10/18/23 Roundup: Alarm Bells for the Global Financial System
This is Dylan LeClair, presenting this week’s Onramp Weekly Roundup.
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And now, here’s the weekly roundup…
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Alarm Bells for the Global Financial System
The selloff in government bonds continues to dominate our focus. The significance of this trend reaches far beyond mere economic theory; it has tangible, real-world impacts. Rising costs for long-term financing affect the global cost of capital, serving as a valuation benchmark for all other assets. Most crucially, the Treasury market acts as the bedrock of the global financial system. Its ongoing instability not only pressures asset prices but also aggravates the existing debt spiral, laying the groundwork for a precarious U.S. fiscal situation.
Contrary to the concerns evident in the bond market, the current administration seems either blissfully unaware or unperturbed. As we witness the unchecked government spending, headline news like “WHITE HOUSE EYES $100 BILLION UKRAINE, ISRAEL AND BORDER ASK” shows that fiscal caution has been thrown to the wind. This approach of recession-era spending in an economically stable time is unprecedented. Unsurprisingly, the bond market’s response has been a steady climb in yields, marking a discernible disconnect between fiscal policy and economic fundamentals.
Despite these conditions, the drumbeat of quantitative tightening from economists remains. In a recent opinion piece for Bloomberg, former president of the Federal Reserve Bank of New York Bill Dudley argued that the Fed’s current cycle of quantitative tightening (QT) will likely persist until late 2025. He highlights that the Fed has been selling off Treasuries and mortgage-backed securities at a rate of about $75 billion a month to reduce excess reserves in the banking system. The repercussions of prolonged QT obviously include an upward pressure on long-term interest rates, tightened financial conditions, and a potential risk of turbulence in the Treasury market due to increased volume of securities that need to be absorbed. However, Dudley adds a caveat that serious dysfunction in the Treasury market could potentially prompt the Federal Reserve to alter its course on quantitative tightening.
One of the most fascinating divergences in the macro world today is the relationship between gold and real yields. Historically, they have been tightly, negatively correlated. However, the current situation has flipped the script. In the aftermath of the Russia-Ukraine conflict, which led to the confiscation of Russia’s G7 reserves, gold and real yields are showing a positive correlation.
Unraveling the Notion of "Risk Free"
In a world where G7 sovereign debt is susceptible to confiscation and geopolitical tensions, the very notion of ‘safe assets’ is being questioned. Gold’s strong bid, as a counter-risk monetary asset, is reflective of a world on edge. This repositioning, however, isn’t limited to gold alone. Bitcoin, with its unique advantages and growing liquidity profile, is on a similar trajectory, albeit still in the very early stages of its monetization with a $500b market cap.
The Hash Rate Boom: Survival of the Fittest
The Bitcoin network’s hash rate continues its explosive growth, shattering previous benchmarks. The 30-day average hash rate has reached a new all-time high of 425 EH/s, marking a staggering 72% increase year-over-year and a 176% surge from its level on the day bitcoin reached its all-time high price. This exponential growth is fueled by relentless advances in machine efficiency, propelling the ever-competitive mining landscape into high gear. In this mercilessly capitalistic, energy-driven industry, the race has no finish line, only perpetual evolution. The strongest, most efficient operations emerge as victors, while those unable to keep up inevitably falter and exit the market. Importantly, this ecosystem operates devoid of government bailouts, purifying the market landscape of weaker players. This is capitalism and industry in its rawest form, where meritocracy reigns supreme and market forces work unimpeded to sift out inefficiencies.
Podcast of the Week
E021: Is This Time Different? with Larry Lepard
In this week’s episode of The Last Trade, Larry Lepard shares his insights on the current economic landscape, touching on topics ranging from inflation and the potential of a market crash to the rising significance of Bitcoin. He paints a picture of what many believe to be a “soft landing” in the economy, while a subset of Bitcoin enthusiasts foresee a more concerning trajectory.
Lepard also delves into the imperative of constructing non-centralized bitcoin solutions ahead of significant capital inflows, highlighting potential pitfalls with centralized entities such as BlackRock. Lepard warns against the perils of ‘paper bitcoin’, advocating for the adoption of Bitcoin’s inherent multisig features and the importance of diverse, trustworthy custodians. Later, he explores the potential volatility in gold and bitcoin markets, and stresses the importance of diligence and discernment in bitcoin specific investment vehicles.
Check out the full episode here.
Closing Note
Wrapping up this week’s digest, Onramp Bitcoin invites you to explore our offerings on our website.
With an industry-leading multi-party custody solution, Onramp allows Bitcoin withdrawals without triggering a taxable event. Onramp stands as an optimal solution for HNWI and institutions seeking Bitcoin exposure prior to transitioning to self-custody.
If Onramp’s offerings align with your needs, or those of someone you know, feel free to schedule a chat with us here.
Onward and Upward,
Dylan LeClair