Blain’s Morning Porridge, Nov 20 2020: Fire in the Hole (2)

“To save the village we had to destroy it….”

Action Close… HARD HATS READY: Who had “Deliberate Political Hand Grenade” at the top of their Risk Threat Board? 

Last night’s statement from US Treasury Secretary Steven Mnuchin demanding the expiration of certain Federal Reserve lending programmes that have been supporting the credit market because they “have clearly achieved their objectives” was either incredibly stupid – demonstrating the underqualified Trump yes-man he has limited knowledge on how markets work – or much, much worse. See: Mnuchin Declines to Extend Several Fed Emergency Lending Programmes.

It looks like a calculated escalation of tension in the “disputed” US Election farrago.

The effect of the threat to pull back support in the midst of rising pandemic crisis could be similar to a “taper tantrum” in 2013. That’s when the Fed announced its intention to end bond-buying QE programmes set up to support markets in the wake of the 2008 Global Financial Crisis. As soon as the threat of normalisation was announced, the markets panicked, crashed and an immediate restitution of the policies was made.

These distortions remain effectively in place today – central banking policies of easy money and liquidity support that were notionally designed to promote economic recovery, but instead underpinned strong markets and financial asset inflation, while achieving lacklustre growth through the 20-Teens. It’s the market’s dirty open secret. But it’s been long-term reliable central banks behind the polices, rather than governments playing short-term electoral games. That changed last night.

Central bankers and strategists have been agonising for years on how to normalise markets and remove the pricing distortions QE Infinity policies have created without triggering a market collapse. The upside from QE has been market confidence – everyone knows the worst thing now would be a market crash in the midst of the double-dip Covid recession.

The very real risk today, following Mnuchin’s Manic Moment, is markets will lose confidence in the Fed’s independence and ability to maintain liquidity in bond markets. Liquidity is the major threat to stability. If corporate bond markets seize up – then confidence across the board will break. A full crash is possible unless there is a retraction. Even a hint it might happen will trigger a slip.

It’s not just the Fed. Global central banks have been acting in unison to pump prime markets via support programmes. If one domino falls, the others may follow. We’ve got an escalating crisis in Europe as Poland and Hungary threatening to block recovery programmes. The Bank of England is solid but could be undermined by government action. Everyone is vulnerable to a global tsunami out the US.

QE corporate bond programmes have not only boosted bond prices, but by acting as buyer of last resort – it has established liquidity in illiquid markets, giving investors the confidence to invest in bonds and push interest rates lower, which makes stocks look relatively more attractive, fuelling the gains we’ve seen since March.

Threating to end the Fed backstop programmes as the market digests a rising pandemic is like pressing the eject button.  If we see a dash for the doors in the corporate bond I guarantee that becomes a full blooded market crash – which will suit the Trump “Apres Moi – le Deluge” narrative perfectly.

Who knows markets best? Trump’s yes-man; Mnuchin, or The Fed? The US Central Bank is unequivocal: “The full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.

Keep a very close eye on how markets respond to this threat. I’m staying Long Gold a while longer….

Or what about Bitcoin? 

The current uncertainty on markets, politics, government pandemic spending programmes, and central bank QE very much suits proponents of Bitcoin. Febrile markets mean Bitcoin is on a roll – but it’s just another of its periodic flirtations with the financially credulous. It will soar higher attracting more and more cash from buyers who “understand it” and then it will, predictably, crash again. In the meantime there will be a lot of noise and a lot of social media fake-news about how people got spectacularly rich. At the end the “Greater Fools” will be left holding BC watching the value plummet before discovering their digital wallet got hacked and is empty.

We have been here before.

Yesterday the FT asked some questions about the repeated crisis on crypto-exchanges but suggested Bitcoin is a maturing asset class. It quoted a billionaire hedge fund manager call it an inflation hedge with great intellectual capital behind it.

Bollchocks. I understand what Bitcoin is very well. It is just like money – but it isn’t. It’s not real like gold, it’s not guaranteed like real money. Its only credential is the number of other people who believe in it. It’s an instantly transferred store of value and unit of account to anyone that believes or smells the opportunity around it. To everyone else… it makes limited sense to replace gold or money with something so intangible.

And that’s the issue – there are those of us who see no real need for such a notional asset, and there are those who see great opportunities for personal enrichment by convincing people there is greater utility in BC than in fiat money or gold.

The supporters of Bitcoin fall into three camps (which I will describe below). Everyone else is being pulled along for the ride. Forget whatever guff you read about how Bitcoin will change the world, how it opens new windows on financial innovation, or how it is a safe store of value when Governments are destroying trust in money – put it aside. Ignore such Nonsense – these are sales points.

Approach everything your read or hear on Bitcoin with suspicion: BC proponents have one common objective: to establish a wider veneer of credibility to attract in the next Greater fool.

The first group is criminal. Bitcoin is the perfect untraceable token and transfer mechanism in the netherworld of the Dark Web and Silk Roads. Its anonymity makes it the preferred medium for any kind of cybercrime. You don’t have to believe in the concept or understand the complexities of distributed ledgers to accept it’s the preferred way for the underworld and shadow economy to transact. Untraceable, easy to launder, easy to transfer money – it’s the dream asset for the shadow economy.

The second group are the social theorists. If you argue about Bitcoin – as we did in our virtual office yesterday – very quickly the libertarians will emerge, pounding on about how Bitcoin is immune to the vague dangers of government spending creating inflation, the dangers of money creation, and the inherent evil in government monopoly on money. The reality is Bitcoin has become a poster-child for the Libertarian Right’s war on “big” government.

And the third group are the public who’ve bought Bitcoin. They crave reinforcement and praise for their financial acumen. They don’t particularly need to understand the tech or the social aspects of Bitcoin. They just want to see it rise higher and higher – and you will meet them in all kinds of social situations bragging about how much they’ve made. Their success is compelling – yesterday a number of my colleagues were letting their sceptical barriers down, suggesting; “well, maybe I will put just one percent of my assets into BC…”

Money works because it is accepted.

All three groups want to see Bitcoin gain credibility which means wider acceptance. Which explains why a Citicorp analyst was on the wires this week predicting it will hit $318,000 in 2021. Greater adoption by users will inflate the value of the scarce asset. My simple maths says the demand for Bitcoin would have to astronomically increase – being accepted as a credible medium of exchange by at around 20 times more people than currently believe.

All the Bitcoin hacks are on the wires saying the fact Paypal now accepts BC is a “tremendous” step in increased adoption, and will boost BC higher. Really.. you can already buy most things with BC.. if you were inclined to do so.

I understand how distributed ledgers work, the opportunities and disruptions likely to arise from the perfected transfer of digital money, and the point of a digital currency for our digital age. I’m pretty sure we’ll be getting proper digital currencies from the traditional providers of monetary stock. Great article this morning on BBerg about it: It’s Better to be First on Digital Currencies: ECB Study Finds.

I’m pretty sure unregulated crypto-currencies have a limited shelf life. Governments are unlikely to ever willingly surrender their monopolies on printing and digitising money.

I also understand the lustre of gold, and that makes far more sense to me than something that requires enormous amounts of power to run unfeasibly complex computer programmes to create an invisible unit of account I don’t believe in…..

At the end of the day… Bitcoin is money to those that believe it is money. Be very suspicious of the BC parasites and ticks trying to persuade you its better than Fiat Currency or Gold. It’s not. At best its niche…

Or think about it this way (my mate Ben came up with this analysis) : Imagine a man offered to sell you a handful of invisible money for $100. You laugh. The next day he offers to sell you a handful of invisible money for $200. You say “really”. On the third day he offers to sell you a handful of invisible money for $300.. and you buy because that’s the market price?

Get real..

And back to the US elections.. .

The Giuliani press conference yesterday was extraordinary. Chris Krebs, the head of the US Agency charged with making sure the elections were fair, and who was sacked by Trump for stating they were, tweeted: “That press conference was the most dangerous 1 hour 45 minutes in American history.

Weeks after the election, its looking unlikely Trump accept the result – it doesn’t suit his plans. His policy now is to overturn the electors States send to the electoral college. Last night US Republican Senator and contender Mitt Romney tweeted: “Having failed to make even a plausible case of widespread fraud or conspiracy before a court of law, the President has now resorted to over pressure on state and local officials to subvert the will of the people and overturn the election. It is difficult to imagine a worse, more undemocratic action by a sitting American President.” 

The world is watching. Shocked. That the “home” of democracy – the nation that’s been lecturing the world on the sanctity of the ballot box is so conflicte??? Fair and swift election results are critical to sustain confidence in democracy. The US election authorities agree – they say there is no evidence of widespread fraud and the election is perhaps the most closely observed in history.

I tried to make light of the situation, commenting in this blog that: “The Democrats must be the stupidest political party on the planet. They organised the most successful and invisible ballot-stuffing exercise of all time to ensure Biden was elected president, yet, despite their electoral rigging expertise they didn’t do the same to ensure they won critical senate and congress seats.” (I am not convinced American’s understood my subtle sarcasm… )

The critical thing is – America is running out of time. The negativity is escalating – denial of the transition process, the sacking of officials, the rush to appoint unsuitable candidates, the President threatening a cascade of deliberately negative initiatives which will trigger global implications and heighten long-term geopolitical threats. Trust and credibility in the US is in serious danger. Isolationism looks increasingly likely – which will increase the likelihood of a global economic pivot to China.

And now we have Mnuchin shutting down Fed market supports, risking a financial crash. The goal is clear; persuade Trump supporters that the crash and everything else is a consequence of Biden stealing the election. A number of US readers have told me not to worry.. The constitution is robust, the mechanisms will ensure Biden is anointed on Jan 20th.

Don’t Panic? I don’t think so. A House Divided Can Not Stand. For the life of me I can’t see anything to be positive about when considering our investment horizons re the US at present.

Five Things To Read This Morning

BBerg – This Fed-Treasury Public Fight Has No Winners

WSJ – Afghanistan Braces for Worst as US Troop Withdrawl Accelerates

FT – UK public borrowing soars to record high

BBerg – IMF, G-20 Warn Recovery May Be Derailed, Risk Still Very High

FT – Carnival to sell $1.6 bln unsecured bonds as virus pressure eases

Out of time, and have a great weekend.. if you can.. I suspect we come back to a whole host of pain Monday morning…

Bill Blain

Shard Capital