Bitcoin has a market capitalisation of
approximately US $200bn with 24 hour trading 7 days a week, making it
the perfect TRADING instrument.
At present the value of mining a
bitcoin, is sustained by the price of bitcoin, which is sustained by
net new money into the market, which is sustained by……(insert
your own ideas).
When all 21m bitcoins have been mined
or by 2140, miners who verify transactions will no longer be rewarded
for mining but only by the transaction fee they can charge.
However the cost in electricity to do
one transaction in bitcoin is the same as approximately 400,000 Visa
transactions.
For bitcoin use as a transaction medium
to be valid when the last coin is mined requires huge productivity
falls from Visa to equate the two systems.
Or the protocols of bitcoin can be
changed by 95% support from the last 2,016 miners, to lower the cost
of validation. Either by increasing the amount of bitcoins, i.e. a
reduction in the value of a bitcoin or, they could change the method
for validation (the highly praised algorithm).
Further approximately 80% of mining
pools are in China, making bitcoin protocol susceptible to that
countries political system.
Whilst we have been a huge successful
INVESTOR in the Chinese economy it has been with companies that ADR
list, therefore providing transparent and recognised reporting.
Unfortunately for us, bitcoin remains an instrument too far.
First Published In FOTT Family Office Magazine Beijing – June 2019
The Turing machine that broke the enigma code during WWII was the birth of Artificial Intelligence (AI). However since then, the adoption of AI has mainly been confined to the manufacturing, transportation and distribution sectors; with the rise of robots that build Japanese cars and stack Amazon warehouses. But now AI is moving leaps and bounds into the service sector including: game playing, self driving vehicles, facial recognition, customer service chat bots, language translation and even medical surgery.
AI consists of two strains: machine
learning and deep learning. Deep learning seeks a statistical
inference from a small part of the data and then apply all that it
has “learnt” upto that stage to the next small part until all
parts have been examined, similar to the way a human will adapt from
experience. Machine learning seeks to extract a statistical inference
intermediately from the whole data. Your preference would depend on
whether you believe the way humans learn is superior, although there
are statistical methods of measurements that provide a guide as to
which gives the best results based on the PREVIOUS data. The
resources to develop both deep and machine learning are: free, open
source and available on-line to all who wish to utilise.
The benefit of AI is that it can
provide: repeatable results, irrespective of the behavioural bias of
humans and with unimaginable productivity. Repeatable results allow
an amount of certainty as to performance in the future. A lack of
behavioural bias provides results without human failings such as:
hangovers, partner disputes, career pressure, saving face and
emotional attachment to incorrect decisions. However where AI comes
into its own is handling exponential growing amounts of data and
choices, that our 10,000 year old brain design is not equipped for.
An early adopter of AI in investment
management was the Medallion Fund of Renaissance Technologies with
spectacular results for over 30 years. However the majority of
adoption has been on the sell side with automated customer service
departments and robo-advisors that provide asset allocation
portfolios to retail markets. The downside of the recent adoption
being, data scientists and computer programmers extract the most
perfect result from the available data without any understanding as
to whether the input data is correct or relevant to the result
(“garbage in garbage out”) or, if the model has any intellectual
rigour. Leading to failure once the program goes “live”.
Market participants can either accept
or reject the relevance of AI on the investment industry, I can only
give you our story……
Way back in autumn 2016 as CIO of a
Swiss based multi-family office it was out of scientific curiosity
that I attended a seminar on AI coding (computer programming). It was
given by a former CERN employee, who discussed how they discovered
“The God Particle” or “Higgs-Boson”, the smallest sub-atomic
particle for which I still have a still have an early edition of the
same named book. However as someone steeped in investment education
and not quantum physics it appeared easier to utilised these
techniques in my chosen professional field, any by the end of that
year we were ready to go live.
Initially we had a macro model for the
US economy that provided basic asset allocation. Our model accessed
the limitless information provided by Federal Reserve Banks and the
rest of the internet. The trick was knowing which information was
relevant to use. In the last thirty years we already had two “new
paradigms” called by the economic community. And as someone who
skipped his undergraduate econometric exam due to never getting
beyond being asked for a password on the university computer, this
could have been a show stopper. However in 2008 our office had
already delivered a 23% investment return against the 45% fall in the
S&P 500, that was the result of: experience in several previous
economic cycles, admitting and learning from mistakes, strong
outperformance of managing a multi sector portfolio for a big four UK
bank, and actually attending and getting some decent grades in
international, monetary and fiscal economic undergraduate exams.
Our US economic model actually gives us
an eighteen month forward forecast, which allows us adjust the
portfolios in a timely manner, and back in early 2017 we were still
very bullish. Due to our very strong stock picking abilities (long
and short) the next stage was to utilise the AI to assist in this
task. We took the universe of stocks with a US, ADR, Canadian or UK
listing and a market capitalisation of over $1billion, that is over
6000 stocks. Again the challenge was to choose the relevant input
data, be it: fundamental, technical, industry, company or independent
news, as well as the multiple other sources, for example,
outperformance against Google “usual customer attendance” matrix.
Our limiting factor was the intel i5 core processor that our AI was
using (we wish to avoid the cloud due to security issues), which
again meant that we could only choose a few most relevant inputs.
This resulted in the very strong appearance of Chinese stocks, some
of which produced returns of nearly 200% over the year. It was an
obvious step to develop an AI macro model of the Chinese economy,
which by coincidence was the second largest. However during 2017 our
US economic model started to flash recession meaning we would soon
need to move to fixed income and so also developed an AI model for
the US 10 treasury.
Despite our massive risk adjusted
performance of 2017, in 2018 we had a little underperformance as we
transitioned to the cautious portfolio, caused mainly by the poor
performance of our individual stock positions. We reprogrammed our
stock picking AI to allow it to make better decisions given the stage
in the economic cycle and this year it is producing absolute returns
on a monthly basis whilst being net short the market. Our biggest
problem is what to do with all our cash, especially given our AI US
10 treasury view is not positive (in contrast to our traditional
methods), so we are investing in 3 month corporate bonds.
After the initial success we had an
obvious capital requirement to invest in internal hardware,
purchasing the top of the range “gaming” computers with the best
CPU and GPU. In AI the CPU is used for the machine learning software
and the GPU is used for the deep learning software. We have further
developed, “natural language processing” AI to provide sentiment
analysis on news flow especially transcripts, reading and deciphering
in a matter of seconds as opposed to the hours a human would take.
So what is my job as the CIO of an AI
driven MFO? It is both master and servant; as servant it is to
ensure that the data the AI receives is not garbage and, as master it
is to reprogram the AI to take account of changing computing,
economic and investment circumstances. Can the AI do these spare
roles? As servant certainly, for us it’s a matter of cost
effectiveness, will the time taken writing and testing the code be
recouped by using the code, at this moment we are happy just to run
our human eye over the data to ensure accuracy and suitability. Can
the AI learn from its own mistakes and take over the master role? The
beauty of deep learning is that it is unsupervised (it can choose its
own inputs) take for example the champion Go program developed by
Deep Mind (also UCL alumni) after given the rules it taught itself
strategy or, Google language translation that no longer needs a
Rosetta Stone, it can understand just by word structure.
Unfortunately we don’t have the resources to develop these high level
creative solutions, whilst undoubtedly some of the larger houses do,
their decision makers are steeped the fear of losing their jobs and,
their indecisiveness provides us with an alpha to harvest.
So what have I done, I’ve cloned myself
as a senior level analyst to live forever but instead of eating my
lunch it is eating the lunch of the 2000 other analysts I would have
had to employ to get the same level of productivity.
Whilst it will be very difficult for AI
to capture the creativity of genius (“thinking outside the box”)
it can certainly do the hard-work.
Suffice to say there is very little
genius in the top professions: law, medicine, engineering,
architecture, hairdressing etc. so the service sector is not immune
to disruption.
In fact, where the is enough data on
any successful person decision making in an professional industry, AI
can isolate the factors that made them successful, and then apply
these factors to opportunities for eternity.
Steven J Cohen CFA is the principal and CIO of a Zurich based multi-family office. He gained his BSc Econ from UCL, spent several years in Chartered Accountancy and had established a retail clothing firm in central London. He was in-house counsel to the wealthiest family in the UK and managed a multi billion dollar portfolio for a big 4 UK bank. After a very successful 2007 & 2008 he established his family office and today develops artificial intelligence generated investment strategies for an increasing Asian client base.
Was
he sensitive, was he hell? Did he ride to the rescue…..more times
than you’ve had hot dinners. And boy could he walk, talk & shoot
straight. If he starred in a modern political feature his usual
“can-do”character may have got into the following minor scraps and
righting of wrongs.
Fiscal Reform:
Simplifying and reducing tax rates, encouraging: investment at home, employment and, rewards for success in business and career.
Fiscal Easing:
Reminiscent of Reaganomics unmet spending, but this time from Debt
levels not seen since the end of WWII. With demand from global pension
plans to meet cash requirements of the expanding number of retirees,
allowing easy adoption of increased issuance, until expanding US growth
rates permits increased tax recovery and Debt pay-down.
Infrastructure & Urban Regeneration:
Not talking bridges to nowhere as in the Japanese example, for
fertility rates in the US are still reasonable and the legal immigration
policy liberal. But improving productivity and bringing previously
criminal elements into legal activities boosting growth and tax
collection.
Reduced Regulation:
Relaxation of the burden on small business to enter markets and
complete against global market leaders, bringing back the local feel.
And a return of Caveat Emptor improving the self-reliance and
diminishing the hollering in recent generations.
Realigned Foreign Policy:
Requiring Allied nations to meet defence spending requirements that
may reduce the need for US foreign bases that have prevented any recent
major European wars. Not undermining solid allies with a shared cultural
outlook, together with a healthy scepticism of vocal cultural
opponents, thereby providing certainty of deterrent. Even the Duke would
never call US citizens of Mexican heritage, rapist, murderers and drug
dealers and would have found it inconceivable to want to eliminate the
Chicano vote. Unless the comments were referring to ILLEGAL immigrants
whilst still assuming some of them are good people. Profiling of LEGAL
entrants who’s cultures are sympathetic to extremist/criminal
activities.
Renegotiated Trade Agreements:
Whilst most country trading surpluses are caused by large savings and
productivity gains they are also usually accompanied by a certain
amount of xenophobia. Restriction of free trade can be inflationary but
may also bring in the huge amount of people not counted as looking for
work and an incentive to invest in robotics.
And the fantastic cinematography that usually accompanies Duke’s
features? This is being provided by the beautiful and breathtaking
capital markets reaction of higher expected growth and a decent yield on
fixed income savings of the more conservative.
But what of the plot, of course that would depend on the director of the feature?
Directed by Michael Moore we’ll just get a remake of the Alamo, when
the Central Bank returns to its misguided ways of belated and
exaggerated action to stifle this hero’s efforts.
But with Quentin Tarantino we’ll get his reboot of the Searchers with
the search, discovery but this time, successful reuniting of America
with it’s Greatness.
“We
finally really did it…You Maniacs! You blew it up! Ah, damn You! God
damn you all to hell!” Cry the Bremain supporters, EU politicians and FX
and equity capital markets.
The departing and presumptive British PMs suggests a period of calm
negotiations before any change occurs. EU politicians and administrators
continue their disregard for democracy and demand immediate panic,
liberal elite demand disenfranchisement of over half the British public,
and investors, employers and capital markets bemoan uncertainty.
The benefits of free trade remain: purchasing of goods from the
cheapest source allowing allocation of remaining resources to the most
relative productive activity.
In the coming re-negotiations Britain approach from a position of
strength, it accepts net services and goods from the EU and the rest of
the world, any threat to allowing British goods and services into Europe
(as long as they meet EU regulatory standards) could be met with even
harsher reprisal. Of course as the UK is smaller than the EU the
relative effect would hurt the UK more. But both Switzerland &
Norway with massive net exports have access to the EU free market for
which they pay, on this basis the UK could maintain access and receive a
net receipt.
Under free movement of labour Britain again receives net migration
from the EU. Britain could limit EU immigration, on a one-to-one basis,
to the highest quality and demanded resources without jeopardising
British nationals working or living in their homes in the EU.
Britain is also a net contributor to the subsidies and grants of the
EU, for that benefit it is allowed access to the decision and law making
processes that is shared with 27 other nations. Whilst the direction of
political EU and UK may now differ, the UK would be free to adopt any
of the best in-class practises from the EU without having to contribute
to the EU treasury.
For trade with the rest of the world any existing EU agreements with
the rest of the world could also be adopted by the UK and the non-EU
blocks until if necessary renegotiation take place.
A call for calm rational negotiations by British leaders and the head
of the other successful economy in the EU (and provider of the British
royal family, maintained after the Magna Carta, reinstalled after the
English Civil War as a constitutional monarchy and, possible model for
UK’s continued membership of the EU) would lead to a beneficial outcome
for both sides (and a similar non event to the Y2K). The rash hysterical
shrill for punitive action from the world liberal elite provides the
reasoning for British exit, but also evokes uncertainty for the UK, EU
and rest of the world.
US
unemployment rate is reaching pre recession levels
But
Fed rate hikes could lead to another stock market crash
We
are now eight years on from the global catastrophe of the “Great
Recession”, but with the US stock market (SPY, DIA, QQQ) banging up
against all time highs and global stock market indices (ACWI)
recovering to all time peaks reached twelve months ago, can one
assume all is swell the global economy?
Unemployment
levels in the US are fast approaching levels pre Recession and in
Europe it is finally showing meaningful reduction from the peaks of
2013 a story repeated in many of the worlds largest economies.
The
policies to get us here have been a mixture of both traditional and
extreme. From the US we’ve had traditional government spending unmet
by tax collection together with interest rate cuts, to the extreme
with the Central Bank purchasing the government debt with conjured
money. Europe has avoided expanding government spending but have gone
to the far side of extreme with negative interest rates. Japan is
using all of the above and China has gone the way of massive
relaxation of lending restrictions to the private sector that
comically sloshes around.
If
all was well with the world it would be time to stop these policies,
and indeed the US stopped magically producing money several months
ago and have even had an interest rate increase.
However
the information content of the developed world government bond
markets (BWX) are signalling something very sinister, most are
providing a yield around the current inflation rate or, expectations
of no inflation usually caused by coming slow growth or recession.
This indicates that we are again in the era of potential policy
mistakes.
In
an appraisal of the policies that have already been installed, US
government debt relatively reaching WWII leaves very little room for
further support unless in desire of a centrally planned economy. The
EU have been late to the party on cutting interest rates and
conjuring money but should be applauded for government austerity in
the face of a reducing tax base. Japan has morphed into a basket case
but China continues to grow at an envious rate for the time being.
Unfortunately negative interest rates for retail and corporate banks
have not made them lend more but punished pension plans, mainly due
to increased financial regulation.
Even
more comical than which quarterly bubble private lending is funding
in China, is that they have embarked on empowering the private
sector, where as the US is empowering the government and the
previously failed establishment. It is in fact a shame that the US
information technology revolution of the last forty years have passed
their rulers and central bankers by. Today “community” platforms
(LC, TREE) are enabling borrowing from highest quality risk takers,
to increase productivity and create growth, with enviable interest
rates and data collection to the lender. Central bankers, however,
continue to support their former work alumni and ignore calling for
mandates to fund “community” platforms.
In
support of the old school at the US Federal Reserve, they correctly
watched the stock market or as they call it “data” to help
determine when to make their first interest rate rise, but now is the
time to start waiting for yields in their unsupported bond market
(TLT) to recover. Although employment is at high levels, US central
bankers can be relaxed with their inflation mandate, as corporate
profitability is very tight, lay-offs are preferable to reduced
margins.
There
is little room for error but a policy mistake can take us back to the
last decade including a stock-market crash.
We’ve just had the first 10% correction in the US stock market in
over 3 years, immediately preceded by a halving of equity valuations in
the Chinese stock market, together with most other country stockmarkets
moving into bear or correction territory.
This has been driven by two factors; a slowdown in Chinese economic
growth and the probability of a September interest rate rises in the
USA.
However we believe that the probability of a US September interest
rate rise (from near zero) has now been removed and the probability of
Chinese interest cuts (from 4.85%) have increased.
This should benefit economic growth and allow many country stockmarkets to recover recent losses.
Put in the context of the USA’s seven year bull market, there may not
be many more years left in the bull market, but now is not the end, it
is not even the beginning of the end, but it is, perhaps, the end of the
middle.
Last Thursday the Swiss National Bank (SNB) suspended it’s support for a Euro floor against it’s currency of 1.20, the Euro promptly fell 45% against the Franc. i.e. Swiss investors lost 45% in value of their European assets. Eventually the Euro recovered for a loss on the day of 17% to settle near levels of the August 2011 Franc crisis. The Swiss stock market also fell 15% in two days, implying the only safe haven were Swiss Franc denominated bonds and cash accounts. However the SNB also lowed the target deposit rate to negative 0.75% per annum, whilst holders of 10 year Swiss government bonds have to pay 0.13% per annum (pa) for that pleasure.
Whilst the timing of the decision was a surprise the market reaction
was supreme shock, only days before a member of the SNB publicly
supported the previous policy. The previous policy was also beneficial
to growth and price stability in the Swiss economy. After the
announcement investors, traders and global companies scrambled to hedge
their exposure, supplemented by any future SNB commitment to foreign
exchange stability already losing credence. In sympathy with the SNB the
Swiss economy at only the 20th largest economy in the world, inhibits
the risk tolerance for limiting external influence.
The Swiss Banking industry has a long history in lacking moral
discrimination of deposit ownership. Swiss regulators also condone
misrepresentation by financial intermediaries (when referring suspect
money drug traffickers or terrorists to them). All-in Swiss financial
system participants are the most rational in the world. Some may
therefore not be surprised in a conflict between Swiss words and deeds.
Investors with Swiss liabilities, long investment horizons and
generating non-investment income in Swiss Francs: should continue to
seek growth in the equities of high growth areas and value companies
(the US stock-market has outperformed the Swiss currency by 5% pa over
the last 30 years); maintaining fixed income in the major trading block
currencies with potential for recovery back to fundamental levels before
increasing allocation to Swiss fixed income. Those with short
investment horizons and not generating non-investment income in Swiss
Francs, continue to be inhibited by negative domestic interest rates and
domestic equities that are presently penalised by an uncompetitive
exchange rate.
Steven J Cohen CFA, BSc (Econ) Hons Lond. 19th January 2015.
On February 25th 2009 the Fed released details of how US banking organizations were to be assessed to ensure that they had sufficient capital to perform on an ongoing basis. The S&P 500 closed that day on 764.9 and, reached a further inter-day low of 666.79 on March 6th 2009. Since then, the S&P 500 had reversed direction, to reach a high of 1219.8 on April 26th 2010.
However by July 1st, the S&P 500 had fallen-back to it’s year to date low of 1010.91. On July 14th the FOMC released minutes of their June meet that included the phrase “the economic outlook had softened somewhat” and on July 21st Bernanke release his “economic outlook remains unusually uncertain” testimony. Could these pronouncements be as significant in allowing a bottom to form as the Fed’s stress test announcement?
Bernanke served as a member of the Fed Board from 2002 and became Chairman on February 1st 2006. He will always be fondly remembered for his November 2002 speech that included both the terms “printing press” and “helicopter drop” in a discussion on how to prevent deflation. In his role of Chairman, he tried to prevent the financial market crisis with upbeat economic assessments, to no avail. He now appears to have learnt that a candid assessment, allows markets to respond to the expected monetary policy changes quicker.
He was certainly complicit in the bubble’s that formed, leading to the financial crisis. He’s certainly THE MAN who knows the necessary policy responses to that financial crisis. Now his communication to market participants has improved. And, in his January 3rd 2010 speech he has even accepted that, monetary (secondarily to regulatory) policy should be used to prevent damaging asset price bubbles. A well rounded Central Banker appears to have developed.
CME 30-day Fed Fund Futures are now indicating that, the FOMC may increase the federal funds rate (from their sub 0.25%) to 0.50% only in Sept 2011. This still gives the S&P 500 plenty of time to recover, till it will have to start discounting the interest rate rise.
According to the Nationwide Building Society, UK new home prices have risen 3% in the first half of 2010, following a previous flat year. This amounts to an astonishing recovery from the global pessimism that remains in most developed economies. So is it sustainable, and why? Like gold bullion, London realty appears to be a safe haven play in troubled political and economic times. Britain possesses one of the oldest democracies, a tolerance of extremists and, a language that is used globally in business, medicine, computing, movies and music. London specifically, has extensive cultural and leisure facilities and, the world’s busiest international airport. Wealthy Russians and Arabs, concerned Greeks, and many other nationalities, purchase holiday or rental properties in the Capital without due regard to the economic situation in the UK.
Whilst after the 1989 housing bubble burst it took four years, for new home prices in the UK to start showing positive gains; recent gains are in line with long term historical performance. Since 1964 UK new home price increases have outperformed US by an average 3.25% annually (in national currencies), however during the same period the pound has fallen an annual average of 1.62% against the dollar. This outperformance may have something to do with relative population density. So there may be some justification to believe that UK home prices can continue to outperform US.
Sources: US Census Bureau: Average Sales Prices of New Homes Sold in United States, Nationwide Building Soc. Price New Houses (UK)
However, when we look at the affordability to nationals of their new homes (measured by the annual differential from the average new home price / GDP / population) justification for continued home price growth in the UK seems less justifiable. As at the end of 2009 UK new home prices were seven times the average gross domestic product per person.
Further source IMF: GDP/capita, current prices.
The battle lines between local and foreign residential house traders in the UK are drawn. Higher taxes, high unemployment, government austerity measures and, lack of credit, are holding back the British, while cash rich foreign buyers continue to invest. The question is, what do these foreign buyers know that the British don’t?
Setting aside blame for the current credit crisis, the use of fiscal policy to remedy monetary problems continues to use 1930’s solutions to 2000’s problems. In addition if banks, that have the best understanding of each others problems, do not trust themselves, why should savers or government. In addition banks have been given access to borrowings by central banks but refused to accept it, due to stigma association, however banks share prices continued to fall. Therefore the commitment of greater and greater amounts of fiscal and monetary resources to the financial industry will only have a slow effect with drastic side issues, and is equivalent to throwing the whole universe down a black hole.
In addition financial institutions are only getting used to the implications of short selling, mark to market and capital ratios, all of which are reasonable and correct policies. Therefore a temporary suspension of these policies, of approximately a year, would give banks and regulators the time to adopt correct working practices for the use of financial products that are or have been developed.
The essential problem is that the velocity of money has shrunk to an unreasonable low level. Therefore to compensate the amount of money in circulation needs to rise to maintain the present global output growth at reasonable price growth. Addition problems are that: individual savings are at an unreasonably low level and job creating entities cannot gain access to capital in the form of borrowings.
The monetary solution requires that all individuals savings and deposits at financial institutions needs to be guaranteed by the respective central banks of that country and currency.
There needs to be a policy of immediately replacing all terminating borrowings of job creating entities, to reduce the possibility of a recession or depression. Securitised borrowings, from institutions with the necessary credit rating quality (rating), that have come up for redemption and that cannot be refinanced in the market at reasonable rates, should be refinanced by national central banks, creating new money. Assistance to inter-bank lending can continue to be given to through central bank lending windows (with the attached stigma).
Loan officers from financial institutions that have stopped refinancing non-financial job creating entities should have secondments to local central bank offices, with their pay still furnished by their permanent employers. Any loans not renewed by the loan officers present employers should be provided by central banks, again creating new money. This requires access to the data bases and records of banks that are not lending, the internet and, a new data base at central banks; with supervisory and approval officers at central banks.
Once problemed financial institutions and the regulators have established the correct working practices and are in the position to start to lending to non-financial institutions, increasing the velocity of money, central banks can then reduce the amount of money by selling their loan books back to the previous lenders or, in the
case of securities selling to the market.
The net effect will be a reduction in the size of employment in banking (fundamentally a structural issue) whilst maintaining the amount of employment in the rest of the economy. The penalising of future generations by increasing national debt would have been avoided, and any issues of moral hazard would have also been prevented.
Steven J Cohen, BSc (Econ) Hons CFA
Thursday October 16th, 2008
950 N Kings Road, Suite 151
West Hollywood
CA 90069
USA
