Unless you count using your credit card as part of your income this is what GDP
has looked like since the financial crisis…….
Luke Rosiak of the Daily Caller is out with a follow-up to a report on the Awan Pakistani IT family who had access to highly sensitive Congressional networks, both on-site and from Pakistan, where they are suspected of a variety of crimes -including brokering classified information to hostile foreign governments. Of note, they had access to the House Permanent Select Committee on Intelligence – whose members have top secret clearance and are looking into Russian election interference.
Debbie Wasserman-Schultz and Imran Awan
Note Rep. Louie Gohmert‘s reaction when he learns of the Awan’s remote access from Rosiak:
Clip of the year? @replouiegohmert learns from @lukerosiak that Debbie Wasserman Schultzindicted staffer teleworking and providing House Dem IT “support” from Pakistan! Full @JudicialWatch discussion here….https://t.co/4HwY3Jgvd2 pic.twitter.com/VVjkiujJqo
— Tom Fitton (@TomFitton) December 17, 2017
The Awans also operated a used car dealership known as “CIA” in court filings, which has all the markings of a money laundering operation:
On its Facebook page, CIA’s “staff” were fake personalities such as “James Falls O’Brien,” whose photo was taken from a hairstyle model catalog, and “Jade Julia,” whose image came from a web page called “Beautiful Girls Wallpaper.”
If a customer showed up looking to buy a car from Cars International A, often referred to as CIA, Abid Awan — who was managing partner of the dealership while also earning $160,000 handling IT for House Democrats — would frequently simply go across the street to longstanding dealership called AAA Motors and get one.
While Imran and Abid Awan ran their car dealership in Falls Church, Va. in the early part of the decade, Drug Enforcement Agency officials a few miles away in Chantilly were learning that the Iranian-linked terrorist group frequently deployed used car dealerships in the US to launder money and fund terrorism, according to an explosive new Politico expose. –Daily Caller
“Based on the modest way Awan was living, it is my opinion that he was sending most of his money to a group or criminal organization that could very well be connected with the Pakistani government,” said Wayne Black – a private investigator who worked in Janet Reno’s Miami public corruption unit, adding “My instincts tell me Awan was probably operating a foreign intelligence gathering operation on US soil.”
Philip Giraldi, a former CIA officer, wrote that Attar “was observed in Beirut, Lebanon conversing with a Hezbollah official” in 2012–shortly after the loan was made. –DC
Dr. Ali al-Attar
Al-Attar’s license to practice medicine was revoked by the Maryland State Board of Physicians and he had to pay a $50,000 fine for unprofessional conduct, healthcare fraud, and failure to cooperate with an investigation.
The money which the Awans borrowed was moved from Ali Al-Attar through accounts intended for Fairfax County real estate. Both Imran Awan and Khattak — who also put up $200,000 in cash as an investor in CIA — had realtors licenses.
Per the Daily Caller:
It’s not clear where the dealership’s money was going, because it was sued by at least five different people on all ends of a typical car business who said they were stiffed. CIA didn’t pay the security deposit, rent or taxes for its building, it didn’t pay wholesalers who provided cars, and it sold broken cars to people and then refused to honor the warranties, the lawsuits say.
Adding to the list of interesting connections, when the Awans stopped paying vendors of their ‘CIA’ dealership, a U.S. Congressman from Florida began paying a monthly salary to a man who had threatened to sue the Awans.
Rep Theo Deutch (D-FL), Awan Benefactor
The brothers had numerous additional sources of income, all of which seemed to disappear. While they were supposedly working for the House, the brothers were running a car dealership full-time that didn’t pay its vendors, and after one — Rao Abbas — threatened to sue them, he began receiving a paycheck from Rep. Theodore Deutch (D-FL), who like Wasserman Schultz represents Florida. –Daily Caller
The Awans were also accused of stealing “huge amounts” of computer equipment from the House. As the Daily Caller reports:
Shortly before the 2016 election, investigators found huge amounts of House equipment unaccounted for under the Awans’ stewardship, and when they looked into the family further, they found that they had logged in to members’ computers for whom they did not work. There were signs that the House Democratic Caucus’ server “is being used for nefarious purposes and elevated the risk that individuals could be reading and/or removing information,” according to a House investigation. They were also moving files online, “a classic method for insiders to exfiltrate data from an organization,” the report found, and “steps are being taken to conceal their activity.”
In July, Imran Awan was was arrested by the FBI at Dulles Airpirt attempting to leave the country, and was indicted by a grand jury on four counts along with his wife Hina Alvi, on allegations that the pair made false statements on loan applications before wiring nearly $300,000 to Pakistan. ““Defendants AWAN and ALVI did unlawfully, willfully, and knowingly conspire, combine, confederate, and agree with each other to commit offenses against the United States,” including bank fraud, false statements, and unlawful monetary transactions, the indictment said.”
Awan’s arrest came days after a Daily Caller report that the FBI has seized more equipment from the garage of a house owned by Imran Awan and his wife Alvi after a tenant called investigators.
FBI agents seized smashed computer hard drives from the home of Florida Democratic Rep. Debbie Wasserman Schultz’s information technology (IT) administrator, according to an individual who was interviewed by Bureau investigators in the case and a high level congressional source.
The congressional source, speaking on condition of anonymity because of the sensitivity of the probe, confirmed that the FBI has joined what Politico previously described as a Capitol Police criminal probe into “serious, potentially illegal, violations on the House IT network” by Imran and three of his relatives, who had access to the emails and files of the more than two dozen House Democrats who employed them on a part-time basis.
Fellow IT staffers interviewed by TheDCNF said the Awans were often absent from weekly meetings and email exchanges. One of the fellow staffers said some of the computers the Awans managed were being used to transfer data to an off-site server.
Shortly after the criminal probe was revealed in February, Imran abruptly moved out of his longtime home on Hawkshead Drive in Lorton, Va., and listed it for rent on a website that connects landlords with military families.
The new tenants were none other than a retired Marine and his active duty Navy wife. In the garage, they found “wireless routers, hard drives that look like they tried to destroy, laptops, [and] a lot of brand new expensive toner.”
After hearing about the House investigation into the Awans on the radio, the tenants called the Navy Criminal Investigative Service (NCIS), and shortly thereafter the FBI and Capitol Police became involved.
Speaking on the condition of anonymity over concerns for his wife’s naval career, the former Marine told the Daily Caller:
“It was in the garage. They recycled cabinets and lined them along the walls. They left in a huge hurry,” the Marine said. “It looks like government-issued equipment. We turned that stuff over.”
The Awans also kept their Imprisoned their stepmother to bilk inheritance money
THREE DAYS before U.S. Capitol Police told House members about the Awans, their stempmother called Fairfax County, Virginia police report she was imprisoned in their house – kept from her husband’s deathbed. Oh, and they were bugging her with listening devices.
A relative described the woman’s life as being completely controlled by the brothers for months while they schemed to take their father’s life insurance. –Daily Caller
After their father died, the Awans carted their stepmother to Pakistan to collect her inheritance – which they promptly extorted from her.
So – the Awans, who were in a trusted position – handling some our nation’s most sensitive information, ran a shady car dealership, remotely accessed House networks from Pakistan, imprisoned their stepmother and stole her inheritance, took $100K from a Hezbollah-linked doctor, let Rep. Theo Deutch pay their bills, stole and smashed computer equipment, and helped Debbie Wasserman Schultz make a call using a voice changer to a law firm suing the DNC.
The only thing I can conclude from this is that Debbie Wasserman-Schultz had Hezbollah spies working for her.
Is Wasserman-Schultz a foreign agent? https://t.co/0NawkbCLd8
— Based Monitored???????????? (@BasedMonitored) December 19, 2017
The new Tax Policy Center analysis of the bill tells the story. It finds that in 2027, 53 percent of taxpayers will see a tax hike, relative to current law. That’s because the plan makes the individual rate cuts and the preferences that will benefit lower earners temporary, while establishing an inflation index that nudges people into higher income brackets over time, to limit the impact on the long-term deficit. Meanwhile, the bill makes the corporate tax cuts (which overwhelmingly go to shareholders and capital, and thus mainly to the rich) permanent.
The key to understanding the plan’s regressiveness is in the distribution of the tax cuts and tax hikes that will hit in 2027. I’ve created a chart, using the TPC’s data, that tells this story:
As you can see, the groups who see a tax hike in 2027 are heavily concentrated in the lower-income quintiles. By contrast, more than three-quarters of the top 1 percent get a tax cut — an average tax cut of nearly $40,000. And more than 90 percent of the top 0.1 percent get a tax cut — an average tax cut of more than $200,000.
Republicans have said that passing this plan is key to staving off a disaster in the midterms. They are hoping to sell it to voters by claiming that at its core, it is a middle-class tax cut, and they are hoping that the tax cuts that working- and middle-class Americans see in the short term will make this claim credible.
It is true that in the short term, the vast majority of taxpayers will see a tax cut. But even in the short term, the plan is very regressive. Here’s another chart that demonstrates this, using the TPC data:
Next year, the bottom three quintiles get an average tax cut of less than $1,000, while the top 1 percent gets an average tax cut of more than $50,000, and the top 0.1 percent gets an average tax cut of nearly $200,000. By 2025, the lower quintiles get approximately the same-sized tax cut, while the average tax cut for the top 1 percent jumps to higher than $60,000, and the average tax cut for the top 0.1 percent jumps to more than a quarter of a million dollars.
And over time, as the first chart shows, more and more in the lower quintiles end up paying higher taxes, even as the very wealthiest Americans continue to enjoy huge benefits. Indeed, the TPC data show that by 2027, more than 80 percent of the plan’s benefits go to the top 1 percent. As Dylan Matthews points out, this is even worse than a previous iteration of the bill.
The plan gets increasingly regressive over time. But this feature of it is essential to maintaining the GOP priorities at the core of the bill and to the GOP’s hopes of passing something that embodies those priorities. Republicans must pass the plan with only GOP votes because Democrats will not accept a plan that lavishes such an enormous share of its benefits on the rich, and Republicans will not accept a plan that does not do that. So Republicans must pass it through the Senate by simple majority, which requires keeping it from raising the deficit over the long term. Managing that — while also keeping the tax cuts that overwhelmingly benefit the rich permanent — required them to make the tax cuts that benefit everyone else temporary. Thus, the plan’s increasingly regressive nature is essential on multiple levels.
Republicans will try to get around the awful politics of this by arguing that in the short term, the middle class gets both a tax cut and will also benefit from the explosion of growth and wages that cutting taxes on corporations will supposedly produce. But very few economists believe that the latter will come to pass. And given the size of the tax cuts for less fortunate Americans relative to those that top earners will enjoy, it is far more likely that voters will continue to see the plan as a giveaway to the rich. Which is exactly what it is.
Since last November 8th the Russell 2000 has risen by 30% and the net Federal debt has expanded by an astounding $1.0 trillion dollars.
In a rational world operating with honest financial markets those two results would not be found in even remotely the same zip code; and especially not in month #102 of a tired economic expansion and at the inception of an epochal pivot by the Fed to QT (quantitative tightening) on a scale never before imagined.
And we do mean exactly those words. By next April the Fed will be shrinking its balance sheet at $360 billion annual rate and by $600 billion per year as of next October.
Altogether, the Fed’s balance is scheduled to contract by upwards $2 trillion by the end of 2020. And it’s apparently on a path that is so locked-in—-barring a recession—that Janet Yellen affirmed in her swan song that the Fed’s giant bond dumping program (euphemistically called “portfolio runoff”) would no longer even be mentioned in its post-meeting statements.
So the net of it is this: The Fed will sell more bonds in the next 3-4 years than had been accumulated by all of the central banks of the world in all of recorded history as of 1995!
That prospect alone might give a rational stock market at least some cause to pause. After all, the Fed’s $2 trillion bond selling campaign (likely to be joined by the ECB in 2019 when a German replaces wild-man Draghi) is on automatic pilot unless there is a recession.
So stock prices are either going to be battered by slumping profits if the business cycle hasn’t actually been abolished; or, in the alternative, rising bond yields will sharply inflate the carry cost of $12.5 trillion of US non-financial business debt (e.g. a 200 basis point increase in rates would lower pre-tax business profits by $250 billion or 15%) even as PE multiples shrink and stock buybacks are sharply curtailed.
And that’s not all, as the late-night TV man says. There is literally a fiscal red ink eruption heading straight at the Fed’s balance sheet shrinkage campaign that will rattle the rafters in the casino.
As detailed below, Uncle Sam’s borrowing requirements are likely to hit $1.25 trillion or more than 6% of GDP in FY 2019 owing to the fact that the tax bill is so heavily front-loaded and the GOP’s wild spending spree for defense, disasters and much else.
Needless to say, this impending bond market collision has not fazed the dip-buyers in the slightest. Financial markets are in the blow-off stage of the third great central bank bubble of the present era and are therefore entirely in the grip of momentum chasing robo-machines and day traders. The latter are processing price action alone—-to the complete exclusion of a swelling tide of facts and threats which sharply contradict the bullish mania of the moment.
For instance, the now booming Russell 2000 (RUT) wasn’t exactly a laggard when the Trump Trade incepted in the wee hours of election night. At that point it traded at 1190 and was already up by 230%from the March 2009 bottom.
But at yesterday’s record 1549 close, these small and mid-cap domestic companies had a combined market cap of $4.45 trillion. That represented not only 440% of the RUT’s $1.0 trillion market cap at the March 2009 bottom, but also reflected utterly absurd multiples of the current earnings and dividends attributable to its constituent companies.
To wit, the RUT companies generated just $60 billion of dividend payments during the LTM period ending in September. In what sane world does a GDP-hugging basket of main street companies trade at 74X their dividend?
Worse still, the RUT companies are apparently borrowing money to pay even that miserly 1.35% dividend.
That’s right. Net income during the LTM period was slightly under $42 billion or just two-thirds of the RUT’s dividend payout. So this also means that America’s main street businesses are being valued at a preposterous 107X earnings.
These absurd valuations would be troublesome enough if the fiscal and monetary context were stable rather than heading for a thundering dislocation. But there is no other word for a fiscal equation which is unraveling at lightening speed as we head for the onset of FY 2019 next October 1.
Under the CBO’s baseline projection of last June, the picture was already bad enough. Federal outlays were projected to rise from $4.0 trillion in the year just ended (FY2017) to $4.38 trillion in FY 2019. Notwithstanding revenue growth of 11% under current law over the two year period, the resulting baseline deficit still computed to nearly $700 billion.
But Trump has already signed into law a defense authorization bill which will raise baseline outlays from $625 billion to $700 billion. And on top of that, the House yesterday approved an $81 billion disaster aid supplemental for the hurricanes and wildfires, which will bring total spending for this year’s disasters to a staggering $133 billion.
That’s vastly more than the $51 billion spent for Hurricane Sandy or the Katrina outlays of $60 billion. More importantly, the Congressional Republicans are not contemplating any off-setting cuts elsewhere in the Federal budget—-a sharp reversal from their traditional insistence to that effect.
Indeed, the disaster fix is already in and will be attached to the next two-week installment of the FY 2018 continuing resolution (CR).
The fact that the Federal deficit is soaring and was already up by 75% in the year just ended compared to FY 2015 has apparently not registered with the Republican leadership. And that’s to say nothing of horrific timing: Upwards of half of the $133 billion of disaster aid will hit in FY 2019 at the exact time that the GOP’s front-loaded tax cut ($280 billion) will also arrive with full force.
As Bloomberg noted with respect to the disaster aid bills, fiscal rectitude is not the GOP’s flavor of the month. For instance, the “ask” of $61 billion for disaster aid from conservative Texas governor Gregg Abbott is more than has ever been spent on any previous disaster in US history.
Likewise, the Florida GOP is seeking $1.5 billion for damages suffered by the citrus industry when Irma came roaring across the peninsula. That’s especially rich because hurricanes are surely a known cost of doing business in Florida, and orange and lemon producers ought to buy insurance or self-insure, not ding taxpayers in Fargo North Dakota.
In any event, as Bloomberg explains below, the GOP’s stalwart conservatives from Florida, California, and Texas are on the case because this time is apparently different:
The aid likely would be attached to a government spending bill that must be passed this week to keep the government open after Friday. The disaster spending is being pushed forward by Republicans from Texas, Florida and California who threatened to oppose the spending bill if hurricane relief wasn’t included……“The dollar figures I hear are fine,” said second-ranking Senate Republican John Cornyn of Texas. “How it’s distributed may need some changes”.
House Rules Committee Chairman Pete Sessions of Texas predicted that conservatives will support the bill, despite a lack of offsetting spending cuts, because they understand the urgent need for aid. The Texas port on the Gulf of Mexico, through which military armaments pass, is “still in shambles”, he said.
Florida has requested $1.5 billion to help its citrus industry recover from hurricane Irma. Texas Governor Greg Abbott has requested $61 billion in aid for his state, while officials in Puerto Rico have sought $94 billion.
Still, there are at least two more budget shoes to drop just around the corner, as well. The first is the House GOP leadership’s plan to bust the sequester caps for defense via a rider on the Christmas Eve CR, but to leave the cap on domestic appropriations frozen at existing levels.
Needless to say, it won’t fly. The Dems have already rejected what they are calling Ryan’s defense and disaster plan—-yet the sheer vote math in the GOP caucus is prohibitive on a strictly partisan basis. This means that to raise defense spending by about $75 billion per year or 12%—either in the current CR extension or the next one in early January—will ultimately require at least a $25 billion or 5% increase in domestic appropriations in order to obtain at least some democratic votes.
Like in so many other cases, the Speaker will lose votes from among the 40-50 member Freedom Caucus owing to the lack of off-sets for the giant disaster relief rider and would simultaneously face defections from the 50-member Tuesday Club if defense appropriations are raised by 12% while domestic appropriation for education, community development, health services and research etc are kept frozen at sequester levels.
So we expect that he will end up cobbling together a majority by pacifying the GOP moderates and buying off the requisite Dems to obtain the needed 218 votes to keep the government open—-even if only a few weeks at a time.
That baleful outcome is more or less baked into the cake based on how McConnell auctioned off the votes for the tax bill in the Senate. Specifically, he made an ironclad promise to Senator Collins to fund the ObamaCare insurance subsidies at around $20 billion per year.
Yet given that his majority will dwindle to just 51-votes after Alabama, he has no way to renege. That’s because the RINO from Maine was negotiating for Senator Alexander and a handful of other GOP Senators who insist on “stabilizing” rather than repealing ObamaCare. But when the insurance company bailout comes back to the House, there will be huge defections by the anti-ObamaCare stalwarts of the Freedom Caucus.
In all, then, we expect FY 2019 outlays to rise by upwards of $200 billion from CBO’s most recent baseline projection. That would include $75 billion for defense, $65 billion for disaster aid, $25 billionfor increased of domestic appropriations above the sequester cap, $20 billion for the ObamaCare subsidies and another $15 billion for interest on higher spending and lower revenues.
Those kinds of spending increases are now virtually certain, and will take total FY 2019 outlays to around $4.575 trillion. That happens to be nearly 20% more than the $3.85 trillion spent during FY 2016 during the run-up to the presidential election—-when the GOP politicians loudly denounced the runaway spending of the Obama Administration.
And that get’s us to the tax bill and what the Wall Street Journal has dubbed “Sunset Boulevard”. What that means is the biggest tax cut occurs on the front-end in FY 2019. Thereafter, the tax bill devolves into an endless sequence of gimmicks, sunsets and implausible out-year revenue raisers that were designed to shoehorn the 10-year cost into the $1.5 trillion deficit allowance which enabled a 51-vote reconciliation process.
So the Sunset Boulevard depicted above amounts to the most blatant and dishonest abuse of the budget reconciliation process since its enactment in 1974, and we will elaborate on that in greater detail tomorrow.
But suffice it to say here that the “cliffs” built-into the graph below are not going to happen in the real world. Instead, they will soon lead to political conflicts and fiscal food fights that will make the 2012-2013 tax expiration “cliffs” look like small potatoes in comparison.
For instance, the only semblance of honesty in the claim that the bill is a “middle-class tax cut” is the 2-3 points of downward adjustment in the 7 marginal rate brackets compared to current law and the doubling of the child credit to $2000.
In the sunset year of 2025, however, those measures would save taxpayers $250 billion. compared to current law. Yet if there is any certainty in this world at all, it is that a legislative and political bloodbath will ensue when the Congress comes check-by-jowl with a quarter trillion dollar per year tax increase on 150 million individual taxpayers in 2026.
Likewise, the $53 billion per year cut for pass-thru businesses expires in 2025—-even as the corporate rate cut to 21% (at a cost of $150 billion per year) stays on the books forever. That’s not going to happen in a month of Sundays, either.
From the other side of the equation (i.e. payfors), the limit on interest deductions for business debt tightens sharply in the out years. This causes the “payfor” gain to nearly double from $20 billion per year to $37 billion (2027), while at the same time a whole new regime of amortization of corporate R&D rather than 100% expensing incepts in 2022—raising a projected $120 billion in the final six years of the bill.
Since the K-Street lobbies and business PACs essentially wrote the current bill, we have little doubt that they will have the clout to “un-write” what amounts to $200 billion in phony revenue increases in the out years when the time comes.
In short, we will demonstrate that the true 10-year cost of the GOP’s tax bill folly is in the order of $2.5 trillion on a honest accounting basis, and that under current circumstances it doesn’t have a snowball’s chance in the hot place of paying for itself with higher growth.
But for the moment, however, the FY 2019 budget disaster also explains why coping with this fiscal monstrosity in the out years in the context of baseline deficits which already total $10 trillion over the period will be next to impossible.
As is evident below, the FY 2019 revenue loss from the final conference bill will total $280 billion, thereby reducing Uncle Sam’s collections to just $3.40 trillion compared to the aforementioned $4.575 trillion of spending.
So there you have it: An FY 2019 budget deficit of $1.175 trillion—and you need to add another $100 billion for off-balance sheet programs that add to the borrowing requirement.
Even under the CBO’s generous estimate of nominal GDP for FY 2019 ($20.7 trillion), the Treasury’s total borrowing requirement of $1.275 trillion would amount to 6.1% of GDP.
But here’s the thing. That would be during months #111-125 of the business expansion that started in June 2009. As we have frequently noted, the US economy has never been there before—with the longest previous expansion during the far more benign 1990s totaling only 118 months.
And that is to say nothing of the fact that this purported record business expansion would be occurring at a time ultra-late in the cycle when the Fed is shrinking its balance sheet by an unprecedented rate of $600 billion per year.
In a word, something’s going to give.
We’d bet a fair amount that one of those “somethings” will be a casino so delirious with momo madness that it is valuing the RUT main street businesses of America at 107X peak earnings.
Shares of Alibaba fell on Thursday morning, despite an exciting news story involving the Chinese e-commerce juggernaut, which is rushing to shake up the way people buy cars in China. Alibaba seems to be taking a page from Amazon’s acquisition of Whole Foods, with the continued push into physical retail. The plan outlined by Alibaba, is to open two giant car vending machines in early 2018, shaped like a futuristic tubular building with a giant cat’s head on top.
Having monopolized the online world, Alibaba continues to push offline with investments in Chinese bricks and mortar retailers.
Alibaba CEO Daniel Zhang said back in November, “physical stores serve an indispensable role during the consumer journey, and should be enhanced through data-driven technology and personalized services in the digital economy.”
“By fully integrating online and physical channels together with our partners, we look forward to delivering an original and delightful shopping experience to Chinese consumers,” he added.
So how does this vending machine work?
The smartphone user must open Alibaba’s Taobao app to scan a car. The app will then process the picture and let the user pick a color and other basic options.
Next, the app will require the user to take a selfie to confirm their identity. Once confirmed, the app will arrange for a test-drive at a car vending machine.
To retrieve the car, the customer will gain access through a facial recognition device at the staffless vending machine. According to the company, a “super member” does not need to leave a deposit to retrieve a vehicle.
Once the identity is confirmed, the multi-floor vending machine will rotate cars like a ferris wheel until the car is found. The test-drive is limited to three days, after which Alibaba can arrange for the sale or the user can choose a different model. Alibaba members are limited to five test-drives per month, where Alibaba is relying on its financial services arm to vet members before borrowing.
Alibaba said it will open two locations starting in January 2018 (Shanghai and Nanjing), and it plans to open “dozens” more across China later in the year. The vending machine concept blended with car buying, is an attempt by the company to streamline the buying process to as quick as opening a can of soda.
“Our thinking behind the Car Vending Machine is focused on helping users solve certain problems they face in the car-buying process. To do that, we are building a physical, experiential store that offers staffless car pickup through facial-recognition, three-day ‘deep’ test-drives, and a one-stop-shop that displays [cars from] all mainstream brands at once,” said Huan Lu, marketing director of Tmall’s automotive division.
Back in May when the Chinese domination over Bitcoin was ending, we predicted that it would shift over to Japan, specifically, we said that “just as the Chinese bubble frenzy in bitcoin is fading, it may be replaced with a new one, in which thousands of Mrs. Watanabe traders shift their attention away from the FX market and toward digital currencies” and added that “If the transition is seamless, there is no telling just how far this particular bubble can grow.”
Judging by the exponential price surge in bitcoin in the subsequent period, we were clearly right on the latter, and now, according to a new analysis, we were also right on the former, because as Deutsche Bank reveals in a new report by Masao Muraki, “Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped) are driving the cryptocurrency market” and who according to DB, happen to be more or less idiots, arguably because for the time being they are outperforming every other asset class… in history, to wit: “Japanese retail investors are less financially literate than their US peers across all age groups. Compared to the US, financial literacy is particularly poor among people 35-54 years of age. The poor literacy of Japanese retail investors also stands out beside UK and German investors.”
Ah yes, by contrast, the financial literacy of the world’s central-planners is off the charts. Look where that got us…
In any case, and without further ado, please meet the (rather boring) people who are propping up the Bitcoin market, at least according to Deutsche Bank.
Here are the details:
The identity of who is propping up the Bitcoin market
1. 40% of cryptocurrency trading is Japanese yen-denominated
An 11 December Nikkei report stated that 40% of cryptocurrency trading in Oct-Nov was yen-denominated. Japanese traders have reportedly come to account for nearly half of cryptocurrency trading since China started to shut down cryptocurrency exchanges, and this is said to be widely known among industry insiders (various estimates exist). This report shows that Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped) are driving the cryptocurrency market.
2. The true face of investors engaged in leveraged FX trading
“Mrs. Watanabe” is a buzzword often used by US/European media and market participants to symbolize the typical Japanese retail investor who trades in FX. Following Abe and Kuroda, Watanabe may be the most famous Japanese name among market participants (although the purported creator of Bitcoin, Satoshi Nakamoto, is also famous). Japan accounts for a high 54% of global foreign exchange margin trading (leveraged FX trading) (source: Forex Magnate, 1Q2017), so Japanese retail investors are major players in FX markets. Data from GMO Click Securities which is the top company in its industry indicates that men hold 79% of FX trading accounts, and 63% of these men are aged 30-49 (as of end-September 2017; Figures 3-4). The typical Japanese leveraged FX trader is thus a man in his 30s or 40s and really ought to be called “Mr. Watanabe”.
As the speculative frenzy over cryptocurrency heightens, the spotlight is falling on the unique characteristics of Japanese retail investors. The Nikkei report mentioned above cited an example of a 38-year-old businessman who invested ¥8m ($70,000) in Bitcoin, including his bonus. The average household income of a 38-year-old is about ¥6.1m, the average savings are ¥5m, and the average borrowings are ¥8.8m. This report was also a topic of conversation among the managers of Japanese financial institutions that I visited this week.
3. Financial literacy
How much financial literacy do retail investors engage in leveraged FX/cryptocurrency trading possess? According to a survey by the Central Council for Financial Services Information (the Bank of Japan), Japanese retail investors are less financially literate than their US peers across all age groups (Figure 6). Compared to the US, financial literacy is particularly poor among people 35-54 years of age. The poor literacy of Japanese retail investors also stands out beside UK and German investors (Figure 7).
Before the FSA started applying pressure, the core investment products sold by banks and brokers were investment trusts with distribution yields above 10% (products with yields above 20% were particularly popular) that took compound risks and drew down principal (the typical purchase commission was above 3% and annual management fees were over 2%).
Figure 8 shows the top 3 reasons that Japanese retail investors engage in leveraged FX trading: 1) expectations of high returns, 2) they can easily invest in foreign currencies, and 3) many investors are earning profits. However Figure 9 shows that most investors say they quit leveraged FX trading because they did not do well (only 7.5% said they realized their profit goals).
More than a few Japanese investors positively value volatility. We have believed that “Japan is the Galapagos of asset management markets, pursuing its own path amid the long period of deflation. Japan’s investment style is typified by a combination of low-risk, low-return deposits and high-risk, high-return investments” (see our 11 December 2014 report, “Initiation: Securities firms confront changing “Galapagos market””).
4. Investors’ winning percentage and turnover
New investors continuously enter the leveraged FX trading market and repeat the metabolism of being forced out by a margin call due to sharp market changes. This results in a market with a tumultuous annual participant turnover.
Leveraged FX trading is essentially a zero-sum game. Japanese retail investors are playing this zero-sum game with institutional investors engaged in algorithmic trading. It would be very difficult for business men trading on their smartphones during lunch or after work to sustain their trade wins. In Figure 5, we equate increases in FX trading account margins with wins, and decreases with losses. Over the past 10 quarters, we estimate that wins to losses were basically even in six quarters, while significant losses dominated in four quarters.
5. From leveraged FX trading to leveraged cryptocurrency trading
We think that retail investors are shifting from leveraged FX trading to leveraged cryptocurrency trading. Firms such as the GMO Group and SBI Group are embracing the sense of urgency and starting to offer cryptocurrency trading services. Factor breakdown is difficult due to market variables, but leveraged FX trading has been sluggish since February 2017 (Figure 1).
Cryptocurrency has been trending up, so retail investors’ unrealized gains are also rising. With few investors leaving and a steady inflow of new investors, the investor pool has been expanding. We believe that investors participating in leveraged cryptocurrency trading are typically Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped). We think that the pool of cryptocurrency investors not using leverage is even larger.
6. Margin call risk and fail risk
Leveraged cryptocurrency trading services are available in Japan. Some major FX brokers are using the same 25x leverage limit that applies to FX trading, but there are no direct rules in leveraged trading of cryptocurrency. During the Swiss franc shock in January 2015, many retail investors not only received margin calls but also incurred losses greater than their margin balances, because forced settlements couldn’t be implemented in a timely manner. This shows that investors can suffer losses which brokers end up booking as credit losses even with leveraged FX trading of developed-nation currencies. Authentication of Bitcoin settlements takes at least 10 minutes. The risk of incurring losses greater than margin is higher than in normal FX trading, due to high intraday volatility. As a result, we believe that brokers also face a higher risk of failure.
7. Unrealized gains are also virtual
The National Tax Agency recently indicated that profits generated by the sale or use of cryptocurrency are classified as miscellaneous income in principle and are required to be filed in income tax returns. We think that many investors are hesitant to realize profits because, combined with other sources of income, these profits would be subject to income tax (up to 45% tax rate) and residence tax (around 10%).
The progressive taxation system means that the tax rate rises in keeping with income for a single fiscal year (on a calendar year basis). For investors thinking of taking profit in the near term, a rational tax trade would be to sell some holdings this year and the rest next year. In contrast, investors hoping that profits will be taxed as capital gains in future (20% tax rate; but we cannot see any movement towards this) may put off realizing a profit.
8. Fair value of cryptocurrency
Cryptocurrency such as Bitcoin that have pure distributed systems do not have an underlying value like precious metals. Value is not guaranteed by an issuer because there is no issuer. The value of cryptocurrency is thus entirely based on the belief that it can be exchanged for goods or sovereign currencies (BoJ review of December 2015). While the valuation of exchange rates between legal tender and cryptocurrency should be the vital factor, it is retail investors (including “Mr. Watanabe”) who are currently carrying out price discovery.
With a broader range of investors set to enter the market in 2018 and an increase in the ways to hedge (short selling), we expect to see the market’s price discovery function being utilized. The CBOE Futures Exchange began offering Bitcoin futures trading on 10 December and the CME plans to start on the 18th (the US Futures Industry Association sent a critical letter to the Commodity Futures Trading Commission who self-certified new contracts for bitcoin futures products. The letter said that there has not been enough discussion on topics such as margin levels, transaction limits, stress tests, and settlement).
Rather than the cryptocurrency used for speculation, our focus is on the impact that distributed ledger technology (broadly defined as blockchain technology) can have on financial transactions and the business models of financial institutions. Furthermore, as speculation in cryptocurrency is growing to a scale that cannot be ignored, we plan to look more deeply into the potential impact on the market if the bubble should burst and the effect of concerns over this on regulations and monetary policy.
Presented with no further comment for your viewing pleasure…
To a market cap of over $12.6 billion…
Grant’s Interest Rate Observer drew the world’s attention to this ‘company’ yesterday…
Shares in over-the-counter name The Crypto Company, which listed in May and traded around $20 as recently as Dec 1st, have gone on a parabolic run in the last ten days – trading as high as $642.
That gives the Malibu, California-based business a market capitalization of $12.6 billion.
Valuing the Crupto Co. is somewhat difficult, as the only public filing on Edgar (the SEC website), is its securities offering document, in which it ticks the box “decline to disclose” under revenue range.
The company’s website does note that it’s in the business of providing “institutions and individuals direct exposure to the growth of global blockchain developments.”
And today it is down 75%.
GOP lawmakers have come forward with new allegations of political bias or interference at the FBI – this time involving the 2012 Benghazi attack. John Solomon of The Hill reports that Rep. Ron Desantis (R-FL) recently interviewed a retired FBI supervisor who told him he was instructed by Deputy Director Andrew McCabe not to call the 2012 Benghazi attack an act of terrorism when distributing the FBI’s findings to the larger intelligence community – despite knowing exactly who conducted the attack.
The agent found the instruction concerning because his unit had gathered incontrovertible evidence showing a major al Qaeda figure had directed the attack and the information had already been briefed to President Obama, the lawmaker said. –The Hill
After the September 11, 2012 attack against U.S. government facilities in Benghazi, Libya, the Obama administration peddled a lie, telling the public that the attack was related to Muslims who had become enraged at an anti-Islam YouTube video, and not a planned act of terrorism – despite Hillary Clinton mailing Chelsea Clinton from her unsecured @clintonemail.com server the night of the attack to say exactly that.
Chelsea – using the pseudonym “Diane Reynolds” probably didn’t have the clearance to receive classified intelligence from her mother, the Secretary of State.
“Two of our officers were killed in Benghazi by an Al Queda-like group: The Ambassador, whom I handpicked and a young communications officer on temporary duty w a wife and two young children. Very hard day and I fear more of the same tomorrow.” –Hillary Clinton to Chelsea Clinton
And we now know FBI Deputy Director Andrew McCabe lied for the Obama administration in a clear, partisan violation of the FBI’s mandate to “detect and prosecute crimes against the United States,” not “lie for the President so as not to offend Islam.”
As Rep. DeSantis told The Hill:
“What operational reason would there be to issue an edict to agents telling them, in the face of virtually conclusive evidence to the contrary, not to categorize the Benghazi attack as a result of terrorism? By placing the interests of the Obama administration over the public’s interests, the order is yet another data point highlighting the politicization of the FBI.”
DeSantis and other GOP lawmakers say they plan to question FBI Director Christopher Wray at a Thursday hearing in front of the House Judiciary Committee about claims of growing concern among certain FBI supervisors over political bias clouding decisions at the highest levels of the agency.
The case against the FBI for overt political bias couldn’t be more clear. Over the last week we’ve learned of veteran FBI investigator Peter Strzok’s dismissal for texting his mistress anti-Trump messages, which the DOJ is handing over to the House Intelligence Committee. We also learned yesterday that a second prosecutor on Robert Mueller’s Special Counsel, Andrew Weissmann, praised then-acting Attorney General Sally Yates after she refused to defend President Trump’s travel ban.
Fox News reports:
A top prosecutor who is now a deputy for Special Counsel Robert Muellers Russia probe praised then-acting attorney general Sally Yates after she was fired in January by President Trump for refusing to defend his controversial travel ban.
The email, obtained by Judicial Watch through a federal lawsuit, shows that on the night of Jan. 30, Andrew Weissmann wrote to Yates under the subject line, I am so proud.
He continued, And in awe. Thank you so much. All my deepest respects.
Judicial Watch President Tom Fitton called the new Weissmann document an astonishing and disturbing find.
“The data points we have regarding politicization are damning enough but appear all the more problematic when viewed against the backdrop of investigations whose ferocity seemed to depend on the target: the Clinton case was investigated with an eye towards how to exonerate her and her associates, while the Russia investigation is being conducted using scorched earth tactics that seek to find anything to use against Trump associates,” DeSantis told The Hill.
DeSantis also said his FBI source pointed to an incident after Trump’s National Security Advisor Mike Flynn resigned over lying to Vice President Mike Pence over his contacts with Russia’s ambassador. An FBI executive is said to have made an inappropriate comment during a video teleconference indicating that the agency had a personal motive in investigating Flynn and ruining his career.
“The wildly divergent ways these investigations have been conducted appear to dovetail with the political bias that has been uncovered,” DeSantis said.
In response to the overt political bias at the FBI, the Inspector General’s office (OIG) has launched an investigation into Strzok and other officials connected to both the Clinton email investigation as well as the Trump-Russia investigation. Agent Peter Strzok who was removed for anti-Trump text messages ran both investigations, the latter Trump-Russia having been taking over by Robert Mueller’s probe which he was recently kicked off of.
Deputy Director Andrew McCabe, meanwhile, is directly under investigation by the OIG for potentially violating the Hatch Act or engaged in ethical conflicts pertaining to his wife’s run for the Virginia Senate in 2015 as a Democrat. She received $700,000 in campaign contributions tied to Virginia Governor Terry McAuliffe (D) – an ally of Hillary Clinton who was under FBI investigation at the time. The Hill reports that records show McCabe attended a March 2015 meeting with McAuliffe designed to secure the governor’s support of Jill McCabe’s candidacy.
As The Hill concludes:
McCabe has said he sought FBI legal advice on how to deal with his wife’s campaign. He nonetheless presided over the Clinton email case until just a few days before it was closed, when he unexpectedly recused himself.
Multiple Republican lawmakers said Wednesday they believe the email case was tainted by political favoritism and special treatment for the 2016 Democratic nominee and planned to press Wray about their concerns.
“We are here today calling for an investigation into FBI systems and procedures that have allowed special treatment and bias to run rampant,” Rep. Matt Gaetz (R-Fla.) said. “The law demands equal treatment for all, not ‘special’ treatment for some. There is a clear and consistent pattern of treating the Clinton investigation differently than other investigations.”