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Market Lab Report - Premarket Pulse 2/26/18 [Includes Dr. K's Crypto-Corner]

Major averages rose on lower volume. Volatility remains elevated so the question remains how far this pull back may run or if it has run its course. Much damage was done to many leading names so it may take some time for the price gash to heal, if it can heal. Meanwhile, bonds continue their overall slide as shown by 20-year treasury bond ETF TLT.

On Monday, St. Louis Fed President James Bullard said he doesn’t think the so-called neutral U.S. interest rate is likely to rise much over the next two years. According to the minutes of the Fed’s January meeting, many Fed officials believe that the neutral level could start to trend higher. Some thought the rate might “move up more than anticipated as the global economy strengthened.” The Fed has pencilled in three rate hikes this year and two or three next year. Fed Vice Chairman Randall Quarles will speak on the same topic at the National Association of Business Economics in Washington at 3:15 p.m. Eastern. 

Futures are currently trading higher.

The Unwinding

Global debt stands at an all-time high of $233 trillion. How do governments unwind the QE-generated portion of the debt without undoing the QE-generated bull market which began in 2009? If the global economy were strong, central banks would be able to materially reduce the amount of money they print. Instead, we have the Bank of Japan reducing their monthly purchases by a scant $70 million. The European Central Bank has reduced its printing from $60 to $30 billion a month, but this is still a drop in the bucket. And the issue is that major central banks continue to print en masse, still near record levels. The economy should have jump started long ago, but the recovery remains questionable. Prior catalysts were major countries such as Germany and Japan coming back online after World War II. This time, there are no such countries. In addition, interest rates remain near record lows.

Blockchain

The way out of this mess may very well be the rise of the digital age. Blockchain is likely to be the technology that rescues the world from insurmountable debt. Much as the internet eliminated borders for information flow, the blockchain is eliminating borders for innovation. It is allowing people from all around the world to do things. It will no longer be people in Silicon Valley who have the greatest access to capital. Capital formation is changing in a way that it will find you anywhere in the world no matter what country you're in.

The Rise of ICOs

Venture capital in the cryptospace in 2014 was similar as it was for the internet in 1995. Same for the cryptospace in 2015 vs. internet in 1996. But in 2016, investment flatlined because revenues were not being seen, so VCs took a wait-and-see attitude and held off making new investments. As a result, ICOs became a way to fund new cryptocompanies which explains the surge of ICOs in 2017. The amount of money raised showed the ICO model can scale. ICOs are currently funding early startups by a factor of 5-times that of conventional venture capital. Conventional VCs will probably not be around in several years nor will many Wall Street jobs.

In other words, big changes comes at a steep price to centralized systems which include governments and corporations as they currently exist since decentralized, open source, trustless, secure protocols will always win over centralized, closed source, third party, insecure platforms.

ICO Bubble?

And whether ICOs are in a bubble that is close to bursting, bitcoin is currently worth about $170 billion while the whole cryptospace is worth about $450 billion. By contrast, in 1999, the dot.com bubble pushed the internet to a peak value of several trillion dollars in 1999 dollars. So while a tidal wave of ICOs came online in 2017, they may just be getting started. Relative to that market which was betting on the future potential of the internet which is inferior to blockchain technology, bitcoin and blockchain technology stand to have valuations in the tens of trillions of dollars within the next several years. Those valuations will be achieved even after bitcoin's bubble bursts once again as it has dozens of times since 2009 with corrections as steep as 94%.
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