Crushed
Bitcoin got absolutely crushed last night. Down 26% on the day. Why? So steep was the fall that any leveraged long (and there are many) got swept up in the decline on both regulated and un-regulated exchanges, there was a great deal of forced selling which found buyers with stronger hands. Bitcoin is not like the stock exchange, there are no breakers, the market never ever closes. When the S&P is down 7%, trading halts, again at 10%. Not so bitcoin, it trades, without pause, continually. 24/7 trading for 11.5 years so far.
This is a big test of its resilience and it is passing. The bond and equity markets are failing the same test. Last night the Federal Reserve announced $1.5 trillion of support for financial markets which cannot support themselves. That is 10x bitcoin’s market capitalisation. (We’ll cover that next week).
Bitcoin is surviving on its own, the rest of the markets are on life support. Ride out the storm because when it turns it will turn much harder than last night’s fall.
Remember, this is our exact playbook, unlimited money printing and unfunded fiscal stimulus. It’s happening.
Monday was fun and you would have seen lots of charts, most of them looking like the downhill course at Hahnenkamm. This was my favourite though, it shows the difference between the borrowing rate on a 2 year and 10 year United States Treasury Bill. As a rule, the longer you borrow money for, the more the lender wants in return. So, a 2 year rate might be 3%, a 10 year rate might be 5%. It makes sense because things happen, the world is uncertain and you need to be compensated as a lender for that risk.
Our chart however shows us that in lending to the US government, the difference in rate of lending for 2 and 10 years is 0.045%, a differential that fell 80% on Monday. These are not penny stocks, these are the largest markets in the world. The United States has US$22 trillion of debt out there, trading. It’s more than their entire GDP and average daily volumes exceed half a trillion dollars.
In years 3 – 10 of lending to the US you will receive 0.045% return annually. For benefit of good order, I have done the compounding for you. 0.36% for the 8 years under consideration.
What we are witnessing is the destruction of the value of money, so much has been printed since 2008 that it simply no longer matters. The largest market in the world is speaking, it is saying that money is infinite, the belief in the market is that the Federal Reserve, The ECB will simply “do a Japan” print like crazy and buy everything to keep prices high. It seems they have no option, I think the market is right.
What next?
Here in Australia we never got quantitative easing. Back in the financial crisis, the government bought everyone a flat screen TV and a pizza and that was the extent of the required stimulus (plus a gold plated guarantee for bank deposits). This time around only old people get are getting a new TV but the government is still spending $17 trillion of money it doesn’t have. The further question is, what else will the central bank do?
The market seems to think that the Reserve Bank will opt for ‘yield curve control’. This allows the central bank to buy and sell government debt to maintain the yield at their preferred level. You might see parallels with the Federal Reserve’s recent musings on doing exactly the same. The beauty of the strategy is that it is potentially unlimited, you don’t have to pre-announce the amount you will spend just let the market do the work and trade accordingly.
This type of action forces the price of money to “behave”. The government can control it simply because they control the printing presses. In some forms it has been tried before. The Federal Reserve has used something similar in the 2011 ‘Operation Twist’. When interest rates are near zero, there isn’t much you can do but you can impact longer term interest rates, simply you do it by selling short dated bonds and buying longer dated bonds. The process worked in the US and long term bond yields dropped to 200 year lows.
Looking at the broader picture though, you might argue it is counterproductive. The whole world appears to be charging into bonds, they are liquid and ‘safe’. As we stand today, the yield on Australian government debt has never been lower (meaning prices have never been higher) and now the biggest buyer of all, the institution with unlimited money, is about to enter the market and buy.
It will be Mugabenomics around the world. The government announces significant fiscal stimulus, the central bank simultaneously announces it will buy all the newly issued debt. There you have it, free stuff.
Janet Yellen
The thing is, the US economy never deteriorated if the figures are to be believed. Employment was never higher, GDP growth was on target and yet immediately after the Fed began unwinding its QE, there were problems in the money markets. It simply could not do it, neither could it raise interest rates in any sustainable way. Having begun the QE unwind in mid 2018 the Fed was forced to reverse course in a year later. They have since dramatically expanded their balance sheet, even before Coronavirus.
The whole idea of reversing QE, it isn’t going to happen, its only getting worse. Be it the Fed, the Bank of Japan, The ECB, they will all print and essentially attempt to monetise their debt. I know it, the bond market knows it and pretty soon everyone will know it. It is a ponzi.
Not to be outdone at the free money spigot, the world’s leading obesity salesman Warren “Coca Cola for Kids” Buffett went to tap the markets for cash this week. On seeing this, I assumed it had been doctored and you will need to check it for yourself on the SEC website. Please do so here. Berkshire are issuing a €1 billion bond, for zero interest for 5 years. Yes, you did read that correctly, you will give him your money for five years, for nothing. As a reminder, Berkshire had US$128 billion of cash on hand at December 2019, quite why they needed to add another one I don’t know. Perhaps they are making a point?
Anyway, the debt is also unsecured. It’s just a billion euros for free, thanks.
