Two-Lip Bubble

There have been a lot of loose lips flapping about Bitcoin, and its brethren cryptocurrencies in the last week. Ron Insana, Mohamed El Erian, Jamie Dimon, and now Ray Dalio have all taken turns at trying to talk down the validity of these volatile, yet innovative financial advancements. As this week's rebound is showing, cyber-dough is a concept whose time will come. Talk is cheap, though, and all it has done is reinforce my thinking on the topic.

Like any disruptive technology, cryptocurrencies are a threat to incumbents that has only prompted knee-jerk dismissal. Dimon's claim last week that Bitcoin is a"fraud" and represents a "tulip mania" not only showed an imperious ignorance but a touch of fear mongering as he threatened to fire anybody at JP Morgan who dared to 'speculate' in the cyber currency. Wall Street's resident financial Master of the Universe was juuuust a bit over the top.

OK Jamie boy, let's take a quiz on disruption. Connect the terms that relate to one another in the following lists:

Post Office Email

Taxi Uber

AMC Theater Hulu

Hilton AirBNB

Chalkboard Bloomberg Terminal

JP Morgan Etherium

Dinosaur Comet

Ok, I made it too easy for you. The answers are right across from each other ... staring you right in the face. Like in real life.

As I have argued before, there is no turning back from the deflationary future that will be facilitated by a computer connected to the web. The future of commerce is in non-hierarchical, distributed networks. Those who are used to centralized control with traditional channels, are feeling threatened ... as they should be. Jamie knows little about this future and his cavalier dismissal speaks volumes about the sense of denial that pervades traditional banker's collective groupthink on fintech.

What Bitcoin does best, constructed as it is in a widely distributed system, is offer a solution that has no 'central banker' to control it. It provides a major advancement in the efficient transfer and settlement of large payment transactions. Entrenched Wall Street bankers have no edge on the nimble, low cost entrants that are likely to adapt to the new financial services paradigm.

Last week showed the resilience of the new currency model. The prohibition on crypto-exchanges announced by China last week is ultimately doomed to failure as a control mechanism. The internet is too slippery to be so easily tripped up by such a naive and parochial attempt at financial control.

The naysayers have a muddled view of the value propositions that Bitcoin has offered. At once a medium of exchange, a store of value and a speculative diversification vehicle, cryptocurrencies are just beginning to sort themselves out in the new-age fintech world. The crypto-bears point to the dominance of speculative demand and its effect on volatility.

Like the early dot-com internet days, the current Bitcoin mania is a wild west phase of discovery and adoption. This is a temporary phase along the way to a stable, trusted mechanism of exchange that reflects the true 'value' of cryptocurrencies.

Every financial service provider worth his/her salt should now be quaking in their Blundstones. The value proposition in your industry, once based on the propriety of information and its centralized control, continues to be commoditized and debased again and again. Like the dinosaur, it is also unlikely to return anytime soon.

MARKETS

RISK MODEL: 5 out of 5 = risk on!

Notable charts:

A Massive rebound in risk-on for AAII Bull/Bear ratio;

A potential double bottom in the yield curve with the 2YR versus 10YR differential;

Which, when combined with the currently much improved global growth data, should lead to a rebound in the cyclical value play against the current leadership tech-heavy growth sector;

We are set up to rally cyclicals into the seasonally strong second quarter of next year and the last hurrah of the market will then be complete. In a perfect world, the Fed will then tighten into the surge in economic strength as cyclical inflation will prompt such a response. The curve will slowly invert as the short rates will rise independently of long term rates. The long end will stay pinned by demand stemming from the secular forces of deflation and risk management as well as the dampening effects of the rising cost of credit. Voila! Bear market!

Unfortunately, this is not a perfect world so I'm sticking with the weekly reads from the model. Long for now!