Reggie Middleton

Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at, where we're ushering the P2P Economy.


Friday, 23 April 2021 09:22

Hex Forensic Analysis and Valuation

Hex is easily, the most controversial crypto analysis project the Veritaseum research team has performed to date. This analysis is sure to make some waves. It contains a project overview, detailed project description, a strengths section, risks and liabilities and a token valuation. The "Risks and Liabilities" section is sure to turn some heads.

Here's a preview of the contents...

 You may download the full document for free here:  default HEX FORENSIC ANALYSIS and VALUATION


Importantly, it should be noted that we are not declaring HEX a Ponzi scheme. We are not lawyers, and such a declaration requires a legal conclusion better suited to be resolved by the courts. However, from a forensically analytical investor’s perspective, this issue is deserving of very careful consideration to avoid unanticipated events that can severely affect an investment. Below, please find an illustration of a hybrid Ponzi/Pyramid scheme, with characteristics of a typical Ponzi scheme on the right and the characteristics we perceive to be inherent in HEX on the left.

 It is common for many to conflate the terms “Ponzi scheme” and “pyramid scheme”. A Ponzi scheme, as noted above, involves a promoter who has no real investment opportunity. The promoter simply collects payments from a stream of investors, promising them all the same high rate of return on their investment.

People have been asking me, "How did you manage to score such a monumental crypto patent before all of these billion and  trillion dollar companies?". The answer is actually quite simple. I understood what crypto and blockchain were, early on.

These videos were all made in the first week of 2014 - over 7 years ago - before the birth of Ethereum!

Foresight and understanding enabled me to see what many others couldn't or didn't. That was back in 2013. Fast forward to 2021, and some of the biggest names on Wall Street still don't have a clue. This means that I still have a distinct advantage!

Reuters reports: Bitcoin is 'economic side show' and poor hedge against stocks: JP Morga

For one, you know there's a problem if someone is trying to value a paradigm shifting, inter-industry protocol by using its "production costs"! 

It shows a blatant misunderstanding of how platform-based, paradigm shifts behave - or even of what they are.

Let's take a look at using that logic as applied to the last protocol-based paradigm shift.

What is the "production cost" of the Internet? We can back into that by quantifying the complete operating costs of those entities that actually supply the Internet.

  1. The Blended Telecomm net profit margin is 8%
  2. Global broadband revenues are $395B (alternative source).
  3. Thus, rough, all-in cost of production is about $363B ((199% - 8%) * $395B).

This is the Internet Protocol's applied production cost (the cost to actually use the value of the protocol in real life) - $395B.

Now, how much is the Internet worth? A common sense view...

At a glance

  • The value of the internet is difficult to assess, but economists believe its services are worth much more than the cost of internet subscriptions.
  • It presents a significant consumer surplus, which is the gap between how much something is worth to us and how much we pay for it.
  • Deeply ingrained in society, it is almost impossible to put a monetary value on the internet.

The internet became a global commercial network in the 1990s. Less than three decades later, it is everywhere. Now that we’ve created it and come to rely on it, we inevitably wonder: what is it worth?

Well some studies say in excess of $10 trillion, others $7.8 trillion - all account for.... just the US! As the US is roughly 20% of global GDP, multiply that by 5, and.... you will find that $40 to $50 trillion is a lot more than the cost of production at $395 billion. But wait...

As excerpted from "How Much is the Internet Worth?"

... Most recently, yet more economists – this time Erik Brynjolfsson, Avanish Collis and Felix Eggers – tried yet another tack: in 2017, they asked people already on the internet whether they would give up a particular internet service in return for money.

On average, respondents said they would forgo services such as search engines for US$17,530, email for US$8414 and maps for US$3648.

This study tells us a lot about what people value most about the internet. It also gives us a figure for internet consumer surplus across the US: almost US$8 trillion a year in an economy with a US$20.5 trillion economy.

Source: Internet Association data from BEA.

Source: Internet Association data from BEA.

 Indeed, a real-world example now shows what happens when you remove internet access. India’s government turned off internet access in Muslim majority Kashmir in August 2019 in a bid to reduce public protest. The effect even in this poor region was immediate: pharmacies quickly began to run out of medicine; students could not study; news about the region dried up, even within the region itself. The New York Times quoted one local as saying: “There is no life without internet, even in Kashmir.”

At this point, Greenstein says, valuing the internet is a task for which economics lacks the tools.

“It’s no longer a partial equilibrium,” he explains. Or in plainer English: “It’s not a well-grounded question anymore.”

The internet, it seems, is now too deeply ingrained in our society to be assessed with mere money.

Why am I comparing the Internet to Bitcoin? Because I truly understand what Bitcoin, distributed ledger protocols, and the crypto industry are really about. It's the underpinnings of a global value transfer network that has the real potential to easily dwarf the Internet Very much like the Internet exists as the result of its underpinnings in information transfer protocols (IP, or Internet protocol), it is a utility with unprecedented global reach and ability.

It is not a commodity, nor an investment or a security. It is much too monumental to be measured in mere materialistic, one-dimensional Wall Street parlance. Big banks, regulators, investors, the media - many have this all wrong. This is how I was able to score the patent. I knew what it was that I was patenting., while nearly everyone else was looking at price charts and thinking money remittances. Granted, that was almost 8 years ago. Fast forward to today, have the big investment houses learned their lesson?

The Ultimate Flip Flop: JP Morgan Validates Cryptocurrency › i-told-you-jp-morgan-phil-nagy
Feb 21, 2019 — I hate to say, “I told you so”, but JP Morgan…I told you so. They just announced that they're creating their own cryptocurrency to use in house ...

JP Morgan Continues Crypto Flip-flop Amidst Square's $50M ... › 2020/10/16 › jp-morgan-continues-cry...
Oct 16, 2020 — The latest statement by JP Morgan on the price of Bitcoin has left multiple in dilemma. But is this something to worry about?

JPMorgan Completes Surprise Bitcoin Flip—And Calls A Price ... › sites › billybambrough › 2020/06/13
Jun 13, 2020 — JPMorgan, one of Wall Street's biggest banks and up until recently an outspoken bitcoin critic, has changed its tune on the world's number one ...
Missing: flipflop ‎| Must include: flipflop

JPMorgan Flip-Flops Again, Says Bitcoin May Hit ... - LaptrinhX › jpmorgan-flip-flops-again-says-bitcoin...
Jan 5, 2021 — Back at the start of November, JPMorgan quant NIck Panigirtzoglou - perhaps tasked with being the skeptic in-house bitcoin strategist ...

zerohedge على تويتر: "JPMorgan Flip-Flops Again, Says ... › zerohedge › status
Jan 4, 2021 — JPMorgan Flip-Flops Again, Says Bitcoin May Hit $100,000 "But Such Price Levels Would Be Unsustainable" ...

Bitcoin May Never Go Above $ 40,000 Again, JP Morgan ... › CryptoCurrency › comments › bitco...
Jan 27, 2021 — 1.7m members in the CryptoCurrency community. The official source for CryptoCurrency News, Discussion & Analysis.


JPMorgan Flip-Flops Again, Says Bitcoin May Hit $100,000 ... › jpmorgan-flip-flops-again-says-bitc...
Back at the start of November, JPMorgan quant NIck Panigirtzoglou - perhaps tasked with being the skeptic in-house bitcoin strategist - predicted that based on ...


In the meantime, JP Morgan advisory customers, with friends like these, who needs enemies???.


Now, I'm not a Bitcoin maximalist, nor do I even think that Bitcoin is the most valuable crypto, but that doesn't mean that I will just sit back and ignore the spread of misinformation! If you want to know what I'm into, then just Imagine having the keys to the internet back in 1995. Well, that's where I feel we are in 2021, with the same Luddite movement acting the role o f the naysayer! For my take, read "A Most Powerful Invention Comes to Life"


This is a video that I published  over 7 years ago. I find it be quite prescient.

This is an extended appearance that I made on CNBC on the same topic. Remember, this was 7 years ago (click graphic below)... 


Fast forward to today, we have built functional product which utilizes the invention, and more importantly, a patent has been granted and registered - with reach into nearly half of the G20. Now, we move forward to implementing what I believe to be one of the most powerful technological inventions of modern time (then again, please realize that I am biased). Let's walk through what it is that I invented, and how it fits into today's world.

 First, a few definitions....

  • Zero Trust” is a situation where there is no or very little trust needed between parties in order for them to safely transact
  • "Value transfer" is a process of transferring rights (e.g., ownership, control, etc.) of objects of economic value among parties (e.g., gold, goods, services, responsibilities, securities, commodities, real assets). 
  • Cryptocurrency”, for the purposes of this discussion, is a cryptographically secured account of value that works in conjunction with a blockchain. Examples are Bitcoin, Ethereum, Chinese Digital yuan and Binance BNB

Overview of the Reggie Middleton ZeroTrust Concept

Market efficiency tends to increase—and therefore transaction costs tend to decrease—in proportion to the degree that transacting parties trust each other. However, rent extraction tends to increase—and therefore trust decreases—in proportion to market size1. Economic rent is any payment to an owner or producer in excess of the costs needed to bring what is being purchased into production.Efficient and productive participation in larger markets therefore requires mitigating trust issues, but that comes at a cost. That cost can often be reduced by economies of scale, but even today, there is substantial overhead from buffering against risks introduced by counterparties, intermediaries, post-delivery payment failures, guarantor failures, escrow, etc. Rose, David C. The Moral Foundation of Economic Behavior. New York: Oxford UP, 2011. Print.

Since the mid 1990s, there has been an explosion of commercial activity where parties previously unknown to each other agree to transact using the internet as the fundamental communication medium, sometimes even across international borders. Establishing and maintaining trust between those parties has played a central role, and various crude solutions based on traditional, but inefficient and high friction methods have been attempted (e.g., electronic exchanges with expensive fees that step in as the counterparty, “online” escrow and dispute resolution using third parties, various reputation systems, third party guarantors, etc.).

Among those markets where unknown and untrusted individuals interact are those which trade financial instruments (e.g., stocks, bonds, options, futures, swaps, currency exposure, etc.). With the advent of financial engineering, individuals and businesses have been able to leverage computing in financial trading, including automating the process of entering and exiting trades based on programmable conditions or algorithms. However, even with the explosion of the use of technology in this space, such technology is overwhelmingly layered on top of legacy centralized markets. Nearly all impose relatively large costs to conduct trades with untrusted counterparties. Some very high-volume exchanges sell the ability for “high value” (i.e., high-paying) customers to cut in line ahead of less savvy or less well equipped investors. Some have questioned the fairness of this practice.

Further, the cost of contract enforcement in international trade can be prohibitive, and success might be very difficult to predict. In addition, a seller may wish to receive one currency, and a buyer may wish to send another. The value of one currency denominated in another can be volatile. Historically, one way that remote parties have mitigated risk is to engage the assistance of trusted intermediaries. One such mechanism is a letter of credit (L/C). L/Cs are appropriate where a seller does not know whether to trust a buyer wishing to place a large order, but does trust a bank where the buyer has established a line of credit. The buyer and bank agree that the bank will release funds from that line of credit to the seller when the seller meets certain conditions (most often transmitting evidence of shipment to the bank before a certain date). The bank provides the promise (L/C) to the seller, and the seller and buyer agree on the remaining terms of the transaction. However, payment often happens at a later date than the agreement, and exchange rates could vary between the time that the agreement was struck and the time payment is received. Only the largest of institutions have the resources necessary to properly hedge against exchange rate volatility. Additionally, the fees charged by banks for L/Cs and currency exchanges are substantial. Perversely, a high degree of trust must also be placed in the intermediary institution(s), who effectively acts as self-interested document examiners who may or may not independently verify the veracity of said documents before releasing the funds, perhaps leaving much of the risk of mistake, forgery, or fraud on the shoulders of the seller. As such, L/Cs are typically not well-suited for consumer transactions, or where transactions involve currencies whose values may vary wildly in relation to each other.

Decentralized digital currencies (or so-called “cryptocurrencies”)—technologies that promise tightly-controlled asset creation coupled with the ability to transfer control or ownership of those assets computationally when rigorously-defined criteria are met, with little-or-no dependency on third party intermediaries, and with very low transaction costs compared to traditional mechanisms—are relatively new creatures. The Bitcoin protocol and progeny (Ethereum, Litecoin, etc.) are one such class of technologies that have recently enjoyed meteoric rises in popularity (and valuation).


The invention pertains to systems and methods enabling parties with little trust or no trust in each other to enter into and enforce agreements conditioned on input from or participation of a third party, over arbitrary distances, without special technical knowledge of the underlying transfer mechanism(s), optionally affording participation of third-party mediators, substitution of transferors and transferees, term substitution, revision, or reformation, etc. Such exchanges can occur reliably without involving costly third-party intermediaries who traditionally may otherwise be required, and without traditional exposure to counterparty risk.

This patented invention description explores example embodiments enabling two forms of value transfer: arbitrary swaps and L/Cs. Arbitrary swaps and L/Cs are useful as illustrative examples because traditionally the two are very different animals. However, the invention allows for their expression and enforcement in remarkably similar terms. As one skilled in the art will appreciate, the invention can be applied to many other forms of value transfer as well.

  • In one example, Party A believes that bitcoins (BTC) will rise in notional terms when valued in New Zealand dollars (NZD) over the next few weeks. Party B believes the opposite is true, that BTC will fall when valued in NZD over a similar timeframe. Neither parties are aware of each other, but each wants to place a small bet in accordance with their respective beliefs. One embodiment of the invention allows those parties to discover each other, collaborate with each other to agree on concrete terms, propose transactions reflecting their agreement, and finally enforce that agreement without traditional, costly measures.
  • In another example, Party A is a merchant who wishes to allow her customers to trade their BTC for her services. However, she would rather receive US dollars (USD) because she is concerned about the volatility of BTC. Party A is not concerned about whether BTC will rise or fall when valued in USD. Periodically (e.g., once per day, hour, etc., or even once per transaction where she receives BTC), she can offer to sell exposure to BTC valued in USD in proportion to the BTC she receives from her customers. In other words, she swaps her exposure to BTC in exchange for exposure to USD. Party B has fewer BTC and more USD than he wants, and desires increased exposure to BTC valued in USD. One embodiment of the invention allows Party B to find and exchange—or “swap”—exposures with Party A, allowing Party A to accept BTC in exchange for her goods or services knowing that she will be compensated by Party B if her BTC lose value against USD, in exchange for Party B being able to keep any upside if BTC gains in value against USD. Another embodiment seeks out these swaps automatically upon detection of Party A's ownership of additional BTC.
  • Combinations are possible. For example, Party A accepts Australian dollars (AUD), but prefers USD, and wants to hedge against volatility of AUD in USD. One embodiment of the invention allows Party A to swap exposure to USD in BTC with Party B, and simultaneously swap exposure to BTC in AUD with Party C over a similar time period, thereby synthesizing a hedge against AUD in USD. The invention is not limited such that Party B and Party C are distinct parties (they could be the same), nor is it limited such that such that Party A must conduct two separate trades. In addition, various embodiments of the invention allow the parties to perform these types of transactions without maintaining currency deposits or making currency purchases or exchanges.
  • In yet another example, Party A wishes to purchase goods from Party B. The parties do not know each other well. Party B wants assurances of availability of funds from Party A, but Party A does not want to release those funds to Party B (or an assignee) until Party B has demonstrated proof of shipment (or met some other condition).
  • In one embodiment comprising a swap, a first device called a “client” and a second client participate in a series of transactions where assets from a first party and assets from a second party are committed until a combination of two (of a total of three) of the first party, the second party, and an facilitator release them in accordance with a calculation by the facilitator based on observation of external state, such as the relative value of certain financial, commodity or real property instruments, at a specific time.
    • This is basically a swap without a middleman or credit risk/counterparty risk exposure since the participants (clients) hold the assets in their possession at all times unless committed to the blockchain where the blockchain itself then becomes the counterparty. Until the blockchain has been hacked or in some fashion critically malfunctions, the credit/counterparty risk has been drastically reduced and approaches that of zero, hence the need for due diligence and vetting of your counterparty approaches zero as well as the need to vet and trust the authoritative third party who may hold and escrow funds, i.e. exchanges, brokers, banks. Thus, we now have Zero Trust Contracts and agreements. Swaps can take many forms and themselves can become many things.
  • In another embodiment comprising a L/C, a first client and a second client participate in a series of transactions where assets from a first party are committed until either the first client or a facilitator releases them based on observation of external state, such as verification of delivery to a shipper or an address. The L/C as implemented by the invention, remedies multiple maladies in the traditional application of the L/C.
  • In a further embodiment, the assets may be refunded if no such observation can be made by an expiration timestamp.
  • In yet another embodiment, the commitment of assets may be extended pending a settlement facilitated by a mediator.

A quick Google search for letters of credit and swaps yields…

Note: The net economic exposure of swaps is roughly 1/10th or less of this figure, but for the purposes of this invention’s discussion, fees would be charged on notional amounts, not netted amounts.


$6.6 trillion daily times a 360 day year is approximately $2,376,000,000,000,000, to view this as an annualized number.

These are but two of what is possibly hundreds of permutations to be achieved by those skilled in the art, who can take the invention and use it to replicate nearly any transaction of value in a fashion that eliminates counterparty and credit risk, to wit (as per simple Google searches):

With the advent of faster block and settlement times and more efficient consensus systems, the speed and usability of this invention combined with the simplicity of user-friendly interfaces that allow those unskilled and unfamiliar in the art can transform finance, commerce and any transaction of value to an extent that far exceeds the transformation witnessed by the popularization of the Internet pre-ecommerce days.

This invention seeks to claim that transformation as its addressable space, and this space is monumental and set to grow exponentially larger, to wit:

Op-ed: A new global arms race in digital finance is heating up › 2021/01/21 › op-ed-a-new-global-arms...

4 days ago — Much like the space race, development of central bank digital currencies will influence ... Specifically, this latest phase of progress has its sights set on a massive ...

What Are the Main Goals for Central Banks in 2021? › Banking

Jan 4, 2021 — It has been an unusually eventful year for central banks all over the world in ... see the introduction of the first major central bank digital currency (CBDC) in 2021. ... pushing collectively for the development of the international monetary system

2021 the year for central bank issued digital currencies ... › 2021-the-year-for-central-bank-issu...

Jan 4, 2021 — 2021 the year for central bank issued digital currencies? ... China is well ahead in this journey, having planned for a Central Bank Digital Currency (“CBDC”) ... to a blockchain that is controlled by the rules built into the algorithm that powers it.

Turkish central bank announces surprise digital currency pilot ... › turkish-central-bank-announces-surpris...

Jan 2, 2021 — ... new digital currency in 2021, after the country's central bank announced it had ... Turkey is now at a more advanced stage of development than other countries ...

Bank of France settles $2.4M fund in central bank digital ... › news › bank-of-france-settles-2-4...

6 days ago — The Bank of France has successfully wrapped up a $2.4 million CBDC pilot, which saw ... The Bank of France successfully piloted a central bank digital currency — or ... “From a technological point of view, the experiment required the development ... underway at the Bank of France, with some expected to run until mid-2021.

China's CBDC 'Dress Rehearsal' Sets Stage for Other Central ... › B2B

Jan 4, 2021 — Notably, the digital currency offered by China's central bank does not carry ... Fed and seven central banks have put forth a framework for CBDC development ... the central banks' approaches may differ, but 2021 may show marked progress ...

Swedish Bankers Face Identity Crisis Over Digital Currency ... › News › Technology News

Jan 5, 2021 — For a graphic on Central bank digital currencies across the world: ... advisor for the Swedish Bankers Association is concerned that the Riksbank has not made it ...

Venezuela to have 100% digital monetary system - FXStreet › analysis › venezuela-to-have-100-...

Jan 4, 2021 — To facilitate the entry of the digital currency, the country began demanding Petro in the form of payment in the country's oil-related transactions, which turned ...



FIG. 1 depicts a typical embodiment for practicing the invention, especially for use with or comprising a transfer mechanism such as a decentralized digital currency, where the clients, transfer mechanism, facilitator, and data source are distinct participants connected by a computer network.

Aa lot of crypto industry rags cheered the news that banks were given the regulatory go ahead to use stable coins and the blockchain as a transfer settlement layer. My suggestion is to be careful of what you wish for. The Office of the Comptroller of Currency (a regulatory arm of the US Treasury) released the following note: Federally Chartered Banks and Thrifts May Participate in Independent Node Verification Networks and Use Stablecoins for Payment Activities, as excerpted:

“While governments in other countries have built real-time payments systems, the United States has relied on our innovation sector to deliver real-time payments technologies. Some of those technologies are built and managed by bank consortia and some are based on independent node verification networks such as blockchains,” said Acting Comptroller of the Currency Brian P. Brooks. “The President’s Working Group on Financial Markets recently articulated a strong framework for ushering in an era of stablecoin-based financial infrastructure, identifying important risks while allowing those risks to be managed in a technology-agnostic way. Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low cost associated with these products.”

The agency letter concludes a national bank or federal savings association may validate, store, and record payments transactions by serving as a node on an INVN. Likewise, a bank may use INVNs and related stablecoins to carry out other permissible payment activities. In deploying these technologies, a bank must comply with applicable law and safe, sound, and fair banking practices.

Engaging in INVN within the federal banking system may enhance the efficiency, effectiveness, and stability of payments activities and achieve the benefits of real-time payments already enjoyed in other countries. For example, such activities may be more resilient than other payment networks because of the decentralized nature of INVNs, which allows a comparatively large number of nodes to verify transactions in a trusted manner. An INVN also limits tampering or adding inaccurate information to the database because information is only added to the network after consensus is reached among the nodes validating the information.

that blockchains have the same status as other global financial networks, such as SWIFT, ACH, and FedWire. Sounds like good news, right? Well, yes, and no... Banks, by their very business models, are gatekeepers of capital. No one will every really have as much capital on hand to deploy as we bank. Combine that access to capital with implicit and explicit preferential rights given by regulators (we are not all invited to play the game on the same terms, let's face it) and the banks willingness to play hardball as opposed the the blochchain's genesis entrepreneurs coming from mainly an opensource mentality and you may find a recipe for disaster for the entrepreneurial blockhain/token startup. There's near guaranteed doom for the ICO funded startup, as the US regulatory environment is downright vociferous if not lethal!

That leaves self-funded and VC funded ventures - again, limited in scope and depth of creativity. Not everybody has the hook-up for capital! Then there's the open-sourced mindset of the typical blockchain developer or architect. The look at companies that attempt to place their stake in the ground and claim territory for themselves, and say, " But... Can't we all just get along???" Well, on Wall Street, the answer is... No! Or, at least it has been since I've been alive. You have to be part of the old boys club, and that club ain't very big, and even more to the point, it ain't offered to just any or everyone.

So, with that preamble, we have a bunch of the crypto pioneers who came up with many great ideas, yet failed to protect them. Then we came up with banks who took these ideas, and did very little to build upon them, yet stand quite likely to capitalize on them. Let's take Wells Fargo, who apparently has patented the cryptocurrency exchange, and done so right under the nose of the industry. If this is the case, all of you Stellar, Tether, USDC and other USD stable coin aficionados might need to site down and hold on tight. The rug may be snatched from under you. 

Wells Fargo patent number: US10565645B1 United States - 

Systems and methods for operating a math-based currency exchange


Math-based currency (“MBC”), commonly referred to as cryptocurrency, is rising in popularity, use, and public acceptance. MBC differs from fiat currency (i.e., currency that is declared by a government to be a legal tender) in that principles of cryptography are used to create, secure, and transfer MBC directly from a first user to a second user. A user of MBC can transfer funds to another party by using a private key associated with a certain value of MBC. The private key may be used to generate a signature for the transaction, and the signature can be verified by nodes in the MBC network, thereby completing the transaction. Additional information, including the identities of the parties involved in the exchange, is not required to effectuate the transaction. Accordingly, MBC allows for anonymous transfers of currency between users without the reliance on financial institutions (e.g., a bank) to facilitate the transfer. Examples of MBCs include Bitcoin, Ripple, Litecoin, Peercoin, and Dogecoin, among others.

Generally, users of MBC store information relating to private key and public key pairs that are associated with specific values of MBC in MBC wallet applications. The wallet applications are used to facilitate the above described transfers. Services that provide a secure place for users to store private keys associated with MBC. Beyond that, however the wallet applications do not take actual possession of or an ownership interest in the MBC.

I warned of this 5 years ago, this week! For those who didn't pay attention, the result is what you see and read above....

See also...

A couple of days ago, I tweeted...

This is what that chart looks like now...


Tesla's data store allows it to do things that no other car manufacturer can accomplish at this time, and no amount of capital can enable them to catch up in the short to medium term. That's not to say that TSLA is not overvalued, but I think the pundits are mis-valuing Tesla more than overvaluing it. No company is worth 150 P/E, but the data store and gathering machine is by far its greatest asset and needs to be worked into the equation.

As a refresher, Tesla has well over 1 million data delivery drones, aka semi-autonomous cars fitted with (as quoted from the Tesla website):

  • Eight surround cameras providing 360 degrees of visibility around the car at up to 250 meters of range.
  • Twelve updated ultrasonic sensors complement this vision, allowing for detection of both hard and soft objects at nearly twice the distance of the prior system.
  • A forward-facing radar with enhanced processing provides additional data about the world on a redundant wavelength that is able to see through heavy rain, fog, dust and even the car ahead. 

To make sense of all of this data, a new onboard computer with over 40 times the computing power of the previous generation runs the new Tesla-developed neural net for vision, sonar and radar processing software. Together, this system provides a view of the world that a driver alone cannot access, seeing in every direction simultaneously, and on wavelengths that go far beyond the human senses.

To make use of a camera suite this powerful, the new hardware introduces an entirely new and powerful set of vision processing tools developed by Tesla. Built on a deep neural network, Tesla Vision deconstructs the car's environment at greater levels of reliability than those achievable with classical vision processing techniques.

These millions of fully autonomous data discovery and remittance drones are constantly roaming on all five continents, sent exabytes of data to Tesla's servers - 24 hours per day, 7 days per week, during rain, snow, sleet, sunshine, sandstorms... The works. All types of obstacles, driver and pedestrian behavior, natural occurrences, everything that normally and abnormally occurs during driving is being sent to Tesla in exquisite and complete detail - constantly, from everywhere. If you think Google's data advantage is insurmountable (think search and maps), you ain't see nothing yet.

This enables Tesla cars to do things like fully autonomous driving - right now, not 5 years into the future.

Engadget: Watch Tesla's Full Self-Driving navigate from SF to LA with (almost) no help.

Now, how much is that worth? Hard to tell since the Fed has destroyed risk pricing and price discovery with the onslaught of unprecendeted printing, but I do know that it is worth something, even in this ridiculous multi-asset bubble!

Not only are unemployment insurance claims rising again, but not a single media outlet has chimed in on the fact that after 6 months of so-called "economic recovery" (that doesn't really exist since claims are back on the rise), the claims number remained materially above any level that has every been recorded by the government pre-COVID lockdown - EVER!

Yes! That's how bad it is! The best of the Pandemic is still worse than it's ever been... until the start of the pandemic. And... The claims are rising again! Those of you who follow my YouTube channel shouldn't be surprised.

Wednesday, 18 November 2020 20:57

Reggie Middleton's U.S. Stagflation Analysis

Stagflation is a combination of numerous economic conditions: slow economic growth, high unemployment, and high levels of inflation, i.e. it describes an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. Lain Macleod first used the term stagflation in 1965 before that stagflation was long believed to be impossible by the economist.

The term is later used to describe the recessionary period in the 1970s following the oil crisis when the U.S. underwent a recession that saw five quarters of negative GDP growth. The U.S. inflation rate hit double digits in 1974; unemployment hit 9% by May 1975.

Stagflation is often caused by supply-side shocks which cause an unprecedented increase in costs or disruption to production. This results in a higher inflation rate and lower GDP. Stagflation may also occur with a decline in traditional industries leading to rising structural unemployment and lower output. 

The outbreak of COVID-19 led the historically strong job market of the U.S to a record level of unemployment. Imposed restrictions and shutdowns of economic activities resulted in negative GDP during the first and second quarter of 2020. The Federal Reserve made an emergency rate cut in the federal funds rate which paused hiking in inflation.

However, the emergency cut made by the Federal Reserve has also exposed the risks associated with the policies as the economy begins to reopen. Many analysts expected that, backed by low rates, businesses and consumers may spend aggressively after being quarantined for a while - pushing inflation upward. At the same time, unemployment remains high, and likely growth negative, resulting in a material chance of pushing the U.S. economy into stagflation.

Let us look at the key factors which will tell us if the predictions made are correct or not.

Gross Domestic Product (GDP)

According to the "advance" estimate by the Bureau of Economic Analysis, U.S. the real gross domestic product (GDP) in the U.S. contracted 2.91% in the third quarter of 2020 over the same quarter of the previous year as efforts continued to resume activities and reopen businesses that were postponed or restricted due to COVID-19.

Figure1: Official GDP Reporting vs. Alternate ShadowStats Estimates (Y-o-Y Real Growth)


The U.S. economy suffered its steepest downturn in the second quarter, 2020, highlighting the effect of the pandemic that disrupted businesses across the country and left millions of Americans unemployed.

Gross domestic product shrank by 9.0% in the second quarter of 2020 over the same quarter of 2019. The main reasons for the shrinking GDP include lockdown measures issued in March and April, and the pandemic assistance program of the government, to assist households and businesses.

This was the biggest ever contraction, pushing the U.S. economy officially into a recession as the coronavirus pandemic forced many businesses including restaurants, cafes, stores and factories to close and people to stay at home, hurting consumer and business spending.

However, the GDP numbers by the BEA, include numerous adjustments allowing room to present a more positive gloomy picture of the economy.

If we are to believe, a site that attempts to recalculate GDP as it was historically configured, states that GDP would actually have come down to -12.96% and -6.74%, respectively, in the second and third quarter in 2020 - if calculated by historical methods, resembling a materially worse situation than estimated.

Balance of Payments

According to the latest data published on 4th November by the U.S. Census Bureau and the U.S. Bureau of Economic Analysis, the U.S. goods and services deficit fell to US$63.9 billion in September decreased from US$67.0 billion in August (revised) as exports increased more than imports.


Exports of goods and services increased US$4.4 billion, or 2.6%, in September to US$176.4 billion. Exports of goods increased by US$3.7 billion, and exports of services increased by US$0.7 billion.

Figure2: Exports (in US$ billion) Seasonally Adjusted (by Commodity/Service)Source:

The increase in exports of goods are mainly due to the increases in foods, feeds, and beverages (US$1.6 billion) and in capital goods (US$1.4 billion).

The increase in export of services is a result of an increase in transportation activities (US$0.2 billion), in travel (US$0.1 billion), in financial services (US$0.1 billion), and other business services (US$0.1 billion).


Imports of goods and services increased by US$1.2 billion, or 0.5%, in September to US$240.2 billion. Imports of goods increased by US$0.6 billion and, imports of services increased by US$0.6 billion.

Figure3: Imports (in US$ billion) Seasonally Adjusted (by Commodity/Service)


The increase in imports of goods is mainly due to the increasing demand in automotive vehicles, parts, and engines (US$3.2 billion) and capital goods (US$0.8 billion).

The increase in imports of services is a reflection of the increase in travel (US$0.3 billion) and transport (US$0.2 billion), which was halted temporarily, due to COVID-19.

However, both export and import are yet to reach the level of the pre-pandemic period, and the current rise in COVID-19 cases can drag trade downward, indicating a lower demand in the economy.

Consumer Price Index (CPI)

Consumer Price Index (CPI) measures the average change over a time in the prices paid by urban consumers for a basket of consumer goods and services.

Figure4: Monthly CPI for All Urban Consumers - Seasonally Adjusted, (% Change)


According to the U.S. Bureau of Labor Statistics, the CPI-U became negative in March and April of 2020 with declined demands due to imposed lockdown to avoid the spike in cases of COVID-19. During May 2020, the government started loosening and lifting the restrictions which positively drove the CPI-U and increased it by 0.6% in June and July 2020. All items index increased by 1.4% over the last 12 months before the seasonal adjustments.

When substituting BLS numbers with that of Shadowstats’, the inflation figures are different and much higher. The ShadowStats provides alternate inflation data that uses the 1980 CPI methodology. This is because of the methodological shifts in government reporting, which have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living and towards a core inflation index stripped of the several volatile, yet necessary cost of living price inputs. Reference Shadowstats No. 515—Public Comment On Inflation Measurement And The Chained-Cpi(C-CPI) for more information.

Figure5: Consumer inflation – BLS Vs. ShadowStats (Not Seasonally Adjusted) (% Change) (Index 1980= 100.0)


Source:, Shadow Government Statistics

As per the U.S. Bureau of Labor Statistics, the October 2020 Consumer Price Index (CPI-U) gained 0.04%, having gained 0.20% in September, up by 1.18% year-to-year, versus 1.37% in September.

The October 2020 ShadowStats Alternate CPI (1980 Base) rose by 8.9% year-to-year, slowing versus 9.1% in September and 9.0% in August. The ShadowStats Alternate CPI estimate restates current headline inflation to reverse the government's inflation-reducing gimmicks of recent decades, which were claimed to explicitly designed to reduce/understate COLAs (cost of living adjustments), used for products such as social security, annuities, and other products very heavily used by wage earning consumers and savers.

This apparent “theft” from wage earners and savers can be seen to easily be the source of the rise populism in the US, and the concentrated, yet staunch following of political personalities such as Donald Trump. These potential fire starters of populism can be seen in both the adjusted inflation figures, and the figures of the US unemployment rate.

Unemployment Rate

The outbreak of COVID-19 has severely affected the U.S. employment market. In January 2020 the unemployment rate in the U.S. was 3.6%, however, in April 2020; the U.S. recorded an unemployment rate of 14.7%, the highest and the most massive over-the-month surge in the history of the data (available back to January 1948).

The total unemployed persons in the U.S. rose by 15.9 million to 23.1 million in April 2020. However, with the Federal governments' efforts and continued resumption of economic activities, the unemployment rate has started to decline and reached 7.9% in September 2020 with the number of unemployed persons dropping to 12.6 million.

According to the Bureau of Labor Statistics, the non-farm payroll employment has risen by 0.66 million in September 2020. A significant number of job was generated in leisure and hospitality, retail trade, healthcare and social assistance and professional and business services sectors. Employment in the government sector has declined over the month, particularly in state and local government education.

Figure6: Monthly Unemployment Rate, Not Seasonally Adjusted (% Change)


Both the measures of unemployment – the unemployment rate and the number of unemployed persons, have declined for the five consecutive months but are higher than in February, by 4.4% points and 6.8 million, respectively.

According to Shadow Government Statistics, the actual scenario is much different. SGS claims BLS. BLS is understating the unemployment from the last eight months by misclassifying some of the unemployed persons as employed in the household survey. While calculating, an estimate of 562,000 persons were considered employed who more properly should have been counted as unemployed. This has reduced the U3 unemployment rate of October 2020 to 6.88% from September 2020 level of 7.86%. The unemployment rate of the U6 category has declined to 12.19% in October 2020 from 12.84% in September 2020.

Figure7: Unemployment Rate - BLS vs ShadowStats-Alternate (Seasonally Adjusted)

Source:, Shadow Government Statistics

The Y6 unemployment category includes short-term discouraged workers and workers employed part-time for economic reasons. The overall unemployment rate, including long-term discouraged/displaced workers as per ShadowStats Alternate measure, was 26.3% for October 2020, down from 26.9% in September 2020.

Figure7: Unemployment Rate U-3 vs ShadowStats-Alternate Unemployment Rate (Seasonally Adjusted) (Jan-oct, 2020) 


Source:, Shadow Government Statistics


Currency De-valuation

The dollar started dramatically weakening at the onset of the spike in the coronavirus cases in March, and its downward slide was reinforced when Fed Chairman Jerome Powell announced a new policy of average interest rate targeting. That policy would allow the Fed to keep interest rates at zero, even if inflation temporarily rises above its 2% target, which means a further weakening of the dollar.

The three most important aspects behind the weakening USD are the ultra-loose monetary policy adopted by the U.S. Fed, the historically unprecedented increase in federal, state, and municipal debt and the weakening U.S. economy. It is further expected that the interest rates will continue to be near zero for the foreseeable future in the U.S. A rise from this point would make US debt service untenable, but despite record debt in both nominal and GDP adjusted terms (near record), debt service is cheaper now than when at lower levels.

Figure8: Federal Reserve Board vs ShadowStats U.S. Dollar Exchange Rate Indices (Not Seasonally Adjusted, Level and 

Y-o-Y % Change)


Usually, falling currency rates indicate more inflation, aided with higher unemployment and lower GDP growth thereby, making the economic situation difficult.

What the USD is witnessing today, might just be the beginning of a broader structural downtrend, driven partially by the steady recovery of other countries post Coronavirus relative to the US, particularly Asia and Africa, but Europe as well.

The SGS Financial-Weighted Dollar Index reflects a composite value of the foreign-exchange-weighted U.S. dollar, weighted by the proportionate trading volume of the USD versus the six highest-volume currencies: EUR, JPY, GBP, CHF, AUD, CAD.

On the other hand, the FRB Trade-Weighted Dollar is the Major Currency Index published by the Federal Reserve, with the USD weighted by respective merchandise trade volume against the same currencies.

Over the past seven months, the U.S. dollar has continued to lose value against other currencies and the euro in particular. As can be seen in the chart, the value of the dollar in August has fallen to -4.53% as per ShadowStats and -3.95% as per the Federal Reserve Board, the lowest in all of 2020.

What the weaker dollar does is that it makes the economy slower than it otherwise would, causing an economic recovery more challenging for the U.S. with, the investors tending to invest elsewhere. Of course, it also makes exports cheaper on a relative basis, but with demand muted to the extent that it has been, this benefit can be easily overstated.

The continued growth of Coronavirus cases in the U.S. is slowing the speed of the economic recovery while apparently, Eurozone and Asia are doing relatively better – save certain European hot spots.

Money Supply

Increase in money supply lowers the interest rates in the economy, reducing the price for borrowing money with increased consumption and lending. Usually, in the short-run, higher rates of consumption, lending and borrowing increase the total output of an economy with a rise in inflation.

As can be seen from Figure 9, the excessive printing of money (from M1 to the full monetary base) bears a tight correlation with the skyrocketing stock market - as liquidity drives nominal prices ever higher. This is only interrupted by the sharp contraction in Q1 when the reality of the bursting "everything bubbles" through COVID eventually hit.

Figure 9: Money Supply Vs. Stock Market (indexed at Jan 2016 = 100)



The COVID-19 pandemic has replaced a historically strong U.S. job market with record levels of unemployment. The unemployment rate in April rose to 14.7%, four times the rate in January 2020. At the same time, second-quarter GDP numbers plummeted to an all-time low of 31.7% on an annualized basis.

If we are to believe the data provided by the government of the U.S., so far, there is no sign of inflation. If anything, prices have fallen during the pandemic. Both exports and imports remained low during the pandemic, reflecting the impact of COVID-19, as many businesses continued to cease operations entirely or operate at limited capacity, and the movement of travellers across borders remained restricted. Adding to the worries is the depreciation in the value of the USD.

However, the reopening of economic activities witnessed a positive uptick. The significant rebound in GDP in the third quarter seemed promising, yet the spread of the novel coronavirus in the country over the summer has put growth at significant risk. Many pundits view the surge in stock prices as a powerful sign that many in the market expect a healthy recovery. We see it as the inevitable results of ZIRP (zero interest rate policy), QE (quantitative easing) and the largest fiscal and monetary stimulus packages in the history of the union. Keep in mind that these share prices have been spiking as earnings stagnate and a record number of companies mire in mediocre operating results, slowing businesses and insolvency.  Unemployment has soared since the pandemic hit the U.S. economy but is slowly coming down with 7.9% in September, the lowest post-pandemic number, as inflation also remains low at 0.2%.

In addition, the U.S. Federal government acted with unprecedented scale, speed, and coordination, surpassing past efforts to mitigate the crisis caused by the pandemic and to bring back the economy on track. By mid-August, the federal government had spent more than US$3 trillion, to keep hundreds of thousands of businesses and over 150 million Americans from the brink of economic failure, preventing the recession from turning into a depression. Also, the Fed spent US$ 2 trillion on securities between March – June and June to preserve the economy.

But, the current set of data provided by Shadowstats, shows high retail inflation, high rate of unemployment, falling currency rates, along with a contraction in GDP. This is analogous to the phenomenon of stagflation. The current situation has emerged mainly due to the impact of the pandemic and is more cyclical in nature. There is one major exception to this cyclicality, though. It is now not only mandated, but from efficacy perspective, highly desirable to have employees work from home when possible. This effectively gutted the large urban commercial centres in the country’s metropolitan clusters – leaving vast swaths of office centres with 65% to 90% vacancy rates, which daisy chain into the surrounding ecosystems that rely on the commercial real estate activity, i.e., restaurants, retail stores, office support infrastructure, public transportation, and the cities’ commercial tax base. This is essentially a structural and permanent (or at best, semi-permanent) change in the demographic make-up in major cities. The CMBS underpinning these office parks are cracking now as we pen this. Reference With Every Hedge Fund and Their Mother Crowding Into the Big Short 3.0, Remember Who Warned You 1st, in 2007 and 2020.

The main factors leading to supply-side disruptions are local lockdowns, particularly for perishable agricultural products, which have contributed extensively to the rise in inflation of certain food items.

At present, supply disruptions caused by localized lockdowns and changes necessitated by social distancing, are overshadowing faltering demand, which is raising the likelihood of a stagflation-like scenario. "Nevertheless, if the situation presented by these data trends continue in the medium term, the economy is at risk of entering into stagflation."

The idea that the U.S. economy has fallen into the trap of Stagnation is still a minority view and at this point fears about the inflation side of it seem to be subsiding. However, the stagnation half of it seems a real danger only if a vaccine is delayed or the damage from the coronavirus pandemic extends for longer than is anticipated.

It is our opinion that this second branch of thought is overly optimistic, for a vaccine, even if produced timely, must be distributed at an unprecedented rate and volume and at an unprecedented cost (nigh zero). In addition, real-world safety and efficacy issues loom, which may also mire the speed with which the vaccine can be used, borne from the speed at which it was developed and tested.

Add to all of this, the rapid rise of the infection rate across the western world and the unprecedented re-closing of many economies in Europe and the states foreshadows a much more stagnant GDP growth forecast than pundits are espousing.

Currently, the infection rates in many U.S. states and several major EU countries and the U.K. and India are at the highest they've ever been, eclipsing the rates that have caused the original shutdowns that drove GDP negative in the first place.

Although the mortality rate has materially lessened, the increase in overall infections has increased the net deaths relative to the pre-lockdown peaks, threatening once again to overload healthcare systems across much of the western hemisphere, posing a threat of another economic downfall.

Exactly as I predicted, there is no V-shaped recover, U-shaped recovery, or any other representative letter of the alphabet. We are mired in structural downturn exacerbated by a cyclical downturn, popping of the everything bubble, and a horrible poor response to a global pandemic. There is no good news here!


Token analysis and valuations

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many "professional" investors and analysts seem to miss the point. You often hear, those who only see rewards (or lack thereof, ie. "Hey, Ether went up 150% last year!") or those who only see risks (or lack thereof, ie. "Bitcoin is too volatile to make a good investment"). This last point has been espoused not only be novice retail investors, but by global investment banks, the Financial Times, CNN/Money and even the London Business School. I'm actually quite serious about this (Financial Times, London Business School and Credit Suisse) - all entities that really should know better.

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