Which followed only 10 years after this you can trade an option that has no Intrinsic Value at all it just 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 the underlying stock goes up and down a lot then you have an implied value for that option and so its a way to price risk but the way to price risk is the need to know time time best have value time has to use the and align prevailing Interest Rate to establish a baseline of the value of time from now on the curve from short to long so if youre negative as weve 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 to 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 its all basically a guessing game which weve 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 want the 750000000000 because it sounded better there is there was no basis for the number whatsoever its just all optics its all window dressing and its 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 and shoals formula no longer applies because negative rates theyre using a formula for designed by a french guy in the 1900 centuries i think its called the bashful a formula and that was resolving an issue from einstein of the brownian problem so these are going back to. Form to rationally formula will give you a horrible rate of return i dont i dont recommend that any bank is using this you need to short that bank immediately that is theyre 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 theyve 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 its 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 thats exactly whats happened in 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 were the theory of moral sentiments about how 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 youre just left with. Crackheads since math or math are big these days between and you yang and bitcoin is you know backed by man im 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 speculate on whether rates on bonds or loans will rise or fall thats because the black 76. 00 model the mean tools the price options for Interest Rate derivatives and its variants are socalled log normal forward models for those who arent math nerds it can essentially be boiled down to this the formula breaks because it requires users to calculate a logarithm and a logger 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 and p. Futures Interest Rate futures that was the beginning of this he took financialization need to 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 doesnt for Interest Rates are negative then effectively the value of the portfolio 0 thats why that the flesh and story is so key because all negative Interest Rates are deflationary as ive said they dont create inflation they dont create Economic Growth they dont 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 thats deflationary were going to get into another headline here about financialization but i do want to point out that its 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 in a boutique sort of unique look at trying to predict the risk now involved because the Central Banks have basically. Theyre 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 theyre all using their separate models then you have arbitrage or zilla come in and play one bank off the other and theyll just wreak havoc in these markets and drain it from capital again thats also deflationary so financialization this is an interesting headline from the past. Week from miss talk dot com and he posit something that you and i have suggested over the course of the past few years on kaiser report and that is that all of these trade imbalances and all this financialization were as a result 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 are huge trade deficit. Unwinnable trade war gold explains why explaining the u. S. Trade deficit this is from mr talk if its not nafta and not china what is it because nafta is 1904 china joined in 2001 he says china did not cause a soaring u. S. Trade deficit but china did excel or at the issue nafta is not involved at all as other chart show so what happened of course is we went off the Gold Standard i mean thats quite obvious but you see it in the charts quite clearly that going back into the fortys and fiftys 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 dont 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 were not on the Gold Standard in the its a game of market share of nonsense and thats 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 theres been blinders pulled over nobody knows exactly how much risk there is exactly how much. How much free goods americas essentially getting from the rest of the world from the u. S. Dollar but theyre trying to recreate the Gold Standard with tariffs to retire or if they just go back on a Gold Standard also with us financialization you you can have not only the topsy turvy world where you cant 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 a like the fundamental thing youre talking Business School is never borrow along and lend short like its its its the opposite like you should do the opposite thats what the banks do and thats what the banks did for years until negative Interest Rates and if you live in mexico you should be buying silver or plata i believe its called. I know some mexican state turn right after the break well be back. Because they called you so good that even such a bad ending. Not. To find the next guy. Down cause. Done d. N. Fell to feed the dog she even dumped the attempt. To deflect some 40 c. E. O. Thing to the deflection board after to say. That is a god that i got up from idiots are. Going to write about. That you can bank on. The look up. Monologue while the name. On the bottom theres a plain a Spiritual Life and not all. And a one person and they have to name 100 gandhi a new normal gandhi. On the seas. Are you going to mock you then beam and join you. Rob them to follow and then comes out of. The set up one among what i would all im. A father of 3 main t. V. They tell you not the high i might. Add that this month when the sun shone. Full of thought it was a muslim it shook a lot of the. Theater some when we did the board. Oh i welcome back to the kaiser report i max kaiser time now to return to our conversation with mark go of market create capital welcome back thanks again for having me already were digging into some big stories here the macro picture global reserve currency the u. S. Dollar the repos scandal lets 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 theres 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 its never produced the growth that they thought it would the thing about money and finance and markets is that youve got to assign value to time to create the 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 ive 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 whats left its 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 seventys and since that time right now. Wealth and income inequality skyrocket and kleptocracy plain and simple kleptocracy the top point one percent are still in the wealth and those d 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 peoples money manage institutional money and even around for decades and youve got a great reputation and it sounds like you are highly critical of the system and you also have a solution yes its 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 its get off 0 what does that mean mark yes so look hashtag get off 0 is really simple it has to do with this idea that 10 years from now well 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 doesnt change that your business or this is a new asset class knows what a 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 its 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 look ive been around a long time at the white hair to prove it and ive 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 dont deliver on that promise they have a higher level of correlation and people think so you dont get as much diversification benefit you know International Stocks 70 percent correlated hedge fund 60 percent correlate even bonds 30 percent correlated whats 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 lets just take this if the endowments there is 600000000000. 00 of money in endowments of 5 years ago they had taken half a percent from stocks half a percent from bonds instead of making 7. 2 percent over the past 5 years they would have made 9. 2 percent now lets say because we would have failed and have gone to 00 a 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 thats because of the low correlation thing that people dont 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 the 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 won wouldnt won the nobel prize said absolutely math would be way too hard so i use variance upside and do