Sunday, December 10, 2017

10/12/17: Rationally-Irrational AI, yet?..

In a recent post ( I mused about the deep-reaching implications of the Google's AlphaZero or AlphaGo in its earliest incarnation capabilities to develop independent (of humans) systems of logic. And now we have another breakthrough in the Google's AI saga.

According to the report in the Guardian (,:

"AlphaZero, the game-playing AI created by Google sibling DeepMind, has beaten the world’s best chess-playing computer program, having taught itself how to play in under four hours. The repurposed AI, which has repeatedly beaten the world’s best Go players as AlphaGo, has been generalised so that it can now learn other games. It took just four hours to learn the rules to chess before beating the world champion chess program, Stockfish 8, in a 100-game match up."

Another quote worth considering:
"After winning 25 games of chess versus Stockfish 8 starting as white, with first-mover advantage, a further three starting with black and drawing a further 72 games, AlphaZero also learned shogi in two hours before beating the leading program Elmo in a 100-game matchup. AlphaZero won 90 games, lost eight and drew 2."

Technically, this is impressive. But the real question worth asking at this stage is whether the AI logic is capable of intuitive sensing, as opposed to relying on self-generated libraries of moves permutations. The latter is a form of linear thinking, as opposed to highly non-linear 'intuitive' logic which would be consistent with discrete 'jumping' from one logical moves tree to another based not on history of past moves, but on strategy that these moves reveal to the opponent. I don't think we have an answer to that, yet.

In my view, that is important, because as I argued some years ago in a research paper,  such 'leaps of faith' in logical systems are indicative of the basic traits of humanity, as being distinct from other forms of conscious life. In other words, can machines be rationally irrational, like humans?..

Friday, December 8, 2017

8/12/17: Coinbase to Bitcoin Flippers: You Might Flop

If you need to have a call to 'book profit', you are probably not a serious investor nor a seasoned trader. Then again, if you are 'into Bitcoin' you are probably neither anyway. Still, here is your call to "Go cash now!"

In simple terms, Coinbase is warning its customers that "access to Coinbase services may become degraded or unavailable during times of significant volatility or volume. This could result in the inability to buy or sell for periods of time." In other words, if there is a liquidity squeeze, there will be a liquidity squeeze.


So a couple of additions to this post, on foot of new stuff arriving.

One: Bloomberg-Businessweek report ( that some 40% of the entire Bitcoin supply is held by roughly 1,000 'whales'. Good luck seeing through the concentration risk on top of the collusion risk when they get together trading.

Two: Someone suggested to me that ICOs holding Bitcoin as capital reserves post-raising are part problem in the current markets because by withdrawing coins from trading, they are reducing liquidity. Which is not exactly what is happening.

Suppose an ICO buys or raises Bitcoins and holds these as a reserve. The supply of Bitcoin to the market is reduced, while demand for Bitcoins rises. This feeds into rising bid-ask spreads as more buyers are now chasing fewer coins with an intention to buy. Liquidity improves for the sellers of the coins and deteriorates for the buyers. Now, suppose there is a sizeable correction to the downside in Bitcoin price. ICOs are now having a choice - quickly sell Bitcoin to lock in some capital they raised or ride the rollercoaster in hope things will revert back to the rising price trend. Some will choose the first option, others might try to sit out. Those ICOs that opt to sell will be selling into a falling market, increasing supply of coins just as demand turns the other way. Liquidity for sellers will deteriorate. Prices will continue to fall. This cascade will prompt more ICOs to liquidate Bitcoins they hold, driving liquidity down even more. Along the falling prices trend, all sellers will pay higher trading costs, sustaining even more losses. Worse, as exchanges struggle to cover trades, liquidity will rapidly evaporate for sellers.

It is anybody's guess if liquidity crunch turns into a crisis. My bet - it will, because in quite simple terms, Bitcoin is already relatively illiquid: it takes hours to sell and spreads on trading are wide or more accurately, wild. Security of trading is questionable, as we have recently seen with, and the market is full of speculation that some of these 'heists' are insider jobs with some exchanges acting as pumps to suck coins out of clients' wallets. The rumours might be total conspiracy theory, but conspiracy theories turn out to be material in market panics.

8/12/17: Happiness: Bounded and Unbounded

Why I love Twitter? Because you can have, within minutes of each other, in your tweeter stream this...

and this

That's right, folks. It's the Happiness Day: bounded at 0.2% annual rate of growth for the workers, and unbounded at USD11 trillion for the Governments. All good, right?

But of course all is good. We call the former - the 'great news' for the families, and the latter, 'savage austerity'.  Which is, apparently, good for the bonds markets... no kidding. At least there isn't a bubble in wages, even though there is a bubble in bonds.

8/12/17: China v U.S.: Forbes

Tuesday, December 5, 2017

5/12/17: U.S.-China Trade Confrontations: Redrawing the Post-Bretton Woods Order

I have recently posted some select slides relating to the background to the U.S.-China latest standoff in the WTO. Here is the full set of slides detailing U.S.-China battle for hegemonic dominance in post-Bretton Woods institutions:

4/12/17: The Other Hockey Stick (not Bitcoin)

Financialization of the global economy is now complete, thanks to the world's hyperactive Central Banks and the age of riskless recklessness they engendered.


The notable 'hockey stick' that is, dynamically reminiscent of the Bitcoin craze is now evident in the stock markets too, and it has zero parallels in the period. In fact, this is the highest global market capitalization level on record, as data from the World Bank augmented with current data through November 2017 shows:

You can think of the stratospheric rise in world equities valuations as a reflection of liquidity supply generated by the Central Banks since 2007. You can also think of it as a wealth buffer built up by the world's wealthy elites to protect themselves against potential future stagnation and political populism. You can equally think of it as a bubble.

Whichever way you spin these numbers, the rate of increase since 2015 has been simply unprecedented by historical standards, faster than the bubble and faster than the pre-GFC bubble.

Sunday, December 3, 2017

3/12/17: Russian and BRICS debt dynamics since 2012

Back in 2014, Russia entered a period of recessionary economic dynamics, coupled with the diminishing access to foreign debt markets. Ever since, I occasionally wrote about the positive impact of the economy's deleveraging from debt. Here is the latest evidence from the BIS on the subject, positing Russia in comparative to the rest of the BRICS economies:

In absolute terms, Russian deleveraging has been absolutely dramatic. Since 2014, the total amounts of debt outstanding against Russia have shrunk more than 50 percent. The deleveraging stage in the Russian economy actually started in 1Q 2014 (before Western sanctions) and the deleveraging dynamics have been the sharpest during 2014 (before the bulk of Western sanctions). This suggests that the two major drivers for deleveraging have been: economic growth slowdown (2013-1Q 2014) and economic recession (H2 2014-2016), plus devaluation of the ruble in late 2014 - early 2015.

The last chart on the right shows that deleveraging has impacted all BRICS (with exception of South Africa) starting in 2H 2013 - 1H 2014 (except for China, where deleveraging only lasted between 2H 2015 and through the end of 2016, although deleveraging was very sharp during that brief period).

In other words, there is very little evidence that any aspect of Russian debt dynamics had anything to do with the Western sanctions, and all the evidence to support the proposition that the deleveraging is organic to an economy going through the structural growth slowdown period.

Saturday, December 2, 2017

2/12/17: Bitcoin Craze Heads for the Moon

Just about 10 days ago, I wrote about the Bitcoin being a bubble. And since then, few things happened:

  1. The bubble has now gone into public euphoria stage, witnessed by an ever-growing number of discounted brokerage platforms actively selling access to Bitcoin markets with leverage in excess of 100:1.
  2. The bubble has gone from hyperbolic to hyperbolic+ trajectory, adding a massive degree of volatility to the trend. Earlier this week, Bitcoin managed to drop some 21 percent within a day and then go back above pre-drop levels within less than 24 hours. The confirmation phase is now complete with buy-on-the-dip 'investors' triggering waves of herding.
  3. And the hype has gone institutional. In my post, I said "This is not just a shoe-shine-boy moment, folks. It is white-powder-under-the-nose-and--empty-bottles-of-vodka-on-the-floor hour for high school dropouts with cash to burn." Yeah, read this from as always excellent Matt Levine of (not always excellent) Bloomberg View: "One of the presenters at the conference... “Decentralization will change more in our lives over the coming years than possibly any other technological shift we’ve seen,” he says, likening the crypto rush to the Reformation. He describes building anarcho-capitalist city-states on the back of the blockchain. “If you’re going to built a new city, you’re not going to have the DMV – we don’t like the DMV,” he says at one point. Later: “We can actually tokenize the moon with a startup society.” When I ask him about the SEC’s role in the space, he waves the question off as irrelevant. “Under crypto-anarchy,” he explains, “we’ll get to determine the government that we want.”" Nasa should worry now, not just the SEC, for one day, the International Space Station will have to be flying through clouds of Bitcoins spread around space by the Moononizers of anarcho-capitalist-libertarian variety who securitized their moonhomes using blockchain contracts enforceable only under the anarchy laws.
Yes, bottles of vodka are empty now. 'Investors' have moved onto magic mushrooms.

Friday, December 1, 2017

1/12/17: Euro - Unfit for Diverging Economies

An interesting chart from Bloomberg on intra-EU productivity divisions:

The key here is not the current spot observation or the trend forecast forward, but the dynamics from 2008 on. Since the GFC, productivity divergence within the EU has been literally dramatic. And the two interesting markers here are:

  1. Divergence in productivity between the ‘North’ and the ‘South’ - highlighted in the Bloomberg note, but also
  2. Divergence in productivity between Germany and France

In simple terms, until about 2010, the Euro monetary union was not quite working for the ‘South’ while it did work for the ‘North’. However, since 2010-2012, the divergence between the ‘North’ and the ‘South’ has spread to France vs Germany divide as well. The Euro, it appears, is not quite working for France either.

A more involved view of the continued divergence in the Euro area is here:

1/12/17: Eonia's strange vaulting

What concentration risk and liquidity risk can do to you when both combine?

Eonia (Euro OverNight Index Average) is the 1-day interbank interest rate for the Euro zone. In other words, it is the rate at which banks provide loans to each other with a duration of 1 day (so Eonia can be considered as the 1 day Euribor rate). In other words, it is a measure of short-term liquidity.  Eonia is an average of actual rates charged, so it is, in theory, a reflection of the market demand for short term liquidity. But Eonia is a tiny market, trading normally daily at around EUR7 billion or less. And in a tiny market, there can be a sudden shift in trading volumes. This is what happened on Wednesday and Thursday. Eonia rose from -0.36 basis points on Tuesday to -0.30 bps on Wednesday to -0.24 bps on Thursday.

Eoinia's volumes are 90% direct borrowing by prime banks (and the balance is brokered), so a handful of large institutions use the market to any significant extent. Which induces concentration risk. Worse, Eonia is a secondary/supplementary market, because the ECB currently provides extremely cheap liquidity in unlimited volumes on a weekly basis. Which is another risk to Eonia, as it is thus set to absorb any short term variation in liquidity demand (below 1 week).

Bloomberg speculated that "The most likely explanation is a technical hitch, rather than some sudden crisis warning. The cause of the spike could be a U.S. financial institution that has switched its year-end accounting period from Dec. 31 to Nov. 30. This may have driven a sudden need for short-term liquidity, thereby causing a squeeze. It was month-end for many financial institutions on Thursday, on top of which we are approaching year-end periods, when cash and collateral rates often get squeezed. A bit of indigestion shouldn’t be a surprise. But a move this big is."

If Friday close gets us back toward Tuesday opening levels, the glitch might just be a glitch. If not, something might be happening beyond 'technical' hitches.

The strangest bit is that the move signals a potential liquidity squeeze in a market that has, if anything. too much liquidity. And the matters are not helped by the shallow trading volumes, that imply a concentrated move.

Something to watch, folks, if anything - for just another illustration of the concept of correlated risks.