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. there this is the kaiser report we get into it like you probably are used to so if you're not used to it get ready stacey hey max well you know what we have a topic today that is right in your court and that is i know you used to be an options trader on wall street so we have some stories from the options market and the topsy turvy world where the black in shoals formula was supposed to get rid of risk it was supposed to help separate risk and reward this paper was published in 1983 the black initials options formula and negative rates are rewriting the rules of modern finance negative interest rates have quite literally broken one of the

pillars of modern finance as a columnist and central bankers weigh the pros and cons of sub 0 rates and their impact on the world traders have been contending with a rather more mundane fundamental issue how to price risk on trillions of dollars of financial instruments like interest rate swaps when their complex mathematical models simply don't work. right now the black and sells model didn't get rid of risk that separated risk from reward so i make the analogy to the atomic weapons or the atomic power of the whole idea of einstein's discovery that energy equals mass and by understanding that you could create an atomic weapon that was based on a fusion exciter oh so in the financial world. the black controls model basically pried open risk and reward and you could trade risk separately so in the options

market which followed only 10 years after the us you can trade an option that has no intrinsic value at all just to. has implied value based on. time to time value plus. the volatility or beta so if you have been on a stock and the option is the buy the stock in the 6 months in the future and that underlying stock goes up and down a lot then you have an implied value for that option and so it's a way to price risk but the way to price risk is the need to know time time as to have value time has to use the underlying prevailing interest rate to establish a baseline of the value of time from now on the curve from short to long so if you're negative as we've said before you have no value of time as a matter of fact time as

a negative value i have often quipped that negative interest rates are a way for goldman sachs to go backwards in time and steal from clients in the past you know having looted all their current clients and future clients they need to go backwards in time so negative interest rates give the opportunity to commit crimes in the previous decades but put in the time machine aside. the negative rates make the entire proposition financialization moot because without a baseline to value risk and to value time you have no basis to value this financial eyes post industrial economy whatsoever it's all basically a guessing game which we've said for many years that all the values are like when the bailout the reason they came up with $750000000000.00 for the bailout during tarp remember they wanted one over a trillion but they said that number sounded bad so they went to 750000000000 because it sounded better there's there was no basis for the number whatsoever it's

just all optics it's all window dressing and it's just a guessing game which is getting more absurd as we go deeper down the rabbit hole of negative interest rates going back to the 1900 because apparently now that the black in shoals formula no longer applies because negative rates they're using a formula for designed by a french guy in the 1900 century i think it's called the bashful a formula and that was resolving an issue from einstein of the brownian problem so these are going back to $8.00 internationally formula will give you a horrible rate of return. i don't recommend that any bank is using this you need to short that bank you made of that is they're going to go out of business and then of course karl marx did say and did warn that capitalists would have. sell you the rope to hang them with and this is what has happened here is that black it shows they've invented all these formulas this in derivatives explosion happened post 973

and those derivatives took down the financial system which has caused the negative rates which make them it's like the immune system is rejecting these derivatives wielders with with their own they sold themselves the options that destroyed the system that prevents them from selling more options and also i mean that's exactly what happened and the system is rejecting these players on the on the economy you know if you go back to adam smith the economy is a subset of the ecology. and also if you go back to smith he wrote 4 major works one of course refer to the invisible hand in free market capitalism the other 3 or the theory of moral sentiments about morality and ethics are the key the ecology and environment are the under pinning to the economy the natural economy so when you get rid of all that stuff you're just left with. crackheads since math or math are big these days between and to yangon bitcoin is you know backed by man i'm

going to read you this segment because this is for the math nerds out there because it explains why particular negative rates are harming in particular interest rate swaps which is one of the largest sectors of the derivatives market so the issues are most apparent in the market for interest rate swaps this market allows professional investors to lock in interest rates and lets speculators bet on whether rates on bonds or loans will rise or fall that's because the black $76.00 model the mean tools the price options for interest rate derivatives and its variants are so-called log normal forward models for those who aren't math nerds it can essentially be boiled down to this the formula breaks because it requires users to calculate a logarithm and a lager them of a negative number is undefined or leaning. back to the beginning there so interest rates and credit of swaps interest rates interest rates swaps they are a way to get banks the same protection that farmers used to get when they were

raising their crops and you know that futures were invented i think back in japan you know hundreds of years ago to get farmers away to protect themselves against variations in weather so they could sell crops forward as sacrifice some of the upside but they wanted that predictable money because they had a reef plant for the next season as the speculators would speculate that the price would be higher so this was carried over into financial futures during the deregulatory era. reagan thatcher so you had financial futures as in p. futures interest rate futures that was the beginning of this he took financialization he took credit which is supposed to help the real economy to turn that into the product that he turned that into the financialization of the economy was using these interest rates and now the interest rate protection that one would have if you are a bank and you want predictability where their rates going to be next year that is the underpinning for your entire portfolio of derivatives like a farmer needs to guarantee prices for his crop right you need guaranteed interest

rate for your profit your portfolio of derivatives which is what the product of the bank is if there is no way to value that because it doesn't for interest rates are negative then effectively the value of the portfolio 0 that's why that the flesh and story is so key because all the negative interest rates are deflationary as i've said they don't create inflation they don't create economic growth they don't create tax revenues they are a way to signal collapse in financialization era that we are living in all bonds and all options and all derivatives with a negative interest rate are worthless that's deflationary we're going to get into another headline here about financialization but i do want to point out that it's worth reading this article here about options because it goes into at length all these various banks around the world trying to come up with their own you know you know boutique sort of unique look at trying to predict the risk now involved

because the central banks have basically. they're flying blind at the moment because central banks have found you know taper across the eyes of the global banking system with a problem with that as you know standardization so if they're all using their separate models then you have arbitrage or zilla come in and play one bank off the other and they'll just wreak havoc in these markets and drain it from capital again that's also deflationary so financialization this is an interesting headline from the past. week from this talk dot com and he posit something that you and i have suggested over the course of the past few years on kai's report and that is that all of these trade imbalances and all this financialization were as a result 'd of going off the gold standard and here he provided some charts and data that shows that because a lot of people right now are think well maybe the tariffs will win and will like trade will be restored and manufacturing be restored to america and some people

will blame that nafta is about cars that are huge trade deficit but unwinnable trade war gold explains why explaining the u.s. trade deficit this is from mr talk if it's not nafta and not china what is it because nafta is 1904 china joined in 2001 he says china did not cause a soaring us trade deficit but china did excel or at the issue nafta is not involved at all as other charts show so what happened of course is we went off the gold standard i mean that's quite obvious but you see it in the charts quite clearly that going back into the forty's and fifty's we had a trade deficit and then as soon as we went off the gold standard with a bit of inertia you know from 1979 and then dropped ever since every single year right the gold standard imposes a certain discipline and there is a way off the gold standard is because you need the girls to pay for wars typically but what the gold standard deal way to break out of the inertia of having middle

class existence is through genuine innovation so genuine innovators you know the combustion engine the electric light bulb you know the central processing unit. that genuine innovation to break out of the status of what is the gold standard and so we don't reward horrible innovation like pets dot com or we work we work right so these are. innovative products they are scams that are being rewarded because we're not on the gold standard and the it's a game of market share of nonsense and that's deflationary just as i said that central banks have pulled the blinders down over the global financial system with negative rates here the same thing happened and with international trade there's been blinders pulled over nobody knows exactly how much risk there is exactly how much. how much free goods america's essentially getting from the rest

of the world from the u.s. dollar but they're trying to recreate the gold standard with tariffs get rid of tariffs and just go back on the gold standard also with us financialization you you can have not only the topsy turvy world where you can't price risk anymore and that in the derivatives market but here we have the situation we have like we work again breaks all the rules of physics of finance or like the fundamental thing your top business school is never borrow along and lend short like it's it's the opposite like you should do the opposite that's what the banks do and that's what the banks did for years until negative interest rates and if you live in mexico you should be buying sober or plata i believe it's called. i know some mexican state right after the break will be back.

the world is driven by shaped by. no dares thinks. we dare to ask. for. problems in syria. and became excess rebated is probably because the united states and the russian federation both of them decided to deal with it at an arm's length of. their reach move up allies to take

care of things there are a number of opportunities therefore if there were scenes to end there there were real serious attempts by moscow and washington to shoulder the problem and i was witness to a number of them and it would have been possible and would have shorten the war and would have saved a lot of lives there's no doubt. oh i welcome back to the kaiser report i'm max kaiser time now to return to our conversation mark go of market create capital welcome back thanks again for having me already we're digging into some big stories here the macro picture global reserve currency the u.s.

dollar the repos scandal let's talk about negative interest rates ok because how that relates to an deflation because a seem to me like wow that seems awfully deflation area other folks on bloomberg seem to think there's a valid justification for this type of policy it seems daft what is your thoughts i love the word deft is perfect especially good to talk about the europeans. illogical at best crazy at worst i think one of the challenges of of the central banks today is they started to believe their own necessity in that you know they tried desperately to make this q.e. thing work started in japan fedorov or into the u.s. and europe and it's never produced the growth that they thought it would the thing about money and finance and markets is that you've got to assign value to time to create that dividend discount model or to have volatility priced into options market this time has value if these bonds are negative that means that time is

going backwards i judge that this is a way for goldman sachs to go backwards in time and steal from clients from the esther day. i mean that i've been able to convert back to a private partnership and forget the shareholders altogether yeah negative interest rates make anything possible but in other words if you destroy the time value of money right i mean what's left it's not anything having to anything to do with capitalism at that point the problem is we left capitalism decades ago we went to crony capitalism starting in the seventy's and since that time right. wealth and income inequality skyrocket and kleptocracy plain and simple kleptocracy the top point one percent are still in the wealth and those banking institutions are at the root of it and negative interest rates is the penultimate example of kleptocracy you basically stealing from the poor and middle class giving to the rich you manage

people's money manage institutional money and even around for decades and you've got a great reputation and it sounds like you are highly critical of the system and you also have a solution yes it's called get off 0 i hear you and pump yes you know this is the message the clarion call to all those out there their pension funds their individual accounts it's get off a 0 what does that mean mark yes so look hash tag get off 0 is really simple it has to do with this idea that 10 years from now we'll look back in time machine will look back and will say 0 was the inappropriate allocation of as a fiduciary to crypto assets and when i say crypto assets i mean cryptographically secure assets crypto stocks crypto bonds crypto currencies crypto commodities today we have crypto currencies and crypto commodities eventually we have crypto bonds in crypto stocks and it doesn't change this year because of this is

a new asset class knows how the new asset class is just an improvement on the old asset classes that were analog then electronic now they will be digital so digital assets and the best example today is because it's a crypto commodity also crypto currency but mostly a crypto commodity a store of value digital gold it has a great role in a portfolio and one of its primary uses in a portfolio is as a diversifying asset i've been around a long time at the way here to prove it and i've seen every alternative way whether it be hedge funds 25 years ago or private equity 15 years ago or derivatives. as or any of these alternatives and they all promised a couple things they promised better returns they promised lower volatility and differentiated return streams or low correlation the problem is most assets don't deliver on that promise they have a higher level of correlation and people think so you don't get as much diversification benefit you know international stocks 70 percent correlated hedge

funds 60 percent correlate even bonds 30 percent correlated what's interesting thing about pick winners over the 10 years and even over the last 5 years for the 1st 5 years low liquidity but even the last 5 years the correlation with traditional asset stocks and bonds is only about 15 percent point $15.00 that means it has huge diversifying power so let's just take this is the endowments there is $600000000000.00 of money in endowments and 5 years ago they had taken half a percent from stocks half 'd a percent from bonds instead of making 7.2 percent over the past 5 years they would have made 9.2 percent now let's say because we would have failed and have gone to 0 is only half a percent exposure 11 percent half percent versus one percent if that one percent of gone to 0 their return would have been 7 so point 2 points of downside 2 points of upside $10.00 to $1.00 upside down side risk and that's because of the low correlation thing that people don't see most as they fear the volatility of the

asset because in particular i think no volatility is a good thing we love volatility we all want upside volatility the only thing we fear is downside volatility in fact i got to have dinner with markets once real pleasure right when the nobel prize and i said dr marcus i had heard that you said that you would have used semi variance downside volatility for the capital suppressing model but the math would have been too hard you would have one would've won the nobel prize absolutely math would be way too hard so i use variants upside and downside volatility because i want to win that damn prize he said that he said absolutely. and the key is that upside volatility we should want and the thing about bitcoin it's a 200 percent per year compound return to earth 35 percent 80 percent volatility 80 percent volatility seems really high but when you're upside is 235 a sharper issue is really good so we should seek assets that have high levels of volatility and low correlation to our other assets so get off 0 means take an

allocation one percent 3 percent 5 percent put it in this uncorrelated asset and the reason is so one correlated stocks and bonds derive their return from economic growth interest rates and profits corporate profits because it doesn't derive its value from any of that it drives it's value from the technology itself from regulatory changes from adoption from millennial rise because the millennial is are actually adopting at a faster rate because they are digitally native so all those things have nothing to do with g.d.p. and core profits so it's a true diversifying asset when you talk about the innovations of the past 101520 years where there's hedge funds in 1987 you know or in the eighty's there was portfolio yeah we had long term capital management with very innovative with their quantum approach to managing money those typically have been in the area. of mitigating risk with bitcoin it's a pure play an alpha this is

a pure play an alpha when you know you're generating returns with this innovative product so is it that seems to be in a can a certain respect and it does therefore a qualify as a new asset class to a degree because it is something that uniquely gives a portfolio boost in performance. due to its novelty i can go there with you on this because i actually think that innovation if you want to call it is all right now because i am involved i'm going to offer so i'm on a 5 percent they let me talk to the innovation as let me talk to these billionaires i'll get. the 5 percent mark i would love that let's do it let's hang up right now and go do it they say are shooting too low one percent that's too low get off 0 you need to you need you need as you need to reach for 10 percent reach reach for 10 percent i heard once in in fundraising you should always ask the person for something that makes them gasp right if you think you can get enough out there on

the gas 5 that's for sure and i'm still using up i'm going on a sleep over here with that with that policy young guy give him something to tell this think is teeth and to reach. reach right now you recently were quoted as saying that the best time to sell bitcoin has never never seen like warren buffett their own take that is. not. the right time to sell is never and the reason i said that is people were again picking on the volatility and i said well let's think about another volatile asset let's think about amazon amazon's been a public company for 20 years and set a double digit draw down every single year including this year the average peak to trough is 31 percent twice more than 90 when was the right time to sell never so but i jokingly people that owned it from the i.p.o. to sedate her jeff and his mom and dad that's it everybody else was shaken up by the volatility same things through because people are focusing on the volatility and not looking at the fact that every year say $1015.00 didn't fit but 9 out of 10

years the low in each year is higher than the previous low so the network value is increasing every year the number of transactions making new highs the size of the blocks making new highs the number of wallets making new highs all the fundamentals are positive we're in a bull market for fundamentals and yet we're in a quote unquote bear market compared to the previous peak but again people are looking at the wrong thing you have to wonder why value c. and b. saying they're talking about because they never talk about the fundamental valuation because they only talk about price volatility and this must be financially literate but the price some of those be priced sell. holes t.v. ads because everyone's talk about the price we don't talk about the fundamentals or anything they talk about the price but price is a liar let me ask you this global stage global macro picture in belarus is apparently mining bitcoin other nation states also mining because i'm you know we know that the hash rate is 100 quintillion calculations how do you know how to write that number right it's 27 zeros to observe or more now of 28 was because as

1200 quintillion and it seems like this protocol is playing us there's a game theory and it's acting on os there and were and were people trying to do battle against it and the more that you try to kill it the stronger it gets because the security goes up yes and therefore the price goes up but the genius of that adjustment in difficulty yeah. is mind numbing it is genius right so he really is that that that mining death spiral when the price was down but the difficulty just been adjust down and it finds a sweet spot where some miner is willing to take a gamble and dick and then them the animal spirits as keynes a call them kick them so there is no there is no 0 i mean what i love about this asset is everything we do in life is about converting energy to value everything in life whether you're a consultant when you produce a product it's about turning energy whether it's higher carbons or some other form

of energy human energy into a product and sell it. to us but the thing about it is it moves the energy to the lowest cost production source so you know one of my partners created a waste energy business that has negative cost electricity in my eyes because it's pretty tough to be negative cost electricity and you let a story that is boiling the oceans is false it's actually very green very green because it pushes the electricity usage to renewables to hydro to these recapture and i'll give you another example so we had a lot of oil and gas wells in the permian basin in texas they were having people inst and they're having to flare the natural gas because on the pipelines very non-green we're now taking that natural gas capturing it putting on a turban a micro turban and mining because it so you're making the world a better place by taking those flared hydrocarbons out of the atmosphere putting them into securing this global network and the security of that network and the

computing power of the big quinn network is the most powerful supercomputer in the world by a factor of 1500 will we see governments get into a hash war yes the smart ones because here's the thing china theoretically is going to announce their digital wrong you on 1111 i don't know if it actually happened but that's the rumor they're moving in that direction the u.s. is fighting. but like. if you are 1st or last just like the space race it is the 6th year not 1st or last so not 1st or let the markets go wise words that ring on the guys are part of thanks for having me right here that's going to do it for this edition of the kaiser report with me max kaiser stay there would like to thank our guest mark morgan craig capital if you want to reach us on twitter it's kaiser in park until next time by.

what politicians do something to. put themselves on the line they get accepted or rejected. so when you want to be president and she. wanted. to go right to the press this is like the full story in the morning can't be good. i'm interested always in the lawyers in the. city. you know world a big part of the lot and conspiracy it's time to wake up to dig deeper to hit the stories that made stream media refuses to tell more than ever we need to be smarter we need to stop slamming the door. and shouting past each other

it's time for critical thinking it's time to fight for the middle for the truth the time is now for watching closely watching the hawks. just look. at this crash the moment a lot of them should ask for the lost revenue and seeing and i'm embarrassed for the promotion of the commission so you. were.