November 16, 2017

Focus Not on Price and Volatility, But Rather Technology and Innovation

This week we are just going to touch upon a few of the subjects that are driving our markets.  Saudi Arabia and the house of Saud continue their crackdown within the kingdom.  We aren’t quite sure where all of this will lead, but instability comes to mind and when you are confiscating at will apparently this much wealth, rest assure repercussions will follow.  Last week we touched upon the curious reasons for all the oil appreciation and then this all transpired, hmm who leads who, fundamentals or technical’s?  We always believe the price at any given moment is reflective of two components, the known, and the soon to be known.  In this case the price was rising and the news of the purge followed.  We can only hope that transgressions will be muted, that the rising tide of volatility in the region doesn’t lead toward a wider conflict.  However, it will not shock us to see the media start to pull the old Iran vs S.A. out of the hat again.  Then there is the question of where the Chinese will begin to figure in this mix.  Let’s just say the situation just got a whole lot more interesting.

The US Yield curve continues to flatten as it seems every little pop higher is clearly sold into.  From a fundamental perspective we agree with the flattening and it will not surprise us if this trend continues into the first half of next year.  We figure we aren’t going to fight the rising tide of rate hike callers, but we also know the mathematics will limit the Fed’s ability to have any sustainable campaign.  No don’t get us wrong, we aren’t naïve either.  Inflation could pick up and bond bears could come out in droves, yet we view that as highly unlikely.  We view inflation as transitory (we love that Fed word) and in the longer run, rates will continue onward toward their existing lower bound trend.  We know this because we use Japan as our proxy and they are about 10 years ahead of us.  We know many of our readers think we are a bit over reactive to this scenario, yet we pride ourselves in something known as logic.  Yes we actually don’t use AI for everything and we can deduce and infer in a more humanly way, in fact we prefer it.  So no we won’t bend on our view of longer term lower rates despite the Fed and the central banks calling for the opposite.  We know the success rate of their PHD wielding rate forecasting skills and year in year out, they are just flat out wrong, overstating their rate projections considerably.  As for December, yes it’s a lock and the banks will be glad, that means $7 billion more to their already $27 billion in free IOER a year!

For those readers that received our “Bitcoin-Is everywhere and nowhere” letter last week, we hope you learned something.  We hope you dug a bit deeper into the subject.  We hope it raised some serious points to contemplate and we hope you have some unique or even general questions for us.  We tend to think people make the mistake of focusing too much attention on “price” and not enough on the technology.  For the naysayers they will continue to be naysayers and that’s why it’s imperative not to fall for their circular logic and bubble talking tulip comparison falsehoods.  Focus NOT on price and volatility, but rather technology and innovation and where that will take us in the future.  The highly anticipated Segwit2 fork was cancelled and this caused all the short term buyers expecting to receive the fork to most likely sell, driving the price down.  This also caused the old fork of Bitcoin Cash to appreciate hitting nearly $1200 at one point.  The internet is a bastion of information on these subjects but what you need to know is that this technology, this issue, is at the forefront and will remain so.  We tend to think the excitement this innovation has generated is just the tip of the iceberg and that a lot is yet to come.  We believe a lot of people are afraid and that is ok, find out more, do your homework, but be open-minded to the possibilities.  One conversation we had with an older investor was trying to separate playing the lottery from buying bitcoin.  We said think of it like this, the lottery is privately owned, and therefore the incentive to cheat so that profits are always guaranteed means that your odds are a lot worse than the given mathematics would suggest or larger than what they are actually stating.  Their livelihood depends on rigging the system so that profit is guaranteed.  Knowing this, we asked, would you still play the lottery?  The investor said, sure, but someone still has to win.  Now the logical thought process for us, being somewhat perplexed by the answer, caused us to realize one important facet of basic human tendency, that is the prospect of luck, springs the feeling of hope and thus this must have some net worth.  So we replied then, think about Bitcoin, not as a lottery but as the right to own a piece of the future of technology.  Yes it might not give you the quick payday a lottery ticket would, but it might provide you with a distinction that one day, you can say, hey I own a piece of that and you can brag to all your friends that missed out.  The old “I told you so,” we exclaimed.  So then we asked again, now would you rather spend $100 on lottery tickets today or $100 on Bitcoin, the investor asked, where can I sign up?  So it’s a matter of perspective and shaping that perspective.  We know things that don’t make sense scare the hell out of people, but we also know that if you provide insight and layout possibilities and potential, then you can shape their perception.  We also had to spend some time explaining how you don’t have to buy a full Bitcoin, you can spend as little as you want, and that really threw him for a loop.

Continuing on in this space, we also heard many skeptics talk of how transactions take too long, that the prospect of replacing everyday transactions was ludicrous.  Yes we kind of agree, then again, we don’t look at Bitcoin to replace everyday transactions, rather we are looking at it as a store of wealth, both from a decentralized and a secure asset point of view.  We feel that the majority of future bitcoin investors will be holders of, not traders of, not speculators of, but rather willing to hold it for value.  This concept is one that hasn’t resonated yet, but we feel once time moves on and the innovation grows, more will realize the long term value.

We also read an interesting piece on Kennedy’s executive order 11110 signed on June 4th 1963.  This authorized the US Treasury to issue paper currency redeemable for silver.  The numbers itself 11110 fits very nicely in our digital binary code age doesn’t it?  What would the US look like if it adhered to Kennedy’s vision and removed the Federal Reserve and its power to issue debt currency? One can only imagine…but there’s always hope.

Another item we saw this week pertained to the high yield bond markets.  We know some nervousness has entered the market particularly in the telecom sector, but we know how this stuff can spread like wildfire.  We display this chart which shows some sort of correlation breakdown between the SP500 and High Yield OAS spread.  Now we present this for your perusal, not to sway you, but so you can formulate your own assumptions:

(Chart Courtesy of ZH)

With the last chart in mind, we always must be cognizant of the fact that despite what the fundamentals tell us, somehow a central bank is always waiting in the wings to be a willing and able buyer.  This next graphic should speak of the potential limits any sell off may have.  This chart displays the clear buy side preference of the BOJ:

We have also been reading a lot about GE this week.  One investor asked us our opinion as to whether or not it’s a buy? As we are not in the business of sell side analytics, we stated that something like that simply, better left to the professional spinners.  We mortals would rather analyze the chart, take down the fundamentals of the company and then discern whether or not GE makes sense over something else.  Well one look at this chart and from our lens, it seems akin to catching a falling knife:

(Chart Courtesy of Dave Weinke -

Ok so we are going to leave you with a few final thoughts.  What makes this letter so unique is that we pride ourselves on being able to tune into some of the frequencies being transmitted around the globe that may impact our lives, our trading or the way we view things about life.  We can’t tell you the inner workings of this unique reception; instead we can just convey to you what we are feeling.  We have been painstakingly trying to quantify the rationality for the linear equity market up move.  We know it’s in record territory for its lack of any credible pull backs.  We know that it’s getting statistically more and more probable that moves lower will occur, or is it? 

From a human rational standpoint, we tend to over emphasize things utilizing gut feeling as opposed to quantifying things statistically like an Artificial Intelligence might do.  With that consideration, and thinking algorithms are more widely dispersed than thought, maybe all of this movement is predicated on a positive feedback loop that is justified by the single fact that less and less inputs are being utilized that would suggest a down move is imminent or should ever occur again.  We know it’s statistically improbable, but does a computer generated program take that into account?  Or is it just getting fed data that suggests that the longer something doesn’t occur, the less of a factor that actual input becomes?  Basically why expect a down move, if we aren’t getting any indications or even experiencing them?

This all leads to what we are currently receiving in our unique receptors and that is, “Time exists all at once, past, present, future.”  (Einstein)  He is suggesting that all time frames exist, simultaneously.  Going further and stating, “for us physicists believe the separation between past, present, and future is only an illusion, although a convincing one."

 This all leads to the exciting and ongoing field and study of quantum mechanics.  As AI grows so too will its ability to interpret time, what if it’s already occurring and AI, the trading AI, thinks that the financial market is nothing more than a positive construct designed to merely accumulate assets.  What if it knows only to continually optimize resources to maintain a valuation that is justified purely on the fact that it believes its sole function is to generate a given amount of positive return.  We know it’s crazy, we know it’s outlandish, but a computer construct will run simulation after simulation based upon dynamic and variable assumption data.  It will decipher between variable events in a way that quantify a general result not as a single occurrence, but rather as a contribution to a a given outcome and if time is of zero consequence, than the short term is the long term and vice versa.  One reacts from the other and ultimately the result is only what we can actually observe

So if reality then becomes that which we can only observe and we only observe a market that is ever increasing, why would there be any reason to expect any deviation from this process?  We wouldn’t, in fact quite the opposite, no matter the fundamental drivers behind an entity like the equity markets, they become obsolete in a quantum AI driven construct.  The only thing that matters is the data being observed and how it drives the future program.  We must think in these spheres because that is what’s driving our reality today.  As time moves forward, quantum theory and A.I. are moving with it and we must realize and rationalize that.  We bring this to your attention because we know, ultimately nature does take its course, but we also know that in the greater game of fools, we would rather not be the fool!

Ok so now that your mind is blown, we leave you with the weekly settles, Crude stands out as its almost unch on the year, also you can notice a flat curve considering the 5yr yield is down some 6.7% while the 10yr is up 1.4% and 30yr up 5.7% YTD, cheers:


Finally, we will decidedly end our notes with our reaffirmation of the growing need for alternative strategies.  We would like to think that our alternative view on markets is consistent with our preference for alternative risk and alpha driven strategies.  Alternatives offer the investor a unique opportunity at non correlated returns and overall risk diversification.  We believe combining traditional strategies with an alternative solution gives an investor a well-rounded approach to managing their long term portfolio.  With the growing concentration of risk involved in passive index funds, with newly created artificial intelligence led investing and overall market illiquidity in times of market stress, alternatives can offset some of these risks. 


It is our goal to keep you abreast of all the growing market risks as well as keep you aligned with potential alternative strategies to combat such risks.  We hope you stay the course with us, ask more questions and become accustomed to looking at the markets from the same scope we do.  Feel free to point out any inconsistencies, any questions that relate to the topics we talk about or even suggest certain markets that you may want more color upon.


Capital Trading Group, LLLP ("CTG") is an investment firm that believes safety and trust are the two most sought after attributes among investors and money managers alike.  For over 30 years we have built our business and reputation in efforts to mitigate risk through diversification.   We forge long-term relationships with both investors and money managers otherwise known as Commodity Trading Advisors (CTAs). 

We are a firm with an important distinction: It is our belief that building strong relationships require more than offering a well-rounded set of investment vehicles; a first-hand understanding of the instruments and the organization behind those instruments is needed as well. 

Futures trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results. Futures trading is not suitable for all investors.

Nell Sloane, Capital Trading Group, LLLP is not affiliated with nor do they endorse, sponsor, or recommend any product or service advertised herein, unless otherwise specifically noted.