A Couple of Gems from the Chicago Fed

Are we really supposed to believe that the feds looks at these charts and think "ya, this is pretty accurate, we are going to be alright."

I'm not convinced....   The first two charts shown below are my favorite, whereby the Chicago fed presumes both a rise in interest rates to 2% and a decrease in unemployment to just above 5% by 2016.  I don't even think most modern Keynesian economists would find this to be plausible, unless they are simultaneously ramping up asset purchasing programs?  I suppose the assumption that QEnfinity will stop before they begin to raise interest rates is a bit presumptuous, recklessness is trending.

For my next favorite graphic, I give you the Federal reserve assets and liabilities.  You can see that Fed assets in every class have shrunk miserably except for one: purchase programs.  The fed is holding 3.7 trillion in government IOU's.  That's 3.7 trillion dollars the government has spent that it otherwise would not have. He who says the fed is not an enabler of government debt may want to rethink some things.

GBP Technical Analysis and Outlook

It's no secret that I remain bearish GBP/USD.... and the technical setup now seems to be favoring this opinion.  The resistance around the 1.625 to 1.630 is very strong and goes back to April 2012; take a gander at the charts below.

The chart above is on a weekly scale and shows the resistance zone I am referring to. The chart below is a daily chart with a fib retracement.  A top seems to be forming around 1.625, and if you look closely, you can actually see the crossing of the Tenkan and Kijun lines of the Ichimoku cloud (bearish sign). 

While its best to see a little bit of follow through to the downside before shutting the door and calling this a bearish reversal, i'm going to add slightly to my current short position now.  The reasoning is simple, any time significant technical resistance aligns with fundamental directional reasoning, the situation is unmistakably +EV.  If it confirms to the downside I may add again.... go big or go home right.  It wouldn't be unexpected for the pair to go up and bump that 1.625 to 1.630 ceiling a bit, but I highly doubt we will break through it entirely.  The longer this pair remains directionless, the more I believe it will begin to favor the downside as we approach further tapering expectations from the fed and more accommodating banking policies from the BoE and a maintained asset purchase program.

What about the other fundamental drivers you say??  Take your NFP number and your quarterly GDP and throw them in the toilet.  These numbers cause market reactions only because they have influence over the fed's monetary policy.... but these numbers are manipulated and watered down at best.  Fed policy is all that matters right now.... Imagine an old rope that has been taped back together so many times that none of the original rope exists anymore, only tape.  The tape is the feds monetary policy, its been forced into a corner and only has one way that it can go.

Evaluating Bitcoin as a bubble, investment, and payment system.

Where to start.   Lets start with the bitcoin as a form of currency.  Fitting adjectives to use to describe bitcoin as a currency are fiat and decentralized.  Bitcoin has no intrinsic value, however it does cost a small amount in energy costs to mine a bitcoin.  The argument that this in itself gives the currency value or that the value should be based upon this is fools logic.  Bitcoin's value is derived from confidence like any fiat currency, and thus bitcoin hardly fits the traditional Austrian value of "money".

So if bitcoin has no intrinsic value, does that automatically make it a bubble?  To be technical (per definition), its a yes..... but an argument can be made that its value is relatively sustainable and thus it seems to fall in a slightly more gray area than more obvious bubbles (US treasury bonds).  Besides, let me remind you that bubbles can form and build successfully over hundreds of years.

This brings me to bitcoin as an investment.  As with all assets with no real intrinsic value there's a bit of risk involved with investing in bitcoin.  More risk than certain high profile tech equities with little to no liquidation value?  Maybe, but its all very tricky to evaluate when you get into the realms of zero intrinsic value and positive expected growth.   First and foremost I would always recommend investments in things like physical silver, gold, commodities and fundamentally sound companies/bonds.  That being said, the bitcoin train shows no sign of slowing and offers some great risk/reward opportunities for investors, and even more for businesses and consumers.

As a currency, or medium of exchange, it has many benefits that make it attractive in comparison to traditional centralized fiat currencies.  It's instantaneous, relatively anonymous, and cannot be controlled by any one entity making it largely corruption proof.  This is a huge advantage over traditional fiat currencies and one can largely contribute bitcoin's success to the combination of those three factors.

In summation,

Bubble?  Yes.
Bullish?  Yes.

This may be contradictory, but the bottom line is that the demand for bitcoin as both an investment and payment system is hard to argue with.  I think this bubble has a very long way to go before dropping dead.

FX Updates

Its been a while, but not much has changed on my front.  I'm still short GBP/USD (though this trade is becoming quite a bit "out of the money").  Looking to be long USD/JPY at next dip.

The debt ceiling debacle and latest fed chair news has got dollar weakness running rampant.  This is to be completely expected.  If i've said it once i've said it 1000 times:

The "debt ceiling" is arbitrary and will be continuously raised until the collapse of the dollar.

There is no recovery.

It is impossible to end QE at this point (not impossible to taper.... but we will soon see that the economy will require more and more QE to function at desirable levels.)

Despite all this, I remain on the side of dollar strength over the next year because I believe we will attempt the taper, and lets face it, many of our friends across the pond are frankly even more irresponsible than us.