Fun Times, Funny Business

Fun Times, Funny Business

Risk sentiment cooled a bit Tuesday on the heels of a six-session rally on Wall Street.

The narrative hadn’t changed. Reflation is still the story, even as evidence to support the notion that the developed world is anywhere near the cusp of a durable recovery that manifests in robust growth outcomes and “desirable” levels of real-world inflation remains scant, mechanical bounces in euro-area CPI and PMI anecdotes stateside notwithstanding.

The dollar retreated a third day and yields looked loath to extend the recent move higher consistent with “bond bear fatigue” ahead of the refunding, which is on deck and could conceivably inject some “excitement,” although I’m not sure that’s the right word. I doubt it’s going to make a difference, if by “difference” you mean something with the potential to break the range. Bloomberg pointed out that the US and German curves are the furthest apart in almost a decade (figure below).

Bitcoin continued to grab headlines. Tesla’s decision to add it to the balance sheet has the market pondering a bizarre scenario: S&P 500 investors are now exposed to Bitcoin, whether they like it or not.

Speculation that other blue chip US corporates will follow Musk down the yellow brick road is rampant. Bitcoin rose above $48,000.

All manner of crypto-related shares were higher both in the US and overseas. It’s hard to begrudge anyone their gains here. There’s a pseudo-fundamental thesis developing, albeit seemingly by accident. If enough large companies go down this road, it could stifle any regulatory push or at least ensure that regulation isn’t so onerous that it poses an existential threat.

Of course, across-the-board corporate adoption remains a pipe dream — for now. Nevertheless, what seemed totally ridiculous has been upgraded to merely far-fetched. And that’s saying something when it comes to crypto.

Still, there are hurdles. Tesla’s decision came despite Bitcoin “having recently been called a ‘funny business’ by the ECB; in the process of being banned in India; and [Janet] Yellen thinking cryptocurrencies are mainly used for illicit financing,” Rabobank’s Michael Every wrote Tuesday. “Central banks [are] planning their own national digital coins that will, if history is any guide, then preclude being ‘funny’ with your own made-at-home business,” he went on to quip, dryly noting that “you can print anything you like at home — except banknotes.”

For now, though, the only people laughing are the crypto proponents. It’s just a matter of whether it all ends in tears. I suppose I’d just reiterate that recent “wins” aside, there’s still something annoying (for central banks) about the idea of an alternative currency that isn’t a yellow metal.

Governments aren’t just going to cede their monopoly on the proverbial coin of the land without a fight. And importantly, they haven’t even begun to fight. So, this isn’t so much a “war” that Bitcoin is “winning,” as much as it is an amusing phenomenon that’s being allowed to persist. At the end of the day, conversion is still paramount. The y-axis on any Bitcoin chart is always denominated in dollars or gold or some other “real” store of value. That raises uncomfortable existential questions. Sure, you can make a chart of Bitcoin/Ether or Ether/Doge, but what do such charts actually show? Arguably nothing.

Anyway, it’s fun. Fun times. And funny business, too.

“US Treasurys hold the key to markets this week (and possibly for much of this year),” SocGen’s Kit Juckes wrote Tuesday. “With 10-year US breakeven inflation rates up by 24bp so far in 2021, and over 50bp higher than they were this time last year, you have start wondering how much further this move has to go,” he went on to say, adding that “breakeven inflation correlates better with headline than core CPI, and not that well with either to be fair, but surely such a huge rethink needs empirical support to keep it going?”

That hints at an important distinction folks have been keen to make lately: “Reflation” is just a trade until it starts to show up in the real world.


17 thoughts on “Fun Times, Funny Business

  1. Do I note the tiny bit of evolution from you re. BTC? ie it still isn’t real in any sense but that also doesn’t matter if adoption is wide enough?

    NB: I honestly don’t see the governments being pissed off at a store of value. Unit of account and medium of transaction are more important to control, I think.

    I mean, if store of value outside of saving accounts are a threat to the sovereignty of a state, what about gold, rare stamps, masters’ paintings and London/Dubai flats? All of these things are being used by the uber-rich, for whom a saving account is ridiculously inadequate, to try and preserve their wealth from monetary devaluation…

    To be fair, it’s all linked. State Capture/inability to tax the rich leads to uber wealth inequality. Uber wealth inequality lead to populism and/or uber accommodating monetary policies that lead to yet more inequality that forces yet more excess liquidity from the Fed that then pushes the uber rich to think of ways of avoiding deflation losses in the same way they try and avoid to pay taxes. In that scheme, engineered inflation is a way to devalue assets that the rich own i.e. it’s a tax. And the rich, just as they refuse to pay taxes, refuse to pay the inflation tax too…

    What was that one guy said about the fall of the Roman Empire? When the elites get selfish, the whole system eventually collapses…

    1. I agree with fredm, governments are more concerned about the untraeability inherent in blockchain than they probably are about the store of value. Imagine if Bitcoin had been around in the lead up to 9/11 and was found to be where al qadea had conducted their transactions in preparation for the WTC attacks? Bitcoin would have been banned immediately after. It’s just a matter or time before some nefarious entity pulls off some big crime that would have been traceable through other value transfers but not through blockchain.

      But, I do find it kind of ironic that we’re still calling BTC a way for regular people to compete with the “uber-rich” as stores of wealth. When the richest guy on the planet just dumped a crap ton of money into the asset, it’s no longer excluded from gold, rare stamps, etc. It has joined the list of assets uber rich guys invest in.

      1. Well, except that banks aren’t exactly known for being especially scrupulous when it comes to their clients. 🙂 But your overarching point is obviously correct. I just think it would take something specifically terror-related to force regulators’ hands. As much as everyone pays lip service to the “war on drugs” and other efforts to curtail organized criminal activity, the fact is, it kinda/sorta gets a free pass as long as it’s not terror-related. Terrorism is the red line. And, incidentally, that’s generally been the Waterloo for the cartels in Mexico and South America historically — when the violence becomes widespread and moves beyond the people involved directly in the business, in yanks in whatever government forces down there aren’t paid off and, when that (invariably) doesn’t work, the DEA. So, yes, I think you’re right. Some kind of discernible, readily identifiable link to a major terror incident would be a call to regulatory action. And that’s another tail risk that corporates take on when they invest in Bitcoin. The first time something really, really bad happens and it can be traced directly to crypto financing, it won’t matter who’s got it on the balance sheet. “Systemic financial risk” would be subjugated to national security concerns. At least for a hearing or two. None of that is Bitcoin’s “fault,” obviously. It’s just that there are bad people in the world.

      2. GPWM.

        FWIW, I don’t think of BTC as a way for the middle class investors to join the uber rich. That boat has sailed. I mean, if you bought BTC below a $100, maybe. But now, even if it goes to $400K or $1M, you’re talking about 10X or 20X.

        Nice returns, for sure, but not enough to lead anyone to change social classes.

        And the point about adoption is – the uber rich need something like BTC. Master paintings, London flats, gold, diamonds – they all come with downsides. BTC is almost perfect… if it gets adopted by most wealthy people/institutions.

        That said, agreed with you and H. A terror attack where BTC is being used to obscure the funding source could be a terrible blow to the crypto currency… though people who have look at it points out that the BTCs being perfectly traceable, it’s more about the wallets and the exchanges KYC than about the crypto itself… i.e. you need to hide your ID from your wallet owner/operator.

  2. Back in the day, following some client problems in the former Soviet Union, my employer tasked me to create and chair an International Reputational Risk Committee to review new clients/products in high risk markets. I just can’t see how BTC passes the sniff test. Lack of transparency, for starters. My BTC owning son tells me I don’t get it and I heartily agree.

  3. Curiosity about Bitcoin lead me to videos of Chamath. Did not know anything about him. Surprised to find him calm, intelligent, logical, believable. Said it took him 18 months to warp his head around Bitcoin, despite being a techie.

  4. I’ll post one final opinion on the BTC/crypto frenzy. I spent some time a few years ago mining cryptos because I wanted to better understand blockchain. Blockchain, is the underlying technology that allows secure transactions to process through an un-impleachable ledger thanks to the nodes churning through cyphers. The objective of blockchain was to create a digital means to process important transactions that currently require humans with certifications to do it. Crypto coins were created as an incentive to get regular every day people to stand up nodes on the blockchain so that these transactions could be processed. And crypto coins are the way you pay transaction fees on the blockchain. When this started I don’t think anyone viewed crypto has being a competitor to precious metals or fiat currencies but it was intended to enable you to buy processing on the block chain.

    FF to today, Bitcoin is approaching 50k in USD value, has all kinds of investment vehicles working in it and, yet blockchain itself is largely unadopted. This is what bothers me about BTC, the underlying technology that was the driver for crypto currencies doesn’t seem to be taking off the way it was intended too, yet, the crypto coin that’s only objective was to allow you to transact on the block chain and incentivize you to run nodes on it is blowing through the roof in value. At some point, the available supply of BTC to mine will be exhausted, and what happens when everyone shuts down the nodes they stood up for the purpose of mining coins and the blockchain stops working, will BTC still be a store of value?

      1. Gold has industrial applications, is minted as coinage, and is used in jewelry. What are you going to do with a BTC besides convert it into USD’s when the blockchain no longer works?

        1. Thanks for the additional color. What about Ethereum? How do you value the technology vs the coin? Is Ether what drives the price of Ethereum or the technology? And BTW, isn’t the majority of BTC mined in China due to low power cost? Should we be investing in coal now that it is the fuel the burns to mine BTC? And how sustainable is that? So many questions…

          1. I was actually mining Ethereum. The Ethereum blockchain seems like a more practical application of block chain. I even got a book on writing Ethereum transaction scripts in their proprietary language which is called Solidity. But again, who’s actually using this? In that book they talked about Ethereum replacing many jobs in financial services like mortgage processing or stock trades, but none of that has happened. The only real momentum I see in block chain is proprietary block chains that private enterprise is trying to develop for their own purposes only. As in, they want to maintain control of the ledger and who can transact on it. So if these block chains see the light of day do you think they are going to rely on Ethereum? Probably not.

            The majority of BTC is mined out of massive data warehouses in eastern Europe because they are cheap to setup and operate. At this point it’s impossible for a regular person to mine BTC due to the complexity of the hashing algorithm.

    1. Great comments, cda.., dead on. Couple these idea with the enormous demand for power that mining creates, and one can see how the parabola of BTC is going to become the classic ouroboros (snake eating itself). Three things that have always bothered me about BTC. 1) There is a fixed number of “coins,” a large percentage of which have been retained by the creator. 2) The mechanism for storage in so-called wallets and the exchange mechanism is apparently fairly easy to hack as several serious thefts have shown. What’s the point of blockchain if one’s share of the fixed pie can be easily stolen or lost (if you forget your password). Finally, this form of payment is not self-referential, as dollars are, and BTC is not legal tender under the law.

  5. Article and comment thread excellent per usual … at this point I see BTC as a barometer of the insanely speculative bubble that we’re now in.

    I would add that I see Musk as a master manipulator who has now integrated the power of the Tweet from DJT … and I have no confidence nor trust in him… that said … if the masses are going to designate him the new Messiah, why the hell not pump BTC and use it to help TSLA survive and thrive…?

    1. Completely agree. Musk has weaponized Twitter for financial gain several times before. He gets his followers to dive into a trade the way he wants, likely with him being on the other end of it. Again it speaks to the dangers of social media when there is no accountability for powerful people using it to drive the outcomes they wish to see.

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