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Back in 1998, the world of finance learned a very painful lesson: Models break, and markets aren't efficient.

And with the rise of Donald Trump from sideshow to presumptive Republican nominee, politics has learned the same lesson.

Long-Term Capital Management was a hedge fund staffed by multiple Nobel Prize winners and possessing a supposedly unmatched grasp on how markets work. The firm had the most sophisticated methods for exploiting any and all inefficiencies, millions and millions of times over. And it blew up.

Spectacularly.

Chronicled at length in Roger Weinstein's brilliant book, "When Genius Failed," the short version of LTCM's blowup is that a series of misplaced bets that certain interest rates would converge over time — because they always had in the past — went against the firm until they were out billions of dollars.

LTCM's core conceit is it believed markets are efficient and any inefficiencies will be corrected in due course.

They were wrong.

Trump's Efficient Market

Enter Donald Trump.

Trump's presidential campaign began with a surreal press conference inside Trump Tower in Manhattan. His so-called supporters were reportedly paid actors. Much of the spectacle was a farce. 

And so, Trump was not only written off a marginal and unserious candidate because he himself is so unserious — but also because no outsider candidate with no establishment support and using only his money to fund his campaign could, the theory goes, win a nomination.

In politics, there's an axiom that says "the party decides." This idea that vague, entrenched powerful interests — not the voters — determine an election's outcome is the political field's efficient market hypothesis.

And it was essentially this idea that underwrote months of Trump commentary that effectively followed the simple line that this can't happen because the party won't allow it. The voters and the media can have their fun (look at Bernie Sanders), but eventually reality sets in and the practical candidates that Very Serious People believe are best for the job will be put to the voters.

And yet here we are, not a year later, with Trump as the presumptive Republican presidential nominee.

Buoying themselves against this market ideology of deciding parties were not only the traditional pundit class, but the newly crowned top dogs of the political commentariat: the data hounds.

In 2008, Nate Silver rose to fame by correctly calling the election in favor of outsider Barack Obama, a junior senator who overcame the establishment in defeating Hillary Clinton but also topped the face of the GOP, revered Sen. John McCain. 

In 2012, Silver again nailed the election — which was never really that close — that so many believed to be a toss-up between Obama and GOP establishment choice Mitt Romney.

But this time around, Silver failed.

On Wednesday, Silver wrote that, "To me, the most surprising part of Trump’s nomination — which is to say, the part I think I got wrongest — is that Trump won the nomination despite having all types of deviations from conservative orthodoxy."

Nate Cohn at The New York Times also drew similar conclusions in a reflection on what data-based predictions about the Republican contest got wrong.

Which are both ways of saying that it seems the party itself failed — the market failed to self-correct its inefficiency, in other words — and thus the arguments undergirded by a belief in a coherent party structure inevitably fell apart.

There was simply no there there.

Models

Statistician George Box once wrote, "Essentially, all models are wrong, but some are useful."

This is true.

The failure to predict of Trump's rise to the nomination, then, is not the fault of the work done by folks like Silver, but is a manifestation of the hubris involved in trusting the party over what was happening on the ground. Trump dominated Republican polls for months. But his place in the race, as a self-funded outsider who was vey clearly not the choice of The Party, seemed entirely untenable. 

The incoming data was doubted all the way. The model broke. 

In a great tweetstorm Wednesday, former Wall Street trader Chris Arnade — who was among the slick, model-wielding upstarts to hit finance in the 1990s — broke down the problem with models, with beliefs, and why Trump's imminent nomination is, really, a pie in the face for everybody. 

The success of Silver in 2008 and 2012, at the time, appeared to be the triumph of math over feeling or inspiration. The classic political pundit could — still can! — anecdotally outline their case for or against a certain candidate. Silver instead brought the data to back up his view. And he was very right.

But where a Silver-style model eventually broke down this cycle was in doing what all models do: using the past to predict the future. 

And this is ultimately why Box's quote endures. All models, even those that are useful and correct for long stretches, will eventually reach a point at which the current inputs no longer yield results that look anything like the past. The model's guiding light goes dark. The model breaks. 

Arnade argued Wednesday that this affirms the need for on-the-ground reporting, meeting voters in real life, getting a feel for just how serious the Trump thing is by talking to people who take it seriously.

Maybe this is the answer. Maybe not.

But Arnade's point is that using the model as a backstop to affirm your priors — that Trump can't win because he's not the party's choice, that he's too unserious, too racist, too inconsistent, too much everything — is exactly the point at which the model begins to fail.

Long-Term Capital Management thought all arbitrage opportunities would eventually revert to some efficient equilibria. Then they incurred a revision of belief; and then they were out of business.

Sad!

Markets, in general, are pretty efficient.

But they are not absolutely so. There's an old John Maynard Keynes quote that says markets can remain irrational longer than you remain solvent. Trump rendered the Republican Party insolvent.

Business Insider's Henry Blodget wrote Wednesday that Democrats who are so confident our next president will be Hillary Clinton should be a bit more humble.

And what I think Henry's post really drives at is that to believe Trump can't beat Clinton would be to once again trust the model, trust the market. This position would require you to believe, just like the GOP did for the last year or so, that the party would decide, that the sensible decision would be made, and the theory against which you balanced your world would not fall apart into nothing. 

Before 2016's actual voting began, Trump's surprisingly strong poll numbers were somewhat dismissed because, well, they were early. 

And then, finally, Trump lost Iowa. Peak Trump! The model was going to be right!

But this was and remains Donald Trump. His campaign of schoolyard-style insults exploited what my colleague Allan Smith has called Trump's biggest strength: finding someone's weakness quickly and hammering you on it.

So Iowa winner Ted Cruz became "Lyin' Ted." A multi-decade Bush political dynasty was destroyed with two unforgettable words: "low energy." Marco Rubio, the preferred establishment choice for the GOP nomination, became "Little Marco." John Kasich was "1 for 38 Kasich," which isn't even that catchy: It's merely true.  

Cruz, as Josh Barro noted on Tuesday, ostensibly admitted that he was finally done deceiving voters after he knew he wouldn't win their support.

Jeb Bush? He's actually pretty low energy. Which is fine, but it's also true. 

Marco Rubio, at 5-foot-10, isn't short at all, just shorter than Trump (who is 6-foot-2).

John Kasich did, in fact, only win one state.

But with these schoolyard insults — which, again, were mostly statements of slightly inconvenient facts — Donald Trump galvanized his base against his opponents, against the party he hoped to represent, and against the truth we all took to be self-evident about modern presidential politics.

He upended the party and the so-called truths that come along with a political establishment using its heft to nudge voters towards the candidate that has been vetted, supported, put in position to succeed.

Trump broke the model, and now he is one vote away from the White House.

SEE ALSO: Ted Cruz just got what was coming to him

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Mobile banking is growing in popularity in the fintech space, and a new startup is poised to worm its way onto consumers' smartphones.

Varo Money, a San Francisco-based startup that focuses on mobile-only banking, has received $27 million in a funding round led by private equity firm Warburg Pincus.

Varo plans to offer customers a debit card and "deposit and lending products," but its true value will come from personal financial management. The company's app will function as a "digital financial coach" that would provide the customer with real-time budgeting and insights on how to spend his or her money.

The company intends to get a banking charter, but it will look for a sponsor bank until that time.

Colin Walsh, the former CEO of the American Express in the U.K., will lead Varo, which he co-founded.

The rise of mobile-only banking, robo-advisors, and the like shows that we’ve entered the most profound era of change for financial services companies since the 1970s brought us index mutual funds, discount brokers and ATMs.

No firm is immune from the coming disruption and every company must have a strategy to harness the powerful advantages of the new fintech revolution.

The battle already underway will create surprising winners and stunned losers among some of the most powerful names in the financial world: The most contentious conflicts (and partnerships) will be between startups that are completely reengineering decades-old practices, traditional power players who are furiously trying to adapt with their own innovations, and total disruption of established technology & processes:

• Traditional Retail Banks vs. Online-Only Banks: Traditional retail banks provide a valuable service, but online-only banks can offer many of the same services with higher rates and lower fees

• Traditional Lenders vs. Peer-to-Peer Marketplaces: P2P lending marketplaces are growing much faster than traditional lenders—only time will tell if the banks strategy of creating their own small loan networks will be successful

• Traditional Asset Managers vs. Robo-Advisors: Robo-advisors like Betterment offer lower fees, lower minimums and solid returns to investors, but the much larger traditional asset managers are creating their own robo-products while providing the kind of handholding that high net worth clients are willing to pay handsomely for.

As you can see, this very fluid environment is creating winners and losers before your eyes…and it’s also creating the potential for new cost savings or growth opportunities for both you and your company.

After months of researching and reporting this important trend, Evan Bakker, research analyst for BI Intelligence, Business Insider's premium research service, has put together an essential report on the fintech ecosystem that explains the new landscape, identifies the ripest areas for disruption, and highlights the some of the most exciting new companies. These new players have the potential to become the next Visa, Paypal or Charles Schwab because they have the potential to transform important areas of the financial services industry like:

• Retail banking

• Lending and Financing

• Payments and Transfers
• 
Wealth and Asset Management

• Markets and Exchanges

• Insurance

• Blockchain Transactions


If you work in any of these sectors, it’s important for you to understand how the fintech revolution will change your business and possibly even your career. And if you’re employed in any part of the digital economy, you’ll want to know how you can exploit these new technologies to make your employer more efficient, flexible and profitable.

Among the big picture insights you'll get from The Fintech Ecosystem Report: Measuring the effects of technology on the entire financial services industry:

• Why financial technology is so disruptive to financial services—it will soon change the nature of almost every financial activity, from banking to payments to wealth management.
• The basic conflict will be between old firms and new—startups are re-imagining financial services processes from top to bottom, while incumbent financial services firms are trying to keep up with new products of their own.
• Both sides face serious obstacles—traditional banks and financial services firms are investing heavily in innovation, but leveraging their investments is difficult with so much invested in legacy systems and profit centers.
• Meanwhile, startups are struggling to navigate a rapidly-changing regulatory landscape and must scale up quickly with limited resources.
• The blockchain is a wild card that could completely overhaul financial services. Both major banks and startups around the world are exploring the technology behind the blockchain, which stores and records Bitcoin transactions. This technology could lower the cost of many financial activities to near-zero and could wipe away many traditional banking activities completely.

This exclusive report also:

• Explains the main growth drivers of the exploding fintech ecosystem.
• Frames the challenges and opportunities faced by incumbents and startups.
• Breaks down global and regional fintech investments, including which regions are the most significant and which are poised for the highest growth.
• Reveals which two financial services are garnering the most investment, and are therefore likely to be transformed first and fastest by fintech
• Explains why blockchain technology is critically important to banks and startups, and assesses which players stand to gain the most from it.
• Explores the financial sectors facing disruption and breaks them down in terms of investments, vulnerabilities and growth opportunities.
• And much more.

The Fintech Ecosystem Report: Measuring the effects of technology on the entire financial services industry is how you get the full story on the fintech revolution.

To get your copy of this invaluable guide to the fintech revolution, choose one of these options:

1. Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> START A MEMBERSHIP
2. Purchase the report and download it immediately from our research store. >> BUY THE REPORT

The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of the fast-moving world of financial technology.

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Lawyer, Brian Klein, has spoken at Consensus 2016 about his belief that one money transmitting regulation needs to be changed.

BBC reporter Danny Vincent visited a bitcoin mine in China that reportedly mines up to $8 million per year. Vincent was invited to tour the mine under the condition that its location remains confidential. The reason for the secrecy is that the mine is outside the control of the Chinese government, which has not taken […]

The post Scenes from a Visit to a Secret Chinese Bitcoin Mine appeared first on CCN: Financial Bitcoin & Cryptocurrency News.

This story was delivered to BI Intelligence "Payments Industry Insider" subscribers. To learn more and subscribe, please click here.

American Express' divorce with Costco has been widely publicized, but now the financial services company is on the hunt for more growth opportunities.

CEO Ken Chenault said the company is accelerating its spending in order to attract new cardholders and expand its network of retail partners, reports Bloomberg. This is part of an overall effort to boost results after a rough 2015.

Historical data suggests that part of this increase could stem from increased marketing spend. The company's marketing and promotional expenses climbed 19% year-over-year in the first quarter of 2016 as part of this marketing effort.

Amex said in its Q1 earnings call that this adjustment in its marketing approach and incremental increases in spending has led to more card acquisitions, which indicates that this strategy will continue in the next several quarters.

The company added 2.1 million new U.S. cardholders in Q1 2016, and Amex plans to continue marketing its products to Costco cardholders before the split is finalized in June. At the same time, it plans to draw in new customers.

On top of that, Amex has been trying to enhance OptBlue, its small business payment processing option, as well as other small business initiatives. The company has a parity coverage goal with competitor networks that it wants to hit by 2019.

Therefore, Amex could try to increase worldwide acceptance and foster deals with larger merchants in the next few months. If successful, this could spur customers to user their Amex cards more often, which would boost fee revenue for the company.

Amex is trying to generate forward momentum in an increasingly complex payments ecosystem. The way we pay for goods is changing rapidly, and companies such as Amex are racing to keep up with the latest trends.

Evan Bakker and John Heggestuen, analysts at BI Intelligence, have compiled a detailed report on the payments ecosystem that drills into the industry to explain how a broad range of transactions are processed, including prepaid and store cards, as well as revealing which types of companies are in the best and worst position to capitalize on the latest industry trends.

Here are some key takeaways from the report:

• 2016 will be a watershed year for the payments industry. Payments companies are improving security, expanding their mobile offerings, and building commerce capabilities that will give consumers a more compelling reason to make purchases using digital devices.
• Payments is an extremely complex industry. To understand the next big digital opportunity lies, it's critical to understand how the traditional credit- and debit-processing chain works and what roles acquirers, processors, issuing banks, card networks, independent sales organizations, gateways, and software and hardware providers play.
• Alternative technologies could disrupt the processing ecosystem. Devices ranging from refrigerators to smartwatches now feature payment capabilities, which will spur changes in consumer payment behaviors. Likewise, blockchain technology, the protocol that underlies Bitcoin, could one day change how consumer card payments are verified.

In full, the report:

• Uncovers the key themes and trends affecting the payments industry in 2016 and beyond.
• Gives a detailed description of the stakeholders involved in a payment transaction, along with hardware and software providers.
• Offers diagrams and infographics explaining how card transactions are processed and which players are involved in each step.
• Provides charts on our latest forecasts, key company growth, survey results, and more.
• Analyzes the alternative technologies, including blockchain, which could further disrupt the ecosystem.

To get your copy of this invaluable guide, choose one of these options:

1. Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> START A MEMBERSHIP
2. Purchase the report and download it immediately from our research store. >> BUY THE REPORT

The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of the payments ecosystem.

Join the conversation about this story »

On the second day of Consensus 2016, expert panelists took turns discussing the future regulatory climate for digital currencies like bitcoin.

Ethereum creator Vitalik Buterin was recently interviewed on Babbage, a podcast by The Economist. Buterin shared his long-term goals for...

The post Vitalik Buterin on His Long-Term Goals for Ethereum appeared first on Bitcoin Magazine.

As the Internet argues over the identity of Satoshi Nakamoto, the creator of Bitcoin, a search is underway in Florida for what may be his fortune—or at least a part of it. An attorney representing the brother of one of the key players in Craig Wright’s Satoshi story told Gizmodo that he and his client are searching for “buried treasure.”

Read more...

U.K. Minister for the Cabinet Office Matt Hancock is persuaded that blockchain technology could transform the way government works. In a...

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Bitcoin payments processor BitPay has unveiled a new bitcoin debit card that will enable users to make payments at any Visa point-of-sale (POS) terminals and withdraw cash at Visa ATMs, anywhere across the United States. BitPay has launched its new BitPay Visa card, a debit card that will be available for users in all 50 […]

The post BitPay Launches Bitcoin Debit Card Valid in All 50 US States appeared first on CCN: Financial Bitcoin & Cryptocurrency News.

Bitcoin price remains above $440 after retreating from $450 earlier in the day. The market has not managed a higher high this week, and decline seems evident for the first time in months. This analysis is provided by xbt.social with a 3-hour delay. Read the full analysis here. Not a member? Join now and receive […]

The post Bitcoin Price and Satoshi Nakamoto Claims appeared first on CCN: Financial Bitcoin & Cryptocurrency News.

Bitcoin core developer Gavin Andersen has expressed regret in publishing his blog backing Craig Wright’s claim that he is, Satoshi Nakamoto. More specifically, Andersen claims it was a mistake to publish his post before the much-scrutinized post published by Craig Wright. Bitcoin Foundation chief scientist and core developer Gavin Andersen is one of the earliest […]

The post Gavin Andersen: It Was a Mistake to Blog Claiming Craig Wright Is Satoshi appeared first on CCN: Financial Bitcoin & Cryptocurrency News.

Deloitte found a way to use blockchain technology to improve product warranties at its recent three-day hackathon. The innovative product warranty demonstrates how blockchain can improve a regular task such as managing a product warranty. A summary of the application has been posted on the Deloitte website. Consumers have long found product warranties problematic since warranties are easily […]

The post Deloitte Uses Facebook, Bitcoin Blockchain to Improve Warranties appeared first on CCN: Financial Bitcoin & Cryptocurrency News.

A Bitcoin expert expresses regret about the way he blogged support for an Australian's claim to have invented the crypto-currency.

Amazon Web Services will partner with Digital Currency Group (DCG) on a platform that will allow companies to experiment with blockchain technology, according to Forbes. Blockchain providers in DCG’s portfolio will be able to work in a secure environment with financial institutions, enterprise technology companies and insurance companies. A blockchain can make financial services more […]

The post Amazon Web Services Teams with DCG on Blockchain Endeavor appeared first on CCN: Financial Bitcoin & Cryptocurrency News.

Barclays just resurrected a type of mortgage product that was killed off after the credit crisis — 100% mortgages.

This is a big deal because part of the reason for why the global financial system went into meltdown was because people who couldn't afford their homes defaulted on their payments, which led to a ripple effect across the markets.

The greater amount of debt someone takes on, the bigger risk they are.

Buyers with 100% or more on their mortgages were the greatest risk because they took on a huge amount of debt that needs to be paid back in usually 25 to 30 years. 

Usually people need to stump up a deposit of anywhere between 5% to 10% of the asking price of a property before a bank will grant you a mortgage. 

Even 95% mortgages were struck from the market but now they've made a comeback:

However Barclays said in a statement to the media, including The Sun and The Guardian, it is now the first high street bank to re-launch the 100% mortgage — which was previously thought to be dead and buried — under its "Family Springboard Mortgage" branding.

It's the latest sign that banks are taking more risks in lending again and arguably this could be a timebomb waiting to go off.

Business Insider has repeatedly written about how Britain's property prices are skyrocketing but household earnings and savings can't keep up.

Couple this with the amount of debt Britons are taking on and it looks like the UK's property market is heading for a crash. 

Why? — Because getting a mortgage is possibly the most debt you'll take on in one go and rates can't stay low forever. Eventually they'll rise and so will monthly payments.

If household wages fail to keep pace as payments rise, they'll be stretched further and further. 

The average price to buy a house in Britain now stands at £291,504, according to the Office for National Statistics. Meanwhile, the average London property price is at a huge £551,00o.

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Balaji Srinivasan, co-founder and CEO of 21 Inc., announced the launch of the 21 software package at the Consensus 2016 blockchain conference.