The Financial Stability Board has just published in 2017 report of the evolution of the Shadow Banking System LINK1. The shadow banking system is a relatively new term, its first use is attrib­uted to Paul McCulley of PIMCO in a speech of 2007. Perhaps the most useful definition is that of the Financial Stability Board that defines the shadow banking system as:
 
 “A system of credit intermediation that in­volves entities and activities outside the regular banking system… focusing on credit intermediation that takes place in an environment where prudential regulatory stan­dards and supervisory oversight are either not applied or are applied to a materially lesser or different degree than is the case for regular banks engaged in similar activ­ities.” 
 
The shadow banking system can also include the unregulated activities of regulated financial institutions such as securitization and structured investment vehicles.  In effect, shadow banks are financial firms that perform similar functions and assume similar risks to banks but which operate under a much lower level of regulatory oversight. Since shadow banks operate outside the formal banking sector, they generally lack the standard safety nets, such as deposit insurance or access to lender of last resort facilities. It is important to note that the emphasis is on credit intermediation so that, for example, equity, stock and foreign exchange trading are not part of the shadow banking activities. Examples of shadow banking institutions and activities include money market funds, mortgage companies, finance companies, hedge funds, private equity, securitization, structured investment vehicles, asset backed commercial paper and the repo markets.
 
The shadow banking system is difficult to measure and monitor as it evolves and different countries have different regulatory regimes and financial systems. The Financial Stability Board has both broad and narrow definition for the shadow banking system Whichever definition is employed, there is no question that the size of the shadow banking system rose rapidly in the run up to the financial crisis, it then shrunk during the financial crisis and has started growing again as traditional banks have cut back on lending. The estimated size of the shadow banking sector using the narrow definitiion if now $45.2 trillion according to the FSB. The percentage shares of the 29 jurisdictions are presented below:

​In a famous paper of 1979 Oliver Blanchard LINK1 and follow up paper in (1982) LINK2 pointed out the concept of a rational bubble and I believe that it has direct applicability to Bitcoin. In a “Rational Bubble” something gets overvalued but because it gets overvalued then needs to rise at an increasing rate to compensate holders for an eventual collapse, so long as the currency increase at an increasing rate then rational investors are compensated for the increasing risk of an ever larger collapse each time the bubble gets bigger. This clearly means the overvalued asset has to increase at an increasing rate at each stage or follow an exponential path which is exactly what Bitcoin was doing until recently. Let us suppose that Bitcoin does have a fundamental value of let’s say $500, when it gets to $1,000 then it is overvalued and maybe needs to increase at 10% a month. It then gets to $2000 but is now even more overvalued so needs to increase at say 20% per month to compensate for the risk of a larger collapse. At $3,000 it is even more overvalued and then needs to increase at say 30% per month and so on. So long as new highs are made some price corrections along the way are OK because investors are being rewarded for taking on ever increasing risks. However the failure to make new highs can be very serious as it maybe means the last buyers are in and people are then not being compensated for the ever larger risks they are assuming. The concept is captured in the diagram below:

​Well if we look at the actual bitcoin price above we can see it actually followed an exponential path peaked at around $19,000 and has tried to make a new high but that stopped at $17,000 so this means that people are no longer being rewarded for the risk of a large collapse to whatever the “fundamental value” is. Also it may suggest that regret is now moving in as some bought at $19,000 and $17,000 but are now being punished. How far may bitcoin fall is an open question. Mining costs of around $5,000 - $6,000 might provide a floor but then again they might not as a bitcoin is fundamentally just a bit of computer code and can be easily replicated and there are plenty of alternatives around such as Ethereum, Ripple, Bitcoin cash and hundreds of others  LINK3. Another thing that worries me is the bitcoin cannot act as medium of exchange as transactions are costing way too much to process $30 to buy a pizza NO THANKS. It still has some features such as a “store of Value” and the fact you can move money across borders and so long as others give it value then it has value a bit like stamps have value to a group of stamp collectors. My prognosis is not a happy one as many of the other coins from the spate of recent Initial Coin Offerings are essentially worthless. Investors are also assuming they can get their digital money transferred into real money but some of the Exchanges may not be willing to convert large amounts when the system is under pressure and will widen considerably the bid-offer spreads and limit conversions so liquidity risk and counterparty risk is very real in this market. People ignore all this so long as prices are rising but when prices are falling it is a different ball game. 

Never before have I seen the UK being run by such an incompetent and low level of government than Theresa May and her team of lying Brexiteers - BoJo, Gove, Fox and Davis. They invoked article 50 without a proper plan in place, they clearly under estimated the complexity of the task ahead and have pandered to the lies of the Brexiteers. There will be no £350 million for the NHS, there will not be any new trade deals within two years and there will be no glorious future for the UK resulting from Brexit. What there will be is a large fall in trade, a large loss of foreign direct investment, a loss of jobs, a €40-60 billion Brexit bill and a rise in inflation and loss of vital tax revenue for the Exchequer and a significant fall in UK standards of living.  

​Of course, all this had not stopped the Brexiteers coming out in full force this week. Four former Cabinet ministers, Nigel Lawson, Owen Paterson, John Redwood and Peter Lilley and  some other jokers have written a ridiculous letter suggesting the UK should walk away from talks and leave with no deal in March 2019 LINK1. They foolishly suggest that resorting to WTO can “crystallise the economic opportunities” of Brexit, give businesses “absolute certainty” and free the UK from  Brussels regulations. These guys really are not living in the real world, some 44% of UK trade is with the EU. We attract masses of FDI due to our membership of the EU and we desperately need EU immigration to help fill in major gaps in the UK labour market. In addition, these idiots do not seem to understand they are ruining the life chances of millions of UK youngsters who will no longer have freedom to live and work in the EU27.

​The Brexiteers lied in the campaign and I now think it is essential that we have a second referendum or MPs just do their job and vote for a revocation of Article 50. It is no longer sensible to allow these lying Brexiteers to take Britain out of the EU with no decent deal in place.

Theresa May has just spoken in Florence. In my view a poor speech. She is still looking for a bespoke deal whereby the UK can have its cake and eat it. That is get free trade in goods and services with the EU and be free to strike trade deals and control immigration without large payments into the EU budget. She has finally admitted that there will be a large bill to exit from the EU and there is a need for a year "implementation period". It seems to me she is basically prepared to pay up € billions so that for 2 years after March 2019 things basically stay virtually the same. She has failed to address key issues like on Northern Ireland will there need to be a physical border or not? How much is more is she prepared to cough up to above the €18 billion which has been banded around? What is the end destination? She said No to a Canada like arrangement No to the European Economic Area but has NO IDEA what is achievable ! In my view there were a lack of clear specifics, to me it will be insufficient to meet the EU demands for greater clarity on the divorce bill, protecting EU citizen rights and the Northern Ireland issue. My view remains that she is a terrible Prime Minister, incompetent, out of her depth and with supported by a terrible team of lying Brexiteer enthusiasts BoJo, Fox, Davis and Gove.

Yes the Brexit clock is ticking away...on 1 April 2019 UK will become the world's biggest fool unless an agreement to withdraw article 50 is handed in or some sort of Transitional deal is negotiated.  The reality is the UK government does not have a plan, does not understand the legal complexities and  has a weak and pathetic leader combined with a weak and pathetic team of Brexiteers Bojo, Liam Fox David Davies and Michael Gove. The red lines of control over borders, ending the jurisdiction of the European Court of Justice and not being part of either the Single Market or Customs Union have been drawn up by Theresa May and her team. As such they are risking pushing the UK economy over a cliff. There is also the fact that leaving the EU means we are leaving the open skies policy so in theory UK flights to Europe may not be possible after April 2019 for a period of time maybe weeks or months.

The British people and this government need to wake up to the reality that the UK is in a perilous position banks are already relocating a bit of their business, we are losing the European Medicine Agency and the European Banking Association, investment is plummeting and uncertainty is increasing.  Business need to plan ahead but have to assume the worst case scenario may come to pass. Please listen to the talk below by Michael O'Leary who is warning of the potential calamity ahead for UK aviation and tourism industry unless the UK government gets its act together. The foolish and costs of Brexit is becoming clearer and clearer by the day. A second referendum is needed to give the UK citizens a way out of this - the Brexiteers are afraid of this as they know their lies and deceit will not survive the second scrutiny of the UK electorate.

I think there are a few crypto currencies that will probably survive over the longer term because they have a good ecosystem and a critical mass of adopters. The three I think most likely to survive are bitcoin, ethereum and ripple. I am afraid for the rest it is way too late and some of the so called initial coin offerings (ico) are basically "me too" scams where I would expect "investors to lose virtually all their money. Initial coin offering have this year raised over $1.3 billion so far in 2017 but some of them seem like scams to me:

Look at eos.io which raised $200 million in an ico talk about its coins which  "do not have any rights, uses, purpose, attributes, functionalities or features, express or implied, including, without limitation, any uses, purpose, attributes, functionalities or features on the EOS platform”

Then there is the Tezos.com coin which has raised over $208 million it states "Bitcoin, Ethereum and Tezos are all decentralized ledgers powered by a blockchain. Bitcoin was the first public blockchain and introduced the first truly decentralized form of electronic cash. Ethereum followed suit by including smart-contracts in its platform, allowing a greater range of application to be developed. Tezos takes this concept one step further by letting participants directly control the rules of the network. It is designed to evolve, so that the next generation of ideas doesn’t have to start over as a new blockchain." What the hell does that mean and is it enough to raise so much money ???

This kind of thing reminds me of the infamous netj.com initial public offering of 1999: “netJ.com conducts no substantial activity of any description” and the company “has no plans to conduct any substantial business activity of any description in the foreseeable future.”

There is a nice report on the ICO craze from autonomous LINK1
 that I recommend for a read. I see the main threat to the top 3 coins (bitcoin, ethereum and ripple) being a company like google or amazon or even microsoft getting into the game. They have a big user base that I think is critical to getting a currency adopted by a critical mass and people have confidence in such companies. The other threat is when central banks decide to launch crypto currencies either as parallel currencies to their own national currencies or as replacement - central banks and government have to power to make such currencies legal tender it could be a great way to relieve pressure on public finances as they (the government) could decide to keep say, 20% of the coins for themselves.

There are new coins arriving every day as anyone can launch their own coin - the best way to keep up with prices is to go to Coinmarketcap.com. There is also a nice Bloomberg story on the crypto coin market here Link2. Below is a list of 56 initial coin offering so far this year.

I will not try to be nice and understanding of the Brexiteers. It is no use trying to explain anything to the likes of Theresa May, Liam Fox, David Davies and Boris Johnson who still seem to live in cloud cuckoo land. They still do not seem to understand some basic facts about how the EU and it's single market works and the laws governing international trade. I don't mind the lot of them jumping over the cliff in March 2019 but I do object to them dragging me and my family and friends  over with them.

1) You cannot be selective when you have a free trade agreement - the Brixiteers think they can do sectoral deals for cars and perhaps pharmaceuticals and possibly agriculture. Sectoral deals are not allowed according to the WTO rules a free trade area must cover "substantially all trade" only then can it be admitted as an exemption to the WTO principle of non discrimination (that is we have tariffs against the US and Japan and not with the remaining EU27).

2) If you remain in the customs Union then you have to adopt the EU common external tariff, this means that you are not then free to do free trade deals with other countries. If you did so then that would undermine the common external tariff. So you are either in the customs union for good or you are not.

3) The EU 4 freedoms that is freedom of movement for goods, services, labour and capital are "indivisible" if you want free trade in goods and services then you have to allow free movement of labour and capital. If you restrict free movement of labour to control inward EU migration then you lose access to the single market.

4) You cannot say you wish to end the jurisdiction of the European Court of Justice and remain in the single market or customs union. The ECJ is the arbiter of the CU and the Single market so once you rule out its jurisdiction over trade and free movement of factors of production then you cannot be in either the CU or single market.

5) If you do not accept EU regulations then it becomes very hard to trade with them where you do not meet their regulatory standards. This means that if UK deregulates then it can only sell its goods and services into the EU if the standards are deemed to be "regulatory equivalent" and that is an ongoing process and means keeping abreast of changes in the EU regulatory environment.

There is a really nice video below where Michel Barnier makes these points in a crystal clear manner. The Brexiteers need to get up to speed very quickly or they will be dragging the UK economy and its citizens into a very hard Brexit. The clock is ticking and they need to get their act together ! Unfortunately, they are so out of touch and stupid that I can only foresee them being forced to understand the reality when it is too late. However, do watch the UK opinion polls as the costs of Brexitbecome clearer and clearer I expect the UK opinion polls to change in favour of remaining and it will be very hard to push some of the Brexit bills through parliament and the House of Lords. A second referendum may be the
only way out of this mess eventually.

I dashed to get my vote in with a couple of minutes to go last night - I can promise you I did not vote conservative ! Theresa May's vision of a hard Brexit was complete lunacy, she is unfit to be prime minister as she U-turns and does not have the intellectual capacity to properly lead the country. Her vision of the UK leaving the Single Market and Customs Union and exiting any rulings from the European Court of Justice was ridiculous as is made clear in this article by William Hutton LINK.

Her election campaign was unbelievably bad and the more it went on the more her majority dwindled as voters could see through her "stable and strong" nonsense. There will now be warfare in the Tory party as the hard line Brexiteers will be furious with her while the "soft Brexit" remainers who are still the majority of Tory MP's will now feel emboldened to stand up for what they believe in and hopefully will stop acting like sheep being herded by May and her fellow Brexiteers like Rees Mogg, Liam Fox, Bojo and David Davies. 

I also am grateful that youngsters decided to turn out in large numbers and influence their own futures. The net result is that a hard Brexit will now be off the cards and the chances of a second referendum have increased and a Norway type deal whereby the UK remains in the single market is much more likely. I believe the EU will spot the opportunity to offer a better deal fro the UK and to give comfort for those who wish to remain possibly hoping a second referendum may yet happen. Last night's election result was a great result for us remainers and we should seek to capitalize on it over the next year or so.
​

I have been for some time extremely worried about the build up of debt in the Chinese financial system and it seems that Moodys is finally moving on the issue. It has downgraded China from AA3 to A1. This is still regarded as well above investment grade and well away from Junk bond status which starts at BB1. However, there a reasons to be concerned, the main one being that GDP growth is slowing to the 6-6.5% figure if you believe the official statistics well down from the traditional 10% rate. The other concern is that a lot of this debt is built up in the corporate and household sector and lot of the corporate debt may well ultimately  become government debt especially banking system debt.

                            2006 Q1         2016 Q3
Corporate             108.2%           166.2%
Government           26.3%              46.1%
Household              11.5%              43.2%
Total                       146%             255.5%

Prosperity on borrowed money can continue for a long time but can end abruptly when the music stops. This is happening as house prices have rocketed, banks have gone on an incredible lending binge (and much of those loans may turn sour) and money is leaving the country as insiders try to get money out in advance of any potential collapse or crisis. The nightmare scenario is property starts to fall in price, non performing loans in the banking sector rise (due to falling property prices and bad corporate loans) and the shadow banking system which has grown rapidly in China also comes under pressure at the same time as the commercial banking system. There is an old adage "the longer a boom the bigger the bust" I personally would avoid exposure to Chinese shares and property for the foreseeable future.

There were many reasons why I voted remain. The main one being that I saw the economic benefits of being an EU member far outweighing any costs, the UK has benefited from increased trade, immigration and inward Foreign Direct Investment and much domestic investment depends on access to the single market which covers sectors such as, consultancy, education and financial services at which the UK excels.

In my view, the referendum debate over the EU was farcical and there were too many outright lies by the Brexiteers that were not properly challenged. It is amazing that there was virtually no debate about the exit costs of Brexit in the debate. There is now talk that the Brexit bill could be as high as £100 billion. In the end the bill will be nothing like that probably in the region of £40 - £45 billion net. However, let's not lose sight of the fact that the real exit costs will be much bigger, there will be a large hit to domestic and foreign investment, a large loss of tax revenue as the economy takes a hit and some businesses decide to relocate in part or in whole to countries within the European Union. Then there will be an army of civil servants, lawyers and consultants required to do work like trade negotiations, agricultural support that were previously dealt with by EU officials.

The costs of a Hard Brexit in terms of rising inflation, loss of trade and falling real wages, rising unemployment will make the potential £100 billion Brexit exit bill look like small change. I wish that all the time, effort and money that is going to be expended on Brexit over the next 5 years could have been avoided as we already have huge problems with the NHS, Schools and Social care to deal with, which will now be put on the backburner.

Brexit is a self-inflicted wound that has divided the country and considerably diminished the status of the UK and it has opened up a can of worms with regard to Northern Ireland and Scotland. There is potential for a better outcome but this is unlikely to occur if Theresa May wins the election - as she has already ruled out the Single Market, Customs Union and jurisdiction of the European Court of Justice. Best be prepared for a disastrous hard Brexit, eventually the folly of all this will be exposed for all to see and attempts made to mitigate it but UK policy makers need to get real and leave their delusional "sunny uplands" view of Brexit.