Bitcoin Price Weekly Analysis (14th of October, 2017)

The previous week has been the most bullish week for bitcoin since the genesis block was first mined, as its […]

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Rickards Warns “Prepare For A Chinese Maxi-Devaluation”

Authored by James Rickards via The Daily Reckoning,

China is a relatively open economy; therefore it is subject to the impossible trinity.

China has also been attempting to do the impossible in recent years with predictable results.

Beginning in 2008 China pegged its exchange rate to the U.S. dollar. China also had an open capital account to allow the free exchange of yuan for dollars, and China preferred an independent monetary policy.

The problem is that the Impossible Trinity says you can’t have all three. This model has been validated several times since 2008 as China has stumbled through a series of currency and monetary reversals.

For example, China’s attempted the impossible beginning in 2008 with a peg to the dollar around 6.80. This ended abruptly in June 2010 when China broke the currency peg and allowed it to rise from 6.82 to 6.05 by January 2014 — a 10% appreciation.

This exchange rate revaluation was partly in response to bitter complaints by U.S. Treasury Secretary Geithner about China’s “currency manipulation” through an artificially low peg to the dollar in the 2008 – 2010 period.

After 2013, China reversed course and pursued a steady devaluation of the yuan from 6.05 in January 2014 to 6.95 by December 2016. At the end of 2016, the Chinese yuan was back where it was when the U.S. was screaming “currency manipulation.”

Only now there was a new figure to point the finger at China. The new American critic was no longer the quiet Tim Geithner, but the bombastic Donald Trump.

Trump had threatened to label China a currency manipulator throughout his campaign from June 2015 to Election Day on November 8, 2016. Once Trump was elected, China engaged in a policy of currency war appeasement.

China actually propped up its currency with a soft peg. The trading range was especially tight in the first half of 2017, right around 6.85.

In contrast to the 2008 – 2010 peg, China avoided the impossible trinity this time by partially closing the capital account and by raising rates alongside the Fed, thereby abandoning its independent monetary policy.

This was also in contrast to China’s behavior when it first faced the failure of its efforts to beat impossible trinity. In 2015, China dodged the impossible trinity not by closing the capital account, but by breaking the currency peg.

In August 2015, China engineered a sudden shock devaluation of the yuan. The dollar gained 3% against the yuan in two days as China devalued.

The results were disastrous.

U.S. stocks fell 11% in a few weeks. There was a real threat of global financial contagion and a full-blown liquidity crisis. A crisis was averted by Fed jawboning, and a decision to put off the “liftoff” in U.S. interest rates from September 2015 to the following December.

China conducted another devaluation from November to December 2015. This time China did not execute a sneak attack, but did the devaluation in baby steps. This was stealth devaluation.

The results were just as disastrous as the prior August. U.S. stocks fell 11% from January 1, 2016 to February 10. 2016. Again, a greater crisis was averted only by a Fed decision to delay planned U.S. interest rate hikes in March and June 2016.

The impact these two prior devaluations had on the exchange rate is shown in the chart below.


Major moves in the dollar/yuan cross exchange rate (USD/CNY) have had powerful impacts on global markets. The August 2015 surprise yuan devaluation sent U.S. stocks reeling. Another slower devaluation did the same in early 2016. A stronger yuan in 2017 coincided with the Trump stock rally. A new devaluation is now underway and U.S. stocks may suffer again.

By mid-2017, the Trump administration was once again complaining about Chinese currency manipulation.

This was partly in response to China’s failure to assist the United States in dealing with North Korea’s nuclear weapons development and missile testing programs.

For its part, China did not want a trade or currency war with the U.S. in advance of the National Congress of the Communist Party of China, which begins on October 18.

President Xi Jinping was playing a delicate internal political game and did not want to rock the boat in international relations. China appeased the U.S. again by allowing the exchange rate to climb from 6.90 to 6.45 in the summer of 2017.

China escaped the impossible trinity in 2015 by devaluing their currency.

China escaped the impossible trinity again in 2017 using a hat trick of partially closing the capital account, raising interest rates, and allowing the yuan to appreciate against the dollar thereby breaking the exchange rate peg.

The problem for China is that these solutions are all non-sustainable.

China cannot keep the capital account closed without damaging badly needed capital inflows. Who will invest in China if you can’t get your money out?

 

China also cannot maintain high interest rates because the interest costs will bankrupt insolvent state owned enterprises and lead to an increase in unemployment, which is socially destabilizing.

 

China cannot maintain a strong yuan because that damages exports, hurts export-related jobs, and causes deflation to be imported through lower import prices. An artificially inflated currency also drains the foreign exchange reserves needed to maintain the peg.

Since the impossible trinity really is impossible in the long-run, and since China’s current solutions are non-sustainable, what can China do to solve its policy trilemma?

The most obvious course, and the one likely to be implemented, is a maxi-devaluation of the yuan to around the 7.95 level or lower.

This would stop capital outflows because those outflows are driven by devaluation fears. Once the devaluation happens, there is no longer any urgency about getting money out of China. In fact, new money should start to flow in to take advantage of much lower local currency prices.

There are early signs that this policy of devaluation is already being put into place. The yuan has dropped sharply in the past month from 6.45 to 6.62. This resembles the stealth devaluation of late 2015, but is somewhat more aggressive.

The geopolitical situation is also ripe for a Chinese devaluation policy. Once the National Party Congress is over in late October, President Xi will have secured his political ambitions and will no longer find it necessary to avoid rocking the boat.


China’s President Xi Jinping awaits appointment to a second term at the 19th National Congress of the Communist Party of China, starting October 18. His reappointment is a foregone conclusion.

China has clearly failed to have much impact on North Korea’s nuclear weapons ambitions. As war between North Korea and the U.S. draws closer, neither China nor the U.S. will have as much incentive to cooperate with each other on bilateral trade and currency issues.

Both Trump and Xi are readying a “gloves off” approach to a trade war and renewed currency war. A maxi-devaluation of the yuan is Xi’s most potent weapon.

Finally, China’s internal contradictions are catching up with it. China has to confront an insolvent banking system, a real estate bubble, and a $1 trillion wealth management product Ponzi scheme that is starting to fall apart.

A much weaker yuan would give China some policy space in terms of using its reserves to paper over some of these problems.

Less dramatic devaluations of the yuan led to U.S. stock market crashes. What does a new maxi-devaluation portend for U.S. stocks?

We might have an answer soon enough.

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Filmmakers Join Forces with Programmers, Turn to Blockchain to Combat Piracy and Content Accessibility Issues

An experienced team of film producers, distributors, blockchain experts, and software developers have teamed up and announced their latest project. Dubbed White Rabbit, the project aims to monetize P2P streaming to the benefit of fans and filmmakers alike. Lets face it, piracy happens and it happens on a massive scale. In a report published earlier this year by anti-piracy and data analytics group MUSO, they tracked over 190 BILLION visits to online piracy sitesnRead MorenThe post Filmmakers Jo

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Bitcoins Meteoric Rise Results in Market Cap Bigger Than Nike, Bayer, Goldman Sachs

Bitcoin&8217s orbital trajectory hit a high of $5800 this week, giving the coin a market cap valuation close to $97 billion, listing the digital currency ahead of companies such as Goldman Sachs, Nike, and Bayer. Bitcoin&8217s rise continued apace yesterday, breaking through the $5,000 mark before going on to hit an all-time high of $5,800. The resulting weekly chart is pictured below showing the tallest weekly green candle growth in the coin&8217s history. The unprecedentednRead Mor

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Freedom Streaming Announces an ICO for the First Uncensored and Anonymous Live Streaming Platform

Freedom Streaming has announced its token sale of FDM Tokens to fund the development of a censorship-resistant and anonymous live streaming platform. Note This is a press release. Live streaming has become a multi-billion dollar industry and is becoming more and more popular each and every day. The emergence of smart mobile devices and easy accessibility to the internet has made the industry even more attractive. Since anyone can live stream from their home withnRead MorenThe post Freedom Stream

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CopPay New Kid On The Blockchain

CopPay unlocks cryptocurrency for consumers &38 merchants worldwide.Everyone from hairdressers to hardware manufacturers can now accept blockchain-based money free from transaction fees.CopPay to launch Initial Coin Offering ICO on October 30, 2017. Note This is a press release. Payment system CopPay will soon make Bitcoin, Ethereum, and other cryptocurrencies available for everyone to use allowing both consumers and merchants to freely exchange them in bricks-and-mortar retail stores and e

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California’s Path To Independence Smoother Than Catalonia’s, Secessionists Say

California’s burgeoning secessionist movement has been watching Catalonia’s struggle for independence with an eye toward the future. Proponents of transforming California into an independent republic have pointed out that there are many similarities between Catalonia and America’s largest state. For example, both are relatively wealthy.  

However, the circumstances of the two states diverge in one notable respect: The US constitution and California’s state constitution would make it easier for California to secede than Catalonia.

At least, that’s what one leader of California’s largest pro-secessionist group said during an interview with McClatchy.

Catalonia has approached secession in the best way it could, Marin said. If secession is what Californians want, he says their path to independence will be easier thanks to the 10th Amendment to the U.S. Constitution, which says any powers not explicitly given to the federal government are retained by the states. The states cannot unilaterally declare independence, but Marin argues that the Constitution provides the federal government and the states a sanctioned path toward that negotiation.

 

“There are definitely similarities in the fiscal situation – we both give more than we get back,” said Dave Marin, director of research and policy for the California Freedom Coalition. “But there’s more flexibility in the U.S. Constitution for secession than there is in the Spanish one. California has more tools available to it.”

In a shocking display of police brutality, the government of Spanish Prime Minister Mariano Rajoy forcefully tried to shut down a Catalan independence referendum that took place on Oct. 1 despite being declared illegal by a court in Madrid. Most recently, Catalan Leader Carles Puidgdemont symbolically declared independence before suspending it pending talks with the central government. Meanwhile, Rajoy said Wednesday that Catalonia has eight days to comply with the state’s order to drop its independence bid or Madrid will revoke the state’s autonomy and reassert centralized rule, likely accompanied by a violent crackdown as the rest of Europe backs away.

However, Dave Marin says California can probably find a way to disentangle itself from the US peaceably by employing unconventional tactics.

The first step for Marin’s group is getting an initiative on the 2018 ballot that would repeal a section of the state’s constitution that says California is an “inseparable” part of the US.

“Our state government is very experienced at doing things that undermine the federal government without being unconstitutional,” Marin said, citing California’s sanctuary cities as an example.

 

The California Freedom Coalition is collecting signatures to get its ballot initiative in front of voters in 2018. It does not definitively say California will declare independence from the United States; it would repeal a provision in the state constitution that says California is “an inseparable part of the United States.” It also directs the governor to negotiate for greater autonomy from the federal government and establishes an advisory commission on California autonomy and independence.

Calls for California’s independence pre-date Donald Trump’s presidency, but his election magnified the movement considerably. Still, most Californians see secession as ridiculous, with only 20% seeing it favorably. Meanwhile, 32% saw it favorably.

“We’re not strictly saying secession right now,” Marin said. “But if that number gets into the high 40s or 50s, it makes sense to consider. And then we have a few more tools to pursue it than Catalonia.”

Given the intense polarization in America’s values and priorities – not to mention California’s open defiance of the federal government, most recently manifested in the “sanctuary state” declaration as well as the state’s legalization of marijuana, which remains illegally at the federal level, the notion that we one day might see an independent California is looking less preposterous.

At the very least, as first the UK – and now Catalonia – have demonstrated, it’d be foolish to write off the possibility.
 

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Turkish-US relations hit new low

The outgoing US ambassador to Ankara, John Bass, has faced criticism during his three years in the Turkish capital for interfering in domestic issues, including political and judicial issues.

Recent remarks by Bass, who is expected to end his Turkish posting this weekend, on the arrest of Metin Topuz, an employee at the US Consulate in Istanbul, are an apparent attempt to interfere in the Turkish judiciary.

Topuz was arrested under an ongoing investigation against a 2013 plot by the Fetullah Terrorist Organization – the group behind last year’s defeated coup attempt in Turkey – known locally as the Dec. 17-25 incidents.

As Topuz is accused of attempting to topple the constitutional order, spying, and attempting to destroy the government of the Republic of Turkey, Bass came under fire for commenting that the accusations were motivated by “revenge”.

Read: Turkey’s Erdogan blames US envoy for diplomatic crisis

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Big Name Investors Voicing Bitcoin Optimism Are Louder Than Negative Colleagues

Big Name Investors Voicing Bitcoin Optimism Are Louder Than Negative Colleagues

Bitcoin’s price is on a tear in 2017, and it’s hard not to notice the decentralized currency’s spectacular run this year. As the value climbed to new heights this October, surpassing $5800 per BTC across global exchanges, many well-known investors have stated this month that they believe bitcoin’s future will be very bright from here on out.

Also read: Judge’s Decision to Delay Bitlicense Hearing Considered a ‘Positive Step’

Despite the Words of Jamie Dimon, Big Name Investors Believe Bitcoin Has a Bright Future

Big name investors and billionaires are talking about bitcoin a lot these days. However, the JP Morgan CEO, Jamie Dimon, has decided to stop talking about bitcoin, for now saying, “I wouldn’t put this high on the category of important things in the world, but I’m not going to talk about bitcoin anymore.” Even though Dimon is supposedly done talking about bitcoin, many well-known billionaires and financial executives have great things to say about the currency’s future.

Michael Novogratz: ‘Bitcoin Could Capture $10K in 6-10 Months’

Big Name Investors Voicing Bitcoin Optimism Are Louder Than Negative Colleagues
Former fund manager for the firm, Fortress, Michael Novogratz.

This week the former fund manager for the firm, Fortress, Michael Novogratz, told CNBC that he thinks bitcoin can capture a value of $10,000 per BTC within six to ten months. Novogratz is excited about cryptocurrencies and explains the tech space is thrilling right now. The former Fortress executive does believe the currency is in a bubble right now but illustrates the demand for a decentralized financial system exists.

“I never thought I’d come out of retirement, but the space is so exciting right now I decided to build a business, hire a whole bunch of smart guys, and we’re gonna to raise a fund,” explains Novogratz.

Hopefully take advantage of what I see as a revolution, actually — A decentralized revolution.   

Jeffrey Epstein: ‘If We Found a Secret Cache of Gold, the Value of Gold Would Decrease Instantly — Bitcoin Doesn’t Have This Problem’

Big Name Investors Voicing Bitcoin Optimism Are Louder Than Negative Colleagues
Jeffrey Epstein the Bear Stearns limited partner.

Another well-known investor who weighed in on his opinion of bitcoin this week was, Jeffrey Epstein the Bear Stearns limited partner. Just recently Epstein discussed bitcoin extensively with columnist Dylan Love from the news outlet, The Next Web, at his Upper East Side Manhattan apartment. Epstein believes “counterfeiting is the big problem” with the money system we use today, and bitcoin offers a solution.     

“Bitcoins each have a unique identifier, and any coins numbered outside a certain range of are fake — the whole system is mathematically controlled, so it can just as easily be mathematically verified,” explains Epstein. Additionally, the billionaire believes bitcoin does work as a good store of value.  

“When we talk about gold as a store of value, that just means a lot of people agree to pay the same price for one ounce of gold. In 2017, enough people agree on the value of bitcoin that it can serve the same purpose.

There will only ever be 21 million bitcoins, but this limit comes from computer code, not by how many bitcoins are left to remove from the earth. If we learn tomorrow that half of Montana contained a secret cache of gold, the value of gold would decrease instantly. Bitcoin doesn’t have this problem.

Tom Lee: [Bitcoin] Has A Lot of Characteristics That Are Very Similar to Gold

Big Name Investors Voicing Bitcoin Optimism Are Louder Than Negative Colleagues
Fundstrat co-founder Tom Lee.

Many other investment luminaries are jumping on the bitcoin bandwagon as well. For instance, Fundstrat co-founder Tom Lee thinks bitcoin will be the best performing asset class this year. Lee expects more and more institutional investor demand will continue to flock towards bitcoin’s “digital gold” attributes.

“I think bitcoin is an under-owned asset with potential for huge institutional sponsorship coming,” explains Fundstrat’s co-founder Tom Lee on CNBC’s “Fast Money” broadcast.

It has a lot of characteristics that are very similar to gold that I think will make it ultimately attractive as an alternate currency — It’s a good store of value.

A lot of mainstream investors are hearing these popular investment types and billionaire financiers talking about bitcoin. It’s likely that retail investors are also jumping in on the bitcoin bandwagon, due to these opinions from Wall Street executives and hedge fund managers. There are still a few big name investors like Jamie Dimon who say negative things about the cryptocurrency, but these days those opinions are being drowned out by the loud roar of investors who are taking bitcoin seriously.

What do you think about these mainstream investment types and billionaire financiers talking about bitcoin in a positive light? Let us know what you think in the comments below.


Images via Shutterstock, Pixabay, and Fundstrat. 


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