no gradient in 2018

Founded on September 26 2017, 2018 has been the first full year of operation for no gradient. Let’s see what went down.

Viewership in 2018

  • 9,632 site views
  • 5,711 site visitors
  • 1,211 YouTube podcast views (1,296 all time, 1,324% increase)
  • 2,309 podcast downloads (2,742 all time, 433% increase)
  • 169 hours watched by viewers on YouTube (173 all time, 4,125% increase)
  • 2 Patreon supporters

Content Posted in 2018

Top Posts

Top Episodes

Predictions

In 2018, two of my predictions proved correct. Five proved incorrect. Bringing my predictions scoreboard to 3 out of 12, for a batting average of .250.

Correct

Incorrect

Developments

Struggles

  • Traffic to no gradient is entirely reliant on my reddit submission gaining traction. Viewership to no gradient is very low on regular basis.
  • Even when posts do well on reddit, this converts to few email subscribers or followers on Twitter and Facebook. All of which would help create a more consistent readership of no gradient.

Ahead

  • Notable names on the no gradient podcast. I would love to get an over the hill b or c list celebrity with some name recognition to come on the show. Give them a low stakes way to riff in public and hopefully bring no gradient new viewership.
  • More guest contributors. There are many people I know with gold inside them without an outlet. I hope to encourage more people to come on and share.
  • More investigative posts with original research like Yang2020 Presidential Campaign and how not to Accept Cryptocurrency.

Make Peace with the Distance

People hate distance; that is, they are predisposed to want to close the gaps of difference amongst themselves that announce and protrude in everyday encounters with each other. In other words, as human beings, we hold ubiquity not only as the standard to which all acts are measured, but as the highest end to which all acts are ordered. This unyielding desire for ubiquity becomes manifest in two ways: either by pushing others into it, or else by redirecting our own actions to meet it. But it is important to note that this twofold character of de-distancing need not be cognitive, i.e., thematic to internal reflection. In fact, it is so pervasive to and throughout our being that most of the time it either goes unnoticed, or else it gets passed off and disguised as something else. But in either case, the ensuing destruction is no less devastating.

One might find oneself engaged in a certain activity deemed worthwhile for the simple reason that it brings with it a beloved joy. But this joy becomes quickly qualified, not by its holder, but by others. The greater the distance between this activity and the current state of ubiquity, the more this joy becomes leveled down and ultimately destroyed, which brings the inevitable abandonment of the activity altogether. Do not let the things that you love be torn apart by others: make peace with the distance.

David C. Abergel is a philosopher studying at Marquette University.

Yang2020 Presidential Campaign and how not to Accept Cryptocurrency

Yang2020 - Standard Logo

Update: The Yang2020 campaign appears to no longer be accepting cryptocurrency donations. A partner of mine filled out the form in December 2018 and never heard back. If you have any information please contact me here.

In July 2018 Andrew Yang’s campaign made headlines (the original story I linked to was removed but is still available on the Internet Archive) by being the first presidential campaign to accept cryptocurrency contributions. Myself and a partner tested their process for accepting cryptocurrency and discovered a severe deficiency that exposes the Yang2020 campaign to bad actors. Let’s walk through their current contribution process, point out the issue, and recommend better alternatives to ensure Yang2020 and other political campaigns doing this in the future do not expose themselves.

Yang2020 Cryptocurrency Contribution Process

  1. Complete their form by supplying name, address, employment info, and the amount and type (Bitcoin or Ether) of cryptocurrency you will be contributing.
  2. Book a 15 minute call with a member of their compliance team.
  3. On the call confirm you will not share the wallet address they give you and also answer the following questions: Are you an American citizen? Are you donating money free of coercion? How did you hear about Andrew Yang? Is there a specific reason why you prefer to donate cryptocurrency over traditional money?
  4. Via email receive the wallet address to send the contributions to.
  5. Send cryptocurrency to the wallet address.
  6. Via email receive a receipt from the campaign.
  7. Yang2020 transfers the cryptocurrency to their Gemini account where they convert it to US dollars.

During the call the representative of the campaign said:

I’m going to share our public address after the call, I’ll email it over to you and we need to make sure you don’t share that. If you were to share that out and people were to send us unsolicited money then we would kind of be screwed just because how strict the FEC guidelines are we wouldn’t be able to account for it.

I then asked if they were giving a different wallet address to each contributor and was told their team is “doing it on a case by case basis to be on top of who’s donating what.” Concerned, I asked what would happen if another contribution was made after mine to the same wallet address. The rep replied:

Based on what the FEC said all the funds in that wallet would become invalid because we wouldn’t be able to account with any certainty what came from where.

The Issue

After the call, the Ethereum and Bitcoin wallet addresses I received were the same exact ones my partner received. Besides the fact that I was told each contributor would be receiving different wallet addresses, sharing out the exact same wallet address to multiple contributors is bad practice if your goal is to keep track of where funds are coming from. Especially given tracking the source of cryptocurrency payments is much more difficult than payments made with a credit card. Furthermore, this increases the chance that a rogue contribution would be sent, thus making all funds in that wallet “invalid.” Suppose a bad actor wanted to invalidate contributions made by others, all they would have to do would be to send another payment after their initial one. This would be further complicated if some of those funds from the wallet had already been converted to US dollars.

Recommendations for Improving the Process

The simplest way for Yang2020 and other campaigns to accept cryptocurrency is to use a payment processor like Coinbase Commerce or CoinGate. This will save campaigns the trouble of having to manage their own wallets and make it much easier to keep track of donations. The other option is to generate a new wallet address for each individual donation, send the funds to your exchange (Yang2020 used Gemini), and never use the wallet again.

Cryptocurrency greatly reduces barriers to entry by opening finance to anyone with a smartphone, but that doesn’t mean it is a silver bullet. Especially for campaign contributions and other transactions where non-anonymity is vital, at least right now fiat currency is going to be safer. I have no doubt that in time it will be very easy to send cryptocurrency transactions that can easily be verified as coming from a specific individual. And on top of that, it will be much easier to determine that the funds an individual is sending are clean. Until then, we are in an in between stage where we must tread carefully.

The Results are in, the US Financial System is Stable

federal reserve

Intro

The Federal Reserve recently published its first financial stability report, which summarizes the Fed’s framework for assessing the state of the US financial system and presents the Fed’s current evaluation. This is important because the findings outlined in the Fed report are used in the design of future stress tests on the nation’s largest financial institutions and in setting the amount of liquid assets that banks and other financial institutions must have set aside in the event of an emergency. It is also highly informative about the current health of the US financial system and the vulnerable areas that may warrant future monitoring. The report is intended to increase public understanding of the Fed’s processes and transparency about its current view of the financial system, which informed stakeholders can use to predict and prepare for future actions taken by the Fed.

The Framework

The Fed’s framework for assessing the resilience of the financial system focuses on monitoring the vulnerabilities that can build up over time. Vulnerabilities are unstable aspects of the financial system that may lead to more widespread concerns in the event of a downturn or an adverse “shock”, such as a trade war or a debt crisis in the Eurozone. There are four broad categories of financial vulnerabilities that the Fed outlines in its report:

Elevated valuation pressures: High asset prices relative to fundamentals or historical norms, which is generally caused by high investor risk tolerance. When asset prices are elevated, there is a higher likelihood of large drops in asset prices.

Excessive borrowing by businesses and households: Too much borrowing can make businesses and households unstable. Falling incomes or asset values will then lead to deep spending cuts affecting overall economic activity and defaults on loan payments will impact financial institutions’ and investors’ performance.

Excessive leverage within the financial sector: In the event of an adverse shock, highly levered financial institutions are less capable of absorbing losses. This in turn reduces their ability to lend and may force them to sell off assets to offset losses.

Funding risks: The possibility that investors will run on the financial system by withdrawing funds. When a run occurs, financial institutions that do not hold enough liquid assets may have to sell assets quickly, forcing prices down and incurring losses.

The report notes that these vulnerabilities can interact with one another, having cascading effects across the financial system. For example, a severe drop in asset prices and income that impedes a business’ ability to pay back its debts could lead to high default rates, causing losses for investors and financial institutions that may be more difficult to absorb if the banks are highly levered. This could then lead to banks selling off assets, further exacerbating asset price declines.

The Fed’s Findings

Given the Fed’s framework and the broad categories of vulnerabilities, the high level view of the Fed’s findings are as follows:

  • Asset valuations are high relative to historical standards and investors exhibit high risk tolerance.
  • Household borrowing has grown in line with income, but corporate debt relative to GDP is high and there are signs that credit standards have been deteriorating.
  • Financial institutions are well capitalized, leverage is below pre-crisis levels.
  • Funding risks are low. Bank assets are liquid and banks rely more on higher quality capital (core deposits) to fund loans than before the crisis.

Overall, the report paints a positive picture of the US financial system’s health. While there are some vulnerabilities present, as there will be in any economy, the Fed does not deem them to pose a serious threat to the country’s financial stability. After providing a high level overview of the framework and the current assessment of the nation’s financial stability, the Fed report goes into detail on the various vulnerabilities outlined in its framework. Here, we examine some of the most interesting findings.

Asset Valuation Pressures
Not too much of what the Fed had to say about elevated valuations was very surprising or concerning. It does point out that current metrics show that corporate debt, leveraged loans (a riskier form of debt), equities, commercial real estate, farmland and residential real estate are all overvalued. However, while valuations are high relative to historical averages, they are still lower than before the crisis and seem to be somewhat in line with what can be expected during a normal business cycle. There will be a correction at some point, but this really only impacts investors in the short term. What’s more, the resilience of other aspects of the financial system reduces the likelihood that a drop in asset prices has a significant impact on the health of the financial system.

One piece of this section that was interesting, however, is the Fed’s conclusion that spreads on high yield corporate debt remain low despite signs that credit risks are increasing (though they have widened considerably in the weeks since the report’s publication). Spreads on high yield bonds reflect the compensation that investors require for the added default and liquidity risk of high yield debt versus investment grade debt. The fact that spreads remain low in the presence of rising credit risks and deteriorating lending standards may present a market inefficiency as investors are not being compensated for the excess risk they are taking.

Borrowing by Households and Investors
Household debt does not seem to pose much of a threat to US financial stability, with debt mostly growing in line with income. While the report notes that some households still struggle with debt and that student loan delinquencies are still above their long run trend (though decreasing lately), the findings seem mostly positive.

Among businesses, however, the Fed report highlights some troubling credit trends. Business sector debt as a percentage of GDP is high relative to historical trends. There are signs that credit standards are deteriorating for many business loans, with a high level of new loans issued to high leverage firms. In fact, the report notes that the leverage of some firms is near its highest level in 20 years and that firms with high leverage, low earnings and low cash holdings have increased their debt burden the most. However, this is contrasted by the fact that default rates remain at the low end of their historical range. In general, the deteriorating credit standards are a sign that the economy is strong and lenders believe low default rates will persist for the foreseeable future. Of course, lenders have been wrong before and in the event of a slowdown this could present more cause for concern.

Another interesting development highlighted by the Fed report is in the distribution of investment grade debt. The share of investment grade bonds near junk status (otherwise known as high yield) has reached near-record levels. This is important because in the event of a downturn, deteriorating business fundamentals could cause this outsized share of business debt to be downgraded to junk status. Many investment funds have mandates that prohibit them from holding junk bonds, so broad downgrades to junk status would force funds to sell off this risky debt, putting further downward pressure on bond prices.

Of all of the vulnerabilities highlighted in the Fed’s report, those affecting business credit seem to warrant the most continued monitoring.

Leverage in the Financial Sector
Financial institutions were largely vilified for their role in the 2008 financial crisis. They were highly levered and held insufficient assets, both in terms of amount and quality, to cover their liabilities when the downturn in the housing market first hit. Since then, reforms by US government agencies, including the Fed and the SEC, have significantly improved the health of the nation’s financial institutions. The report notes that leverage is generally low. The results of the Fed’s most recent stress tests show that banks would be able to continue their normal lending activity even in the most severe scenarios, which include a steep drop in asset prices, a deep recession and general deterioration of business credit quality.

However, there was one slightly concerning finding. Issuance of collateralized loan obligations(CLOs), a security comprised of a basket of loans, hit $71 billion in the first half of 2018. CLOs are largely backed by a form of risky debt known as a leveraged loan, the quality of which has been deteriorating according to the Fed. So, you have high levels of issuance at the same time that credit standards and credit quality are weakening. If economic conditions worsen, leading to increased default rates, the value of CLOs could fall dramatically. Likely for this reason, the Fed points out that CLOs are a vulnerability it will continue to monitor moving forward.

Funding Risks
There was really nothing to see here in the Fed’s report. Funding risks are low. Banks are relying less on capital that has proved susceptible to runs and more on stable sources of funding such as core deposits. Core deposits are those deposits held by the bank that typically come from local customers that are believed to have low risk of being withdrawn, making them a stable funding source.  Banks also hold a larger number of liquid assets to act as a buffer in accordance with regulatory reforms since the crisis.

Near Term Risks to the Financial Sector
After going in-depth on the various vulnerabilities to the financial system, the Fed report points out some of the notable international developments that could pose a threat in the form of adverse shocks. The main threats pointed out in the report are Brexit, a looming debt crisis in the EU (particularly Italy), problems in China and other emerging economies, trade tensions and geopolitical uncertainty. The importance of China in global economic activity warrants it some extra attention. Growth has been slowing and non financial private debt is now 200% of GDP. The Fed report points out that anything that may impede the ability of Chinese households and businesses to repay their debt could “trigger adverse dynamics.” A downturn that reduces income could increase default rates, further reducing growth and leading to economic and political turmoil in the region. The resulting spillover could reduce global growth and strain the US economy, though the impact would not be nearly as severe in the US as in other regions due to the overall resilience of our financial system as highlighted in the Fed report.

Conclusion

The Federal Reserve’s Financial Stability report shows vast improvements across the US financial system since the 2008 financial crisis. Yes, there are some vulnerabilities within the financial system that could undermine its resilience if left unchecked. Yes, there are some external threats that could affect the broader US economy, such as uncertainty around Brexit, currency crises in emerging markets and global trade tensions. However, the fact that the Federal Reserve is not only aware of these vulnerabilities and threats but has publicly released its findings is an extremely positive sign. The Fed will continue to monitor these vulnerabilities and threats, as will investors, financial institutions and other government agencies, and will be able to take mitigating actions before they can pose a serious risk to the economy. Subsequent financial stability reports, which are expected to be published twice a year, will further inform the status of these vulnerabilities and whether or not any future developments warrant monitoring.

Pat Daly is a regular contributor to no gradient, both as a guest on the podcast and now as a writer.