For the trader, the draft abortion decision presents an important privacy narrative …

Our focus is primarily on the trader for trade or exchange of value.  Trade is the only reason humans bother with each other.  From the first engagement between one another we have come up with rules for settling our trades, for being transparent, for injecting trust into the markets.  An abortion decision would seem distant from this concept.  But is it?

The Constitution is a conservative document. The Constitution says nothing about abortion, nor does it provide for the federal government to involve itself in private decisions.  The irony is that those who allegedly want abortion to remain a private matter are asking the ultimate intruder to regulate in this area.  Abortion regulation is another mechanism for government expansion particularly where privacy is concerned. 

For example, I read Roe v. Wade before parsing through the U.S. Supreme Court’s draft opinion in Dobbs. I took this order in reading the opinions to avoid any taint from Justice Alito’s opinion.  My conclusion was that Roe is legal analytical trash.  After reading Roe and reading Alito’s opinion, I had to say that I was mostly in agreement with him.

The pains that the court in Roe went through to create a privacy doctrine that is not supported by the Constitution only to see the opinion sliced and diced by the legal reasoning in Dobbs and the analysis of the U.S. Constitution looked straight out of a horror movie. There is no explicit protection of privacy in the Constitution and in the narrower case it will be left up to state legislatures to guarantee it in their constitutions and/or define it in state law.

For the trader, especially the trader in crypto currencies where the concept of anonymity attracted her to that market, she has to ask, “Will this court’s attack on privacy provide more ammo for government’s attempts at looking at my trades?”

Government sees itself charged with managing all the resources in a country including human resources and maintaining that world view means piercing the veil of privacy.  I would not be surprised to see the courts take further action against privacy by reversing itself on a number of privacy cases that Roe was built on.  Traders should stay aware of this possibility that attacks on privacy could further cement threats to privacy in the markets.

 Alton Drew

6 May 2022

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CFTC Charges Archegos Capital Management and Three Employees with Scheme to Defraud Resulting in Swap Counterparty Losses Over $10 Billion

Regulatory and Legal News

April 27, 2022

Washington, D.C. — The Commodity Futures Trading Commission today announced it has filed a complaint in the U.S. District Court for the Southern District of New York against Archegos Capital Management, LP (Archegos) and its Chief Financial Officer, Patrick Halligan, of Syosset, New York, charging them with fraud.

The CFTC also issued two orders simultaneously filing and settling charges against two Archegos employees, William Tomita of Palm Beach, Florida, formerly Archegos’ Head Trader; and Scott Becker of Goshen, New York, formerly Archegos’ Director of Risk Management. Tomita and Becker have each admitted their roles in the scheme and agreed to cooperate with the CFTC.

“Honesty, integrity, and transparency are fundamental to the proper functioning of our swaps markets,” said Chairman Rostin Behnam. “The CFTC will take action against those who provide false or misleading information that undermines our markets.” 

“These actions demonstrate the CFTC will continue to work vigilantly to protect the financial integrity of transactions in the swaps markets,” said Acting Director of Enforcement Gretchen Lowe. “There is no tolerance for fraud in the derivatives market, including fraud by family offices like Archegos, which are currently not subject to direct CFTC oversight.”

Specifically, the complaint charges the defendants with engaging in a scheme to provide false or misleading material information and failing to provide such material information to swap counterparties of Archegos Fund, LP, a private fund managed by Archegos, regarding the size of its positions, the amount of its unencumbered cash, and the risk associated with Archegos Fund’s investment portfolio. The complaint alleges that as a result of the defendants’ and respondents’ misconduct, Archegos Fund’s swap counterparties collectively lost over $10 billion. The CFTC seeks restitution to defrauded swap counterparties, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and permanent injunctions against further violations of the Commodity Exchange Act and CFTC regulations, as charged.

The CFTC’s orders against Tomita and Becker find the respondents engaged in the scheme in order to secure additional capacity for Archegos to enlarge its swap trading positions, to obtain or maintain favorable margin rates, and to attempt to satisfy margin calls. In connection with the orders, Tomita and Becker each entered into cooperation agreements with the Division of Enforcement and admitted to engaging in the fraudulent scheme. The orders impose immediate cease and desist obligations with respect to Tomita and Becker, and further sanctions will be determined in future proceedings. 

Case Background

The complaint against Archegos and Halligan alleges that from March 2020 to March 2021, Archegos and others acting on its behalf repeatedly misrepresented material facts or omitted material facts relevant to assessing the risk of Archegos Fund’s portfolio, including the size of its largest positions, aggregate gross exposure, amount of unencumbered cash, and liquidity. The complaint further alleges that Halligan aided and abetted Archegos’ fraud by directing Archegos employees to misrepresent or omit certain of these material facts. 

To hedge the market risk associated with its long portfolio, Archegos Fund entered into short swaps with a total notional value of tens of billions of dollars referencing broad-based exchange-traded funds and broad-based custom baskets of securities. The complaint alleges that these short broad-based swaps were also critical to inducing Archegos Fund’s swap counterparties to allow Archegos Fund to continue to build on its highly leveraged, concentrated, and illiquid long positions.

As an example of the defendants’ numerous misrepresentations, the complaint alleges that Archegos and other employees repeatedly and consistently misrepresented to swap counterparties the size of Archegos Fund’s largest position. By March 2021, Archegos Fund’s largest position was approximately 70% of the fund’s net asset value, yet Archegos, at Halligan’s direction, misrepresented during that time that the fund’s largest position was only 35% of its net asset value. Archegos also misrepresented to swap counterparties that Archegos Fund’s portfolio was more liquid than it really was. By misrepresenting the size of Archegos Fund’s largest position and the overall liquidity of Archegos Fund’s portfolio, the defendants misrepresented that Archegos Fund’s portfolio was materially less concentrated (and hence materially less risky) than it actually was. 

During the week of March 22, 2021, virtually all of Archegos Fund’s largest long positions sharply declined, triggering margin calls from its swap counterparties totaling over $13 billion. The margin calls far exceeded Archegos Fund’s available cash, causing it to collapse, dismiss employees, and cease operations. The complaint alleges that during this week, Archegos made additional misrepresentations regarding Archegos Fund’s financial state. 

Tomita and Becker Settlements

The CFTC’s orders for Tomita and Becker find that each made numerous misrepresentations to Archegos Fund’s swap counterparties in connection with the fraudulent scheme. Tomita and Becker admitted to engaging in the fraudulent scheme, including intentionally and/or recklessly providing false or misleading material information and failing to provide such material information to Archegos Fund’s swap counterparties regarding, among other things, the size, composition, and liquidity of positions in Archegos Fund’s entire portfolio across financial institutions. 

Source: Commodity Futures Trading Commission

Taking a look at the US money supply numbers: Has the political right missed the mark?

Between February 2021 and February 2022, Board of Governors of the Federal Reserve System (BOG-Fed) data shows that M1 money supply increased 12.7% or 1.05% per month. When you put this data along side unemployment data from the U.S. Bureau of Labor Statistics (BLS), the 1.05% monthly increase in money supply accompanies a monthly 3.2% decrease in the unemployment rate.

Inflation is running at a rate of 7.9% between February 2021 and February 2022, according to BLS data. This translates to a roughly 0.65% monthly increase in household expenditures.

And the dollar index which measures the strength of the US dollar against a basket of other currencies has risen 7.3% over the February 2021 to February 2022 period, which translates to 0.60% per month.

I’m not going to attempt a causal analysis here. A cursory view of the money supply and dollar index could lead one to conclude that the relationship between the money supply and the dollar index is less than unitary which could be interpreted as the existence of price elasticity; that buyers of dollars could find other competitive currencies to carry out a trade. I won’t say “carry trade” since I am not looking at bond yields.

The political right has been consistent in pointing out that inflation is reflective of increased money supply, but I cannot say whether the less than unitary response in the inflation rate when compared to the change in money supply indicates that the political right has missed the mark.

Alton Drew

03.04.2022

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Government administers the trading post: The underlying philosophy of the law of markets ….

Commentary

Government’s role is to administer the trading post by managing the masses with a law-and-order scheme; broadcasting the value of its money through a regulated banking system; and expanding into and protecting new markets with its military and diplomatic corps.  Government, specifically western government, operationalizes the tenets of western philosophy: that man is at war with himself and nature and to alleviate the uncertainty of extermination, man must divide up the world and seek the most yield from the resulting parts.

Humans have no other reason to engage each other but to extract value from one another.  To garner the most yield from this engagement, the exchange, the trade, needs to be unencumbered by conflict.  Where it is impossible to obtain the means for survival by staying in one’s lane and exchange is necessary, humans then put in place customs, practices, rules designed to reduce conflict. 

Government promulgates the statutes, codes, and policies that manage the day-to-day mitigation of conflict.  It stays “in the money” by optimally maintaining the physical and social infrastructure that facilitates and expands its tax base.  It’s ability to effectively manage infrastructure and expand its tax base makes its money more attractive to traders.

Unfortunately, government has taken on a life of its own, going beyond its mandate to manage infrastructure and ensure law and order to regulating society on an increasingly micro level.  More of its policy and legislative initiatives appear intended to replace private market judgment with its own government judgment.  This imposition of government judgment on market judgment was not part of the original deal between traders, market makers, and government.  The imposition has seeped into the act of establishing price, an act that is best left to markets. 

Government now wants more than its cut in the form of taxes.  It now wants to weaponize price discovery and price setting for the purpose of expanding its cut by garnering more votes from the electorate.

The merchant trader, to protect her lane, should inform herself daily on the political process and support efforts that push back on government efforts to intervene in her ability to set price and other terms and conditions within and via the markets.

Alton Drew

27.03.2022

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The Executive Office of the President appears more about narrative development than policy development …

I did a review of the Executive Office of the President to identify any pertinent messaging on the currency markets. Almost 14 months into Joe Biden’s first term and I could not find any major policy proposals regarding the currency, at least from within the EOP. The EOP appears to amplify the President’s most important political tool: the power to persuade. Created in 1939 by President Franklin Delano Roosevelt, the EOP is the day-day extension of the “bully pulpit”, from whence data-supported arguments are supposed to be made and woven into the President’s narrative.

Two of the most important units within the EOP are the Council of Economic Advisers, which is chaired by Dr. Cecilia Rouse, and the National Economic Council, which is headed by Brian Deese. The CEA was established by the Congress in 1946 to advise the president on economic policy. Along with Dr. Rouse are two other council members who together are expected to analyze economic events and provide the President with policy recommendations. Almost 50 years later, President William J. Clinton established the NEC to coordinate domestic and foreign economic policies and implement policy according to the Administration’s economic agenda. In American football parlance, Mr Deese is supposed to be President Biden’s offensive coordinator.

For the purpose of the trader who is trying to parse pertinent political information out of the noise coming out of Washington, she should be mindful that Washington is about narrative building, maintenance, and transmission. The EOP’s explicit mission is to support the messaging and policy agenda of the President and this support helps the President win votes. The implicit mission of the EOP is to convince the electorate, and more specifically those who trade in the American political economy, that this jurisdiction is superior to the other 200 countries on the globe. America is supposed to be the better business model.

At this point in the electoral cycle, the EOP is still trying to keep the electorate supportive of President Biden’s Build Back Better legislation, which is currently still in the Senate. While the pandemic has been a constant cloud over Washington politics, the issues of inflation and the invasion of Ukraine by Russia have sucked the policy oxygen out of the room. The infrastructure legislation passed last year goes into effect today and while touted as a way to expand productive capacity leading to reduction in inflation, effects from that plan, having just gone into effect this year, will take a while to germinate.

One final note is how to avoid the narrative cross fire. Take inflation for example. There are two competing narratives regarding the cause of inflation. The Democratic Party are selling the narrative that supply chain issues are the major cause of inflation and if the United States is to reduce inflation head on, the infrastructure deal and broader social net agenda contained in Build Back Better are necessary in order to expand the economic and social infrastructure thus reducing physical and social supply congestion and constraints.

The Republican Party, on the other hand, are making the argument that inflation is more closely related to the supply of money, where there is too much money chasing too few goods, and that increased fiscal spending will only make inflation worse.

The trader, again, should keep in mind that she should separate out the “vote buying” aspect of the narrative from the “market making” aspect of the narrative. The focus should be on how whether fiscal or monetary policy provides better insights on where inflation and interest rates are going.

Right now, nothing out of Executive Office of the President is helping to quell the noise.

Alton Drew

07.03.2022

For consultation on how this political or legal event impacts your foreign exchange trade, request an appointment at altondrew@altondrew.com.

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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Candidates for Georgia governor should be mindful of price appreciation for yuan vs dollar.

I was curious about demand for the U.S. dollar versus the Chinese yuan in terms of the British pound, the euro, and the Indian rupee. Given the state of Georgia’s export efforts, I wanted to determine what Georgia should be keeping its eyes open for when it comes to competition between the dollar and the yuan.

Georgia’s gubernatorial campaign is heating up. It has been my experience that candidates nary make mention of export efforts. If you are going to talk about exports, you have to talk about currencies. From what I have gathered so far, only Libertarian Party candidate Shane Hazel has provided serious discussion about currencies. Democratic Party candidate Stacey Abrams and the Republican incumbent governor Brian Kemp have been pretty much mum on the topic.

Now, using data from OANDA, a look at the numbers. During the period 11 February 2021 to 11 February 2022, the price of the US dollar in terms of the British pound has appreciated two percent in price from GBP0.72283 to GBP0.73733. In terms of the euro, the dollar has appreciated six percent over the same period from EUR0.82467 to EUR0.87449. In terms of the Indian rupee, we see price appreciation of three percent from INR72.8104 to INR74.9521.

Compare the above with appreciation of the dollar price in terms of the yuan. Between 11 February 2021 and 11 February 2022, the price of the Chinese yuan in terms of the British pound rose just over three percent from GBP0.11207 to GBP0.11593. In terms of the euro, the yuan appreciated over seven percent from EUR0.12786 to EUR0.1375. Lastly, in terms of the Indian rupee, the yuan appreciated over four percent from INR11.2885 to INR11.7846.

There is a currency war brewing between China and the United States. This war tends to get mentioned in passing during broader political discussions in Washington, DC about the economic and competitive threat China poses to the United States. What gets overlooked is Europe’s political and geographic middle position. Europe has been buying less expensive technology from China; thus has a demand for Chinese currency. In addition, with the Federal Reserve preparing to hike overnight interbank lending rates as early as next month, Georgia’s exporters may be seeing an increase in the cost of doing business and may seek assistance from the state to help keep their prices competitive globally.

The candidates should be contributing to the conversation on trade, preferably encouraging policies that facilitate infrastructure investment. The conversation should begin with an appreciation for what’s happening in the currency markets.

Alton Drew

02.11.2022

Toward Public Policy Support for High-value Trade

21 August 2021

I prefer a society that is biased toward trader/merchants; where one lives on the spread and retains the majority of her earnings.  Wage earning is a fancy term for slavery where many in the labor market are subjugated to selling a precious commodity over which they have illusionary control: time.

The irony is that what one earns for their time is inversely related to the wealth of knowledge they have amassed over time.  Unfortunately for the wage earner, the valuation of their labor is made not by the ultimate end user of their product but by the middle man corporation that employs them.  Rather than selling time to the corporation, time should be another input that labor uses to create and sell their product.

Today’s technology makes such a self-ownership approach increasingly feasible depending on the wage earner’s vocation.  Some of us can transition from wage earner to merchant due to digitalization and that sector of the information/knowledge/problem solving industry that we sit in.  So used are we to selling time that we must now start to think of the utilities, database subscriptions, and equipment costs incurred in producing an information product and sell that product at a sufficient margin; to live via the “carry trade.”

The trader wants a profitable balance sheet, one where she has a healthy surplus.  Bankers that provide liquidity to traders also want traders to enjoy a profitable balance sheet because it assures repayment of leverage.

But bankers also want to fund activities generating high returns and I think to ensure that traders are disciplined enough to seek out information on high return activity, banks will want to assess higher interest rates and other margin requirements in order to weed out low-return low value activity.  The Federal Reserve could encourage high-value search behavior by increasing the fed funds and discount window rates.  The Federal Reserve could also start driving up rates by unwinding its monthly purchases of $120 billion in US Treasury and agency-backed mortgage securities.

Higher rates will encourage living on the spread and the seeking of higher returns.

For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.

Our Africa index shows dollar strengthening against key currencies; Trump last ditch effort at US-Africa trade …

As of 5:10 pm AST, here are exchange rates between the United States and key African nations:

Pairs OANDA as of 18 December 2020 OANDA as of 23 December 2020 Notes 
USD/KES 110.603 109.163 Dollar weakening 
USD/NGN 379.792 380.931 On 21 December USD/NGN peaked at 383.512 
USD/GHS 5.8522 5.87027 Dollar strengthening 
USD/CDF 1951.91 1950.60 US redesignation under AGOA on 22 December 
USD/AOA 649.638 649.479 Flat 
USD/ZAR 14.6031 14.6359 Dollar strengthening 

Source: OANDA

Legal/Political events impacting US-Africa trade relationship

Trump re-designates the Democratic Republic of the Congo as a sub-Saharan beneficiary nation under the Trade Act of 1974

Yesterday, President Donald J. Trump designated the Democratic Republic of the Congo a beneficiary sub-Saharan country under the Trade Act of 1974 as amended by the African Growth and Opportunity Act and the Africa Investment Incentive Act. Pursuant to 19 U.S.C. 3703, the President has determined that the Democratic Republic of the Congo has made progress or is making progress toward the following:

(A) a market-based economy that protects private property rights for men and women, incorporates an open rules-based trading system, and minimizes government interference in the economy through measures such as price controls, subsidies, and government ownership of economic assets;

(B)the rule of law, political pluralism, and the right to due process, a fair trial, and equal protection under the law;

(C)the elimination of barriers to United States trade and investment, including by—(i)the provision of national treatment and measures to create an environment conducive to domestic and foreign investment;(ii)the protection of intellectual property; and(iii)the resolution of bilateral trade and investment disputes;

(D)economic policies to reduce poverty, increase the availability of health care and educational opportunities, expand physical infrastructure, promote the development of private enterprise, and encourage the formation of capital markets through micro-credit or other programs;

(E)a system to combat corruption and bribery, such as signing and implementing the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions; and

(F)protection of internationally recognized worker rights, including the right of association, the right to organize and bargain collectively, a prohibition on the use of any form of forced or compulsory labor, a minimum age for the employment of children, and acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.

The President has also determined that the Democratic Republic of the Congo does not engage in activities that undermine United States national security or foreign policy interests; and does not engage in gross violations of internationally recognized human rights or provide support for acts of international terrorism and cooperates in international efforts to eliminate human rights violations and terrorist activities.

The Democratic Republic of the Congo lost its designation as a beneficiary sub-Saharan nation in 2010 under the Obama administration, according to the President’s executive order. With this new designation, certain textiles and apparel will be able to enter the United States duty free.

Sources: Executive Office of the President; Legal Information Institute-Cornell University

Treat America as a colony. Extract and profit as much as you can …

Opinion by Alton Drew

The typical American’s view toward the economy is what can this economy do for me; provide to me. There is this notion that social, cultural, or political allegiance to the economic system should be compensated with some guaranteed system of job or business opportunity. An economic system goes a long way in demonstrating its validity to taxpayers if it can provide jobs and an environment that supports trade, but relying on promises to “Make America great again” or “Build back better” is not wise or practical. You are setting yourself up for failure or mental and emotional depression.

Rather, it may be best to maintain a colonizer mentality. Yes, it is ideal that the governing authority of a jurisdiction have in place rules that facilitate and protect trade but that is not enough for any success. I find most political rhetoric on the economy is fluff and puffery and have observed that all substance in trade is generated from the “bottom” and on the “side.”

On the bottom is the extractor or producer, capturing and processing the resources necessary for creating goods and services. Coming in from the side are the traders who are constantly in search of information on consumer tastes, producer capacity, and opportunities for capital deployment. Also on the side is the capital, the holder of the “dry powder”, pooling resources with other holders of capital and weighing competing narratives provided by traders and merchants that describe the best investment opportunities.

Again, if government is doing its job, it is first and foremost ensuring optimal conversion of human, natural, and financial resources by implementing and enforcing rules that allow for accumulating and processing resources by traders and liberal movement of capital from investors. It is effective facilitation that gives elected officials fodder for validating and promoting the political economy.

The colonizer mentality tells us to keep an arm’s length between ourselves and the politician. I would argue they need us more than we need them. The politician cheerleads the economy but the producer, trader, and banker give the politician something to cheer about. While the politician’s rhetoric helps her hold sway over a voting public, the globalisation of capital and freedom to search for economic opportunity in alternative jurisdictions gives the producer/trader/banker some sway.

Both sides, the political and the commercial, need each other but the commercial side should avoid the populism and emotionalism that relegates most taxpayers to the “consumed” class, a class stuck in the downward spiral of selling time for pennies, where the failure to spend time on accumulating knowledge necessary for creating “currency” is creating, in my opinion, an increasingly devalued populace; one prone to the button-pushing of politicians.

Be non-emotional toward the political economy. America does not exist to nurture or cater to your emotions.

What does the narrative of fair trade with China mean?

This morning I watched the Fox Business Network‘s Mornings with Maria.  They have been featuring news clips of an interview that U.S. Secretary of State Mike Pompeo had with host Maria Bartiromo where he criticizes China’s trade policy toward the United States and warns Americans of the Chinese intent to steal American intellectual property and Americans’ personal information.  The United States has been making it clear for years that it is unhappy with what it describes as an imbalance in trade between the two nations.

China has a potentially large consumer market, its emergence stymied in part to its current status as a creditor nation where it finances other nations, including the United States versus living off of the dead aid provided by western nations as part of their policy of noblesse oblige toward emerging, lesser developed countries.  In addition, given its growing economic power, it is easily in a position to influence economic affairs in southeast Asia.  As a provider of inexpensive telecommunications equipment it has been able to enter Europe’s telecommunications market providing competition for American made telecommunications products.

But at the heart of the American narrative may be the fear that the Anglo-American world view or philosophy is being challenged by an alternative Chinese view that, if not held under control, will replace the Anglo view thus making the current American narrative on political economy i.e. the greatness of the republican form of government combined with a free market, less attractive for leadership in other nations to use the American model for governing their domestic and foreign trade affairs.

Pompeo and other American leaders have been using the media to signal to Americans that China’s actions are a threat to the American economy thus a threat to the American way of life.  I can see the broad strokes.  For example, if China continues to lock the US out of additional trading opportunities in China and can price the US out of European and other Asian technology and manufacturing markets, America’s wealth and trade influence would shrink and the US would be forced to become more self-reliant.  America, facing a challenged supply chain, would see shortages and increasing prices for goods and services thus the threat to the American way of life.

Pompeo also describes China’s activity as a threat to American democracy.  That threat I don’t buy into and I see it more as a jingoistic ploy than anything else.  Democracy refers to a citizen’s ability to participate in the process whereby political leaders are selected.  Pompeo has yet to state his case in a cogent manner.  He has insinuated that China has deployed an influence campaign targeting voters and elected officials alike but has provided no specifics.

In addition, the terms fairness and balance are continuously uttered, likely part of the jingoism campaign, as Americans tend to conflate fairness and balance with democracy.  A fair and balanced trade relationship between two countries has nothing to do with how the leaders in each respective country are chosen.  Americans should be asking themselves and their leaders why connecting these points creates such a sound political narrative that US electorate would have no other choice but to support any legal initiatives or actions that promote escalated tensions.

And the legal actions and initiatives are being turned up.  The Justice Department recently told PBS News that 60% of its trade cases are against China and that its actions against China are more in line with stopping illegal activity versus expressing an intellectual bias.

I see law as the codification of an originating philosophy transmitted via a narrative and  refined by politics and policy.  What is missing here is the jurisprudence.  For the citizen to properly understand the government’s legal actions against China trade policy, the focus has to come off of messages that conflate democracy, fairness, and balance, and look for the philosophy that is being promoted.  Conflation promoted by government officials should open up the citizens’ minds to questions about the mismatch between the politics, the policy, and the messaging.

Getting to the why is critical.