Do it and do it fast

The starting gun has fired in the US elections with the first Republican primary debates last night. Here’s a guess at how things roll out from here:

• The US election is next year. Very hard to win if unemployment is rising and inflation is high
• The job must be done quickly
• Two more US rate rises before the end of this year
• Difficult Q1 ‘24 in America
• Interest rate cuts going into the second half
• Biden runs on “we conquered ‘Putin’s inflation’”
• An even better narrative if the Ukraine situation has ended

In the postwar period, incumbent presidents have run for reelection 10 times, winning 7 and losing 3. The winners all had strong job markets going for them. Dwight Eisenhower in 1956, Lyndon Johnson in 1964, Bill Clinton in 1996 and George W. Bush in 2004 all ran with both full employment and low inflation, and all won easily. Unemployment was still around 7.5 percent when Ronald Reagan ran in 1984. But job gains were rapid and unemployment was falling from a recession high of 11 percent. When Harry Truman ran in 1948, the economy was experiencing a postwar boom led by the backlog of demand for housing and autos, but was also buffeted by organized labor unrest and inflation driven by rapid wage increases. Truman won a close election. Richard Nixon in 1972 had a strong recovery and an inflation problem that he suppressed with price controls until after the election. He won in a landslide.

The three losers all confronted economic issues. In 1976, Gerald Ford ran with a stubbornly high rate of inflation inherited from the post-price control Nixon years and the first OPEC oil price shock. The economy was recovering from recession but unemployment was still high. In 1980, Jimmy Carter stood for re-election with even more rapid inflation, fueled by the second OPEC oil price shock, and with a sharply higher unemployment rate, which stemmed from policies to reduce that inflation. He lost in a landslide. George H.W. Bush ran during the first “jobless recovery” of the postwar period. Employment was up by barely one percent in the year leading up to the election, and the unemployment rate stood at 7.5 percent, its worst level of the mild 1991-1992 downturn.

So, when Jay meets Joe it is simple. “Do it and do it fast”.

What’s more, the USG cannot afford interest rates that exceed 3.5% for any reasonable period of time. That’s not the Federal Reserve’s problem, they are independent. But if you look at the CV of every Chairperson, you won’t have to look too far to find conflicts of interest all over the place.

Most of the world thinks higher for longer; I think higher until the election really hots up. Then talk of cuts begins; irrespective of inflation by the way. That will be fudged out of existence and if it really is 3.2% in the US at the moment then we’ll believe anything.

Loadsamoney

If you wade through that text it equates to $1.8 trillion dollars in new debt from the US Government before the end of the year. These days we are all comfortable talking in trillions but that amount of money was the entire US national debt in the 1980s.

It remains an open question as to who will buy all this stuff but it certainly is causing rates to rise.

For those people chiming into US treasuries at 4.5% the deal is not a bad one. Compared to say real estate, or even equities which look expensive, the risk profile is very attractive. Sit back and collect and with another $1.5 trillion to come down the pipe there will be plenty more opportunities.

Back to the future

Consistent with their inexplicable strategy of approving high risk ETFs, the SEC looks like it will approve several Ethereum futures products in the coming months. Submissions like this were made throughout 2021 and 2022 but were immediately withdrawn by the applicants on the request of the SEC.

This time the six applicants Volatility Shares, Bitwise, VanEck, Roundhill, ProShares and Grayscale have not been asked to withdraw. In the best case scenario, the first one could launch on 12th October.

It seems you can have a futures product (risky and expensive) based on a very new technology (Ethereum) that is arguably a security, but not a bitcoin spot ETF.

It is logically inexplicable and legally indefensible (as the SEC will find out) but there is evident concern about the legitimisation of bitcoin in the US. It’s entirely understandable in the country with the most to lose in terms of monetary premium.

In Europe they beat the US to the punch, which almost never happens. Jacobi Asset Management launched Europe’s inaugural full spot Bitcoin ETF last week. Quite the line-up of providers too; Fidelity Digital Assets handles custodial services for the fund, while Flow Traders takes on the role of market maker. Authorised participants include Jane Street and DRW.

Exactly when all this happens, of course, the price drops 10% the same week because of ‘activity in the futures market’. Conspiracists (like me) will point to the way the futures market has been used to keep a lid on the price of gold but the key difference this time is that nobody wants to take physical delivery of 100 tonnes of gold without an army to protect it; for bitcoin and ethereum all you need is a hardware wallet.

As a consequence, as these products launch with futures before spot, we will see some spectacular short squeezes over the next few years.

I suspect an inherent bias in traditional market participants “we will just control it with the futures, don’t worry boss”. Most of the time that will work, on the other occasions the people trying it will go bankrupt.

Binance woes

We documented the loss of Binance’s banking facilities in Australia some weeks ago but now the same has happened with Euro payments. Back in June their major provider PaySafe pulled the PIN against a backdrop of what they called ‘regulatory issues’. Now, the smaller checkout.com has done the same.

In relative terms it is less significant as they processed ‘only’ $400m for Binance last year. Still, the pressure on their ability to operate in Europe might result in them pulling out of the region altogether.

The forums are rife with difficulty too.

Still, Binance launched their business without any bank accounts at all. Indeed, they got very big by doing that. At this rate they might have to return to that mode of operation. Increasingly it looks like the traditional finance centres in the US and Europe will lock them out.

The rest of the world seems more welcoming. We might end up with Fidelity and BlackRock serving the Western world and Binance doing the rest. It would still be a great and thriving business, don’t bet against them yet.

Euro-Trash

Europe is saved. The winner of the 12th European Central Bank PhD Forecasting competition has been announced: Dick van Dijk. Reports of his death last year were clearly exaggerated.

Mr van Dijk’s winning paper is enticingly called “Slow EM Convergence in Low-Noise Dynamic Factor Models”. Most encouraging is that he isn’t just a good dancer.

The ECB has run this competition for over a decade to help them with their obsessive forecasting. I’ve pointed out on many occasions just how terrible they have been at that since their inception. The reality of economic forecasting is that it is so infinitely complex that most forecasts are worse than a guess because they imply some degree of specificity that does not exist.

I should not mock Mr van Dijk though because at least his paper points out that if you want to improve the forecasting ability of your model, you should increase the randomness in the model. Artificial noise as he calls it.

It is anything but artificial, his randomness is likely just a proxy for a billion economic interactions every second that each have a consequence on each other resulting in infinite complexity.

The clearing mechanism for the economy is the price level. It is best left untouched and untargeted and it will do its own work. This is especially true of the price of money which is perhaps the most adulterated price in modern economies. A decade of PhDs on improving predictions; and the ECB has got consistently worse at it.

“Anything can happen if you let it.” said Mary Poppins. The problem is, they won’t.