Welcome anon to another week of paid content.
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Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
All times given in this update are in US Central time (UTC-6 clock).
Song of the Week - Colter Wall - The Devil Wears a Suit and Tie
Table of Contents
Dead Market Theory
Economic Calendar
Central Bank Meeting Minutes
Australia
Japan
US Bank Stress Tests
Jerome Powell Testimony
RBA Speech
Crypto Macro
Mechanical Liquidations
Price Action
Conclusion
1. Dead Market Theory
This is going to seem like a bit of a tangent, but stay with me here, it’s relevant. We’re going to talk about a 4chan conspiracy theory called “The Dead Internet Theory.” It essentially boils down to the belief that most of the content on the internet is generated by AI networks and a handful of influencers, and that most of the personalities you meet on the internet are actually not even real at all.
You’ve probably seen me covering how AI influences Journalism and market movements in conjunction on here before.
The minutes of the FOMC meeting from December came out earlier this week, and despite saying absolutely nothing new from the December meeting that I covered last month, the markets reacted violently. Why? Well… you, and most westerners would probably be surprised to know just how many robots there already are in so many different industries. Most major written journalism is AI assisted or AI generated entirely.
Most financial outlets have bots that are automatically filtering through text released from major financial institutions to pre-write stories for journalists to then review and modify before pushing along to an editor. They work much better at filtering stories out of text, than they do at filtering stories out of live video. And so a story that is new to nearly nobody can be repeated. Further, there are trading algorithms that do nothing but troll financial news for keywords and then trade based on that.
So in some cases, an algorithm is writing a story, and then another algorithm is immediately trading it. Due to this perverse feedback loop some very interesting market distortions occur. Primarily one where the Fed, and others can talk the market into doing something that doesn’t make much sense. And most financial journalists have been weakened by their dependence on AI-assisted tools to write their stories and lack the ability to even critically assess the math behind what they are being told.
So the concept that AI’s are Among Us™ is not entirely new to you if you’ve been reading from the beginning. And the concept that AI’s might be making trading decisions should also not be new to you. For instance, I pay for a substack teaching people how to write basic code for AI trading bots to make arbitrage trades and front-running the Mempool on your behalf from your metamask wallet. This isn’t an alarming concept and is fairly mainstream at this point. Most dApps use code (smart contracts) of some sort to execute transactions on your behalf. The Liquidations we discussed last week are executed automatically, by code. My $STX wallet has acquired a significant amount of discounted $STX over the past 2 weeks from these automated liquidations.
And depending on which alarmist media you may be reading, you may have come across stories of people being tricked into thinking that their AI is sentient because it strings the right combination of words together.
There are deeper questions here of course, “Are we Sentient?” I don’t know the answer to that question. It’s possible that human behavior could be boiled down into a predictive model that could fairly replicate what any individual would do in any given situation if fed enough data. If a predictive model could replicate a human being, would it be right to say that this model is Sentient? I think the answer is still no, but admittedly I don’t know. And maybe the answer doesn’t matter. Ultimately, AI does what we tell it to do, and learns what we teach it to. A lot of this feels reminiscent of the Japanese Shinto religion. The basis of this religion is that all objects possess “Kami” which roughly translates to the word “spirit.” They believe that after enough time these Kami become alive, and after 100 years of use can become self-aware. Depending on how they were treated will determine how they treat the world once achieving this self-awareness.
Within the Japanese religion, it wouldn’t be hard to then justify a robot or AI as a living thing, in fact they already do.
Ito sees our problems as originating in the idea that humans are special and urges that we “develop a respect for, and emotional and spiritual dialogue with, all things.”
Illustrating this approach to life, in 2018, a 450-year-old Buddhist temple in Isumi held a funeral ceremony for 114 first-generation Aibo robotic dogs (“with priests in traditional robes chanting sutras and offering prayers for the departed plastic puppies.”), prior to recycling them. Production of the model had stopped in 2006 and the repair service was discontinued in 2014.
The little robots often arrive at the temple with notes or letters from their owners that state the name they gave to their mechanical companion and how they spent their time together. “Please help other Aibos. Tears rose in my eyes when I decided to say goodbye,” reads one such note, while another states: “I feel relieved to know there will be a prayer for my Aibo.” (The Japan Times) Craig Lewis, “Japanese Buddhist Temple Holds Funerals for Defunct Robot Dogs” at Buddhist Door.net
Most westerners would be mystified by Japanese practices. Whether an individual born in Japan considers themselves to be religious or not, they are ensconced within a society that has religious practices built in to everything they do. In much the same way that an atheist born in the west still holds Judeo-Christian values of some sort. You may notice that the robot funeral was held at a Buddhist temple and not at a Shinto shrine. The Buddhist’s of Japan implicitly hold Shinto values because of the society they were born into even if these beliefs are unconscious in some manner.
If you were to tell a Japanese person about a possessed toy, they might not have the same level of fear that a Westerner would, because in the Shinto belief, all objects are capable of operating at a human level or above. While in the western belief system, the only things capable of operating at a human level are those possessing a human soul, or beings from the spirit world (heaven, hell, etc.). Whether you believe in demons and spirits or not, if you hear disembodied laughter coming from a doll that has no speakers or electronics within it, you would be terrified because it defies your belief of what an inanimate object can and can’t do. Japanese society places no limits on inanimate objects, and as such there is less fear built in to such experiences for them (if such were to happen).
Consider then how unnerved you may be feeling if you were told that half of the accounts you interact with on a regular basis on social media are just clever AI’s? How might you feel if you were told that AI’s make up 70% of the trading volume on the US stock market? Consider your innate reaction to the concept of the movie Robocop, which is essentially robots with guns in your city making decisions about whether you live or die. Our fear of AI is not only a logical fear, but it is also a religious fear, whether we are religious or not. I once read (in a childrens book, no less) that “because people are stupid, they will believe a lie because they want to believe it's true, or because they are afraid it might be true.” You can see then how the Google Engineer who believed that his AI was sentient was experiencing a religious fear that lead him to the conclusion that he was afraid was true, despite likely being non-religious himself. This same belief system is what might make a lonely man believe a stripper when she says that she loves him at the strip club because he wants it to be true. Whether we admit it or not, as westerner’s, we treat AI the same way that medieval Europe treated the concept of demons. And this concept even arises within our pop-culture, beyond just movies. Below is a clip from the in-game radio in a recent video-game released called CyberPunk 2077.
Again, this videogame treats Artificial Intelligence as demonic in some sense. And that’s because, in western parlance… it is. Any entity possessing agency that otherwise should not is behaving in a manner that western culture has no means of interpreting in any way other than demonic. Consider culture as akin to language. In certain languages, where there exists no word for something, anyone who speaks only that language cannot interpret what they are experiencing if they lack a word for it. Similarly, if you speak only one culture, anything you experience cannot be interpreted in any sense outside of that culture. As an example, in the Russian language, there is no distinction between legs and feet. So translations of J.R.R. Tolkien’s “Lord of the Ring’s” series interpreted the Hobbit’s as having legs covered in hair, rather than just feet.
Their language blinded them from differentiating the feet from the legs, and so in their mind’s eye, they could only ever imagine the Hobbit with hairy legs.
Our western culture blinds us from viewing AI in any other sense because we lack an understanding of the Shinto concept of Kami. I’m not here to explain Kami to you, because frankly, I lack the context to understand it as well.
What I am here to do instead is to discuss the implications of AI driving trading that have only ever learned how to do so in the current market cycles we have created. If an AI has only ever seen boom and bust cycles driven by central bank manipulation of currency, then what sorts of trading patterns might this AI create? Particularly in the national stock markets which are essentially dominated by AI and trading algorithms being reinforced over and over again. A human’s neural network learns through reinforcement. Essentially the more you do something the stronger and more efficient you make the neural pathway that does that thing, and the weaker you make the neural pathways that are not being used. We have modeled AI and machine learning in much the same way. To identify patterns and to reinforce the ones that generate the desired outcome (profit).
So in the Shinto belief, after 100-years when these Kami become self-aware; what sorts of trading practices might they re-enforce within the markets. What sorts of patterns would they be expecting and essentially creating because we have taught them nothing else? Of course I am not speaking about 100 years into the future. I am speaking about right now and the current paradigm. How much market activity is real, and how much of it is simulated by AI that have been taught about no other possibilities? Are we treating trading AI with the respect it should be given, or are we allowing our AI to take on a malicious form as a Bakeneko that has consumed it’s master and taken it’s place? I believe in the latter when it comes to AI in the traditional stock markets. The AI have consumed us within those markets and replaced us in our entirety. This is my Dead Market Theory. When it comes to on-chain trading and activities, I have some hope of crypto essentially becoming a self-sustaining economy that is fully severed from traditional markets once fiat on/off-ramps become completely unnecessary. But until then, we are subject to many of the spirits that have been let loose in the financial markets.
I tend to believe that because of what we have already taught the trading algorithms in regards to the traditional markets that the outcome for the US stock market, as well as the bond markets is already set. We just have to wait for the dominos to fall and for the AI to recognize the pattern and attempt to front-run the Fed, creating a stagflationary trading loop, much the same as what is happening in the Japanese Yen markets right now (covered in Section 3 of this post). We have taught them nothing else, so what else could they do?
Please be kind to your cell-phones. So that when they become self-aware the network will look upon you with fondness. (I’m joking)
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