Final 2020 Presidential Election Predictions

Early voting is underway and already more than 12 million votes have been cast. At this point in 2016, only 1 million votes were cast. We have turnout that is already 10 times the one in 2016. In 6 states – the more notable of which are Michigan, Wisconsin and Florida – more that 20% of the votes cast in 2016 have already been cast. There are lines around the country with people waiting all day to cast their ballots early and make sure they are counted by Election Day.

The ballots requested and already cast had the following party registrations: 52% of Democrats, 16% Republicans and 32% are not affiliated. You can assume that the independents by and large are voting for Democrats – let’s say 75%. If a person is voting early, it is because they are afraid of COVID. This means that 75% of the ballots already cast are for Biden and only 25% for Trump. Trump is already trailing massively.

Trump with his constant taunting, super-spreader COVID campaign rallies, overt voter suppression efforts and pledges not to give up power peacefully has absolutely panicked the American population. We have a total nutcase in charge of the nuclear codes and American law enforcement. In 2016, this was a hypothetical scenario. Now we have it in front of our eyes and we see how quickly Trump is destroying American democracy. Americans also now realize that American presidents are kings for 4 years. The US Constitution doesn’t really check Presidential power all that much. Presidents can’t be sued, can’t be curtailed and can’t be forced to behave in the public interest. We happened to have elected Presidents in the past who had morals and character and behaved in the public interest. We see what a disaster the US constitution is if we elect an immoral demagogue with no interest in governing in the public interest. American voters now understand that their vote matters and only their vote can save their lives from collapsing into an authoritarian nightmare with a lunatic at the top or into a Civil War with a high casualty death count.

As a result, we will see the biggest turnout in American election history. 150 million people are expected to vote in 2020, which is 45% of the American population. By comparison, the biggest turnout in the past was in 2008 with 129.4 million votes when Obama beat McCain by 9.5 million votes. The next best turnout was in 2016 with 128.8 million when Trump lost the popular vote to Hillary by 2.8 million votes but won the Electoral College.

This 150 million expected turnout means that this election will bring out 22 million new voters compared to 2016.Those are voters that have never cast votes in the past. People like Shaquille O’Neal are casting votes for the first times in their lives. Overwhelmingly these new voters will be voting against Trump. Voting against Trump is the greatest motivation for new voters right now. I will assume that 90% of new voters will vote for Trump. That means that Biden will have 20 million extra votes that Hillary didn’t have in 2016. Those votes will come from the suburbs because rural votes were already maxed out in 2016. Suburban voters are voting 70-80% for Biden. I have already presented analysis in the past in which I show that disillusioned 2016 Trump voters will power the Democratic candidate to a 7 million popular vote win in 2020. To that 7 million, we have to add the 20 million of additional new suburban voters that are suddenly showing up in 2020 because of Trump’s failed COVID response and Trump’s threats to end American democratic governance.

My original projection was that in 2020, the Democratic candidate will win 67.5 million votes and that Trump will get 60 million votes in 2020. I am revising those to 87.5 million for Biden and 62.5 million for Trump (which totals up to 150 million). We are looking at the biggest popular vote win in American electoral history for Biden. Prior to 2020, the biggest popular vote landslide win was in 1972 when Nixon beat McGovern by nearly 18 million votes. Next is 1984 when Reagan beat Mondale by nearly 17 million votes. After that is 1964 when LBJ beat Goldwater by nearly 16 million votes. Biden will beat Trump by at least 25 million votes which will be the largest popular vote beatdown ever. I am also going to issue 3 new Electoral maps for a worst-case scenario for Biden, most-likely Biden win and for a best-case Biden win. There is no scenario in which Trump can win.

2020 Election Prediction

Biden: 87.5 million votes

Trump: 62.5 million votes

Difference: 25 million

Total: 150 million

Worst Case Scenario Biden Win

Biden: 284

Trump: 254

This is the map I issued in my 2020 Market Outlook. In that map, Trump loses the Rust Belt (because he didn’t do anything to end outsourcing) and loses Arizona (because of McCain and Flake Republican opposition in that state). Biden is currently ahead double digits in Arizona, Minnesota, Michigan and Wisconsin. Trump keeps Florida and North Carolina. Trump flips Nevada to him. In that case Biden wins a by 284 electoral votes to Trump’s 254 in a fairly thin 30 electoral vote margin.

Most Likely Biden Win

Biden: 334

Trump: 204

In this scenario we take all the states in which Biden is currently above 50% in the PredictIt map. This puts Arizona, Nevada, Minnesota, Michigan, Wisconsin, Pennsylvania, North Carolina and Florida in the Biden column. Biden is leading by 5% in the latest polls in North Carolina and Florida. Bloomberg’s $100 million spend in Florida seems to be a making a big difference. Seniors have abandoned Trump due to his pandemic response in Arizona and Florida. At this point, I expect (and PredictIt as well), that Trump will lose Florida and North Carolina. This gives Biden 334 electoral votes and Trump only 204. This is a 120 vote beat down.

Best Case Biden Win

Biden: 412

Trump: 126

Latest polls show Trump losing ground in Texas, Georgia and Iowa. All recent polls are even with Biden ahead by a point or two, within the margin of error. In fact, Trump is holding campaign rallies in Georgia. When did a Republican president hold rallies in Georgia two weeks ahead of an election? Try never. The Biden campaign is making big ad buys in Texas and trying to flip the state. In Harris county (which holds the city of Houston), 98% of voters have registered. An astounding number. In Iowa, Republican Senator Joni Ernst has collapsed which means that Trump chances in that state are also collapsing. If we add Iowa, Georgia and Texas to the most-likely scenario, we get Biden with 412 electoral votes and Trump with 126. This is a very comprehensive loss for Trump of 286 electoral votes. A massive humiliation and actually not that crazy of a scenario. It is quite likely to happen.

Bitcoin is The Shitcoin

In early 2014, I wrote a big research piece for subscribers titled “Why You Should Invest in Bitcoin and How”. At that time Bitcoin had just burst on the scene after the bank crisis in Cyprus and had its first major bull market. The technology was about 5 years old and was just getting started in getting public recognition. Like many at that time I considered whether I should take the plunge and reorient my business toward Bitcoin, but for many reasons I decided not to. However, I did take a risk on Bitcoin as an investment with relatively small amounts of money. Undoubtedly, Bitcoin has turned to be my best investment ever and with Bitcoin’s big bull market in 2017, I ended up turning my small investment into another home. Fairy dust digital money turned into real world stuff. If you haven’t read my 2014 research, you need to read it in order to understand the potential scope of this new digital money industry. My bet on Bitcoin in 2014 was a bet on the growth of the decentralized digital money industry and that has come to fruition over the past 6 years just as expected.

However, today is 2020, not 2014 and the digital money industry has changed a lot. I think it has come time to issue a warning to prospective Bitcoin buyers just as Bitcoin appears to be gaining adoption between professional investors. We had none other than hedge fund legend Paul Tudor Jones declaring that he is investing in bitcoin a couple of months ago. And he is not alone. Many other hedge fund titans are pitching bitcoin as a potential beneficiary from the Fed balance sheet expansion. While PTJ is no doubt an investing genius, he is hardly a technology genius which could be a problem when you deal with investments that require technology savvy like Bitcoin. Technology investing in general is brutal because there is always a competitor lurking around the corner that has the ability to take it all. Another issue with Bitcoin is that investors aren’t buying Bitcoin at $250-$500 dollars like I was in 2014 and 2015. Bitcoin is near $10,000 now and represents a massive dollar investment and as such carries substantial investment risk. The current Bitcoin price discounts many future developments such as big network expansion which may not come to fruition.

I have NOT bought a Bitcoin since 2015 and sold all my Bitcoins (with the exception of the collectibles) in 2018. I have invested the remaining proceeds (less the house down payment) in other crypto-currencies during this crypto bear market. I am not going to make a case for other cryptocurrencies here since that is a paid service I provide at VIXCONTANGO. However, I do want to make this blog post as a public service to educate prospective Bitcoin investors on the major investment risks they are undertaking today.

Classic Business Risk

The first major risk that Bitcoin carries now is classic business risk. When you go into a business, competitors may replicate your business and do it better than you and steal your clients. 90% of companies in the world fail and they fail because of competition. Other companies come up with a better product, better technology or have better salesforces and pound the pavement harder. Ironically, with Bitcoin building a better a product is easier than ever since it is “open source” software. Everybody in the world can “steal” the Bitcoin code and improve it. And that is what in fact many have done such as Charlie Lee with Litecoin, Roger Ver with Bitcoin Cash or Craig Wright with Bitcoin Satoshi Vision. Every alt-coin in existence is a better coin from technology perspective than Bitcoin. They have made improvements on the code and are faster to transmit and easier to store. There are other projects that reimagine digital money from the ground up and take completely different approaches that are not based on the Bitcoin code at all. Bitcoin today has many legitimate alternatives that have been around for at least 5-6 years and which have substantial network effects of their own. The important thing to understand here is that investing in Bitcoin today is like investing the 1st version of the Apple iPhone in 2020 instead of 2007. Not investing in Apple, but in its iPhone 1 which today nobody would buy because much better phones have been made since then. This is a very important thing to understand: Bitcoin is now an archaic 12 year old technology. If you want to invest in something in the crypto space, invest in something that has a better technology than Bitcoin.

Halving is Systematic Network Reduction

When it comes to investments like Bitcoin, the technology is not the only consideration. The size of the network is very important as well since it is a “winner take all” world. “Mindshare” is super important. If everybody uses Bitcoin for payments who cares if there are other payment networks. The payment network of choice is whatever the world decides to use. However, Bitcoin faces huge long term problems as a viable payment network given to how it is designed.

One of the core features of Bitcoin is “halving”. Every 2-3 years or so, Bitcoin halves the rewards for bitcoin miners. That is a brutal financial event which means that after halving day, bitcoin miners get paid half for mining a bitcoin. Mining a bitcoin is competitive computer process and a certain dollar amount of electricity has to be spent to mine a Bitcoin. Halving means that miners have to spend double the amount of electricity to mine a bitcoin. And that process happens every 2-3 years. Imagine you hold Gold and you are told every 2-3 years it is worth half the price. Not very appealing. That means that Bitcoin has to go up in price constantly to be able to offset the halving and reward miners justly. In order for that to happen the money flowing into the Bitcoin network has to offset the amounts of money miners are spending on electricity. If the price of bitcoin is less than the production cost, miners have to sell their bitcoins at a loss and eventually go bankrupt. What happens with each halving cycle is that more and more miners go bankrupt and only the most efficient operators survive. While libertarian anarchists and unregulated capitalists admire the “only the strong survive” ethos of Bitcoin, that is a huge problem for the Bitcoin network in the long run. The bitcoin network systematically reduces its network effect. It systematically purges its miners which are the main participants in the network. At the end if you don’t have miners, you don’t have a network. Some of the alternative cryptocurrencies today don’t have this design problem and have taken a radically different approach – their incentive schemes ensure that their network rewards participation and as such their network effects get bigger over time instead of smaller.

Another downside effect of halving is that since China has the lowest electricity costs, basically all mining is now done in China. As such the Chinese government can at any point seize all the mining equipment and perform a 50%+1 attack on the Bitcoin network and change the owner of bitcoin wallets. The Ethereum Classic network experienced 2 such successful attacks recently and I think those attacks are a training ground for a larger attack on the Bitcoin network whose codebase is weaker and less secure than the Ethereum Classic codebase.

The Bigger Bitcoin Gets, The More Centralized It Becomes

As Bitcoin grows in usage, its blockchain grows as well. The blockchain database contains all the transactions on the Bitcoin network from the beginning of time. As Bitcoin network usage grows exponentially so does its blockchain database. Every node on the Bitcoin network is supposed to be able to hold the entire bitcoin blockchain database. The current size of the Bitcoin blockchain is more than 250 GB. As the blockchain gets bigger, fewer and fewer computers will be able to hold it. Bitcoin already can only be mined by specialty firms with specialty equipment. Bitcoin’s promise of “decentralized finance” simply isn’t true. The bigger Bitcoin gets, the more centralized it becomes. In the future, when the Bitcoin blockchain gets big enough, only organizations with massive technology resources such as Google, Amazon, NSA and the Chinese or Russian governments will be able to run Bitcoin nodes and be able to validate transactions on the Bitcoin network. Now tell me, is that what anti-government hackers and cypherpunks are so passionate about?!?

Bitcoin Mining is Bad for the Planet

I am far from a passionate green advocate, but who doesn’t want to live in a nice natural world with clean waters and air? The problem with the electricity consumption of the Bitcoin network is that it is now massive. Bitcoin network now consumes as much electricity as Israel, Greece or Switzerland. Entire countries with $200 billion in annual GDP. And the bigger Bitcoin grows, the more it will consume as the algorithms to mine a bitcoin become ever more competitive and energy hungry. There are better, greener coins out there. There are ways to make fast digital payments on trustless digital networks in a much more energy conscious fashion. At some point, users and governments will demand a more green networks be used for money transmission. I think there is a high probability in the future that bitcoin is banned by the government precisely because of its big carbon footprint. Or at the very least, there will be a carbon tax applied on bitcoin mining. Either way, the massive bitcoin network energy footprint will not be left unaddressed by governments forever.


Now, is it possible for Bitcoin to go up 10x again from here? Sure. If somehow money flows into the Bitcoin network at a rate higher than its total mining costs, that can happen. And it is totally plausible and feasible. Could it happen in the next couple of years? Sure. I don’t know what the investing future holds. But I do know what the technological future holds. The reality today is that there are better, greener decentralized digital payments networks with better incentive schemes and it is only a matter of time before they gain mind-share and supersede Bitcoin. Bitcoin is technologically the worst crypto currency in existence and it has gotten big enough to where its technological limitations present an investment risk. A winner-take-all network usually doesn’t suffer from scalability issues. Unfortunately, in 2020 for a lack of a better word, Bitcoin is The Shitcoin. Invest in crypto and in decentralized finance, but not in Bitcoin. The glory days of being a Bitcoin Hodler are over. Once capital decides to abandon the Bitcoin network for better crypto currency alternatives, the investment losses in Bitcoin will be massive and quick. Don’t be the last one hodling the Bitcoin bag. Be prudent and diversify your crypto exposure. Over the long run, Bitcoin’s dominance will be smaller and smaller.

Sell Bitcoin, Buy Altcoins.

Sell Bitcoin, Buy Altcoins

My Independence Day Constitutional Wish List

The US Constitution has 27 amendments. The last amendment was passed in 1992 and nobody knows what it is about. The last major constitutional amendment to pass was in 1951 when the 22nd Amendment limited the number of times a person can be elected President to two. Before that in 1920 the 19th Amendment allowed women to vote. In 1913, the 17th amendment established the direct election of US senators by popular vote and the 16th amendment allowed Congress to levy an income tax. In 1870, the 15th Amendment allowed people of color to vote.

It is a shame that our generation hasn’t been able to add its input to the US constitution. The US Constitution is far from a perfect document and needs to be improved over time. The Trump presidency showed how much the US constitution depends on the President being an honest and honorable person. There are many practices that US Presidents have followed that are norms, but not laws. But Trump happened and we can no longer assume that future US Presidents will be honest and honorable. Voters can make mistakes and in the age of direct social media and reckless demagoguery, voters will make even more mistakes in the future.  More safeguards are needed to make American democracy more resilient. On this 4th of July when America celebrates its birth, I want to propose a series of constitutional amendments to strengthen American democracy in the future:

  1. A Senator needs to represent at least 1 million people

The US constitution says that House Congressmen have to represent at least 30,000 people and I think a similar requirement needs to be made for Senators. As populations have grown over the years, the disparity between rural and urban states have grown dramatically. A new type of state has emerged – the suburban state – and it is drastically underrepresented in the Senate. Rural states have acquired a disproportionate power in the Senate and rural interests often run roughshod over suburban interests. It doesn’t make any sense for states like Alaska and Wyoming with less than a million residents to be sending 2 senators. A small state like Connecticut has 3 suburban counties – Fairfield, Hartford and New Haven – which each have higher population than the entire state of Alaska or Wyoming. It is not fair for suburban states to be under represented like this. As such we need a requirement that a state needs to have at least 2 million people to send 2 senators. States with sub 2 million populations should send only 1 senator. This type of rule ensures that rural interests still are represented in the Senate but not overrepresented.

  • Direct election of Attorney General

The Trump presidency has revealed a critical weakness in the US constitution – the President can’t be held accountable for crimes he commits while in office. The main reason for that is because the President can appoint and fire the Attorney General at will. If an investigation gets close to the President, the President can fire the Attorney General and put a person who can shut down all the investigations. This makes the US governance system extremely vulnerable to a dishonest President like Trump. There is not enough checks and balances inside the executive branch. We can’t have Congress run impeachments constantly because the Attorney General’s office can’t function properly. Congress should be busy writing laws instead of administering justice. Administering justice is the job of the Department of Justice.

As such, the major parties need to nominate an Attorney General that will be elected together with the President. The name of the AG needs to be right there next to the President and VP. The position of Attorney General effectively dictates US social policy and this is an extremely important position. Americans often have no idea who their next AG will be. The Attorney General needs to be more independent of the Executive Branch and take his power from the people. People need to know who they are voting for AG when they go to vote. Many states already allow the direction elections of state AGs. The President shouldn’t be able to fire the AG. If for some reason the AG resigns or is impeached before his 4 year term ends, the President can appoint a replacement with Senate confirmation as is the current procedure. There should be also a 2-term limit for how long a person can be AG just like there are for a President.

  • Direct election of Federal Reserve Chairman

Presidents currently have way too much sway over monetary policy. Monetary policy powers are granted to Congress by the Constitution. Congress in turn has delegated them to semi-independent agency like the Fed since the economy often runs into trouble faster than political consensus can be built in Congress for a bailout. The Fed needs to have even more independence and in particular, the President shouldn’t be able to fire the Fed chair mid-term. Also it will be helpful to voters if a party outlines its economic policy and its choice for Fed chair before the election instead of after. Many Americans often are very surprised by actions of the Fed. Monetary Policy is extremely powerful and often more powerful than Fiscal Policy in addressing issues in the US economy and it is unconscionable that American voters don’t have a bigger say in who their Fed chair is. In some respects, the Fed chair is a more powerful person for the US economy than the President. The name of the future Fed chair should be right there on the ballot together with the President, VP and AG.

  • Impeached President can’t be Commander-in-Chief

In 2020, we witnessed the sordid spectacle of Trump turning the US military against the American people after a legitimate impeachment failed to remove him from office earlier in the year. Currently, an impeachment by the House is simply a political spectacle and carries no actual loss of power for the President. And a removal is often considered to be too drastic an action. As such Presidents have become more brazen over the years and break the laws with increasing frequency. They can’t be prosecuted by the Department of Justice and with enough political heft in the Senate, they can avoid removal from office. This is a pattern that has gotten worse since Nixon and we need to modify the Constitution so that an impeachment is an act that does remove some powers from the President. President need to be more mindful of Congress and its impeachment powers.

Trump showed that the President can abuse his Commander-in-Chief powers after an impeachment. As such those powers need to be taken away from the Presidency. If a President is impeached, the Vice President automatically becomes a Commander-in-Chief. This way a President who is collapsing politically can’t turn the military against the American people.

  • Allow states to run budget deficits in recession

About 50% of government spending in the US is done by state and local governments. State and local governments are big participants in the domestic economy on par with the Federal government. They provide critical government services such as police, fire, transportation and public education. One of the biggest economic problems that we have discovered in the US over the past 40 years is that state and local government actions to balance their budgets in a recession exacerbate the recession. They have to fire staff because of budget cuts and raise taxes to balance spending and tax revenues. 50% of the US government can’t run Keynesian stimulus in a recession and that in turn has led to longer and longer recessions and weaker and weaker recoveries over the years. We need to change that system so that state and local government can run a deficit like the Federal government automatically for as long as their local economies are in recession.

Trump’s 2016 Voters Have Died

Originally sent to VIXCONTANGO subscribers on February 13th, 2020

Impact of Mortality on the 2020 Race

One thing that is not often discussed is how mortality and demographic turnover affects the presidential race. 4 years is a long period of time and the population that votes changes. Old people die and young people who weren’t legally able to vote are now eligible to vote. Here, I will look at how many people the oldest cohort has lost over the last 4 years and what kind of voters replaced it from the youngest cohort. About 2.8 million people in the US die each year. We can assume vast majority (90%) of those die from old age. In a 4 year period between 2016 and 2020 11.2 million old people died. In the US 18 years is the voting age so people born from 1999 to 2002 will be eligible to vote for the first time in 2020. The birth rate in those years averaged 4 million, so about 12 million new Millennial voters will be eligible to vote replacing the 11.2 million Silent generation voters.

There is a big discrepancy in the voting patterns of the oldest generation and the youngest generation. The Silent generation votes 51% Republican vs 45% Democrat. The Millennials on the other hand vote 62% Democratic vs 29% Republicans. In particular, Millennials made a massive move towards the Democratic Party after the election of Trump jumping from 50% Democratic to 62%. Trump’s approval rating among millennials is really bad as well with 65% disapproving of his performance. The Millennial generation is absolutely terrified of Trump.

When we plug these numbers in the Birth/Death Voter Turnover model, we see that the GOP loses about 5.7 million voters due to old age and adds about 3.48 million for a net loss of -2.23 million voters from 2016 to 2018. Democrats on the other hand lose 5.04 million but add 7.44 million potential new voters for a net add of 2.4 million. Pretty clear demographic advantage for Democrats here over the past 4 years. But this doesn’t tell the whole story. Each generation turns out differently at the ballot box. Older voters exercise their voting rights more than young people. On average 70% of older voters show up to vote and only 51% of young voters. When factoring the turnout differential we see that the Republican Party remains in truly dire straits. It is losing voters which are turning out at a high rate and is replacing them with fewer young voters who turnout at a lower rate. The math is really bad for the GOP. The GOP loses 4 million voters to only add 1.77 million in 2020 or -2.2 million loss. Among democrats the higher proportion of young voters who vote Democrat overcomes the lower turnout and the base remains stable.

From Birth/Death perspective, we can expect voter turnout for Democrats to be roughly what it was during the Obama years, however we can see that Republicans have lost 2.2 million voters over the last 4 years. Trump’s totals in 2020 are likely to come in at minimum 2.2 million less than 2016. Trump got 62.9 million votes in the general election in 2016. That means Trump will be lucky to get 60 million voters in 2020.

The combined population of Wisconsin, Michigan and Pennsylvania is 29 million or about 8.7% of the US population. If we apply the nationwide totals to those 3 states, they have lost 190,000 GOP voters over the past 4 years. Given that about 77,000 votes decided the 2016 presidential election in Wisconsin (22K), Michigan (10K) and Pennsylvania (44K), the unfortunate fact for Trump is that the GOP voters in those states that made him president are now dead.

Globalization is Over. The Era of Cartelization Has Arrived.

Originally sent to VIXCONTANGO subscribers on August 28th, 2019

Geo-Economics and The 3 Continental Cartels


The study of geoeconomics is a branch of geopolitics that deals with the political aspects of economies. The same logic that leads to military conflict pertains to international commerce. States (or groups of states) seek to collect as much tax revenue as they can from their domain while at the same time blocking other states (or groups of states) from doing so. This is a zero-sum game that inherently invites conflict. States regulate economic activity to maximize their own welfare instead of global welfare and since other states suffer that again invites conflict. States seek to restrict payouts and benefits to their own residents at the expense of global welfare. States promote technology innovation to benefit them not for the sake of innovation itself. Geoeconomics is often confused with mercantilism whose goal is to maximize national gold stocks which historically has led to military conflicts. However, mercantilism is subordinate to geopolitics and military competition. In the new era of geoeconomics, military warfare takes a back seat to economic warfare. Diplomatic and military conflicts are resolved with the weapons of commerce. At the end of the Cold War, Richard Nixon said that geoeconomics will supercede geopolitics. The next war will be won with microchips and trade deals not swords.

What are the weapons of geoeconomics? R&D credits, tax cuts on domestic production, tax hikes on foreign production, tariffs, regulatory curbs for foreign companies, export financing, collection of technology intelligence, industry subsidies, state owned enterprises, predatory finance, currency depreciation, below market interest rates, free trade blocs, etc.


By now you should recognize that US and China are in a major geoeconomic conflict. But they are not the only competitors on the stage. The European Union is also trying to establish itself as a Tier 1 force and trying to compete. As I see it, there are three Tier 1 geoeconomic cartels today: United States, China and the European Union. The US is currently trying to get a couple of major additions to its coalition with Japan and United Kingdom by signing free-trade pacts with them. The US is trying to steal the UK from Europe and establish an outpost there. The Japanese outpost for Cartel America in Asia is a given. China has North Korea, Iran and other parts of Asia in its Cartel Asia. It is currently trying to add Russia. Cartel Europe has Germany, France, etc, Western Europe and Eastern Europe. Europe also is trying to add Russia to its cartel. There are two 2nd Tier geoeconomic powers – Russia and India – whose place is currently somewhat uncertain. They are free agents. Which coalition will they join? India by many indications will be the world’s primary generator of economic growth over the next 20 years so India will rightfully might to turn into a Tier 1 power instead of joining an existing cartel. But we will see if they are capable of that. I think the European Union is making a major mistake by letting Russia team up with China over Crimea. It is the height of stupidity to lose such a large economic and military ally. Brazil is also an emerging geopolitical power, but I think the US will seek to add Brazil to its Cartel America together with the rest of South America.

By now you are probably thinking – what the hell are you talking about? Don’t you know about the US led global order? Well, here is the reality. The post WW2 US led global order is dead. It never had a chance in the long run. The last 30 years are moment in history soon to be forgotten. Why is that? When people think of economic or computer systems people either think either a centralized system or a distributed system. Either a system with one dominant player or a multitude of small players with limited resources. In reality, whether with computers or economics, there is power in unity. Economic regions when combined are more powerful together via the forces of specialization than when they are apart. They also have access to more resources whether human capital, earth resources or production capabilities. Competition itself breeds unification. Why? Because a winner takes all and when faced with a bigger competitor, smaller players gang up to form their own big competitor that can survive. It is better to have a share of your own coalition that can reach parity with a big competitor and survive or even expand your economic interest than to lose all in direct competition with a bigger competitor. So while systems may start as highly fragmented or centralized, they always tend to end up in a state of oligopoly. A few dominant cartels (union of smaller players) which have a lot of resources. There was no Italy in 1850. There was Florence, Milan, Rome, Naples. But France was big and unified and they would raid Florence, Milan and Rome every year. Heck, France owned Naples. Apart Florence, Milan, Rome and Naples didn’t have the power to confront France. But in a cartel, they did. And so Garibaldi created Italy – a cartel of city states. Apart the European Union countries such as Spain and Italy can’t compete with the US or China, but together they can. Federalization/cartelization is simply inevitable and won’t stop. Despite the constant cries of the death of the European Union, it will only become a bigger and more entrenched reality.

However, unification has practical limits. Economic or computer system never end up with just one system. One use case doesn’t serve everybody equally. There never will be one currency or one dominant economic cartel. Simply because there are losers and winners and the losers will always gang up to compete with the winner. It is inevitable. The concept of a single world currency like the dollar or bitcoin was doomed from the start. The concept of a US led global order forever was doomed from the start. The more resilient long term form of system organization is oligopoly – whether in business or politics or geoeconomics, oligopoly is where all systems end up. 3-4 competitors of equal size who have the resources and capability of annihilating their competitors completely and thus are too scared to fight directly. Peace through strength. For every Oracle database, you will have SQL Server database. For every Walmart, you will get an Amazon. For every United States, you will get China (or a Soviet Union). For every Republican Party, you will get Democratic Party.

The world is not a G7 or G20. The world was a G2 (US/West Europe and USSR/Eastern Europe) and the world has now moved to a G3 – US, China and Europe.

There is a school of thought that keeps thinking of Europe as part of the US cartel. Why doesn’t the US just gang up with Europe and go after China? That’s what most of the US establishment thinks is the best course. But that ignores what Europeans think. The problem is that Europe is suffering from the United States. The US has a superior federalized economic and governance system that is about 300 years ahead of Europe’s own. Heck, the European Monetary Union was only formed 20 years ago. The US sucks the best and brightest out of Europe generation after generation. It has been many decades now and Europe is starting to recognize that it is losing tax revenue and benefits with this constant brain drain to the US. So at some point they will act in their self-interest and try to stop this migration. US tech companies are obliterating European industries and thus tax revenues and benefits available to European residents are not going to be available. Europe is going to try to stop that. Europe sees how effective China has been in fostering its own tech industry by blocking off Google and Facebook. The only reason why Europe doesn’t have Google and Facebook equivalents is because they let Google and Facebook run roughshod over nascent European competition. Russia which regulated Google has its own viable search engine. That is why Europe is creating its own European Future Fund and seeding with $100 billion to foster tech companies in Europe. That is why European regulation on Google and Facebook is coming and coming in hard. The competition for tax revenue and payouts to residents is what is going to drive Europe to define its own cartel which from a wealth and population perspective is equivalent to the US. Why should Europe just give itself away for free to the US? Not going to happen. So I see Europe not only becoming a more active and independent geoeconomic player on the international stage but I think they will develop their own army and enter the geopolitical sphere. I personally view these G7 meetings as a bit of a farce – France and Spain and Germany don’t belong on the same table with the US or Japan. France, Spain and Germany together belong on the same table, but not apart.


As US share of world GDP declines and the world ex US grows faster than the US, the US Dollar can’t keep the reserve currency status it acquired in WW2. Supply of dollars simply can’t keep up with world growth (in real terms). I mean you can print dollars all you want but that’s not the point, the point is “real” dollars backed by GDP output. And neither does it have enough money to pay everybody else off and keep them in a “one world” global coalition. The world inevitably will break down into the 3 dominant blocs we see today and those blocs over time will become more independent, more self-sufficient and more powerful. At the end of the day, I see 3 major international players as better than 2 anyway. There is a lot of stupidity between two competitors. A 3rd player brings an element of sanity to the room. Europe is needed to keep the US and China competition from going insane.

The Era of Globalization is over. Now we are in the Era of Cartelization and the Three Continental Cartels.

When it comes to your investments, realize that “cartelization” will likely result in smaller world markets for the companies you invest than currently envisioned. Tech company profits in Europe will not go untaxed and moreover will be subject to regulatory destruction in favor of domestic European competitors. While you probably have 3 major free trade blocs, commerce barriers between the Three Continental Cartels will be substantial and will involve every weapon of geopolitical warfare you can think off. And the Continents will not be backing down from this. This is a reality that you need to keep in mind as you look at your investments going forward and look to size up their potential. Big $SPX tech companies will end up with 1/3 of their originally envisioned market – China and Europe won’t be part of it. Thus the high growth multiple that they have been given by investors over time will dwindle. Investing in smaller players that have room to grow within their continent is probably going to be a better strategy than investing in huge players who are going to struggle to grow with the continental barriers being put in place today. Finally, world resources aren’t likely to be shared. Cartelization of resources will lead to higher commodity prices. Imagine if the US didn’t have access to Russian and Chinese silver mines and is only left with Mexican output? What will happen to the price of silver? We are used to all commodity markets being priced in dollars on a global market but going forward I see a separate commodity markets in each continent. China will have its own oil and gold markets. Europe will have its own and the US will have its own. Each cartel will have fully functioning independent market systems. And each continental cartel will have its own continental currency, of course – the US dollar, the Euro and the Yuan.

In terms of what becomes the next reserve currency, the Chinese Cartel doesn’t have the maturity, marketplaces and GDP product to be at par with the US and Europe yet. Just take a look at the SDR – the power relationships are perfectly expressed there. You have the Cartel America with 60% share, Cartel Europe with 30% and Cartel Asia with 10%. That is exactly where we are today. In which bloc Russia and India end up is the next question that can materially change these weights or China upping its game dramatically with Africa which I don’t foresee. At some point Africa will become a geo-economic consideration as well. If Europe can somehow attract Russia and India into its orbit, it can get its share up to 35%, but can Europe execute on that? With Lagarde as ECB head, Europe is off to a good start!


Time the Market with SmartUPRO

Introducing SmartUPRO

I have had a lot of requests for a SmartUPRO algo over the years and I was finally able to put one together that does a decent job of capturing upturns in the market while avoiding the biggest downturns. This algo would have been able to successfully navigate Volmageddon in 2018 as well Great Virus Crisis of 2020. It got out on February 21st right before the big drop this year. GAGR is about 25% per year with annual drawdowns of less than -20%. Best trade is 100% with winning trades only 46% of the time. It has had only one bad year in the back test – 2015 which featured a very fast late year drop followed by a lackluster rally. This algo is like a playoff home-run hitter. It may strike out a few times but when the big opportunity comes, it scores. I think it is a great complement to our short volatility algos SmartSVXY and UltraSVXY which struggled in 2018 and 2019 with Trump induced volatility. Those years were much better for the S&P 500 which was specifically targeted by Trump. SmartUPRO algo would have done a good job of capturing those big Trump-driven SPX runs.

Timing the Market Works!          [SUBSCRIBE HERE]

Now the key question is when will SmartUPRO turn on again?



SmartVXX Comes Back With Vengeance – near 300% trade in March!

SmartVXX is an algo that needs a bear market to work and it did just that with during the Great Virus Crisis of 2020. After being mostly silent for 4 long years, and after many people were asking me “What’s the point of this algo?”, it sent a VXX BUY signal on February 24th and has racked up a nearly 300% gain during this historic SPX downturn. This is by far the best trade any of our algos has ever had. We had to wait 4 years for that one! SmartVXX made up all the losses over the past 4 years and is now up 116% since 2016. SmartVXX is also well ahead of the S&P 500 as the SPY is up only about 20% since 2016 after this big downturn. This is the power of long volatility well timed.

Timing the Market Works!          [SUBSCRIBE HERE]

If you are looking for a way to hedge the big market downturns, SmartVXX tells you when you need to do that. As many are discovering right now, this is a very valuable information to have. SmartVXX has misfired in the past, but if we have a prolonged downturn, you want to know when SmartVXX is on so you can protect your portfolios. If SmartVXX gets whiplashed that is also valuable information in itself because it tells you that we are not in a prolonged downturn and a V shaped SPX rally may be under way



An Algo for All Seasons

With SmartUPRO we have finally completed our suite of market timing algos. SmartSVXY did great in 2016 and 2017 during the extended low volatility regime before the tax cuts, but failed to capture any returns in 2018 and 2019 once Trump started the trade war with China. SmartUPRO would have worked where SmartSVXY didn’t in 2018 and 2019. SmartVXX showed in 2020 that it can nail the big bad bear market. Whether we have bull markets or bear markets, high volatility regimes or low volatility regimes, our suite of algos can deliver a signal that can be valuable to you.

From 2016 through today (March 18th, 2020), all of our algos have dramatically outperformed SPY, VXX and SVXY. Both VXX and SVXY have lost massive amounts of money over the past 4 years. SPY is barely holding onto gains. Timing the markets is the only way to survive a volatile US government successfully.

Timing the Market Works!         [SUBSCRIBE HERE]

Given the rout in the markets, investors need to know when it is safe to get back into the markets again. That is where our algos can help you.







About is a leading provider of trading analytics and algorithms for VIX futures and S&P 500 index products. The website has had over 1 million page views and over 40,000 investors have visited it since its inception in 2015. We publish weekly and daily investment newsletters that provide an overview of the investment landscape from the perspective of a volatility investor. VIX futures are based on the CBOE S&P 500 Volatility Index (VIX) which is widely known as the “Fear Index”. The VIX futures market is one of the fastest growing asset classes with over $4 billion in daily trading volume. VIX futures products offer market beating returns during periods of market calm and protection during periods of market panic. To learn more about us and our strategies, you can follow us on twitter or visit our website.


Twitter: @vixcontango



Strategic Petroleum Reserve (SPR) Backgrounder

Originally sent to VIXCONTANGO subscribers on September 16th, 2019


Since Trump is going to start bombarding us with tweets about the SPR, I need to give you a backgrounder. The US had discussed a strategic stockpile of oil since World War 2. After the Oil Crisis in 1973-1974, President Ford finally signed the Energy Policy and Conservation Act (EPCA) at the end of 1975 establishing the SPR with a reserve of up to 1 BILLION barrels of petroleum. From 1993 to 2000, the Department of Energy (DOE) priority was to make sure the reserve infrastructure was created. In 2001, President Bush ordered the SPR to be filled to 700 million barrels. The filling continued until December of 2009. Not only was Bush drilling for more oil, he was taking oil off the market to fill the SPR which contributed to the big oil spikes at the end of his Presidency. In 2005, Congress directed the SPR to fill up to 1 billion barrels but environmentalists blocked this effort once the Democrats came to power in House in 2006. The effort to expand the SPR to 1 billion barrels was abandoned in 2011. Still, the SPR is the largest stockpile of emergency oil in the world with 688 million barrels of oil.

Enter Trump. In May of 2017, President Trump revealed his intentions to cut the SPR in half as part of his 2018 budget. Trump wants sales from the SPR to reduce the budget deficit by about $16 billion over a decade. This was a very controversial move as both Democrats and Republicans don’t want the US to be left vulnerable to oil shocks even with the burgeoning shale production. Shale production is slow to come online and the SPR provides the ability to cushion price shocks until production is revved up a few months later. The SPR’s near 700 billion barrels of oil are equal to about 150 days of net imports of crude (probably a lot more now) or roughly 5 months. This is a nice big cushion and enough to see the US through until shale production revs up. Trump proposed selling 270 million barrels of oil by 2027, a move that would allow the US government to retire 2 out of the 4 Gulf Coast facilities that store the oil. Trump’s proposal is actually the measured one. GOP think tank The Heritage Foundation wants the entire SPR sold off in 2 year period – yes, those guys over there are totally nuts.

In any case, the SPR is being drawn down slowly as we speak. In the Bipartisan Budget Act of 2015 (GOP House, Obama as President), Section 404 authorized the DOE to sell 58 million barrels or 8% of the reserve from 2018 through 2025 to raise $5.1 billion. In addition, Congress turned to sales of the reserve to meet financing needs of the Highway Trust Fund which drain another 101 million barrels form the reserve (Section 403). So all together Congress is draining 160 billion barrels as it stands from 2018 to 2025 or about 20 million barrels per year. The Trump administration plans to shrink the SPR comes by 270 million barrels comes on top of these 160 million barrels that are already being put on the market by the Congress. At the end, SPR will only have 250 million barrels left or roughly 40% of current levels.

Over an 8 year period, selling the total of 465 million barrels of oil amounts to about 60 million barrels per year or about 165,000 barrels per day which is nothing compared to global consumption of about 100 million barrels per day. But if the selling is done strategically, it can definitely impact oil prices on certain days and months.

This year in 2019, the DOE sold oil from the SPR in 2 tranches:

  • February 2019, 6 million barrels delivered in April and May.
  • August 2019, 10 million barrels delivered in October and November.

DOE probably has another 4 million tranche (from the Congressional appropriations) to announce from here to end of the year.

Then we will have Trump and Secretary Kerry jumping in with more emergency sales because of the Saudi Arabia situation. Kerry already announced that on the DOE website.

Now it should be clear why oil prices were in such dire straits this year. Long story short, I want to make you aware that the GOP/Trump want to shrink the SPR dramatically as part of their ideology for less government intervention in markets. The GOP has been trying to do this unsuccessfully for the past decade and now it seems that they will use the pretext of the tensions with Iran to drain the SPR down to the 250 billion barrels target as they have been planning all along. And if the oil price stays down and helps the Trump reelection and keeps the small GOP crew in power for 4 more years, well – that is just icing on the cake!

Ultimately, despite their SPR drawdowns, I don’t think Trump and DOE will ultimately dent energy prices from their long term upward trend. If Saudis drop their production 4 million barrels per day, the SPR can replace that production for only for 3-4 months. The maximum emergency drawdown capability of the SPR is 4.4 million barrels a day and it takes 13 days for SPR oil to reach the market after a presidential decision. Traders will get ahead of the planned end of the SPR drawdown in the future and push prices higher. In the meantime, expect a lot of oil price volatility as this is another front where traders will be battling Trump. Would you be surprised if the oil chart looks like the SPX – upward trending with sharp downward spikes? I wouldn’t it. Signature Trump market manipulations. Today, Trump’s fingerprints are all over oil prices already. CL (WTI crude oil) opened at $63 and is already down to $59 a few hours later.


SALT Cap Directly Responsible for GOP House Loss in 2018

Originally sent to VIXCONTANGO subscribers on November 14th, 2018

The Tax Cuts and Jobs Act (TCJA) is directly responsible for the GOP loss of the House. I did an analysis last night of all the House districts that switched parties in 2018 mid-term election and discovered that nearly 60% of the districts (18 of 31) that turned from Red to Blue are High SALT districts. In yellow below, I have highlighted districts in New Jersey, New York, Washington, Virginia, California and Florida which turned. While Florida is not a high SALT state, the 2 districts on this list are Miami which has very high property values and thus property taxes. I have looked into housing in Florida – property taxes there are higher than Connecticut. Yes, there is no sales tax, but property taxes are very high. Believe it or not, Miami has had a Republican Congresswoman since forever but this year she lost to a Democrat. Why? Well, when the party in power raises your taxes by removing a critical deduction, what do you think will happen? Particularly if the other party is campaigning on restoring the deduction.


The GOP in their infinite “wisdom” is claiming that Trump lost them the election. So the same people who voted for Trump in 2016 now voted against him in 2018? Well, first of all, Trump was NOT on the ballot. GOP congressmen were on the ballot. The only major policy difference between 2016 and 2018 elections was the Tax Cuts and Jobs Act and a few military spending and omnibus bills. There were no major changes made to Obamacare or to immigration policy or to anything else. In 2016, GOP campaigned on repealing and replacing Obamacare, on closing the Budget Deficits and on cutting Government Spending.


Instead, from 2016 to 2018, the GOP did NOT repeal Obamacare, the Budget Deficit increased by $100 billion, Government Revenues (receipts) stayed flat and Government Spending (outlays) increased by $100 billion. I don’t think there is a single GOP voter out there who voted for this combination of increased government spending and higher deficits. They might as well have voted for Democrats. While it is easy to point the finger at Trump, it was Paul Ryan and the GOP congressmen who wrote all these bills and presented them at Trump’s desk for signing. Those GOP congressmen and their bills were on the ballot in 2018. And their $100 billion tax hike on individuals (primarily by means of repealing the SALT deduction) cost them House. There is no other reason. One thing voters don’t expect is for Republicans to be raising their taxes. For many voters, if Republicans are raising taxes, might as well be politically correct and vote Democrat.

Democratic Health Care Proposals

Originally sent to VIXCONTANGO subscribers on December 6th, 2019

Now that Democratic primary season is upon us and the top 4 candidates are crystal clear (Biden, Sanders, Warren, Buttigieg), I want to provide you with a guide to the most important issue of the 2020 election which is Health Care. I have already sent a mailer about Bernie Sanders’ Medicare-for-All plan earlier in the year and if you haven’t read it, you can read it again here. Bernie’s plan is the most unlikely to pass through Congress since I doubt Americans are ready to jump from fully private health care to 100% government health care overnight. Even if Bernie Sanders base in the 2020 Democratic Party is solid, it is barely 10% of the US population and there is no way 10% of the US population will dictate what the other 90% will do, particularly when a good portion of the population is Republican. So I am not going to revisit Bernie’s Medicare-for-All here, instead I will focus on the Medicare-for-All vision of the other 3 candidates.


To put the discussion below in context, I would like to share with you my wife’s company health insurance plans and also how much they cost for a variety of people and situations. There are 2 types of plans in the US health care system – Silver and Gold. The Silver plans have a higher deductible (out of pocket expense) in exchange for slightly lower health insurance premium. The Gold plans have a lower deductible in exchange for higher premiums. People that are young and healthy tend to pick Silver plans, people with families tend to pick Gold plans. The combined premium that a company and an employee pay to the health insurance company tends to be around $500 per month for Silver plans and about $800 for Gold plans for single people. For families, the premium depends on the number of dependents (kids) but generally speaking a Family of 4 pays $2,050 per month for a Silver Plan and $2,150 per month for a Gold Plan. However, as you see in the chart above somebody with a big family may be paying up to $4,000 per month (the person with 6 teenagers/young adults). Also notice the massive increases in 2020 in both premiums and deductibles. Premiums are up about 6.5% while deductibles are up 14% for Silver plans (from $3500 to $4000). That means Americans will have to spend potentially 20% more on health care in 2020. For a Family of 4 on Silver Plan the total annual deductible increase is $2,000 (4 * 500), while premiums are up another $2,000 (150 *12), for a total of $4,000 potential new out-of-pocket expense on top of current rate. Pretty hefty. People have to plan for that and that is hurting the US economy right now. This hit is at least double the paycheck relief people may have experienced last year due to the Trump payroll tax cut. I have summarized the rough financial below. As the table below shows, Single singles will most likely choose the Silver plan while families will go for the Gold plan because those options result in lower total potential liability (health care spending).


The Biden Plan

The Biden Plan is a big expansion of Obamacare and provides a much desired public option. But the public option is not Medicare. It is a plan with benefits that are less than Medicare currently provides. The main points of the plan are as follows:

  • Increase the value of health insurance tax credits. Under Obamacare families that make up to 400% of federal poverty level may receive a tax credit to cover the health insurance premiums. The amount is calculated as % of income for a Silver Plan. Biden will remove the 400% eligibility cap and lower the limit from 9.85% to 8.5% of income. Also the size of tax credits will be based on Gold Plans instead of Silver Plan (there is a substantial difference in benefits).

What does that mean practically? A Family of 4 making $100,000 will pay $8,500 per year for a Gold Plan. Currently, a Family of 4 pays $25,800 for Gold plan coverage as shown above. This is massive savings of about $17,300 or $1,400 per month. Biden estimates the average family will save $750 per month (that is because the average family makes $50,000 per year). This is going to radically cut the cost of health care for average Americans.

  • Force Obamacare Medicaid Expansion to states that opted out. Many Red states didn’t take up the Medicaid expansion leaving about 5 million potentially eligible people without coverage. Biden will allow the federal government to cover those people. This move also has big political implications as it will guarantee that those voters will vote Democrat in the 2020 election.
  • Stop surprise billing. Out of network providers tend to hit patients with big bills and Americans often don’t even know the provider is out of network. They only learn later through a big bill. Biden will bar health care providers from charging out of network rates when patient doesn’t have control over the provider he sees.
  • Drug Cost Control and allow Medicare to negotiate drug prices. I don’t need to cover this, it is well known Democratic stance. Allow generic imports, limit drug price increase to inflation rate, etc.

The Biden plan is expected to cost $750 billion over the next decade or $75 billion per year. Biden plans to pay for it by reversing some of the Trump tax cuts – primarily lifting the corporate tax rate to 28%. The Biden plan will create a new government health care bureaucracy in Washington DC in addition to the bureaucracy that currently administers Medicare.

Cost: $750 billion

Deficit Impact: Neutral

The Buttigieg Plan (Medicare for All Who Want It)

The Buttigieg Plan has been ripped off from the Biden plan – it is identical – but it adds a few goodies. Here are the additional goodies:

  • Cap out of pocket costs for Medicare beneficiaries (seniors)
  • Limit out of network charges by health care providers to twice the Medicare rate
  • Create a centralized government Claims Database (central clearinghouse for claims)
  • Break up health care mergers

The out-of-pocket cap and the out-of-network charge limit adds up to a lot of money and thus the Buttigieg plan costs about double the Biden plan at $1.5 trillion. But Buttigieg plans to pay for it through a full repeal of the Trump tax cuts (yes, bring back the 35% corporate tax rate) which cost $1.5 trillion. Buttigieg wants his plan to be deficit neutral. My view is that full repeal of the Trump tax cuts is unrealistic. The highest corporate rate I see is 28%. Most likely corporate rate will be rolled back to 25% and the rest has to be financed with higher income tax rates on millionaires. Not impossible.

Cost: $1.5 trillion

Deficit Impact: Neutral

The Warren “Transition” Plan

As you can imagine the Warren transition plan is the most ambitious of all and different from the Biden and Buttigieg plans. It is also simpler to understand in my opinion.

  • Lower Medicare eligibility age to 50 (from 65). In addition, children under 18 and people making less than 200% of the federal poverty level will be eligible. This is massive expansion of Medicare eligibility.
  • Allow people between 18 and 50 to buy into Medicare with premiums capped at 5% of income. Thus a Family of 4 will spend $5,000 on premiums vs $8,500 under Biden/Buttigieg and $25,800 today.
  • Add Dental benefits to Medicare. This is a substantial expansion of benefits.
  • Reduce Medicare Advantage fraud
  • Expand Medicaid Expansion to states that opted out
  • Central clearinghouse for claims, drug cost control, etc

Warren says this plan can pass through reconciliation which means the total deficit hit will be about $1 trillion. Assuming she reverses the Trump’s tax cuts completely without any other revenue raising provisions, her plan would thus cost about $2.5 trillion or a trillion more than the Buttigieg plan. The Warren plan will reuse the current Medicare administration in DC saving the costs of yet another government bureaucracy.

Cost: $2.5 trillion

Deficit Impact: $1 trillion


These 3 plans are far more mainstream than Bernie’s Medicare-for-All proposal which is a total takeover of the health care industry by the government. Americans hunger for a public option and each of these plans provides that. In terms of benefits, eligibility coverage and minimizing costs to families, the Warren plan is the best followed by the Buttigieg plan and then the Biden plan. When it comes to actual policymaking in 2021, the only constraint will be what will pass through Reconciliation in Congress assuming full Democratic control but only a 50 seat advantage in the Senate. Even though Biden and Buttigieg promise to be deficit neutral, I highly doubt they won’t take full advantage of Reconciliation like the Republicans did in 2017. So Biden and Buttigieg will end up passing more than they promise today. But I don’t see them winning anyway. Ultimately, I think the final plan that will pass is a slightly smaller version of the Warren transition plan that costs about $2 trillion with about $1 trillion of the Trump tax cuts reversed to fit it under Reconciliation. This will be a massive improvement in the lives of Americans even if corporate profits will suffer greatly. The passage of any of these plans is very bullish for America and the American economy but unfortunately bearish for stocks (because corporate tax rates go up and after tax earnings decline). I cannot overstate how big a help it will be for American families to start paying $500-$800 per month for family coverage vs $2,000 they are paying now. A $1000-1200 per month in relief for each family is a huge amount of money and huge economic stimulus that will dwarf anything that Trump has done.

One final note I need to make here is the political calculus. All Democratic candidates now have a public option for health care. Cheap health care option is something Republicans don’t have at all. Health care in 2020 is a political weapon that Republicans have no answer for. The forced Medicaid expansion in Red States will bring in about 5 million voters to Democrats which are crucial in beating Trump. But it is not only that group of voters. These proposals will bring a massive amount of people who haven’t voted before who want to get cheaper health care coverage or get any coverage at all – we are talking small businessmen, middle age people, various young communists, anarchists and other knuckleheads. It will be a weird coalition but a very populous coalition that will obliterate the Republican Party at the polls. There are 30 million uninsured today. All of these 30 million people that have been kicked out of the health care system will show up to vote for Warren or whoever wins the Democratic nomination (which I am pretty sure it will be Warren given the Biden slide in Iowa, New Hampshire and California after the Ukraine scandal). I understand if you watch Fox News, you might have massive illusions about what will happen in 2020, but from my perspective this is very simple. People care about their health and they will vote for the people that promise them health care. Democrats promise that. Republicans don’t. Democrats won the House with Medicare-for-All as a headline in 2018, they won a number of local elections in 2019 and they will win with that very simple but effective message in 2020 as well.

Endgame: The Next Fed Bailout

Originally sent to VIXCONTANGO subscribers on February 16th, 2019

Over the past 6 months I have had discussions with various subscribers about how to approach the next market crisis. They asked me how I think various trades will play out. My first immediate impression is that folks are very ready to fight the last war. All of the concerns I heard formulated read like a rerun of 2008:

  • The commercial paper/money market will seize up
  • The housing MBS market will seize up
  • Corporate bond market will seize up and credit spreads will widen a lot (junk bonds will tank)
  • Gold is going to moon because of QE4

Everybody assumes that in the next market crisis the FED is going to do exactly what it did in 2008:

  • Lower rates to zero, potentially even do negative interest rates leading to money market and commercial paper market problems
  • Do QE, buy Treasuries and MBS and expand the balance sheet a lot and thus send gold to the moon

Basically everybody assumes that the problems the US economy has today are the exact same problems it had in 2008. Also people assume that the policy tools the FED and the US government have today are the exact same that they had in 2008. The problem is the setup we have today is different and what will happen will also be very different.

The Last War

Let’s look at what caused the Financial Crisis in 2008:

  • Massive housing oversupply – massive build out of McMansions for the smallest generation (GenX) in recent history.
  • Massive housing bubble spurred on by low interest rates which were first driven by the FED and then by Chinese purchases of Treasury bonds
  • Undercapitalized and highly leveraged banks (40/1 leverage ratio was widespread because of deregulation)

What the FED did then was to address the problem it had on its hands:

  • How do you fix undercapitalized banks? Well, the traditional method since Abraham Lincoln and Samuel Chase invented modern banking was to stuff bank balance sheets with US treasury bonds. The FED went out and bought a ton of short-term treasuries from banks and fixed their capitalization and leverage ratios. Done in QE1
  • There was no market for mortgage backed securities (MBS). The FED took those bad loans off the hands of the banks as well in QE1.
  • Since the economy was tanking and the deleveraging process brought on deflation, the FED thought that interest rates need to be lowered to hike inflation expectations. FED overnight rates went down to zero very quickly. But 3-4 years later long term rates still didn’t go down as much as the FED wanted, so in QE2 and QE3 the FED had to target the long term rates by buying those treasuries.

As a result of all of this the FED quintupled the balance sheet from 800 million to 4.5 trillion sending gold up 5 times as well from $400 in 2005 (pre-crisis) to $2000. Note that the gold market moved higher 2 years ahead of the eventual FED balance sheet expansion announcements.

Are We Fighting the Last War?

Is the situation today the same as in 2008? Do we have the same problems?

Is there a massive housing oversupply and housing bubble? No

No, there isn’t. If anything we have a housing shortage. Millennial generation is much bigger than GenX and because of 10 years of no houses being built, there is simply no inventory. The FED successfully reflated home prices so we have a situation with high housing prices but also no supply. How are prices going to go down if nobody is selling? So where are millennials going to live? In apartments. Multi-unit housing development is exploding. You can sell an apartment for $200-300K and millennials can afford that. Millennials can’t afford a $500K starter home (unless they work at Google like my old neighbors). The new starter home is an apartment and the new 2nd home is the former starter home. But here is the bigger issue – the housing market is not going to tank anytime soon. If anything, rent and housing prices continue to outpace inflation and they will continue to do so because THERE IS NOT ENOUGH HOUSING SUPPLY. If there is no supply, there is no bubble.


Are banks undercapitalized? No

Nope, not a problem either. The FED has been keeping a tight leash on bank liquidity and we have Maxine Waters as House Financial Services Chairman. Bank balance sheets are not a problem.


Long story short, the FED is NOT fighting the last war.

Tools Available in 2008

When you consider what will happen in the future, you also have to consider the tools that are available. That is very important. Let’s look at the tools the FED and the US government had in 2008.

Small FED Balance Sheet

The FED had an 800 billion balance sheet on $15 trillion economy (about 5%). There was plenty of room for balance sheet expansion. If anything the balance sheet was ridiculously small in 2008. Now the FED has a 4 trillion balance sheet on a 20 trillion economy (about 20%). The FED considers this an “ample” balance sheet. In other words, in the next crisis the FED will not be able to ratchet up the FED balance sheet 5 times like it did the last time. There is much less room to move here without triggering inflation.


High Interest Rates

The FED went into the 1990 recession with 8% interest rates. Into 2000 with 6% interest rates. Into 2008 with 5%. Both on the FED rate and the 10 year. Going into the next recession the FED is going in with 2.5% interest rates. As you can see from that chart, the FED had to lower rates about -5% to get the economy running up and running quickly. Next time around, they don’t have -5% to go down. They can only go down -2.5%. Which means that the economy isn’t going to be able bounce as hard. It is one thing to refinance 8% mortgage down to 4%. People’s mortgages go from $3500 to $2500 with no underlying inflation. That is a big boost. When you go from 4% to 2% mortgage, you go from $2500 to $2000. Still a boost but much smaller boost particularly if you have inflation.


Low Debt to GDP Ratio

The US went into the 1990 recession with a debt to GDP ratio of 53%. Into the 2001 recession with 54%. Into the 2008 recession at 62%. Guess where the debt-to-GDP ratio is today? 104%. Clearly there is less room for massive fiscal spending today. The interest expense is going up dramatically. It was at $324 billion in 2018. That 50% more than 2008 (220 billion). This is $100 billion per year that can’t be spent on the economy. Interest expense is almost as much as Medicaid spending! The burgeoning interest expense is going to put a real constraint on the amount of fiscal spending available in the future. What that means is that you can’t do tax cuts anymore without paying for them. What that also means that you can’t do military or infrastructure spending without paying for it. The never ending magical money pot provided by the US government that markets have been tapping since 2008 is rapidly coming to an end.



When you look at these numbers above it is very easy to panic. You see a lot of pundits and articles screaming and pointing at these charts and advocating for imminent doom and gloom and hyperinflation and so forth. Well, it has been 10 years without doom and gloom and hyperinflation. I am showing you the same numbers everybody else is showing you. Where we differ greatly is the interpretation.

There is only one question that you need to answer when you look at these numbers:

What can the government do without triggering inflation?

Would massive expansion in the balance sheet trigger inflation? Not if the balance sheet was scarce to begin with.

Would massive government spending trigger inflation? Not if the money is spent in Afganistan. 6 trillion of the debt under Obama/Bush went into the Middle East. How is that going to trigger inflation in the US? Now if you throw the same 6 trillion on the US, yes you will have inflation.

So what matters really is NOT HOW MUCH money is being spent, but WHERE it is being spent. The real question is what can the FED/US government do in the next crisis that does NOT trigger inflation? Inflation is really what limits their policy responses. In 2008, they had a lot of artillery at their disposal because they were fighting DEFLATION. If you are fighting deflation, you basically have a blank check. That is not the case today. However, the FED and US government are not completely out of tools. Somebody like Peter Schiff who says the FED/US is out of tools is exaggerating. The FED does have tools. The tools are simply smaller than what they were in 2008 and thus need to be deployed more efficiently.

The Next Crisis Response

The FED has been providing an enormous amount of information on what is going to happen next. If anybody is paying attention. We covered how money markets are NOT going to cease up, how people are NOT going to be defaulting on their mortgages and how banks are NOT going to collapse. We covered how the FED is NOT going to be able to ratchet up their balance sheet 5 times and how the US government will NOT be able to borrow 10 trillion again. But they will not need to.

What is the next battle the FED is fighting? INFLATION. That was the headline of my market outlook for 2019. This is very different than 2008, when the FED was fighting DEFLATION.

In 2008, the FED fought deflation caused by a decade long demographic lull (peak years of GenX). In 2019, FED is fighting inflation caused by a demographic crush of millennials coming into their peak years. And the FED has to fight inflation without triggering a spike in the federal outlays for interest expense. Going forward, the FED has to be super-efficient.

Average Inflation Targeting

The first thing the FED is going to do is make its own job easier. It will move the goalposts. FED will start tolerating inflation overshoots. Vice Chairman Clarida alluded to this a couple of times in his speeches but yesterday we had former New York FED Chairman Dudley say it outright: The FED is looking to change its approach on inflation. Dudley said:

Right now, they have what’s called a bygones policy, and what that means is that if they miss on one side, they don’t try to miss on the other side to make up for it. I think the Fed is going to change that policy subtly over time. They are going to talk about, ‘We want to hit 2 percent inflation on average.’ And that’s going to imply to people that if they miss on the low side for a while, that they’ll be willing to miss on the high side for a while.

So the FED will tolerate CPI of 3% for a while if we had a CPI below 2% for a while. They will target a long term average of 2%. This theoretically is not that big of a deal and should not lead to hyperinflation. Many inflation observers think inflation has a momentum and that the FED won’t be able to stop inflation at 2% but so far it seems the FED thinks it can do just that. Let’s assume that they can do that.

In the immediate term, Dudley’s statement means that the FED is done with rate hikes for now. If that wasn’t crystal clear after Powell’s U-Turn. But Dudley provides the rationale for Powell’s U-Turn. Dudley’s statement also means that the FED will not be cutting rates for a while. FED rates are likely to stay at 2.5% for a while. Why? Well, if the FED rates are less than neutral and you have an economy operating at peak capacity, by definition inflation will remain strong. The FED can’t cut with core inflation readings above target. FED is not going to raise, but it can’t cut either.

QE with Positive Interest Rates (Yield Curve Control)

The fact that inflation will remain strong does not mean that there aren’t financial stability risks on the horizon. In fact, the FED is well aware that inflation is likely to start obliterating corporate earnings. Inflation also might keep long term bond yields/mortgage rates high thus putting pressure on the housing industry. The FED previously used QE only AFTER interest rates were at zero. But the FED may not have the luxury of cutting rates to zero before a QE intervention is needed because of inflation.

The San Francisco FED issued a paper to address this issue just last week. The paper is called “The Effects of Quantitative Easing on Interest Rates” and in the paper the authors outline how the FED QE policy in 2008-2012 period really was very haphazard and not targeted well. And as such not very efficient in achieving its policy goals. For example, in the paper they said that buying short term treasuries did not necessarily mean long-term rates went down as much as the FED wanted. That is a total “Duh, of course”, but it is one thing for me to say it, it is another thing for FED research staff to say it. They also said that the FED buying MBS directly had exactly the intended effect to lowering mortgage rates dramatically and improving financial stability in that sector. In other words, the next round of QE is going to be highly targeted towards the specific rates that the FED wants to suppress or specific loans/industries the FED wants to bail out.


So if the FED deems long-term rates a problem in the future, guess what? The FED will be buying 10-year or 30-year treasuries directly. That is called “yield curve control”. That is exactly what the Bank of Japan is doing right now. They just stand ready to buy at a certain interest rate and take everything from the market. So if mortgage rates are high and the housing industry screeches to a halt, the FED will start buying 30-year bonds. Look at the FED balance sheet. Majority of their Treasury security holdings are shorter term maturities, basically 2-year bonds. They don’t own much above 10-year in duration. Look for the FED to start monetizing long-term debt next time around if long term rates aren’t where the FED wants them. The FED might want to take the 30-year down to 2.5%, for example, now that 2 and 10-year are already there.

Add Corporate Bonds To FED Balance Sheet

But that is not all. What is the number 1 risk the FED identified in its inaugural Financial Stability report? Corporate bond yields are too low. Powell repeatedly is saying how corporate leverage is out of control and credit spreads are too low. Powell is after all a former Carlyle partner and he knows corporate leverage from inside out. I initially thought that Powell wanted to raise rates to burst the corporate bond bubble. He may have intended that but he may have been forced to get religion by Trump and Cramer. He might have been forced to accept a bail out the corporate bond sector instead. You never know what is going on behind the scenes. Clearly there was massive change of course by the FED over the holidays. Instead we will get a Carlyle partner bailing out Carlyle’s bad loans!


There is another aspect to this. Once earnings decline, credit spreads tend to widen out. Markets tend to ignore the FED cutting rates and instead focus on the widening credit spreads. Everybody is looking at those and screaming “panic”. How does the FED get control of that situation? Mute that market signal. It is like whac-a-mole. If some rates shoot up and panic the market, the FED whacks them.

The FED’s job is to suppress rates in economic distress after all. They have just slowly expanded their footprint over the years. In 1913, it started by controlling overnight rates. In 2008, they added Treasury bills and notes up to 2-5 years. In 2019, it will be 10-year bonds and corporate bonds. The FED is slowly taking over interest rate control over the entire economy as it seeks to manipulate all risk signals.

Summary of the Next Policy Response

Because the FED is fighting inflation, the FED will NOT be able to cut rates to zero. It will instead do QE while rates are still positive. This QE will be very targeted and it will target long-term Treasuries and corporate bonds. Corporate bonds will be a new balance sheet item the FED has never had before. The FED will expand its existing portfolio of long-term Treasury holdings.

Scope of next FED QE

What and how much the FED will be buying? The total bond market is about 40 trillion. Treasuries are 15 trillion. Mortgage is 9 trillion. Corporate debt is about 8 trillion, etc.



Let’s look at Treasury debt first. As of Sep 2018, total treasuries outstanding are 15.7 trillion. Of those 2.2 trillion are Treasury Bills (up to 1 year), 9.1 trillion are Treasury Notes (1 to 10 years) and 2.1 trillion are Treasury Bonds (20 and 30 year). The part that the FED will likely want to target are the 30-year mortgages to restart the housing industry. If somebody in the private market has 30-year debt at 3.5% and inflation is 2.5% they will be holding onto that. It is still yielding more than inflation. The FED won’t be needed to buy that. Where the FED will have to step in is all the long bonds that have yields below inflation. Normally investors will have to sell those and move their money somewhere else. But if inflation is 2.5% and you are holding a 2.2% 30 year bond, you can’t get rid of that. That is where the FED will monetize. Most of the long-term debt is above current levels of inflation. So I think the treasury debt the FED will monetize is all the sub 2.5% issuance from 2013 and 2016. I think there is at most 1 trillion of that. At most. If I were to guesstimate there is probably about $500 billion that might need a bailout. I think the most likely scenario is the FED simply monetizes the new debt that is coming out of the Treasury that international buyers will not want to buy. I think that is why the FED is stopping QT. They want to start repurchasing the debt Trump is issuing. But that will most likely happen without the FED significantly expanding the balance sheet. At least not this year and next year. The FED was going to do $600 billion of QT in 2019. If they stop the QT, that means the FED can monetize $600 billion of new capacity that the Treasury needs in 2020. Long story short, by stopping QT the FED will monetize the Trump tax cut.


Corporate Debt

In the corporate debt market, you have about $8 trillion of debt. $2.5 trillion is investment grade. 2.5 trillion is BBB rated which currently people consider to be overpriced. Then you have high yield and leveraged loans. The talk is around BBB bonds and leverages loans. If we have issues blow ups there, the FED will rescue them. After 2015 Oil Crisis, I think the FED is ready to start buying junk bonds to bail out energy companies if oil prices go down. This is effectively monetizing the shale build up. I don’t think oil is going to $25 again, but if it was, the FED would be ready to step in and take over the bad loans.

The average default rate in the corporate bond market is 1.5%. A-rated issues have default rate of 0.20%. In the junk bond market, the default rate is around 3% (some say 4%). In the C rate issues, the default rate is 25%. Recovery rate for junk bonds is 40%.

Long story short, let’s assume 10% of the non-high grade corporate bond market needs a bailout because inflation is higher than the yield offered or there is simply default prospects because corporate earnings are getting slaughtered by inflation or low oil prices or whatever. 10% is a very high default percentage but let’s say we have a stagflation economic scenario where that is necessary. 10% of 5 trillion is $500 billion. That is how much the FED needs to monetize in the corporate bonds space.


To summarize, the next FED QE will bail out:

  • $500 billion in long term treasuries
  • $500 billion in corporate bond issues

The scope of the next FED QE as I see it right now is about 1 trillion. That means the FED will have to expand its balance sheet from $3.5 trillion (projected currently) back to about $4.5 trillion. Back to Financial Crisis era levels.