An Open Message To The Financial Technology Community About Bitcoin

The financial technology community sometimes abbreviates its identity as "fin-tech," which is too similar to existing firms selling fishing tackle, retail payment systems, and other forms of industrial support.  That's a small area of confusion.  A larger area of confusion is the tech community's support for crypto-currencies.  The metastasizing problems surrounding Bitcoin should be a wake-up call for developers and finance entrepreneurs.  Here's my open appeal for the financial tech community to abandon its flirtation with Bitcoin.

Building startups that enable ecosystems is a waste if Bitcoin's fundamental flaws cannot be addressed.  Mt. Gox has gone offline and Web rumors are swirling about what is going on inside that troubled exchange.  The central problem in this drama is "transaction malleability," a flaw in a Bitcoin digital signature that fails to hash all of the transaction's data.  This allows a malicious party to invalidate a hash and render a transaction incomplete even though a transaction record exists in the blockchain.  This gaping flaw would never be possible in normal transaction processes that use conventional currencies but it is endemic to crypto-currencies.  Validating an incomplete Bitcoin transaction makes the Bitcoins subject to theft.  This is a critical vulnerability of crypto-exchanges that rely on separate "hot" and "cold" wallets with public and private keys.  Of course, Bitcoin transactions aren't reversible, so when someone steals Bitcoins and masks them with an invalid transaction record in this manner, they are gone forever.

Another huge flaw in Bitcoin is the inexorable growth of the blockchain.  That consolidated transaction record gets longer as more participants grow the market for Bitcoin.  This is the only financial market where further adoption of the technology makes the technology more unwieldy.  The computing power needed to process a single transaction grows with each transaction.  Eventually, with enough participants, the blockchain will become too large for a user's single computer to process and unlocking a private wallet won't be worth the time it takes.

Bitcoin miners have ignored the potential for mining duplication built into the algorithm.  Ignorance is bliss, until another miner claims the Bitcoins someone else already mined.  Claim jumping happened in the California Gold Rush days.  Disputes were settled in court if a court existed, or they were settled with violence.  Bitcoin miners running huge server farms in cold climates have a huge advantage over smaller miners if they ever wanted to artificially duplicate someone's existing claim to Bitcoins.  Read once more about transaction malleability to see just how easy it is to fool the blockchain, and then realize how easy it is to duplicate mining.  Changing Bitcoin's source code with open hacks won't solve the duplication problem; it just forks the code into a new currency even weaker than Bitcoin (i.e., the joke called Dogecoin).

Anything goes in the absence of regulation.  The US Treasury may or may not tolerate Bitcoin, based on what I heard Treasury Secretary Jack Lew say last week at the World Affairs Council.  Bitcoiners are counting on regulators to write rules around whatever precedents they set themselves.  What hubris!  Real precedents matter when trade associations adopt industry standards and lobby for regulatory acceptance.  No way is the IRS or SEC going to take Bitcoin seriously if a bunch of hackers can't even clean up a blockchain.  None of the established industry associations from the banking or brokerage sector will take up the Bitcoin cause where a bunch of developers can't get the job done.

Google Wallet is easier to use than any crypto-currency and works within existing regulatory regimes for finance and telecom.  Regulating Bitcoin may create more problems for its users than it would solve.  Bitcoin's promoters in the venture investing community have admitted in public that government regulation of Bitcoin as an asset subject to capital gains tax means users would have to record its dollar value in a separate ledger.  They would have to maintain this record at the beginning and end of each Bitcoin transaction.  In other words, the blockchain is insufficient to establish valuation for tax purposes.  The tautology of using a ledger to track another ledger is unbelievably stupid, but that's what legitimization of Bitcoin requires.  The whole thing is such a Rube Goldberg mechanism, but techno-idiots and crypto-losers insist on playing around with it.

People who still take Bitcoin seriously after all of its exposed problems don't have to listen to me.  They can check out this awesome LOLpic instead.  I'll quote Oliver Cromwell:  "I beseech you, in the bowels of Christ, think it possible you may be mistaken."

(Image credit:  Caspar de Crayer [Public domain], via Wikimedia Commons)

The amorphous group of developers in transit through San Francisco's hackathons and tech gabfests should find something better to do than work on crypto-currencies.  Stick a fork in this one because it's done, and don't fork it into some new crypto-coin.  It is time for the fin-tech community to wake up.  It is time to abandon the Bitcoin fantasy.  

Financial Sarcasm Roundup for 02/10/14

It's time once again for sarcasm but I think I'll leave out the LOLcats.  Putting those images together is a lot of work and it may not be worth my time if it prevents me from writing more articles.  I may revisit the concept in the future.

Here comes another empty threat of a US Treasury default.  We've all heard this alarmism before.  A default isn't going to happen as long as the US can roll its short term debt to pay interest, and it can do so as long as the Fed is buying Treasuries.  The only threat to this dysfunctional status quo is a spike in real interest rates that crashes the assets on the Fed's balance sheet.  Lawmakers' decreased willingness to risk brinksmanship reveal the precariousness of this untenable situation.

The PBOC is telling us to get used to volatility in the yuan money market interest rate.  Really?  Gee, ya don't say.  My last few sarcasm roundups have dealt with the likelihood that the PBOC is losing control of China's own yield curve.  The first possible WMP default deadline came and went without incident, but future problems are unavoidable.  This is a preview of what will happen in the US when our own central bank is unable to contain interest rates.

Wages are not moving up, and neither is hiring.  The macroeconomic reason is simple but largely unreported.   Real unemployment is much higher than the official BLS figure.  This slack labor market is known to hiring managers who receive thousands of resumes for a handful of job vacancies.   High-income earners are doing just fine while health care mandates are about to hollow out middle class employment.  Everyone below the top 1% should prepare to get a lot poorer.

The SEC is cracking down on financial advisers who make bold claims in social media.  I'm not an adviser, so any claims I make at Alfidi Capital about my tremendous genius or charisma fall outside the SEC's jurisdiction.  I do not guarantee or promise anything at all, although I try my very best to ridicule stupidity.  I do not sell any products or do anything for clients.  Advisers who claim they can guarantee any investment result deserve scrutiny, and a lot of advisers don't deserve to be in business at all.

If you miss the LOLcats, I don't ever want to hear about it.  

Financial Sarcasm Roundup for 02/03/14

I'm so glad US stocks are headed down.  This is more than just an opportunity to buy assets at reduced prices.  It's another big chance to throw my sarcasm in the face of bull shills who bought in at high prices.

The US and EU are promising economic aid to Ukraine.  I do not see the point of antagonizing Russia.  This risks a retaliation if Gazprom decides to jack up natural gas prices for its European customers.  Perhaps this intervention is some kind of revenge for Russia's ascension after the Syria chemical weapons controversy last year.  Ukrainians are perfectly capable of solving their own problems.  They key to understanding what's at stake is the Russian ethnic minority in the southeastern part of the country.  The southeast is Ukraine's most economically productive region with most of the country's arable farmland.  Ukraine's viability as a political entity is doubtful without control of that region.  The only silver lining is that unrest could potentially force more hot Ukrainian women to emigrate to the US and expand my available dating pool in San Francisco.

Corporations realize that the American middle class is weakening.  The class of middle income consumers is getting smaller and its disposable income is declining.  Enterprises are adjusting their business models to accommodate this change.  I've blogged before about how mid-market retailers are toast.  Extend this change to other brands.  We'll see more low-end restaurants with fast food dollar menus and more five-star venues for rich palates with fat wallets.  If the middle class ceases to exist, class warfare will be inevitable.  Most Americans don't see it coming.  The $35,000 leather hammock I saw in a high-end Union Square shop will end up in a hedge fund manager's office, or it will be looted by a rioting mob.  That linked article said hedge fund investors want a restaurant chain to spin off its high-end properties to isolate their performance.  I think those fund managers just don't want upscale chains associated with the same corporate parent as middle-income chains.  It really is about snobbery.

Politicians can't figure out how to fix Fannie Mae and Freddie Mac.  I've known how to fix those things all along.  I'd shut them down and stiff their creditors.  That would destroy the speculative investors who bought up their stock, counting on continued government lifelines.  I don't care at all.  The housing market can't reach a sustainable long-term equilibrium until every misguided government effort to support housing prices reaches a sunset.  These GSEs' continued existence tempts activists to use them to fund disastrous social justice experiments.  Landlords will have fits during hyperinflation if the GSEs impose national rent controls as conditions for securitizing mortgages on multi-unit properties.

There is so much to be sarcastic about in the world but I only have a limited number of waking hours during the day.  Others are welcome to pick up where I leave off.  

Financial Sarcasm Roundup for 01/27/14

The turmoil in global markets that began last week is wonderful news, from my perspective.  This means I can't afford to let up on the sarcasm directed against anyone who went all-in on any asset class this month.

Argentina is liberalizing its restrictions on foreign currency.  IMHO that signals the beginning of that country's hyperinflation end game but we're nowhere near the denouement.  Argentina would have to reduce the currency transaction tax to zero and allow other currencies as legal tender to truly end its crisis.  The Fernandez administration isn't ready to throw in the towel on its failed micromanagement of Argentinians' economic choices.  Argentina could have been a contender for world domination a century ago with its rich agricultural resources but its potential has been comatose since after World War II.  Maybe it's all the fault of the bizarre Peronist combination of incompatible ideologies.

Central bankers at the WEF in Davos are warning banks to quit playing games with rate benchmarks.  Global regulators are promising us even better benchmarks.  Well, sheesh, if they would have invited me to Davos I would have sold them on my idea for GIBOR as a benchmark.  These people need to appreciate my genius.  It's easy for banks subscribing to one benchmark to manipulate it, but a benchmark of benchmarks like GIBOR would be harder to peg.  I'm way more awesome than these global bank regulators.

The global elite confab is studying more than just rate benchmarks.  The Davos crowd sees broader risks in the emerging market sell-off.  They give themselves too much credit.  The crowd in the eye of the pyramid may be blind.  The biggest risk right now is the lack of confidence investors have in the transparency of markets and the trustworthiness of institutions.  The inability of elites to prosecute their own kind for financial malfeasance is the source of market distrust.  Solve that with prosecutions and trust will gradually reappear.

I have a couple of meetings this week in the San Francisco Bay Area with some business folks and an event to attend.  I'll let you all know what happens.  Alternatively, maybe I won't let you know what happens.  

Financial Sarcasm Roundup for 01/06/14

The first Monday of a new year means the grind starts afresh for cubicle wage-slaves.  I celebrate my freedom from such drudgery by unleashing sarcasm tinged with LOL photos.  Taste the rainbow of sarcasm.  Taste the flavor of Alfidi Capital.

A bunch of washed-up economists are mouthing off about rosy economic growth.  Any economist who anticipates continued US growth in 2014 is either incompetent or on the Fed's payroll.  I anticipate the US falling off a cliff at some point for several reasons.  Corporate earnings are at all-time highs and must revert to mean.  Personal indebtedness sustains consumer spending and uncontrolled government spending sustains the rest of the economy.  The US's official GDP reached a new level of absurdity last year after the BEA recalculated it to include money already spent.  Puh-leeze.  Magical thinking about markets won't make them levitate in the face of reality.

Central banks will have trouble keeping a unified consensus for more stimulus.  The developed nations' central banks have stimulated themselves into a corner, and everyone knows it.  "Decoupling" was a big financial meme a couple of years ago when asset managers started worrying about which global sector would head down first.  They all headed down more or less together in 2008 until central bank stimulus  propped them back up.  Now with competitive currency devaluation they all face variations on the Prisoner's Dilemma.  The first one to defect from monetary stimulus will reap a more valuable currency, should they wish to attract FDI, and will set off a shockwave roiling currency markets.  I'm hedging this madness with positions in currencies I trust not to play the game.

China faces a double-whammy.  Western multinationals are moving production away from China and back to their home countries.  Chinese local governments have rising default risk due to their reliance on the shadow banking system.  This means that China's goose is cooked, so the only question is whether they'd like it medium rare or well done.  China's perma-bulls still claim that learning Mandarin is a smart educational move.  I hope they learn to file bankruptcy claims in Mandarin.  I blogged a log time ago that China's rare earth element export quotas were set disingenuously low.  Beijing's central planners can look forward to revising other data down from politically-determined highs.

My new year is getting off to a nice little sarcastic start.  I am confident that the human race, and the finance sector in particular, will keep me supplied with amusing news items.

Financial Sarcasm Roundup for 12/30/13

This is probably my last chance to be sarcastic before 2014 rings in a whole new year of Alfidi Capital  sarcasm.  I shall make the most of it.

US Treasury yields are on the rise again.  Lots of hedge fund managers and other assorted dummies are still buying stocks.  That's okay with me.  I'll laugh when rising yields force up the borrowing costs of those companies using stock repurchases to support their share price.  I'll laugh even harder when banks that aren't supposed to be prop trading anymore start losing on yield arbitrage trading.

Oh goody, here's another big non-surprise for everyone who isn't paying attention.  Academic researchers who bend over for Wall Street with baloney theories get financial rewards.  Remember that the next time a financial advisor tells you the efficient markets hypothesis works.  Academics' public statements aren't the only parts of their careers that face conflicts of interest.  Major funders can skew peer-reviewed research, as the Fed knows darn well.  The pointy heads in ivory towers are just now getting around to filing disclosure statements with their universities.  Contrast this with longstanding requirements for public company insiders to file Form 4 to see how far behind these so-called cutting-edge researchers are in transparency.  On the other hand, it's good work if you can get it.  I don't accept sponsored posts on either of my blogs and I don't publish sponsored work on my website.  My attitude toward disclosure is in my AL-FAQ-DI and my Legalistic Disclaimerism.

China's premier is pledging to keep the liquidity spigot open.  He can't afford not to do so in light of the Fed's continued ZIRP.  China and the US face the near-term prospect of competitive currency devaluations.  That race is a steady marathon right now but it could easily become a sprint that immediately exhausts both competitors' central banks.  The people claiming China had unofficially shifted to tighter monetary policy need to do a double-take.  The PBOC got spooked when it temporarily lost control of intraday lending rates this month and now knows it can't let that happen again.  Spiking rates would destroy that country's shadow banking system.

All right, that does it for now.  Tonight I'm going downtown to see what's going on around the shopping meccas at Market and Powell.  I'm not going anywhere tomorrow night because the drunks will be out in force.  The dumbest people in San Francisco like to run around and get blasted on New Year's Eve.  I can't relate to those idiots.  This has been a very sarcastic year.

Financial Sarcasm Roundup for 12/23/13

It's been too long since I published a financial sarcasm roundup.  It's not for lack of sarcastic things to say.  I just had to find decent LOL pictures to accompany the text.  That problem is now solved.  I was not satisfied with commonly available LOL pics.  Many of them are governed by copyright law because of their proprietary origins.  Getting permission for each use would be expensive and burdensome.  Free stock photos also usually come with caveats about acknowledging credit to the creators.  I decided to take my own photos.  No one deserves any credit except me.  Get ready for genuine original Alfidi Capital LOL photos.

Congress will negotiate its final spending allocations behind closed doors.  The lobbyists for the major sectors mentioned in the article pretty much know what they'll get, so there won't be many surprises.  They don't know that pork spending sprees can't continue forever.  Uncle Sam will have a hard time doling out research grants and child care subsidies after hyperinflation begins.  Meanwhile, let the catfights begin.

China is trying very hard to prevent a run on the yuan.  Note the discrepancy of over 300 basis points between the opening quotes on seven-day repos and that rate's mid-morning weighted average.  The PBOC is not injecting enough liquidity into the Chinese banking system to stop the rate from rising.  If real estate prices collapse, so will the shadow banking system, and then the run on the yuan will become very real.  I'm so glad I am no longer exposed to China in my portfolio.

The IMF is bullish on the US's prospects for growth next year.  It is no coincidence that Mme. Lagarde said this very close to the FOMC's taper announcement.  Central bankers and monetary authorities coordinate their actions and announcements to foster stability.  The IMF, as part of the European troika lending to the crippled PIIGS, knows darn well what the Fed's support means to the ECB.  I don't think she's realistic about the US's prospects but I'm one of the few analysts who lives in the real world.  She needs to know that corporate earnings are still at twice their historic norm as a portion of GDP, and when they revert to mean they'll take equities down with them.

Alrighty, then.  There's your fix of LOL pic sarcasm.  Expect more lulz now that I have a collection of my own meme photos to use.  

Happy 100th Birthday to the Federal Reserve!

The central bank of the United States is one hundred years old today.  I'll bet the Board of Governors is having a blast celebrating the Federal Reserve's long history of achievement.  Let's review the Fed's more notable achievements.

Here's a CPI chart showing how the Fed has degraded consumers' purchasing power since World War II by managing inflation.  The Fed kept inflation artificially high after the war to make it easier for the US government to repay its war debt.  Patriotic Americans who bought war bonds got ripped off in later years as inflation eroded the purchasing power of the bonds' principal at maturity.  Oh BTW, the Fed learned this inflation war-funding trick in World War I according to the Mises Institute.

Here's what the NBER had to say about the Fed's ability to control inflation during World War II.  Economic legends Milton Friedman and Anna Jacobsen Schwaartz saw the Fed's expanded balance sheet as a plus, if only the Fed had sold securities to control inflation.  The implications for Fed's huge balance sheet today are obvious.  If the Fed begins to reduce its balance sheet by selling the agency paper it has acquired through QE, the deflationary effects on our economy will destroy the stock and bond markets.  The Fed must really like inflation.  Remember that the next time you buy groceries or pay your energy bill.

The Fed's greatest hits aren't all in ancient history.  The hits keep on coming today.  Bloomberg's US bond data shows us what the Fed's ZIRP is doing to the short end of the yield curve.  Rates from three months to two years are at zero, so investors using bond ladders are forced to seek yield buying much longer termed bonds as their shorter maturities expire.  Those long bonds are much more sensitive to interest rate changes than short term bonds.  Rates at the long end have risen this year.  Prices have an inverse relationship to rates.  Fixed-income investors can thank the Fed for any unhappy birthdays to come as their bonds decline in value.

Hey, I just thought of something.  The Fed's periodic audits have not shown us physical proof of the system's gold reserves.  Who's watching that bullion?  I have an idea.  Here's an exclusive look inside the NYFRB's bullion vault courtesy of Alfidi Capital.

LOL, just kidding.  I've never been inside the Fed's vaults.  I think cats running the show would be an improvement over the current state of affairs.  Someone has to provide continuity while Helicopter Ben hands the baton to Calamity Jane.  They could always pick me for a vacant Fed BOG seat, as I have more qualifications than a LOLcat.

Central banks were once a great idea.  I'm not clear how they add value today.  They're supposed to stabilize our financial system but prolonged interventions give rise to instability.  Artificially suppressing interest rates leads to distortions in the cost of capital that investment managers and corporate project managers use to plan investments.  This places economic growth at risk.  Playing games with interest rates means foreign central banks can't trust the value of their dollar-denominated securities.  This places the dollar's world reserve status at risk.  The Fed had a role to play the United States' growth as a world power.  Its indefinite monetary stimulus is now risking our world power status.  Happy birthday, indeed.

Adding LOL Photos to Alfidi Capital

I'm always experimenting with ways to make the Alfidi Capital experience more phenomenal for my brilliant readers.  That's why I'm going to start adding LOLcats and other such pics to my blog posts.  Why LOLcats?  Well, they're cute and popular.  The Web is all about viral stuff and if one of these sarcastic kitties helps my stuff get seen then it's worth doing.  Other images of animals, people, and bizarre scenes shall appear as I see fit.

The Cheezburger Network has an automated LOL builder with stock photos.  I used it to create a photo that includes a haiku just for this inaugural occasion.  The finished LOLcat should appear here on the Cheezburger Network.  I don't know if it will stay up there forever so that's why all future LOL meme pics will appear here on the Alfidi Capital Blog.

LOLcat haiku here
Nothing to do with finance
Just more funny stuff