Bitcoin’s rise is no joke, it is a sign of the failure of financial services

Bitcoin’s rise is no joke, it is a sign of the failure of financial services

Bitcoin’s surge past $17,000 late last week reinforces an important economic theory: a rapidly-expanding asset bubble will always draw a crowd. But it should also reinforce fears about a situation that is not limited to a few foolish retail punters and a few swashbuckling hedge funds. This is a crisis for financial services.

The cryptocurrency’s rise is a source of much hilarity for most of finance, reminding us that you can always count on dumb money. But financial institutions — exchange operators, derivatives clearing houses and others —have now joined the party, taking a slice of business from bulls and bears alike. Today, Cboe Global Markets began allowing investors to trade bitcoin futures, and the CME Group will follow suit on the 18th.

As a result some are worried about whether bitcoin could present a systemic risk. The phrase ‘next Lehman Brothers’ has been tossed around with willful abandon, by observers including Interactive Brokers chairman Thomas Peterffy, whose company is one of the US’ largest derivatives traders. Peterffy took out a full page advert in the Wall Street Journal to demand that regulators force any organisation clearing bitcoin derivatives to be ring-fenced from other types of derivatives clearing.

“Cryptocurrencies do not have a mature, regulated and tested underlying market,” Peterffy wrote. “The products and their markets have existed for fewer than 10 years and bear little if any relationship to any economic circumstance or reality in the world.”

He is wrong, on two counts.

Firstly, the idea that bitcoin could present a risk to the financial system itself is laughable. The financial crisis was prompted by a huge repricing of risk; the near-religious belief that the US housing market was safe as, er, houses — held by almost all of the financial industry — was suddenly challenged. But those selling bitcoin options are under no illusions that it could implode in minutes. In that sense, it is more like an emerging market currency that is one half of a hedge fund’s carry trade, and the world doesn’t end every time a heavily leveraged shop blows itself up on a wrong-way bet.

There is a reason why exchanges are demanding investors hold 35% of the value of their futures contracts in cash with the exchanges — far higher than other assets. They have no illusions about the risks involved in handling an asset that is about as volatile as nitroglycerin.

Peterffy is also wrong about bitcoin’s relationship to the real world. In fact, its rise is finance’s existential problem in microcosm: when the financial crisis burned investors and required gigantic taxpayer bailouts, the effect was that retail money fled from traditional investments, and asset managers say it has been slow to come back. While the S&P 500 has returned 269% since 2009, a report in late 2016 by the CFA Institute found nearly a third of all investors were predicting a market crash within three years. BlackRock chief executive Larry Fink estimates there could be as much as $55tn uninvested.

But while institutions have now decreased their cash allocations to 4.4% – the lowest reported cash levels since 2013 – according to a fund manager survey by Bank of America Merrill Lynch in November, the climate of fear among retail investors remains very real.

Liz Ann Sonders, chief investment strategist for US wealth manager Charles Schwab, told the New York Times last month that retail investors have nowhere near the commitment to stocks that they did in past booms. One investment adviser quoted in the piece said that he had pleaded with clients to put money into the stock market, but that all they wanted to know was when the next crash would come. “No one ever asks me when the S&P is going to blow past 3,000,” he said.

A great many people simply do not trust the financial services industry to look out for their interests, and with so much money still “on the sidelines,” it is fair to assume many people believe bitcoin to be more trustworthy than the stock market.

When it blows up, they will despise bitcoin too. But that is not a problem. The fact that they apparently despise the finance industry, so much that many of them would shun a simple mutual fund in favour of bitcoin — whose annualised volatility against the US dollar is a whopping 97% — is a serious problem.

There is only reportedly around $200bn in digital assets, which is small compared with the wider markets. But the existence of that cash, and its stubbornness in staying out of equity markets despite a record-setting bull market, is proof that something is still terribly wrong in the world of finance. Many asset managers believe that retail investors will eventually overcome their post-crash fears and get back in the game. History suggests as much. But if this time really is different, the next challenger to traditional finance — one that could be less volatile and more of a sane investment — will be harder to ignore.

For now, the financial services industry can go on and laugh as the rubes eagerly line up to surrender their hard earned money to hackers and short-term traders who are likely making millions exploiting the arbitrage opportunities among the various quoted prices. But remember that their rising fortunes are just further proof of finance’s falling ones.

Bank of America strategist warns of potential 2018 flash crash

 A man reads a copy of the Evening Standard on the day of the Black Monday stock market crash

A man reads a copy of the Evening Standard on the day of the Black Monday stock market crash.

The S&P 500 stock index is on track to celebrate the longest bull market in its history next summer, but Bank of America Merrill Lynch’s chief investment strategist believes the era of low volatility and sky-high returns could end with a flash crash to rival that of 1987.

In a research note giving his overview of global investment strategy for next year, Michael Hartnett wrote: “The air in risk assets is getting thinner and thinner. Asset returns will likely peak in early 2018, but optimism fueled by recent stunning returns and historic low volatility could be followed by a sobering flash crash a la 1987, 1994 and 1998 as central banks, the major sedative of volatility, start to withdraw liquidity.”

In October 1987, large Asian and European stock market declines were followed by a 22% one-day plunge in the Dow Jones Industrial Average index in what became known as Black Monday.

Nearly seven years later, it was the global bond markets that suffered a sharp sell-off, while in 1998 world markets were rocked by fears of economic meltdown in Asia and Russia, which was forced to devalue its currency that summer.

Central banks, via post-financial crisis quantitative easing programmes, have been key providers of liquidity and drivers of market performance, but as they remove their stimulus, growth could slow to a crawl.

In October, the European Central Bank said it would halve the monthly amounts of government bonds it would buy next year in a downsizing of its stimulus policy, while in the US the Federal Reserve has begun to pare back its balance sheet in a reversal of its crisis-era stimulus programme.

Hartnett wrote: “The end of the Icarus trade – a central bank-enabled high-flying bull market with investors chasing growth and high yielding assets – could give way to an aggressive downgrade in risk assets once peaks in profits, policy and positioning become excessive.”

He added that there are already abundant signs of “bubble-like behaviour”, citing record art prices, soaring cryptocurrency valuations, as well as “exponential Nasdaq growth and US Treasuries, the first robot-managed ETF, climbing global debt levels and Argentina issuing a 100-year bond (the country has had eight debt defaults in past 200 years)”.

The Wall Street Journal yesterday reported fresh highs for bitcoin mania as the price of the digital currency surged by around 40% in 40 hours to beyond the $16,000 mark — it has since passed $17,000.

Meanwhile, the art world last month saw a record $450.3m paid for a Leonardo da Vinci portrait of Jesus Christ at auction house Christie’s, with the bidder identified as Saudi Arabia’s Crown Prince Mohammed bin Salman.

Opinion: Here’s why U.S. stocks will likely be higher in December 2018

Market history favors stock investors every year

There is precisely at 65.5% chance that U.S. stocks will be higher one year from today. Many investors will be happy with those odds, given that the stock market has been unexpectedly strong so far this year. But what they might not realize is that the odds of an “up” market in 2018 would be the same even if equities had been terrible performers this year.

In fact, the odds of a positive year are the same regardless of the conditions that prevailed in the previous calendar year.

That at least is what I found upon feeding into my PC’s statistical package the yearly returns for the Dow Jones Industrial Average DJIA, +0.29%  since it was created in 1896. Of the 119 calendar years since then, the stock market has risen 78 times — or 65.5% of the time, on average. Following calendar years in which the stock market rose, in the next calendar year it rose in a statistically equivalent 65.4% of the time.

And, as you can see from the chart below, these are exactly the same odds that apply following years in which the Dow fell.

Why are the stock market’s odds of rising so impervious to what happened in the previous year? Actually, it would be surprising if this weren’t the case, according to Lawrence Tint, a chairman of Quantal International, a firm that conducts risk modeling for institutional investors. In an interview, he argued that what emerges from the data is exactly what we should expect from an efficient market — a market whose level at any given time reflects what is already known and therefore has incorporated past history.

If, instead, the stock market’s future direction was a function of what had come before, Tint continued, it would suffer from “unnecessary and unhealthy turmoil. We can be comforted by the fact that reasonably efficient markets always base their level on anticipated future returns, and do not include history in the calculation.”

This is particularly illustrated by the right-most bar in the chart, which reflects the market’s historical odds following years in which stocks gained more than 20%. That’s relevant to today’s situation, since the Dow’s year-to-date gain is around 22%. As you can see, however, the odds of the market rising in the years subsequent to such gains are no higher or lower than in any other year.

A good way to understand these results is to think of coin flipping: What are your odds of flipping a heads after flipping, say, five heads in a row? Those odds are no different than if you had flipped five tails in a row, of course. To think otherwise is to be guilty of what is known as the “gamblers’ fallacy.”

This isn’t to say that the stock market and coin flipping are equivalent. But playing the stock market over the short term is essentially gambling. It’s only over many years that considerations like valuation start to play a statistically significant role.

The bottom line? Optimists will latch on to the two-out-of-three odds of the market rising next year, and pessimists will focus on the one-out-of-three odds of its falling. Regardless of what does happen, the outcome will have nothing to do with how well stocks have performed this year.

Dollar gives back gains as traders gear up for U.S. jobs data

The U.S. dollar gave up advances against major rivals Thursday, as investors looked ahead to the release of monthly U.S. labor-market data.

Elsewhere, the Brazilian real fell to a new multi-month low against the greenback.

What are currencies doing?

The ICE Dollar Index DXY, +0.11%  was little changed at 93.631, while the broader WSJ U.S. Dollar Index BUXX, +0.15%  was up 0.1% at 87.06.

The British pound GBPUSD, +0.2389% recovered to $1.3430 from $1.3394 late Thursday as U.K. markets were closing, while the euro EURUSD, +0.0509%  was little changed at $1.1795 from $1.1798 in the previous session.

Against the Japanese yen USDJPY, +0.42% the dollar rose to ¥112.65 from ¥112.29 late Wednesday in New York.

TimeBrazilian Real18 Sep2 Oct16 Oct30 Oct13 Nov27 Nov


The buck gained versus the Canadian dollar USDCAD, +0.3050% buying C$1.2836, rising from C$1.2788. The dollar started to rally Wednesday after the Bank of Canada sounded a cautious tone about interest rates.

In emerging markets, the Brazilian real USDBRL, +1.6442%  was slammed, falling 2.2% against the buck to its lowest level since June at 3.3185 real per dollar. Brazil’s central bank cut its benchmark interest rate by 50 basis points on Wednesday but signaled another 25 basis point cut could follow in February. At the same time, investors worry that a pension reform plan, which President Michel Temer wants to push through before the end of his term might fall apart. Brazilians go to the polls next year. One dollar last bought 3.2915 real.

What’s driving the markets?

The November snapshot on U.S. nonfarm payrolls and wages will arrive on Friday, with economists polled by MarketWatch looking for the addition of 200,000 jobs and growth of 0.3% in average hourly wages. Private labor market data from ADP on Wednesday showed employment growth was solid in November, with the addition of 190,000 jobs.

The Labor Department’s report will keep investors focused on Washington, where President Donald Trump is scheduled on Thursday to meet congressional leaders to discuss a bill to keep the government open. A bill to avoid a shutdown will be up for a vote in the House on Thursday, after the House Rules Committee on Wednesday put together a temporary funding package.

Lawmakers in the Senate and the House were still working out how to produce a single tax-cut bill that could be passed and sent to Trump to sign in to law.

Meanwhile across the Atlantic, the euro managed to claw back losses from earlier in the session despite worse-than-expected industrial production data from the eurozone’s biggest economy, Germany. This suggests that the euro is mostly trading on dollar sentiment at the moment.

Over in Britain, Brexit negotiations are in focus. Of particular interest is the chances for a deal on the Irish border issue, the last of three Brexit issues that have to be resolved before Friday, a deadline set by lead EU negotiator Michel Barnier.

U.K. Prime Minister Theresa May is working on a new proposal for the Irish border that she will present on Thursday, Ireland’s Prime Minister Leo Varadkar said, according to media reports. A dispute with May’s Northern Ireland political allies over the issue of whether to have a “hard” or “soft” border scuttled a potential deal on Monday.

What are strategists saying?

“The dollar is starting to regain some strength as traders begin to prepare for nonfarm payrolls data tomorrow. The dollar index has now broken a four week downtrend and is now starting to build a run of higher lows and higher highs, which is are early stages of a new uptrend,” said Richard Perry, market analyst at Hantec Markets, in a note.

A “decent read-through from the ADP employment change yesterday sets up for a nonfarm payrolls…where with a rate hike nailed on for December, a dollar positive/risk positive reaction would meet a positive surprise in the data,” he said.

“There is some push and pull in the dollar, with tax reform and positive U.S. economic growth on the one hand and the debt ceiling on the other, limiting upside” said Tim Alt, portfolio manager at Aviva Investors, adding that overall expectations of a government shutdown were low. “This is a low probability high impact event.”

What are the data?

First-time jobless claims for the week ended Dec. 2 came in at 236,000, slightly below MarketWatch consensus expectations 240,000.

In other data, the flow of funds report for the third quarter comes out at 12 p.m. Eastern, followed by consumer credit for October is on the docket at 3 p.m.

Small and Medium-sized Enterprises stand to benefit from 60-day National Action Plan

This reading rose healthily in June, from 48.5 to 52.5. The improvement was seen across all company sizes, and the proportion of respondents reporting no change eased from 77% in May to 73%. There have been recent steps by the FGN to create a more business friendly environment. One such is the 60-day National Action Plan by the Presidential Enabling Business Environment Council; small and medium-sized enterprises stand to benefit from this initiative. An improved operating environment would allow companies to rejig and most likely take on additional labour.

The labour force report from the NBS for Q4 2016 shows a pick-up in the national unemployment rate from 13.9% in Q3 to 14.2%. A total of 28.6 million people were either unemployed or underemployed in a labour force of 108.6 million.

The reading for new orders, the most forward-looking of the five sub-indices, showed a rise from 52.5 to 55. This was wholly driven by small companies whereas the responses of the large and medium-sized firms told the story of a slight deterioration. This could be because SMEs are seeing more fx as a result of dedicated CBN sales. No change was the response of 50% of firms.

Respondents under the model of our choice (the ISM’s in the US) are not asked to distinguish between domestic and export orders. According to the CBN, non-oil products accounted for just 7.1% of total exports in Q4 2016. Additionally, the foreign trade statistics for Q4 2016 from the NBS show that Nigeria exported goods (presumably non-oil products) valued at N464bn to other African countries; exports to ECOWAS countries accounted for half of this figure.

Manufacturing exporters will have noted the signals that the FGN plans to reintroduce the export expansion grant (EEG). The Manufacturers Association of Nigeria, following discussions with the authorities, thinks that the new grant may have lower rates than previously, be robustly designed to prevent abuse by applicants and reward exporters for value addition. We should add that the FGN’s announcement in December on its uncovering of N2.2trn in unpaid debts from the previous administration to the private sector includes arrears to exporters, which are likely to be obligations under the old EEG.

This question is inverted for respondents (i.e. a fall in delivery times is a positive indicator). In June the reading declined from 64 to 60.5, the only one of the five sub-indices to post a fall. The decline was pronounced for medium-sized forms. This reading has been in positive territory since February 2015 and averaged 57.4 over the past 12 months.

A significant improvement from 53 to 57.5 was observed, led by small companies. No change accounted for 45% of all replies, compared with 50% the previous month.

Naira falls at inter-bank, investors window

The nation’s currency, on Thursday depreciated at the inter-bank spot foreign exchange and investors and exporters window due to forces of demand and supply.

Naira lost N0.70k to close at N306.20k per dollar on Thursday from N305.50k per dollar traded the previous day at the inter-bank market, data from FMDQ show.

At the investors and exporters forex window, the local currency weakened by N1.00k 0.27 percent per dollar as it closed at N366.00k per dollar on Thursday as against N365.00k quoted on Wednesday.

The naira traded at the rate of between N366/$ and N367 per dollar at the parallel market, the same level it was quoted since the week.

The nation’s currency is seen steady on the foreign exchange markets in the coming days as the central bank continues to inject dollar into the market to improve liquidity while also tightening naira liquidity to curb pressure on the local currency.

The CBN on Wednesday announced bids for retail auction by authorized dealers in the inter-bank foreign exchange market, following its intervention in other segments of the market on Monday, July 3, 2017, to the tune of $195 million.

Authorized dealers in the wholesale window were offered the sum of $100 million on Monday. The Bank also allocated the sum of $50 million to the Small and Medium Enterprises (SMEs) window, while it allocated the sum of $45 million for invisibles such as Basic Travel Allowance, tuition and medical bills.

Gatwick Airport has recorded 7.7 per cent increase in passenger traffic to 44.1 million over the past 12 months

Gatwick Airport has recorded 7.7 per cent increase in passenger traffic to 44.1 million over the past 12 months, with revenue at the airport was also up 7.7 per cent, to £725 million.

This, combined with carefully controlled cost management, resulted in EBITDA rising 12.9 per cent to £373.6 million and a profit before tax of £132 million.

Long-haul continues to be a success story with routes growing 13.6 per cent and now represent one in five of Gatwick’s passengers.

As capacity issues become a challenge, Gatwick will continue to see considerable growth in passenger numbers as airlines swap short haul for long haul services.

Reports released by the National Bureau of Statistics, (NBS) showed that in the first quarter of 2017, the performance of the different parts of the Nigerian Aviation sector varied. Both passenger numbers and aircraft movement declined, relative to both the previous quarter and the first quarter of 2016.

Experts have said this development is partly resulted from the Abuja Airport closure and the general economic downturn, which affected the purchasing power of customers. However, some airports recorded larger percentage declines than Abuja, and declines were also recorded in the previous two quarters, suggesting that other factors

The total number of passengers to pass through Nigerian airports was 2,505,612. Of these, 67.3% were domestic passengers, travelling within Nigeria, and the rest were international, entering or leaving Nigeria.

This represents a considerable drop compared to both the previous quarter (of 31.3%) and the same quarter of the previous year (of 34.5%, based on revised 2016 Q1 figures.

Tayo Ojuri, an industry expert and Chief Executive Officer, Aglo Limited, an aviation support service told Financial Quest that air travel industry is often the first to be affected when there is a recession because travellers are propelled based on their purchasing power. Ojuri added that the industry is also often the last to pick up when the economy comes back to life.

Ojuri however assured that the Nigerian air transport industry will continue to be attractive because most travel in Nigeria are business travels. There was a quarterly fall of 18.2%, and a year on year fall of 23.7%. As discussed, the closure of Abuja Airport will have had less of an effect on international passenger numbers than domestic, because in the case of domestic travel, each trip made to or from Abuja has a corresponding effect on another domestic airport. Nevertheless, the decline was also broad-based, with nearly all airports contributing to the decline.

Financial Quest’s checks show that international airlines had to cut down frequencies into Nigeria, while local airlines suspended operations as a result of the economic downturn and the high exchange rate.

Private-sector credit extension at end-2016 represented just 21.9% of GDP

Minimal growth in private-sector lending

Credit is one of the several inputs in short supply in Nigeria. Private-sector credit extension at end-2016 represented just 21.9% of GDP, compared with 75.0% in South Africa. Nor is there impressive growth to suggest that the gap is narrowing. CBN data from a different series to that shown in our chart highlight an increase of 19.4% y/y in December in naira terms: we should note, however, the large share allocated to the oil and gas sector and the weight of those loans denominated in fx. The increase would otherwise have been negligible.

· One aim of monetary policy in 2016 was to persuade the deposit money banks (DMBs) to boost their lending to what the CBN termed job-creating and productive sectors such as agriculture and manufacturing. Neither lectures nor incentives worked.

· DMBs’ lending to agriculture has risen from about 1% to about 4% of their total loan books over three years. This will not bring about the rapid growth in agro-industry underpinning the FGN’s strategies of import substitution and economic diversification, and explains why the CBN has launched three subsidised credit schemes for the sector in the past decade.

· In February the average prime and maximum lending rates of the DMBs were 17.1% and 29.3%. At the time, FGN bonds were yielding more than 16% and longer tenor NTBs more than 22%.

· Faced with this choice and allowing for the sizeable risk attached to most credit applications from the real economy outside the blue chips, it is little surprise that the DMBs have accumulated very large positions in FGN paper.

· Until those yields retreat substantially and credit applications improve, we do see not much change.