra-low interest rates, as well as increases in farm earnings and productivity.

There is something else going on with American farmland. Farm production is frequently being bought up by foreign companies and sovereign nations.  Obviously, this involves the production of food for export to those countries.  From another viewpoint, this is a way for those countries to import water, i.e., if they don’t have enough water at home to produce enough food (as in Saudi Arabia), buying farmland or farm production in the U.S. achieves the same goal.

Pipelines and Refining

The price of crude oil dropped from $100/barrel in mid-2014 to $30/barrel in the span of 18 months, and now hovers in the high-$40s.  Although oil companies represent good long-term investments, current crude oil prices are likely to stay put for the next couple of years (absent a major outbreak of war).

But, there is still a constant demand for gasoline, especially in the U.S.  Pipelines are always in use and in demand, and represent a good opportunity for gain, plus some of the highest yields available in the market place.  Refiners can actually have higher profits when the price of crude is low … the spread between the prices which they can charge for gasoline and their lower costs of crude oil represents increased profit for refiners.

Clean Energy

Despite Donald Trump’s promise to “bring back Coal” (that is really not happening), the economics for Clean Energy, such as solar and wind, continue to improve steadily.  The use of Clean Energy grows in the U.S., but more so in other parts of the world, such as China.

Japan

After two “lost decades” which began in the early-1990s, the Japanese economy is finally growing again.  Most Japanese companies lost more than 70% of their value from 1990-2009.  However, many companies have doubled since the depths of the Financial Crisis of 2007-2008, partially-aided by actions of Prime Minister Abe and the central bank.

Growth in domestic spending and business capital spending is helping to lift the economy and large-cap companies, and smaller companies are expected to benefit in the coming years.

Defense Spending

One of the few initiatives which the Trump Administration and the Republican-controlled Congress are likely to push through will be a substantial increase in Defense Spending. We can expect more than $50 Billion in additional spending over the next few years.

Data and Networking

We will present a discussion of Autonomous Vehicles in a later edition of  IntelDigest.  This is just one area where the market continues to grow for greater computer power, faster speeds, more interconnectivity.  The Internet of Things (IoT) makes communication among devices more ubiquitous.  More millions of people each year adopt electronic devices and digital platforms.

Companies which provide the networking connections and data storage necessary to run each of these sectors should continue to grow.

More next week …..

 

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

AUGUST 30 , 2017

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

We will continue, over the next several weeks, to discuss prospects for The Economy and Investing for the remainder of this year.  September has historically been a difficult month for investors, and the length of the current Bull Market causes nervousness among analysts.  So, we will follow these matters closely and devote each weekly issue of IntelDigest  to investment matters through the end of September.

It would surprise no one if stocks were to experience a 10% correction sometime in the next two months.  However, that is NOT what we anticipate for the markets.  We have written that:

“…. expect the stock market to stay strong through the end of this year, attributable in part to a ‘melt-up in earnings.’  We have experienced the second-longest Bull Market in history, but this Bull is still pretty healthy.  Plus, interest rates remain at historically low levels.”

We believe that the single most important factor in the current market climate is  Interest Rates.  While ultra-low rates have done immense damage to fixed-income investors over the last several years, investors in equities have done very well.  There have simply been no easy options for investors, so they have invested heavily in stocks and stock funds, driving Price-to-Earnings Ratios to unusually high levels.

There is no chance of large or frequent increases in interest rates at any time in the near future.  So, we expect that stocks will continue to be the “only game in town” for the remainder of this year.

We will stay invested, but keep an eye on our Stop Losses.  If the market continues to “melt up,” we will ride the last few months of the Bull Market.  If we encounter a correction, we will follow our Stop Losses and take profits.

Consumer Sentiment

Another positive note for the Economy is a renewed confidence among Consumers, which can be attributed to higher job creation and a lowering in the “official” unemployment rate, trends which have been improving steadily over the last few years.

According to The Conference Board, consumer confidence has attained the highest level since July, 2001.  It had bottomed in February, 2009, at the depths of the Great Recession.  Economists pay attention to these numbers because consumer spending accounts for 70% of U.S. economic activity.

News from Jackson Hole

The annual meeting of central bankers at Jackson Hole, Wyoming is a closely-watched event every Summer.  Leading officials from the Federal Reserve and foreign central banks get together at the foot of the Grand Tetons to discuss interest rates, the world economy, and financial regulation.

A notable participant at the conference this month was Mario Draghi, President of the European Central Bank (ECB), who clearly signaled that the ECB would continue its program of monetary accommodation.  This would keep bond yields in Europe extremely low.

This is yet another motivator for higher stock prices.

Bullish Catalysts for Stocks

Among the other bullish catalysts for stocks to run higher: low inflation, a lower US Dollar, lower energy prices, and the prospect of lower taxes by next Tax Season.

We have also discussed, in the August 9 issue of  IntelDigest, the fact that the stock market is shrinking:

“The number of publicly-traded companies … represented by individual stocks … has contracted significantly in the last two decades.  In 1997, there were nearly 7,500 publicly-traded stocks;  today, there are fewer than 3,600.  In addition, many companies have bought back millions of shares of stock since the market downturn in 2008.

One explanation for the market run-up of the last eight years:  a diminished supply of stocks available for purchase, and investor demand for equities because ultra-low interest rates ravaged the fixed-income markets.”

Some analysts call this the “washing machine” market.  There is more money sloshing around (Demand) and chasing fewer and fewer companies (Supply).  The stock market is buoyed by this sea of Demand.

More next week …..

 

 

InnOvation Capital & Management, LLC

 IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

AUGUST 23 , 2017

 

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

 

We continue on the theme of  Investing and the Markets  in this issue of  IntelDigest.  Over the “Dog Days of Summer,” we have re-published a series of articles from the IntelDigest archive discussing investment theses for 2017, and covered the topic of Exchange Traded Funds (ETFs) in two new issues in August.

This issue will be shorter than usual, concentrating on the broad market climate for the rest of 2017 and into 2018. Over the next few weeks, we will analyze specific opportunities in the markets … in technology, biotech, interconnected systems, and commodities … explain the blockchain and cryptocurrencies … and discuss the market for autonomous vehicles.

Today, we’ll discuss both the short-term Market “Melt Up” on the positive side, and warn of troubles to come … probably in 2018 … because of endemic problems related to Debt.

 

Market “Melt Up”

As we discussed in the August 9 issue, there are well-known market strategists who expect the stock market to stay strong through the end of this year, attributable in part to a “melt-up in earnings.”  We have experienced the second-longest Bull Market in history, but this Bull is still pretty healthy.  Plus, interest rates remain at historically low levels. For these reasons, we wrote in our April 26 issue:

“As we expect 2018-19 to feature both a Credit Default Crisis and a cyclical Recession, we think that these last few months of the expansion bring us the best opportunity for significant investment gains for quite a while.”

So, with Stop Losses on our portfolio tightened up, we expect to ride the last few months of the Bull Market.

 

Reckoning and Recession

Our long-term thinking must acknowledge the endemic problems in the U.S. economy.  The economy has been fueled by Debt for much of this century.

On the corporate side, American businesses have borrowed vast sums of money in recent years.  Some of those funds have helped to grow companies;  some have been used to buy back shares.  Too many companies have used borrowed funds to pay dividends or enhance the “bottom line” without actually growing the business.

Individuals have also borrowed heavily during this period. American consumers now carry more than a $Trillion of credit card debt.  Total household debt … including housing, auto loans, student loans … now exceeds the Debt that Americans were carrying when the Financial Crisis hit in 2008.

Fortunately, we are still in an era of ultra-low interest rates. Despite raises in the Fed Funds Rate over the last nine months, that rate still stands no higher than 1.25%.  Any interest rate increases over the coming years will be slow and infrequent, because the economy and markets would incur significant damage if rates rise too fast.

The governors of the Federal Reserve know that the economy, the markets, and American borrowers … including Federal, state and local governments … need real interest rates to stay low.  This accommodates business growth, and consumer spending, and the ability of governments to pay the interest on their Debt.

Although the Fed talks a big game about its mandate to keep inflation in check, the governors know that Inflation is the only means by which we can manage the current massive debt levels.  If Inflation rises, the value of each U.S. dollar will go lower.  Each dollar of debt becomes smaller in an inflationary environment, and that much easier to pay off.

 

A Reckoning is surely over the horizon.  Whether the catalyst is an emerging-market recession or a monetary crisis or political chaos, eventually we will have to deal with massive Debt and unfunded liabilities.

But, in the meantime, this is how the system works.  So, “make hay” while you can.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

AUGUST 16 , 2017

Contact Richard Power with comments or questions.  IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

We continue a discussion of Exchange Traded Funds (ETFs) in this issue of      IntelDigest.  ETFs are low-cost, “passive” investment funds which track particular benchmark indices.

 

Exchange Traded Funds

The number of ETFs has grown to almost 5,000 globally … approximately 2,000 in the U.S. … and continues to rise.  This is greater than the number of publicly-traded stocks.

ETFs represent an important investment tool for all investors, but especially those looking for an easy way to invest in a particular geographic region, market, sector, etc.  ETFs are simple to understand, and appeal to investors who may have been disappointed by the relatively high fees and underperformance of “active” funds, where fund managers select stocks to include in the fund.

The amount of assets under management (AUM) held in ETFs now exceeds $3.4 Trillion, a 17-fold increase since 2003.  The growth of these funds … both in number and assets … has been staggering.

In the era of smartphones, we are accustomed to saying “There’s an app for that.”  There is now an Exchange Traded Fund for virtually all asset classes, many of them very narrowly focused.  For example, there’s now an ETF that focuses investment only on companies in the ETF industry!  Some very small, niche-market ETFs have attracted significant capital.

 

The Downside of ETFs

The growth of ETFs is part of the larger trend of “passive investing.”  But, there is a potential downside to passive investing, and some unintended consequences.

“Passive investing” means using a “buy-and-hold” strategy by investing in an exchange traded fund or index fund which simply tracks an index.  We are experiencing a boom in passive investing.  Over 40 percent of all funds under management in U.S. equities are passive investments;  by some Industry estimates, that number will grow to 50 percent by 2018.

At some point, if too many investors follow the same benchmark, the benchmark becomes the tail that wags the dog.  The flood of money into index-tracking funds has a huge impact on overall market liquidity, and is distorting the valuation of stocks.

Consider that Vanguard Group (one of the largest investment companies in the world) now owns five percent or more of 491 stocks in the S&P 500.  And,
Vanguard now owns almost seven percent of the entire index, according to the Financial Times.  Since 2009, investment clients at Bank of America have dumped $200 Billion of individual stocks, and purchased $160 Billion of ETFs

ETFs now comprise 24 percent of trading in U.S. equities, according to the Financial Times.

 

Cause for Concern

There is concern on Wall Street that passive investing is undermining basic market principles … share prices of good companies should rise in value as their businesses grow, and bad companies should go bust.  The grandfather of passive investing, Vanguard Group founder John C. Bogle, thinks that indexing can get too big for its own good.  “What happens when everybody indexes?” he asks.  “Chaos, chaos without limit.  You can’t buy or sell;  there is no liquidity, there is no market.”

With passive investing, many investors focus less on company fundamentals.  They throw their money at index funds, rather than doing the hard work of determining which companies are well-run and growing, which shares are cheap and which are overvalued.

Too often, no one is “kicking the tires” on sectors or companies to examine fundamentals.  Passive funds simply invest in dozens or hundreds of stocks at a time, with capital allocated to each stock depending on nothing more than their market capitalization.

In a recent Wall Street Journal article titled, “The Dying Business of Picking Stocks”:

“Passive funds are designed only to match the markets, so investors are giving up the chance to outperform them.  And, if fewer managers are drilling into financial reports to pick the best stocks and avoid the worst – index funds buy stocks blindly – that could eventually undermine the market’s capacity to price shares efficiently.”

 

 

How to Invest

As in all things, Moderation is the key.  Take advantage of the ease and low cost of exchange traded funds, but don’t use them exclusively.

Always do your homework with ETFs, just as you would with any individual stock.  Read the prospectus, and know exactly what index the ETF tracks, and how closely.  Some ETFs suffer from “tracking error,” so don’t assume anything … read the reports!

Be skeptical of exotic ETFs.  As the ETF market has grown, sponsors have developed more exotic … and risky … products to stand out in the increasingly-crowded field.  Some of the most risky are the “Leveraged” ETFs which seek to double or triple the returns of an index, and “Inverse” ETFs which seek returns in the opposite direction from an index (for example, if the underlying index goes down, the ETF goes up).  These ETFs use “derivatives.”  You remember reading about those in the context of the 2008 Financial Crisis!

If you are not an investing professional, your best strategy is still Diversification.  Spread your eggs among several baskets … and watch the baskets closely!  That is still the time-honored method of earning good returns in complex and uncertain markets.