As the largest monetary expansion in history fails to contain the long-term debt cycle that ended in 2008 (see The 40-Year Market Distortion Unwind), while spurring unprecedented levels of moral hazard, the barely-hidden financial crisis stands as proof that Predator-Prey Resource Competition Dynamics governs mankind as it does all living things — regardless of the language constructs that power elites have been spinning over the ages. Ultimately, individual rights to property, mobility, and self-defense continue to be trampled under the 21st Century Schizoid Man’s Logic of Violence.

As the 21st Century approaches its first quarter end, it becomes ever more obvious that once the generation of US President Thomas Jefferson faded from the scene in the early 19th Century, neither “democracy” nor “individualism” had ever been truly guaranteed — and did not persist. In 1831, political philosopher Alexis de Tocqueville noted: “…having thus successively taken each member of the community in its powerful grasp and fashioned him at will, the supreme power then extends its arm over the whole community.” Two centuries later, his words resonate louder than ever to those of an independent mind, unshackled from the mainstream media.

Sadly, nearly a century before Jefferson’s monumental contribution to the world, the political-financial elite in England had already begun expanding unfunded credit cycles. Since 1694, the Bank of England (BOE) had been arbitrarily debasing its currency and expanding credit, knowing this would shock nominal prices higher. The BOE founders and their entourage quietly seized prime income-producing assets before real-economy asset-prices soared. Predictably, unlimited money expansion bumped up against physical inventory size, causing asset and commodity prices to soar — until aggregate demand collapsed and nominal prices crashed too. Regrettably, against Jefferson’s wishes, the BOE template — which bypassed democracy — was adopted in the USA, and the same happened. In fact, had it not been for the oil empire that made the US Dollar more dominant than Gold for several decades into the 20th Century, the expanding global adoption of the BOE template would long ago have taken G-7 nations to the dog-eat-dog world where Zimbabwe, Venezuela and other nations languish.

Unfortunately, the BOE template still prevails around the globe. Whatever actions are taken to neutralize it are almost always doomed to fail, as prescribed by the simplest differential equations ever devised: the Lotka–Volterra Predator-Prey equations, which prove why the linear-math models of Neoclassical Economics absolutely fail to describe the dynamics that govern human ecosystems. Only System Dynamics can fully validate the interactions that rule human economics and are intrinsic to all ecosystems (see Predator-Prey Economics). There is no better proof of this than the top chart, where the blue “Financial cycle” curve “kills” the red “Business cycle” curve, as the latter begins to dip irreversibly after 2008 — despite the titanic credit expansion by G-7 Central Banks to save Globally Systemically Important Banks (GSIBs), which have flooded the world in fiat currency and debt for the past 14 years. The GSIBs have used ploys straight out of the 1966 Report from Iron Mountain, which specifies, as a justification, using substitutes for war that must (1) be economically wasteful, (2) represent an apocalyptic threat, and (3) provide a credible excuse for making people serve the government’s will. What the “Iron Mountain” report written by James K. Galbraith and members of the think-tank predecessor of the WEF, failed to mention is that, except for scaring citizens into giving up their individual rights, wars rarely serve many other objectives. Instead, the most ruthless factions in a nation’s industrial-military complex are presented with a kaleidoscope of opportunities to encroach on the privacy and property rights of ordinary citizens for the sake of “national security.”

In conclusion, as the world reaches the end of the current long-term debt cycle and commodity purchases become unaffordable, regardless of how much domestic currency or sovereign debt G-7 economies issue, the global ratio of production versus consumption is likely to reverse, with interest rates moving towards their 5% nominal geometric-mean of 5,000 years. That will strip naked governments’ highly levered, illiquid and inefficient monetary scheming. Their four decades of interest rate distortion will likely not survive the onslaught of real interest rates and truly capitalist competition… Thank goodness!

Fortunately, as humanity faces the current cycle ending, we are the first generation to have access to a new monetary technology that can endure longer than ornamental rocks. Its name is Bitcoin, the only payment in specie ever invented to be impregnable to government decrees, counterfeiting, shipping blockades or the threat of violence.




“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.”
John K. Galbraith, 1975 “Money: Whence it came, where it went”


“Gentlemen, you can’t fight in here” … After Bitcoin Replaces Fiat!

“Bitcoin is the first example of a new form of life.
It lives and breathes on the internet.
It lives because it can pay people to keep it alive.
It lives because it performs a useful service that people will pay it to perform.
It lives because anyone, anywhere, can run a copy of its code.
It lives because all the running copies are constantly talking to each other.
It lives because if anyone copy is corrupted it is discarded, quickly and without any fuss or muss.
It lives because it is radically transparent: anyone can see its code and see exactly what it does.”

Ralph Merkle

The main reason I dedicated nearly two years (2015–17) to study how Bitcoin works was an intense mix of incredulity and curiosity. It was hard to believe that a mysterious hacker had found, implemented, and abandoned! Triple-Entry Bookkeeping (“TEB”), the solution, I had found (accidentally) to Systemic Financial Risk*. Or believing that, before vanishing, alias Nakamoto had left running the digital equivalent of a perpetual motion machine. Except, I had to admit that just as TEB had come along in 1989 (see bottom), microprocessors had already opened up a nonphysical reality where the absence of Newton’s “external unbalanced forces” could enable a digital perpetual motion machine to “live” on the internet, as Merkle put it. In essence, Satoshi had proven Newton right: “The laws of physics indicate that perpetual motion would occur if there were no external-unbalanced forces.”

A secondary, more mundane reason is that, although I had enough informal computer knowledge to understand the basics, it wasn’t enough to understand cryptography, without taking several months of online courses to scrutinize what Satoshi had actually achieved.

*I bumped into TEB in 1994, only because one of my professors at Tepper School of Business (Carnegie Mellon) had invented it just 5 years earlier and nearly 500 years after Double Entry Bookkeeping.

Simultaneously, I had been studying Systemic Financial Risk since 1989, when the SEC’s Paul Mulford unilaterally changed decades of FSAB regulations (and common sense) in order to allow banks to register Latin American Debt at FACE value, by just taking it out of our trading book and registering it into our maturity book (as if they were Treasury Bills or near maturity bonds).

Later, when Nicholas Brady came up with his nominal face value exchange plan (versus net present value logic), did it become clear to me why they had changed our mark-to-market rules entirely. An immoral scheme that left no doubts in my mind, that financial sector regulators were fully captured by the banking cartel, who knows since when.

Thus, Bitcoin was the first time I saw a functional application of TEB, and since I considered it the final solution to global systemic financial risk, I had kept on searching for any meaningful implementation of it. Once I understood Bitcoin’s technological and historical significance, I could only wonder if Prof. Ijiri had ever seen his majestic invention at work, before he passed away.

To give you a sense of the vastness of information Satoshi handled better than others in many fields where they are experts, notice in the brief below, that just knowing the fundamentals of Prof. Ijiri’s invention would be a formidable feat for a non-financial professional, furthermore being so familiarized with its principles, as to be able to unequivocally encode them in an algorithm that has been flying solo, while interacting with millions of people and billions of transactions with a 99.98% uptime record for over 13 years. Let alone the depth of knowledge** needed to master the interactions of the myriad scientific, logical, and behavioral principles that keep Bitcoin overcoming adversarial opponents of all sizes, both in the physical and digital realms, as if such an invention had already been maturing over several decades.

** To illustrate, ignoring that Bitcoin is purposefully coded in Non Turing Complete language (NTC code), doomed ETH from the start.

Oswaldo Lairet
Fund Manager & Financial Researcher

Since Triple-Entry Bookkeeping* (“TEB”) arrived in 1989, it had been expected to eradicate our financial system’s dependence on Double-Entry Bookkeeping’s unavoidable byproduct: Centralized Trust. Thus, TEB would eventually stop our global financial system’s exponentially growing degree of Systemic Risk. Surprisingly, it was not until 20 years later, when Bitcoin’s activation validated TEB, that it became widely known. Meantime, Centralized Trust reached a point beyond which, it could only subsist, under a mantle of central bank monetary maneuvers, collusive practices, and concealed gate-keeping constraints that netted a web of hidden encroachments on privately-owned financial assets. Since then, the negative gap between real and nominal global bank capitalization has been fixed by globally expanding sovereign debt and central bank balance sheets to help GSIBs’ cover their chronically deficient Loan-to-Value ratios while compressing real interest rates. A policy that, aside from conflicting with natural law, brought global Real GDP expansion to a halt.

Conversely, Bitcoin’s most transcendental innovation was to achieve simultaneous, secure, and irreversible consensus, prior to registering bookkeeping entries on a ledger, shared among innumerable, unrelated, and globally disseminated parties. In turn, Bitcoin participants receive a verified and continuously updated copy of their digital ledger that replaces every one of the constraints previously preventing them from taking full and instantaneous control of their assets, for a set of cryptographic keys that only they can access.

In this context, it becomes clear that by providing Unconstrained Access to Privately-Owned Financial Assets, what Bitcoin truly digitized and decentralized is Trust.

  • Tepper School of Business Professor of Accounting and Economics Emeritus Yuji Ijiri developed TEB in 1989 ~500 years after the mathematician, Fry Luca Pacioli formalized Double-entry bookkeeping.


“Capitalism is the only system of economics compatible with human dignity, prosperity, and liberty. To the extent we move away from that system, we empower the worst people in society to manage what they do not understand.” — Frederick Hayek

Venezuela epitomizes Hayek’s dictum. It enjoyed the world’s fourth highest per-capita income in 1961, when it established the political system that over the six following decades, it tenaciously expanded, until fully abolishing capitalism and destroying its economy. 

Visualizing how the progression from one wealth-extreme to the other happened, entails charting how each of the dominant economic regimes, before and after 1961, impacted Real GDP per capita (dotted line) and oil production (continuous red line), versus Oil price (continuous blue line). Below, a few more pointers:


Blue– Capitalism: GDP and Oil production grow unbounded, despite Oil price

Yellow– Socialism: GDP binds to Oil price and Oil production drops materially

Red– Communism: GDP depends on Oil price and Oil production starts a persistent descent


  1. The coloring of the labels coincides with the periods along the timeline when Venezuela, formally or not, adopted each type of economic policy. Note that GDP & Oil Production outcomes closely follow the rubric above, even for the shortest time period (89- 92).
  2. Though in 1961, Venezuela adopted central planning as the guiding principle of its economy, it continued to enjoy the same degree of economic freedom that allowed foreign concessionaires to invest capital, knowledge and technology in developing oil production to the high reached in 1970, when our new constitution began impacting it.
  3. Though constitutionally allowed since 1961, the nationalization of Venezuela’s oil business was not openly debated in Congress until the late 60s. Yet, by 1970, the certainty that the oil industry would be nationalized had pushed foreign oil companies to stop all new investments in oil exploration and production expansion.
  4. Even as oil production begins dropping sharply in 1970, GDP doesn’t follow until 1977, a year after oil nationalization. What postponed the decline was the sudden and massive inflow of petrodollars, coming from the multiple oil price increases that began in 1973.
  5. Capitalism returns in 1989, and though cut short by a military uprising that forces the president to resign, its economic-liberalization and government decentralization reforms go on to benefit Venezuela for at least a decade. Note also that, as per the rubric, GDP & Oil production begin growing, despite oil prices dropping during most of this period.
  6. Upon the return of Socialism, economic difficulties caused by years of low oil prices and a local banking crisis forced the new president to honor the previous government’s plan to reopen Venezuela’s oil business to foreign oil firms, under the Orinoco Oil Joint Ventures. Once again, Capitalism is what brings oil production back to higher levels.
  7. Communism begins under a democratically elected militaristic regime, that eventually seizes power via undemocratic maneuvers and starts an indiscriminate wave of company expropriations, FX and economy-wide price controls, and many other counterproductive economic policies that over time bankrupted Venezuela’s economy.



Only one year after measuring how much devaluation the Chavista regime had imposed on its citizens since 1999, the aggregate sum of counterfeit money the Venezuelan central bank has issued totals  6.5 million times the amount of Bolivars available in Venezuela, when Chávez came to power in February 1999.

As a benchmark of Venezuela’s purchasing power for many decades, our “4.30” represents an ideal gauge to measure the degree of embezzlement gulped down by the current regime since 1999.

In fact, the monetary dilution of the past 19 years has been so many times greater than “4.30,” we need to use a logarithmic scale to visualize it. Additionally, log scaling allows us to expose the scam, using data directly available on Banco Central de Venezuela’s web page, rather than using conversions that require any explanation.

As the chart confirms, via massively printing Bolivars, the government diluted all of the capital Venezuela had amassed until 1999, plus every resource that entered our economy since then.



Monetary Base

Inorganic Money



Edition (Spanish)


Banco Central de Venezuela

Dólar Today

U.S. Energy Information Administration

Organization of the Petroleum Exporting Countries

Servicio Nacional Integrado de Administración Aduanera y Tributaria de Venezuela

Ministerio de Petróleo y Minería de Venezuela



As a benchmark of Venezuela’s purchasing power for many decades, our “4.30” represents an ideal gauge to measure the degree of embezzlement gulped down by the current regime since 1999.

In fact, the monetary dilution of the past 18 years has been so many times greater than “4.30,” we need to use a logarithmic scale to visualize it. Additionally, log scaling allows us to expose the scam, using data directly available on Banco Central de Venezuela’s web page, instead of conversions that would require further explanation.

As the chart confirms, via massively printing Bolivars, the government diluted all capital Venezuela had amassed until 1999, plus every resource that entered our economy since then.



Monetary Base

Inorganic Money

Implemented by Argentina in 91



Edition (Spanish)


Banco Central de Venezuela

Dólar Today

U.S. Energy Information Administration

Organization of the Petroleum Exporting Countries

Servicio Nacional Integrado de Administración Aduanera y Tributaria de Venezuela

Ministerio de Petróleo y Minería de Venezuela




Como parámetro del poder adquisitivo que disfrutó Venezuela durante décadas, el “4,30”, representa un indicador ideal para medir el grado de malversación impulsado por el régimen actual desde 1999.

De hecho, la dilución monetaria de los últimos 18 años ha sido tantas veces mayor al “4.30”, que necesitamos usar una escala logarítmica para visualizarla. Además, esa escala nos permite exponer la estafa, utilizando datos directamente disponibles en el sitio web del Banco Central de Venezuela, en lugar de utilizar métodos que requieran más explicaciones.

Como confirma la gráfica, mediante la impresión masiva de bolívares, el gobierno diluyó el patrimonio que Venezuela tenía acumulado hasta 1999, más todos los recursos que ingresaron a nuestra economía desde entonces.



Base Monetaria

Dinero Inorgánico

implementado por Argentina en el 91






Primera edición

Última edición (inglés)


Banco Central de Venezuela

Dólar Today

U.S. Energy Information Administration

Organization of the Petroleum Exporting Countries

Servicio Nacional Integrado de Administración Aduanera y Tributaria de Venezuela

Ministerio de Petróleo y Minería de Venezuela



If Predator-Prey Economics formally existed as a field of study, it would address human economic interactions from the perspective of Resource Competition DynamicsPredator-prey dynamics have been used since at least 1967 to model the growth cycle and more recently, Debt vs Capital, its most intuitive use considering that the former must feed on the latter to survive. This application of the model gets even more interesting when the interest from Debt accrues at a greater Internal Rate of Return (IRR) than the income accruing from Capital. In this case, their “predator-prey” dynamics produce an unstable feedback system. This is precisely the outcome that Graph 1 confirms and Hyman Minsky’s 1985 Financial Instability Hypothesis predicted: The leverage to income ratio grows exponentially in a wave of ever larger amplitude. Yet, in a world run by hard-core Keynesians (not Post-Keynesians!), it’s only fitting that neither the chart showcasing all stages of this super-Minsky cycle nor its dire prognosis for the future, shall surface until our generation’s true Minsky Moment arrives.


Typically, the Minsky Long Cycle ends with Trade retreating until it reaches global scale, while present-day “Trade War Warriors” such as Trump, Le Pen, Farage and other isolationists  begin winning elections worldwide. Hence why, in my view,  we’ll see the collapse of our current Globalization economic model over 2016 and 2017.

Yet, as per the essay linked above, the crash is bad for the “predator,” but good for “the prey” …Over the long-term.


As the Steel-Dragon flies over its 2009 high, it validates our premise that China’s colossal money printing is what truly underlies the world’s economic “recovery” since 2008. Just as it created $30 trillion of Yuan-denominated debt in 7 years, China may have injected upwards of $2 trillion over the past three months.

Putting these numbers in perspective, explains how Chinese steel makers were able to produce in March (first chart), about 80% of annual US production or nearly ten times more than US steel makers over the same month. Yet, as shown on the second chart, the same money that brought steel production to a global record in March, helped fuel its price to $407/ton at the close today. That’s a 48% increase since December.

Oh well, China continues to upend the laws of Supply and Demand, as it’s been doing since 2008, when it discovered the modern central banker’s alchemy: QE Levity!
Sound familiar?

Steel Production

Steel Price vs Chinese Production



Oswaldo Lairet – Sequoian Financial Group Research

Time-decay makes this post more valuable as is (Spanish), but headings may help you choose what part to translate, if any!


Nos aproximamos al punto en la historia, donde la élite politico-financiera mundial (el 0.1%) pierde su milenaria ventaja informativa…En una sola palabra: “Blockchain,” una base de datos* cuya emisión, verificación y compilación histórica es compartida y actualizada cada cierto tiempo (10 minutos en el caso de Bitcoin) por miles de computadoras conectadas entre sí, vía internet. La automatización del proceso fue creada en 2008 por alias Satoshi Nakamoto (white paper) para crear Bitcoin. Hoy, el potencial de Blockchain para descentralizar el poder se evidencia en aplicaciones como EthereumCryptoNoteBitnation y otras, diseñadas para eliminar alcabalas erigidas por el 0.1% hace milenios. Bitcoin, por ejemplo, comienza a surtir sus primeros efectos “igualadores.

*En la mayoría de los casos, un registro contable de tres entradas.


Desde hace unos 15 días, Ethereum hace afirmaciones de gran transcendencia en su página1. Primero, aun cuando Buterin podría haberlas hecho desde que diseñó el algoritmo hace 5 años, no lo hizo hasta tener todo comprobado. Segundo, para entender el grado de veracidad de sus afirmaciones, el mejor ejemplo lo proveen aquellos Bitcoin Wallets, que ni siquiera sus creadores pueden intervenir. De hecho, si el dueño de una des éstas cuentas, pierde su clave privada (el protocolo PGP requiere una clave pública y otra privada), perderá todo el dinero almacenado allí, tal como sucedería si pierde una cartera con dinero en efectivo.

Los actores financieros buscan la forma de crear sus propios blockchains, pero para ser inmanipulable (censorship resistant2), el registro contable debe compartirse con miles de computadoras (nodos o nódulos) que confirmen cada nueva versión y ninguna red bancaria podría llegar a tener mas de varios cientos. Sin embargo, un registro compartido siempre sería una mejor opción para ellos, que el sistema actual3. Algunos de ellos, parecen haber infiltrado sus programadores en los equipos de blockchain mas avanzados. Otros han creado empresas tipo Coinbase, Coinsetter, Gemini, etc., que no dejan de ser simples intermediarios financieros. Es decir, el dinero que tengas allí, sigue siendo tan susceptible al fraude, intervención, riesgo sistemático, etc. como el que tienes en el banco4.

“Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference. These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middle man or counterparty risk.

2Censorship Resistant: If enough of the validators collude maliciously, they can prevent a particular transaction from being confirmed in the blockchain, leaving it permanently in limbo.

3A mayor cantidad de nodos, menor el poder que cada uno (o de un grupo de ellos), para crear transacciones falsas, modificar la base de datos que comparten o de cualquier manera realizar una infracción al protocolo original que gobierna su base de datos. En una contabilidad de activos, por ejemplo, esto significa que la posibilidad de crear dinero o activos falsos, transferir a terceros o modificar la cantidad total de activos se va reduciendo a cero, a medida que sube el número de nódulos.

4Cuanto menor sea el número de nodos, mayor es el poder que tiene cada uno (o un grupo de ellos) para influir indebidamente en el contenido de la base de datos compartida. En todo caso, cualquier sistema de validación tipo blockchain, le confiere menos poder a los nodos que al titular de una base de datos centralizada tradicional (caso de cualquier banco actual o de los bancos centrales que los regulan).


Pregunta: ¿De dónde sacan los bitcoins…siendo que es una unidad de intercambio finita? Respuesta: El intercambio no es finito: Existen en circulación unos 15.3 millones de bitcoins, pero aun cuando lleguemos al total de 21 millones que permite el algoritmo, el precio y los préstamos denominados en Bitcoin, hacen que su capitalización sea ilimitada (anda por $6.3 billones). Entender este punto se hace mas fácil, comparándolo con el oro: La mayor parte de las reservas ya fueron explotadas, pero eso no limita su capitalización, ni el numero de transacciones que se realicen con él. Posiblemente el infográfico abajo sólo sirva para enredar mas las cosas, pero en mi opinión, el autor hizo un gran esfuerzo para reducir el proceso a sus partes principales.

BTC Diagram

Los principales afectados están preparándose de múltiples formas para proteger sus parcelas de poder. Por ejemplo los bancos,  por sus activos intelectuales y organizacionales pueden entender que si no absorben, manipulan o de alguna forma neutralizan este nuevo tipo de Internet (el verdadero 2.0), pronto terminarán como las tiendas de música, las librerías, las editoriales y muchos otros actores en sectores avasallados por Internet 1.0.

Por otra parte, los burócratas que pueblan las alcabalas territoriales, aun no le tienen suficiente respeto a esta amenaza tecnológica. Tienen tantos milenios usufructuando sus barreras de peaje tradicionales (y las que inventan todos los días), que no se molestan en averiguar si en este caso, pueda ser necesario prepararse.

Con simplemente ilegalizar Bitcoin, creen que resolvieron el problema: El mapa abajo, muestra que hasta ahora los primeros en erigir barreras legales a Bitcoin (amarillo y rojo) son países socialistas, comunistas o de pasado socialista/comunista. Sin embargo, la mejor prueba de lo fútil que es tratar de ponerle el cascabel al gato, cuando no hay gato! es que en China, uno de los mas autocráticos entre este grupo de países, es donde se transa el mayor volumen de Bitcoins en el mundo (abajo).

BTC Legal Map

BTC Volume


Regardless of experiencing a 25% GDP Decay since 2007 (Table 1, Page 3 &updated graph, above), the USD has appreciated by 15% since 2011 (DTWEXM), as the US decreased its oil imports by 60%.

Recently, the US became once again, the world’s largest oil producer, while oil imports have dropped from a 2006 high of 13.5 million barrels per day (mbpd) to 5.0 mbpd in May (EIA chart). The corresponding reduction in dollar payments to foreign oil producers, created a scarcity effect that eventually, begun revaluing the dollar.

Revaluation dynamics should continue, as US companies/workers refine their unparalleled Shale Oil expertise, to ramp up production. Additionally, to the extent total US oil production surpasses other producers by an even larger margin, conditions become ideal for repealing the country’s 40 year old crude export ban.



Oswaldo Lairet – Sequoian Financial Group Research


Since our start in 2005, we have sought to keep reports entertaining, even while including the charts, links, mathematical proofs or documentation supporting our opinions.  Like our 2006 and 2007 reports, this one is meant to warn you in advance of potential market trouble. This time, however, we set up a hedging structure that may help you protect your current investments from such a possibility. 

Foxy Loxy:”How do you know the sky is falling?”

Chicken Little: “Well, if you look at Chart 1, since Dec.11, the total amount in OTC (Over The Counter) Derivatives Notional (Notional), as published by the BIS (Bank for International Settlements) has been hovering near $650 trillion, the level it reached, heading into the Jul.08 market collapse!”.

Chart 1.

Foxy Loxy: “Actually, if you had included all contracts in your slightly-outdated chart, the figure would be closer to $700 trillion by Jun.12 and that´s not counting the $300 trillion that were effectively subtracted from pre-2010 aggregates through “Notional Compression” in IRS (Interest Rate Swaps) and CDS (Credit Default Swaps).”

Chicken Little: “Are you saying that, in terms of pre-2010 Notional, the Jun.12, BIS aggregate was really One Quadrillion Dollars (one thousand trillion USD)? That would be almost twice the level of Notional at the start of theHousing Credit Crisis ($586 trillion), marked by Dec.07 in Chart 1″

Foxy Loxy
: “Yes, but Notional itself doesn’t represent ON or OFF balance-sheet risk, it´s a nominal value upon which derivative-market participants compute a percentage to settle periodically, among themselves. AND …of course, it´s also “the living proof” for every fantastic legend out there, whether it´s planetary hyperinflation, gold´s inevitable rise to $5,000/oz or the “end of (take your pick) …the US dollar” …all fiat currencies” …the financial system” …modern civilization”, etc. What these sources never mention is that next to Notional, the BIS table shows GMV (Gross Market Value) and quite explicitly, the actual balance-sheet risk: GCE (Gross Credit Exposure). In fact, using the same BIS table you used to draw Chart 1, I drew Chart 2. But, note that from Dec.08 to Jun.12, while Notional hits $6 to $7 hundred trillion in Chart 1, GCE actually drops from $5 to $3.7 trillion.” 

   Chart 2.

Chicken Little: “Funny you´d mention that 25% drop in GCE, having just acknowledged that 30% of Notional magically disappeared from the aggregate after 2010! Also, while referring to the $5 trillion top in GCE, you forgot to mention howthe world´s financial system spiraled “like a headless chicken” into that amount! Oh well, I´ll fill you in: When markets were collapsing in 2008 and net settlement obligations had reached $5 trillion, banking giants had only $3.1 trillion in collateral (at market price) plus $1.2 trillion of net worth (tangible equity as opposed to Tier 1 capital). In case you want to keep as a secret “who put up the missing $700 billion” or want the whole episode to remain unreported, as themedia did “not to scare anyone”; just have one of your high-placed, furry friends reap page 20 from this sobering OECD recount.”

Henny Penny: “Sorry to interrupt Chicky pie! But, you forgot telling Foxy dearest, that Notional Compression is a lovely, but rather sumptuous manner of saying “Netting”, which in our last brush with systemic meltdown, didn’t quite work as advertised by those charming young fellows at “Sacs of Gold”! Had the Fed not intervened to save the bottoms of our beloved “netters“, just the CDS blowup at AIG (American International Group) on its own, would have many of them, furry critters from around the planet, still “netting” in bankruptcy court! Again, my apologies and heartfelt thanks for accommodating my disruption.”

Chicken Little: “Much obliged! Henny Bunch! I am glad; all of us birds are keeping track of Foxy´s unintentional slips of memory! I was about to say that if Notional is irrelevant, then: why did rollovers from Dec.07 to Jul.10 in Fed letter-soup, liquidity-programs credits reached over $16 trillion for the banks listed on page 131 of the GAO Report to Congress? And why then, is Reserve Bank Credit (short-term liquidity assistance) still rising in Chart 3, having already jumped 600% since Aug.08?”

Chart 3

Foxy Loxy:”You really are …the ultimate Chicken Little! Why would anyone add up the nominal size of rollovers? Theonly conceivably useful information from that report page is the relative amount of assistance received by each of those banks! Regarding Chart 3´s significance, just answer one question for me: Has any of you birds, experienced anything close to a 600% increase in Real Economy prices since Aug.08? By the same token, take a good look at Chart 4 and note that not even doubling public debt to $16 trillion (in red) since Aug.08, has kept Money Velocity (in green) from falling to a 67-year low! Oh, and BTW, notice how the banks you criticize so much, have actually slashed $3 trillion of their own debt over the same period (in blue).”   

Chart 4.

Turkey Lurkey: “Foxy dear, you really need to get out of the woods more often! Banks didn’t stop borrowing out of self-restraint! What keeps decimating the aggregate balance of US financial debt is brutal interbank-lending attrition! Remember that following the world´s “Lehman Momentthe TED spread spiked 500% because banks worldwide stopped lending to each other and didn’t budge until central banks intervened? Well, from that point on, interbank lending has continued to implode as much of the maturing bank debt is being repaid by central banks. That´s why Chart 4’s $3 trillion drop in financial debt, coincides with Chart 3’s $3 trillion top in Reserve Bank Credit.”

Foxy Loxy
: “Darling, you obviously skipped the chapter on Fisher´s equations in your Econ.101 elective! But, never mind, just Google up “MV=PQ=GDP” and be sure to check what each letter means! If you still don’t get it, here is what´s really happening: Banks have generally trimmed down on interbank borrowing, not only to diminish their dependence on wholesale funding, but also, because they can’t start lending massively to unqualified borrowers a la “pre-housing crisis” style, while qualified borrowers have been repaying debt and decreasing new borrowings. So, while money turnover (lending) decreases and Monetary Base (M) increases, Money Velocity (V), which is the quotient betweenthe two (turnover as dividend and M as divisor), must drop in value! In effect, what´s behind the drop in interbank lending is a drop in Economic Demand, which in turn, affects Output (Q) and Price (P) and thus, GDP.”

Chicken Little: “Wow Foxy, that´s quackery only Ducky Lucky would understand! That is…until Chart 5 confirms to him, that domestic orders (green) and imports (red) are up 26% and 29%, respectively, over their 2009 lows! So, your argument that “demand contraction” is behind the drop in Money Velocity is probably unfounded! Regarding Fisher´s monetary interpretation of Mill’s equation of exchange, you should know that it’s meaningless in the absence of interbank lending. Again, I’ll fill you in: In the centuries after the arrival of central banking, most observers had posited that fractional banking had a measurable effect on M and therefore on GDP. By the time Fisher formalized that relationship, using Mill´s formula, he realized that although you can control M, through central banking, V needs to be an unbound (independent) variable. That is possible, only if “fractional lenders” (private banks) have “unconstrained” access to funding from other fractional lenders (the interbank market).”

Chart 5.

Turkey Lurkey: “That might explain why $3 trillion of incremental Fed liquidity plus $8 trillion of incremental public debt have not been enough to outweigh $3 trillion in financial debt reduction. Obviously, public debt has none of the“fractional banking” power of financial debt, but the Fed’s money printing does! If the power of fractional banking is not working for the Fed, could it be, because much of its newly-created liquidity assistance has gone to repay the creditors of undercapitalized banks? If so, then a substantial part of incremental Fed liquidity is not available for bank lending.”

Foxy Loxy: “WHAT? What do you mean?”

Turkey Lurkey: “Well, Foxy, let’s say Bank ABC lost its capital during the credit crisis, as the value of its assets dropped below the sum total of its capital plus liabilities. But, then Lehman happened and regulators decided that, to avoid “financial catastrophe”, banking system losses should go temporarily unrecognized (A la Japan circa 1990). Since ABC’s debt was mostly short-term and from wholesale lenders, it needed to borrow funds quickly against the registered-value of its value-impaired assets. Since only the Fed can create money from thin air, this was the only entity that could lend against ABC’s assets at registered-value. Next, the Fed took ABC’s assets onto its balance sheet and lent itthe funds to repay its creditors in full.”

Ducky Lucky: “It gets even worse Foxy! By lending against the registered value of ABC´s credit portfolio, the Fed not only extinguishes interbank lending (which could still occur at some price below registered value), but eliminates thepossibility of negotiated renewals, which would preserve some of the interbank debt outstanding. Over time, as each new dollar of repayment, unwinds a geometric multiple of credit-dollars created over three decades of unconstrained interbank lending, Money Velocity approaches its historical minimum.”

Foxy Loxy: “So there is no bank hoarding of excess reserves, as much of the 600% increase in short-term liquidity assistance provided by the Fed since 2008, has gone to repay pre-crisis debt on the books of bank-creditors! In theprocess, capital markets have not been allowed to clear prices for pre-crisis financial assets, effectively suspending interbank lending and with it, the astonishing amount of leverage that fractional banking could be providing to theunderlying growth potential of the US economy.”

Chicken Little: “Exactly why THE SKY IS FALLING!”


  • Why central bank “assistance” and not inflationary expectations, is the reason behind the post-2008, price-rise in Currencies, Commodities, Stocks and all other types of “Marginable Securities”. 
  • Why Inflation and Deflation are determined by Central Banks.  
  • How RWA (Risk Weighted Assets) and other Tier 1 Capital allowances are promoting “London Whales”. 
  • The launching date for Systemic Risk Averse Fund of Funds (SRAFOF), developed after years of research on which are the key strategic, operational and legal systemic issues to hedge for.


This month, investors absorbed some important news announcements, among them: the nationalization of the last four oil fields, a 35% drop in Central Bank Reserves, the IMF-withdrawal statement and the threat to nationalize the banking industry. Below we will try to figuratively deconstruct what these messages may mean for all “three” sides of the fence.


Suppose you are subsidizing several economies at once, including yours, but their demands keep increasing every month. Unfortunately, last July your economy’s gross monthly income suddenly stopped growing and has actually been decreasing since then. In effect, you have been running an escalating deficit that only became publicly visible when you had to pull out 35% from savings, even after issuing the largest one-day debt obligation in history. Yet, you tell creditors (especially those holding your currency) you are merely switching pockets and… they believe you. But, there is another problem, in the past few years, although you repurchased every external-debt bond submitting you to SEC surveillance, you still belong to a guild you must regularly open your financial books to. How do you get them out of your hair? Simply drop out. Foreign creditors may be a bit flabbergasted at first, but not to worry, they always come around. Finally, there is the issue of how to prevent local creditors from eventually deciding to cash in their chips and try their luck elsewhere. Easy, tell them that the tellers are just part of the casino and as such they can be nationalized anytime, together with the chips. At least you forewarned them!


All this time, no matter how obvious the direction we are going, there has been little you could do. In fact as time has passed, you have accumulated the largest amount of chips you ever had, because even after it became legal to exchange chips [through negotiable securities]; converting them would cause an accounting loss. By now the size of that potential loss is so huge; it leaves you no choice but to let balances grow and accept the puny interest rates they pay you locally. To top it all, the nationalization threat just complicated things further, because, no matter how big, well-known or international your local chip-holder is, as long as your account with him is under local jurisdiction, it just became an immeasurable risk.


Not everything is bad news though, until recently, no mechanism existed that allowed you to maintain your assets free from the risk of devaluation and/or nationalization, while keeping them in local currency. Last November, our parent company unveiled a Money Market Fund whose shares are local currency denominated, but as shown in the Bloomberg price-history graph below, they track exactly the movements of the parallel rate (shown in the next graph).  This price behavior allows you to hedge against devaluation without converting your chips to foreign currency (to avoid conversion losses). But the best feature of the fund is that it completely shields your assets from intervention: No matter what laws are changed or how many banks get nationalized, they have no jurisdiction over the fund. Additionally, as in any Money Market Fund, shares are 100% redeemable and can be liquidated every Friday in any currency you want.

If you would like to know more about the fund and why the financial service providers behind it are as large and trustworthy as your local provider, just send us a note to




Collateralized Debt Obligations, or CDOs for short can be created from many types of collateral, but the most popular lately are CDOs from MBS (Mortgage Backed Securities). The idea is to create some higher risk assets and some much safer ones, slicing up the MBS into what are called equity, mezzanine and investment-grade bonds. The equity takes the higher risk, and so it earns the higher return if things go well. But if things start to go wrong, the equity is lost first…and then the mezzanine. However, even if there’s quite a high rate of failure in the higher risk end, the investment-grade bonds still get fully paid out. In this way the bankers might, for example, convert a large package of MBS into perhaps 70% investment grade bonds, 15% mezzanine, and 15% equity. It is relatively easy to sell the high-grade investment bonds. Stamped with an investment-grade rating, these bonds are sold off to mostly respectable investment institutions. But the mezzanine, and particularly the equity, are harder to sell. In effect the 30% of the mortgages in the original MBS which were deemed on a statistical basis to be likely to fail, are concentrated into what investment insiders call “Toxic Waste”.  Enter the case of the Bear Stearns hedge funds:

Last week, increasing losses and redemptions induced the lenders of two highly leveraged (at least 10 to 1) hedge funds in “structured” instruments (Toxic Waste) to hit The Street with bid lists of CDO collateral loaded with subprime exposure.  The dearth of buyers willing to pay anything close to their “marked” prices forced the sponsor, Bear Stearns to step up and loan the hedge funds $3.2 billion. However, the specter of downgrades of similar securities and a possible contagion de-leveraging of CDO exposures throughout the market initiated a stock market plunges that is continuing today.

On the other hand, we keep telling you that 10-year US Treasuries is the only investment we believe in, no matter how much of them the Chinese may be selling. Last Friday, for the first time since the 10-year treasury yield started rising from a low of 4.602% on May 11th to a high of 5.316% on June 15th, it rose as equities dropped. This is quite significant in that it confirms a new top from which 10-year treasury yields will probably drop as they have over the past 20 years. You can check this behavior in Chart1 below. Notice that the RSI Readings over 70 (se dotted line) have marked peaks in interest rates and the current reading near 90 hints at either a pause or a pullback in rates.

CHART 1. Source:

In the meantime, the slowdown in retail sales is quite visible after peaking in early 2006, and has turned south sharply following the bursting of the housing bubble. This trend will likely continue heading if retail sales follow its historical relation to the yield curve as it has in the past, as the yield curve leads the trend in retail sales by roughly two years (advanced in chart 2 below).

CHART 2. Source: Moody’s Economy.comimage002

With such a negative housing backdrop, it’s understandable why retail sales are falling and consumers are putting off their plans to purchase big ticket items. Business equipment industrial production has clearly peaked on a year-over-year (YOY) basis and lags the shape of the yield curve by one year, indicating continued weakness for the rest of 2007.

CHART 3. Source: Moody’s

Finally, if you are going to keep some Treasury securities in your portfolio, you can either buy them from us or consider buying them yourself. It is quite easy to buy Treasury securities with a broker. Just go to the Treasury Direct web site ( and follow directions. The purchases are paid for by direct debit to your current bank account.


Tuesday, when markets were down huge, Bloomberg Television inquired what we thought of the PDVSA bond plunge of the past few weeks. We pointed out that PDVSA bonds had done nothing but follow the rest of Venezuela’s external debt bonds down in price. If you look at the first graph below, you will notice that since late march, when PDVSA bonds were issued, until yesterday, Global 34´s, for instance, plunged 15% compared to PDVSA 37´s which dropped a bit less. We told Bloomberg TV there were two reasons why PDVSA bonds performed a bit better. First, from issuance these bonds were arbitraged against Global 18s, 27s and 34s on the basis of “better yield, same debtor and similar period”. Secondly, we believe the bonds have performed better because Venezuelan institutions and individuals (who are still a majority of the holders) are historically prone to hold paper losses instead of realizing them. WHAT NEXT ON PDVSA As we mentioned last Thursday, there was a great chance we would see an overall market rebound. However, the fact that your PDVSA bonds were helped by the rally doesn’t mean you are of out the woods, but we expect that good core PPI figures today and possibly good core CPI numbers tomorrow could inject additional energy to the rebound and hopefully get your bonds higher. Just don’t wait too long after that to start exiting your positions. WHAT WITH TREASURIES China may be the reason behind the swoon in Treasuries of the past two weeks. As you can confirm in the chart below, at least $12.5 billion in 10-year Treasury notes were dumped by “Fgn Official & Intl Accts” during the first week of the plunge. I am sure this week an even larger figure will be reported. In our view, these sellers are Chinese because “they have got motive”. Increasing US rates revalue the dollar, devalue the Yuan and keep the Chinese BoP growing, especially now that China’s yuan rose to a record high against the U.S. dollar after U.S. lawmakers brought up pressure on Beijing to adjust its foreign-exchange policy. Our conclusion: let’s keep checking the weekly updates of the second chart below over the next few weeks. In the meantime, we have been buyers of 10-yr Treasuries this week. As you know, we think Fed rates this year are ultimately going down, not up.


US stocks

We are probable witnessing the last stage of a major bull market in US stocks. However, knowing if this stage will take a few weeks or a few months is what matters and that information is not yet evident to us. On the other hand, there has been a pickup in economic indicators that sent the 10-year Treasury note’s yield on Friday to a nine-month high of 4.986% (from 4.857% a week earlier). Barrons this weekend mentions that China’s central bank may be shifting some of its enormous Treasury holdings from notes to bills. The other explanation, that the market is betting on a second quarter rebound of US GDP, we tackle first under our usual report format below.


Real GDP grew only 0.6% in the first quarter, but the consensus is that capital spending will bring 3% growth back, partly on expectations that corporate profits will lift capital spending. However, corporate profits, (up 6.4% in the first quarter) are sharply trending down after five quarters of double-digit growth (see first chart below). On the other hand, consumer demand has been decelerating since the third quarter of 2006 (see next chart), so neither trend supports the pickup in capital spending argument.

With respect to the May jobs number (157k up), it is being questioned not just by perma-bear economists like Roubini, Ritholtz or Kasriel, but by everyone who cared to look deeper, as shown by Justin Lahart´s excellent analysis attached below. Finally, with respect to the strong pick up in manufacturing this quarter, it is obvious this is not in response to new demand from consumers but a natural consequence of companies throttling back production after wiping out 2006´s inventories in the first quarter. As consumer spending may be about to slow significantly (as real estate and credit-card credit taps out), manufacturers may have second thoughts, but for now, stock investors can enjoy the ride, probably until July, when everyone may realize that 3% growth level is not coming back in the second half.


As shown by Mayela Armas´report below, during the first quarter of this year, we spent $1.2 billion more than we earned during each month. We covered that deficit by issuing new debt and by using up our reserve savings. To be sure, we are not overspending on investment; we are merely financing our monthly public payroll. This partly explains why our reserves are starting to decrease so rapidly, the rest hast to do with the new arrangement whereby the Central Bank never gets to see PDVSA´s dollars before they get spent by the Treasury (also noted in Mayela´s article). In another key economic analysis, Victor Salmeron shows how, not even by boosting imports ($9.1 billion during the first quarter) to a 10-year high have we been able to stop inflation (30.2% in food prices). It looks like if we were able to reach the $40 billion import figure for 2007 (projected from the first quarter), it would have to come from consuming every cent from our liquid Central Bank reserves (some $18 billion –since about $7 billion are gold) and everything we get from PDVSA this year. Yet, even then, our inflation numbers will keep growing together with the incredible growth of our monetary base (60% over the pats 12 months). As pointed out in Salmeron´s article it doesn’t look like our economy is sustainable unless oil prices rocket up miraculously, but soon, because otherwise, it might come to be like the man says: “All this aggravation ain’t satisfactioning me”

In our opinion, there are three main factors behind future parallel rates, one is positive and the other two are negative:

From the minister’s announcement last week, Venezuela is about to issue $500 million in external bonds (Bolivian), together with $500 million in TICC before month’s end. He also announced that at some point during the second quarter, then country will issue another Bono-Sur package with at least $750 million in external bonds (Argentinean and Ecuadorian) plus $750 million in TICC.

The Central Bank´s Monetary Base stands at Bs. 116.899.747 million (see, which added to Central Bank CD´s outstanding of Bs. 48.950.964,00 (see, comprises a total of Bs. 165.850.711 million that can be converted into foreign currency. Simultaneously, Central bank reserves stand at $25.156 million (see, to which we cannot add FONDEN balances, because they are spent or in the process of being spent and thus cannot sustain currency conversion. Finally, if we divide Bs. 165.850.711 million into $25.156 million, we obtained that the currency’s Implicit FX rate amounts today to Bs. 6.603/$.

As pointed out above, US real consumer spending would at the heart of the coming recessionary process and if it gets confirmed over the next few weeks or months, it will trigger a stock market sell-off as both always precede recessions. A bursting stock market will bring down with it the prices of all commodities, including oil. If oil falls, the fragile state of our LOCALY GROWN economics, as pointed out above would begin a serious downward cycle.



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