1. Financial Data Analytics: The REACTION Model

    As the old models of financial analysis and risk management continue to fail us, we need to innovate new ones. At Meraglim™, we provide financial data analytics to institutional investors and global leaders, turning traditional financial analytics on its head by bringing together experts from a variety of backgrounds. By implementing the innovations of multi-disciplinary science, we use our unique interdisciplinary model to help you navigate global markets on a large scale. To demonstrate exactly what our diverse panel of experts has to offer, we will profile different innovations by our leadership team that show we are leading the industry in creating new, more effective financial models.

    Our Chief Global Strategist, James Rickards, recently published a brand new financial model in his newsletter, Strategic Intelligence. This five-stage model is called the REACTION model, and it can be used to analyze times of financial distress to determine their level of severity. In this blog, we will review the five stages of the REACTION model: Repricing, Acceleration, Transmissions, Irrationality, and Oblivion.


    dreamstime_xxl_25681895The REACTION Model

    STAGE ONE: Repricing

    The beginning of any market adversity begins with the repricing of a specific instrument or asset class. Usually, this occurs because the market set the value of an asset at an unrealistic level, and this can sometimes escalate for years before people realize that they have fallen victim to wishful thinking. A stock may have a high valuation, all while the company plummets toward bankruptcy, until a financial analyst finally points out the truth, panic ensues, and the stock quickly crashes. Alternatively, a major event can serve as a smack in the face to the market, such as an election. There are countless examples of this; one recent one can be seen in the market after the Brexit vote.

    Earlier this year, the United Kingdom vote on the Brexit referendum to determine whether or not they would leave the European Union. While the polls leading up to the vote on June 23 were consistently close and the outcome unclear, the media favored Remain, the side that dictated they would stay in the Union. This perception showed in the markets, and assets were valued based on a Remain outcome, despite the fact it was ambiguous if this would actually be the outcome. The day of the election, the GBP/USD exchange rate for the pound was at a high $1.49, and gold fell from $1,300 to $1,255 per ounce. Once it became apparent that the vote was actually in favor of leaving the EU, the market went haywire. The exchange rate fell to $1.30 almost instantly, and the value of gold rose to $1,315 per ounce. These assets were repriced to an extreme level to reflect the reality that shattered delusions.

    Sometimes, such repricing occurs as an isolated incident. Other times, the repercussions continue into the next phase of the REACTION model: acceleration.

    dreamstime_xxl_12649751STAGE TWO: Acceleration

    The next stage, acceleration, occurs when the repricing continues based on different market dynamics, separate from the initial igniting event. The three main reasons that acceleration occurs are leverage, margin, and stop losses.

    In hedge funds, leverage refers to the use of borrowed money to place a bet. There are two types of leverage: explicit and implicit. Explicit leverage is money that is borrowed in exchange for a fee, such as bank loans, and appears on a balance sheet. In contrast, implicit leverage is off-balance-sheet financing, and comes in a variety of forms, including forwards, futures, and swaps. Money is not exchanged until the bet is settled. Whether explicit or implicit, leverage amplifies whatever is happening in the markets, both in terms of gains and losses. This makes gains much larger, but losses significantly worse than they would be without leverage. With a very large loss, the counterparty (who is usually a bank) will be concerned about the losing party actually being able to pay the losses, and will typically ask for collateral for protection. This is referred to as a margin call, and can be for a larger amount than the actual loss and must be high quality, such as cash. If a trader loses and cannot come up with high-quality collateral, they will lose out on the trade and will be unable to recover from the loss should the market move in a positive direction.

    Keeping in mind how risky the combination of leverage and margin calls is, a leveraged trader will protect themselves using a stop loss. A stop loss is a sale that is pre-arranged with a broker to close out automatically once a losing position reaches a certain point. This ensures that the position is closed before too much loss occurs. Depending on the position, these stop losses can be very “tight,” meaning a small percentage; for example, a 1% loss would be a tight stop loss. These are generally automated by a computer and do not involve human judgment, so the position will be sold regardless of how it is valued.

    To demonstrate how disastrously these factors can affect the market, consider this simplified example. An asset is valued at 100, and five hedge funds have set five different stop loss levels.

    Fund A: 99 (1% loss)
    Fund B: 98 (2%)
    Fund C: 97 (3%)
    Fund D: 96 (4%)
    Fund E: 95 (5%)

    Then, the market experiences a shock that triggers repricing, the asset is repriced at 99, and the stop loss for Fund A is triggered, automatically selling the stock. The selling then causes the price to fall to 98, setting off the stop loss of Fund B, which then causes the stock to fall further, trigger the stop loss for Fund C, and so on and so forth until it triggers Fund E’s stop loss. While this is a simplified example of what happens in real life, this is why leverage, margin calls, and stop losses can cause further market chaos after repricing. In this example of acceleration, automated stop losses exacerbate the initial repricing issue. These types of crashes are highly likely to happen again, given that leverage and stop loss algorithms are still used today. The next step after acceleration is transmission.

    dreamstime_13321620STAGE THREE: Transmission

    Transmission is also known as “spillover” or “contagion,” and it occurs when these market disruptions spread to other unrelated markets. This causes these uncorrelated market to unexpectedly become correlated based on current conditions. An example of this can be seen in the 2008 stock market panic. Before this, the correlation between Japanese and US stocks was a low 0.37. When the US stock market bottomed at the height of the crisis, the two markets became perfectly correlated at 1.0. When considering why this may occur, it makes sense to look at this event in context. The 2008 US stock panic was caused by subprime mortgages, an issue that has absolutely nothing to do with Japan. However, because hedge funds needed cash to meet the margin calls, they sold their Japanese stocks for collateral, and the selling pressure and illiquidity of US stocks translated to Japanese stocks. Illiquidity can spread to markets all over the world, which leads to the next phase of the REACTION model: irrationality.

    STAGE FOUR: Irrationality

    After transmission, panic ensues across markets and people begin irrationally selling their assets for cash. The uncertainty of the market causes everyone to realize that their assets are not actually money, and they become desperate to secure all of their money. They don’t care about the long-term potential and relative value of their stock — they just want the certainty of cash. All of the selling drives prices lower, and it becomes a perpetuating cycle of panic.

    In recent panics, banks have worked with the government to figure out a way to give investors the money they seek through money market funds and making cash available through swap line and asset purchases. By infusing liquidity in the market, banks generally ease the panic, and this can stop the market crisis before it reaches the final stage of the REACTION model, Oblivion.

    The issue here is that this puts us in an extremely precarious position in the future. The Federal Reserve expanded its balance sheet to $4 trillion in order to ease the 2008 panic. This would be fine if they had somehow been able to normalize the balance sheet, but instead, it remains at $4 trillion. The other central banks are similarly overloaded, which means that during the next market panic, the re-liquefying will fall to the International Monetary Fund. The IMF will have to print trillions of dollars, which will result in high inflation and significantly decrease the value of the US dollar in the global market. Should this fail, it will lead to the freezing of all bank accounts and the closing markets, or the last stage of REACTION: Oblivion.

    STAGE FIVE: Oblivion

    Oblivion is a subjective term that essentially means a complete collapse. During Oblivion, the markets aren’t just crashing; the entire system no longer functions. In the worst case scenario, this would result in the extinction of the species.

    Smaller scale oblivion can be seen in capital market collapses throughout history, such as in 1933, when every bank in America was closed for eight days. While these collapses are not inevitable, they do happen, and could easily happen again with the right catalysts. While no one catalyst is likely to collapse the market, a combination of factors such as war, natural disaster, and social unrest could come together to start the next collapse.

    In the event of a collapse, the wealthy, who have both the most to lose and the greatest political resources, will respond with truncation, often freezing banks on a temporary basis. For the average investor, this will make no difference; once their money is lost, it is lost forever. Either result, whether the collapse of capital markets or the freezing of markets in response, has disastrous consequences for the average investor.


    dreamstime_xxl_28670895REACTION Application

    Now that you have an understanding of the REACTION model, you can understand what happens during financial panics. Again, keep in mind that every market disruption does not lead to all five stages. Repricing occurs often, but can be recovered from should the markets adjust, or may experience acceleration, but never reach the point of transmission or irrationality. The point is not to assume that oblivion is inevitable, but that it could happen, and when you see signs of repricing, it is important to remain observant of the environment for potential collapse. By keeping this in mind, you can take steps to protect your financial well-being.

    At Meraglim™, our panel of experts have created models such as the REACTION model that put them at an advantage for accurately predicting movements within the global money market. Contact us to learn more about what we can do for you and your team.

    Contact Us For More Information Today
  2. Using The REACTION Model


    Financial Data Analytics: The REACTION Model

    As the old models of financial analysis and risk management continue to fail us, we need to innovate new ones. At Meraglim™, we provide financial data analytics to institutional investors and global leaders, turning traditional financial analytics on its head by bringing together experts from a variety of backgrounds. By implementing the innovations of multi-disciplinary science, we use our unique interdisciplinary model to help you navigate global markets on a large scale. To demonstrate exactly what our diverse panel of experts has to offer, we will profile different innovations by our leadership team that show we are leading the industry in creating new, more effective financial models.

    Our Chief Global Strategist, James Rickards, recently published a brand new financial model in his newsletter,  Strategic Intelligence . This five-stage model is called the REACTION model, and it can be used to analyze times of financial distress to determine their level of severity. In this blog, we will review the five stages of the REACTION model: Repricing, Acceleration, Transmissions, Irrationality, and Oblivion.

    The REACTION Model

    STAGE ONE: Repricing

    The beginning of any market adversity begins with the repricing of a specific instrument or asset class. Usually, this occurs because the market set the value of an asset at an unrealistic level, and this can sometimes escalate for years before people realize that they have fallen victim to wishful thinking. A stock may have a high valuation, all while the company plummets toward bankruptcy, until a financial analyst finally points out the truth, panic ensues, and the stock quickly crashes. Alternatively, a major event can serve as a smack in the face to the market, such as an election. There are countless examples of this; one recent one can be seen in the market after the Brexit vote.

    Earlier this year, the United Kingdom vote on the Brexit referendum to determine whether or not they would leave the European Union. While the polls leading up to the vote on June 23 were consistently close and the outcome unclear, the media favored Remain, the side that dictated they would stay in the Union. This perception showed in the markets, and assets were valued based on a Remain outcome, despite the fact it was ambiguous if this would actually be the outcome. The day of the election, the GBP/USD exchange rate for the pound was at a high $1.49, and gold fell from $1,300 to $1,255 per ounce. Once it became apparent that the vote was actually in favor of leaving the EU, the market went haywire. The exchange rate fell to $1.30 almost instantly, and the value of gold rose to $1,315 per ounce. These assets were repriced to an extreme level to reflect the reality that shattered delusions.

    Sometimes, such repricing occurs as an isolated incident. Other times, the repercussions continue into the next phase of the REACTION model: acceleration.

    STAGE TWO: Acceleration

    The next stage, acceleration, occurs when the repricing continues based on different market dynamics, separate from the initial igniting event. The three main reasons that acceleration occurs are leverage, margin, and stop losses.

    In hedge funds, leverage refers to the use of borrowed money to place a bet. There are two types of leverage: explicit and implicit. Explicit leverage is money that is borrowed in exchange for a fee, such as bank loans, and appears on a balance sheet. In contrast, implicit leverage is off-balance-sheet financing, and comes in a variety of forms, including forwards, futures, and swaps. Money is not exchanged until the bet is settled. Whether explicit or implicit, leverage amplifies whatever is happening in the markets, both in terms of gains and losses. This makes gains much larger, but losses significantly worse than they would be without leverage. With a very large loss, the counterparty (who is usually a bank) will be concerned about the losing party actually being able to pay the losses, and will typically ask for collateral for protection. This is referred to as a margin call, and can be for a larger amount than the actual loss and must be high quality, such as cash. If a trader loses and cannot come up with high-quality collateral, they will lose out on the trade and will be unable to recover from the loss should the market move in a positive direction.

    Keeping in mind how risky the combination of leverage and margin calls is, a leveraged trader will protect themselves using a stop loss. A stop loss is a sale that is pre-arranged with a broker to close out automatically once a losing position reaches a certain point. This ensures that the position is closed before too much loss occurs. Depending on the position, these stop losses can be very “tight,” meaning a small percentage; for example, a 1% loss would be a tight stop loss. These are generally automated by a computer and do not involve human judgment, so the position will be sold regardless of how it is valued.

    To demonstrate how disastrously these factors can affect the market, consider this simplified example. An asset is valued at 100, and five hedge funds have set five different stop loss levels.

    Fund A: 99 (1% loss)

    Fund B: 98 (2%)

    Fund C: 97 (3%)

    Fund D: 96 (4%)

    Fund E: 95 (5%)

    Then, the market experiences a shock that triggers repricing, the asset is repriced at 99, and the stop loss for Fund A is triggered, automatically selling the stock. The selling then causes the price to fall to 98, setting off the stop loss of Fund B, which then causes the stock to fall further, trigger the stop loss for Fund C, and so on and so forth until it triggers Fund E’s stop loss. While this is a simplified example of what happens in real life, this is why leverage, margin calls, and stop losses can cause further market chaos after repricing. In this example of acceleration, automated stop losses exacerbate the initial repricing issue. These types of crashes are highly likely to happen again, given that leverage and stop loss algorithms are still used today. The next step after acceleration is transmission.

    STAGE THREE: Transmission
    Transmission is also known as “spillover” or “contagion,” and it occurs when these market disruptions spread to other unrelated markets. This causes these uncorrelated market to unexpectedly become correlated based on current conditions. An example of this can be seen in the 2008 stock market panic. Before this, the correlation between Japanese and US stocks was a low 0.37. When the US stock market bottomed at the height of the crisis, the two markets became perfectly correlated at 1.0. When considering why this may occur, it makes sense to look at this event in context. The 2008 US stock panic was caused by subprime mortgages, an issue that has absolutely nothing to do with Japan. However, because hedge funds needed cash to meet the margin calls, they sold their Japanese stocks for collateral, and the selling pressure and illiquidity of US stocks translated to Japanese stocks. Illiquidity can spread to markets all over the world, which leads to the next phase of the REACTION model: irrationality.

    STAGE FOUR: Irrationality

    After transmission, panic ensues across markets and people begin irrationally selling their assets for cash. The uncertainty of the market causes everyone to realize that their assets are not actually money, and they become desperate to secure all of their money. They don’t care about the long-term potential and relative value of their stock — they just want the certainty of cash. All of the selling drives prices lower, and it becomes a perpetuating cycle of panic.

    In recent panics, banks have worked with the government to figure out a way to give investors the money they seek through money market funds and making cash available through swap line and asset purchases. By infusing liquidity in the market, banks generally ease the panic, and this can stop the market crisis before it reaches the final stage of the REACTION model, Oblivion.
    The issue here is that this puts us in an extremely precarious position in the future. The Federal Reserve expanded its balance sheet to $4 trillion in order to ease the 2008 panic. This would be fine if they had somehow been able to normalize the balance sheet, but instead, it remains at $4 trillion. The other central banks are similarly overloaded, which means that during the next market panic, the re-liquefying will fall to the International Monetary Fund. The IMF will have to print trillions of dollars, which will result in high inflation and significantly decrease the value of the US dollar in the global market. Should this fail, it will lead to the freezing of all bank accounts and the closing markets, or the last stage of REACTION: Oblivion.

    STAGE FIVE: Oblivion

    Oblivion is a subjective term that essentially means a complete collapse. During Oblivion, the markets aren’t just crashing; the entire system no longer functions. In the worst case scenario, this would result in the extinction of the species.

    Smaller scale oblivion can be seen in capital market collapses throughout history, such as in 1933, when every bank in America was closed for eight days. While these collapses are not inevitable, they do happen, and could easily happen again with the right catalysts. While no one catalyst is likely to collapse the market, a combination of factors such as war, natural disaster, and social unrest could come together to start the next collapse.

    In the event of a collapse, the wealthy, who have both the most to lose and the greatest political resources, will respond with truncation, often freezing banks on a temporary basis. For the average investor, this will make no difference; once their money is lost, it is lost forever. Either result, whether the collapse of capital markets or the freezing of markets in response, has disastrous consequences for the average investor.

    REACTION Application

    Now that you have an understanding of the REACTION model, you can understand what happens during financial panics. Again, keep in mind that every market disruption does not lead to all five stages. Repricing occurs often, but can be recovered from should the markets adjust, or may experience acceleration, but never reach the point of transmission or irrationality. The point is not to assume that oblivion is inevitable, but that it could happen, and when you see signs of repricing, it is important to remain observant of the environment for potential collapse. By keeping this in mind, you can take steps to protect your financial well-being.

    At Meraglim™, our panel of experts have created models such as the REACTION model that put them at an advantage for accurately predicting movements within the global money market. Contact us to learn more about what we can do for you and your team.

  3. Authorities in India Break Down Doors to Confiscate Private Gold

    Confiscate Private Gold

    We’ve warned investors for a while that the war on cash would lead quickly to the war on gold. Now it’s happening in India.

    On  November 8 , Prime Minister Modi declared that popular 1,000 Rupee and 500 Rupee notes were illegal. Those denominations are roughly equal of $20 and $10 bills in the U.S. Holders were required to bring the “illegal” money to a bank where it could be deposited to a digital account or converted to other denominations.

    Of course, the real purpose was to flush out the cash and slap tax liens on anyone who did not have a satisfactory reason for having cash in the first place. The entire Indian economy was thrown into chaos.

    Of course, many Indians did not trust the cash system or the government already, and had converted their cash into gold, which is the best and most reliable form of money. Once the government realized this, they began going house-to-house and breaking down doors to confiscate gold.

    That can’t happen in the U.S. because of Fifth Amendment protections against government seizures of property. But, the government could outlaw new sales of gold or slap on onerous reporting and custody requirements that don’t currently exist.  Click here to read why the best strategy for defending against the global war on cash is to get some gold today before it’s too late, and keep it in a safe jurisdiction.

    -Jim Rickards, Chief Global Strategist, Meraglim™

  4. China is Fighting the “Impossible Trinity” and Losing

    Impossible Trinity

    The “Impossible Trinity” is an economic concept developed by the great economist Robert Mundell in the early 1960s. Mundell said that a country could not have an open capital account, fixed exchange rate, and an independent monetary policy all at the same time without causing a reserve crisis.

    The idea is that if you have interest rate differentials (due to independent monetary policy) and peg your currency, then capital will flow from the low-yield to the high-yield country. At some point, these outflows will cause a reserve crisis or cause the pegged exchange rate to break resulting in a foreign exchange crisis. There are various other outcomes under Mundell’s framework including precautionary capital flight.

    The point is that trying the impossible trinity is bound to fail. China is proving this again today. They are trying to run an open capital account, maintain independent monetary policy (Chinese rates are significantly higher than U.S. rates), and peg the yuan to the dollar within a range. This policy is failing in multiple ways.  Capital outflows are huge, and downward pressure on the yuan is relentless all in anticipation of a maxi-devaluation.

    China may have to slap on capital controls (see story below), but this will upset the IMF, which recently included the yuan in the SDR as one of the big five global reserve currencies.  China is heading for a reserve crisis or a foreign exchange crisis, or both. Read why this will once again prove that the impossible trinity is indeed impossible  in this article .

    -Jim Rickards, Chief Global Strategist, Meraglim™

  5. U.S. and Russia Are in A Full-Scale Cyberwar. Collateral Damage is Coming.

    US and Russia

    This article explains that cyber-financial warfare is not a futuristic scenario; it’s happening now. After the Russian invasion of Crimea in 2014, the U.S. imposed economic sanctions on Russia. These sanctions were regarded as an act of war by Russia. The Russians retaliated by launching large cyber-attacks on major U.S. banks, which temporarily shut down many banking services early in 2016. Russia also allegedly hacked into the computer systems of the two major U.S. political parties and then weaponized the hacked information to discredit Democratic party operatives.

    The U.S. has threatened retaliation, and now Russia is warning of expected cyber attacks on its financial institutions coming from the U.S. and its allies. It seems likely this tit-for-tat escalation in cyber-warfare between Russia and the U.S. will continue. There are no agreed “rules of the game” to encourage de-escalation as there were in the Cold War with regard to nuclear threats.

    Meanwhile, the greatest danger may not be intentional infliction of harm, but an accidental attack. This could arise while one party probes the systems of another party and tries to plant sleeper computer viruses for activation at a later time.

    Such probes can result in accidental launches unforeseen by both adversaries coming at inopportune times. Such accidental attacks could easily wipe out any wealth that you hold in digital form at banks and brokers. The best solution is to convert some of your wealth into non-digital form such as gold, silver, land, fine art, water and other natural resources.

    -Jim Rickards, Chief Global Strategist, Meraglim™

  6. Don’t Take Any Wooden Nickels. And Don’t Take Any Zimbabwe “Bond Notes”

    Don’t Take Any Wooden Nickels

    In the Great Depression (1929 – 1940), money was so scarce that local communities made coins out of wood with various denominations and the names of local merchants stamped on them. These could circulate in exchange for goods and services at participating merchants. It was really a form of credit, but it served to keep economic activity going when it might otherwise have ground to a halt. Yet, it was a non-sustainable system, and the phrase, “Don’t take any wooden nickels,” came into parlance as a warning.

    Today’s version is found in Zimbabwe. Most readers are familiar with the 2008 hyperinflation in Zimbabwe that led to the introduction of the “$1 Trillion” note, which was not enough to buy a loaf of bread. Zimbabwe then moved to a U.S. dollar based economy because it had no trustworthy currency of its own. Now that dollars are in circulation, the government is trying a bait-and-switch scheme in which Zimbabwe “bond notes” will be introduced as “equivalent” to dollars on a 1-to-1 basis.

    Locals aren’t falling for it and are pulling their hard currency out of banks as fast as they can.  Click here to see  how the government is fighting back by going to a “cashless society” and limiting the amount that can be withdrawn from banks and ATMs.   This trend will spread as governments realize the only way they can confiscate their citizen’s money is by outlawing cash, and forcing citizens to use digital money at approved banks.

    – Jim Rickards, Chief Global Strategist, Meraglim™