Bitcoin, Banks, Earnings, Inflation, Shadow Banking and, oh.. what else?

Bitcoin’s recent gains are about as relevant as Liz Truss. But banks, earnings, inflation, rates and investment remain critical. Now shadow banking investment is under threat – which isn’t going to help.

Blain’s Morning Porridge – 11th April 2023: Bitcoin, Banks, Earnings, Inflation, Shadow Banking and, oh.. what else?

“All that glitters is not gold….”

This morning –  Bitcoin’s recent gains are about as relevant as Liz Truss. But banks, earnings, inflation, rates and investment remain critical. Now shadow banking investment is under threat – which isn’t going to help.

I had my moment of market epiphany Sunday afternoon on the sailing club deck…. A chum told me he’s nearly doubled his money buying Bitcoin since buying in January at £13.75k and its now trading around £24.3k – he’s going to hold (“Hodl”) his sizeable bottom-fished position, confident it’s going to hit a new record high this year – at which point he will buy a new car. Nice.

Another sailing mate then told me he follows the candle charts, and reckons there are some seriously bullish signals revealed by “Bollinger Band” analysis of the Bitcoin price action – it’s going to break higher he confidently told me. Neither is a professional investor; they are smart guys watching the markets, looking to make some money. They know its going higher!

They sense the psychology of the crypto markets far better than I.

They buy into crypto as a safe-refuge from the current market dislocation in banks, in stocks and bonds – but mostly because they perceive it as cheap because it has been higher. They see the dollar as a vulnerable (knocking back my arguments about bitcoin being a dollar price, “rubbish, I trade it in sterling”). They get the “digital gold” concept. They are buying BC on the simple basis it got knocked back last year, looked cheap and now its going back up again. They see that as resilience and proof of its long-term staying power – you can’t un-invent or un-regulate it, they say.

I have not made any money on crypto. I make no money in crypto because I have no faith in it or its tenets. My coin base account, (a purely experimental venture I set up some time ago to measure the limits of human credulity by investing in Bitcoin, Ethereum, Cardano and 5 other randomly selected tokeny-things), is down 60%.

I am cursed by the problem of having a “professional” view on cryptocurrency and bitcoin in particular. I suffer from the deeply held belief they have zero legal utility, are regulatory vulnerable, unstable (because of the insecurity and criminality around trading them), and are ultimately only worth what the next greater fool can be persuaded to pay for them. These factors mean I would struggle to advise investing in crypto without feeling dishonest.

Not a problem say my chums, (and incidentally, a surprising number of investment advisors who still spout about crypto in a diversified portfolio) – it’s my loss. From a trading perspective their successes demonstrate there is money to be made by running with the herd, listening to the arguments around buying Bitcoin… and making money by playing the market’s psychology.

A thing doesn’t need to be rational to make lots of money – probably the fundamental investment rule of the last 15 years! Or does it? My chums are exhibiting classic trading mentality.

Traders seek to profit by buying cheap and selling high – when an asset looks cheap… buy. Last month it was buying banks in the wake of the price crash triggered by the collapse of SVB, Signature and Credit Suisse. As long as the market fears further banks are going to collapse, but traders judge a systemic bank run unlikely following swift interventions by central bankers, government and regulators – they will buy. At that stage market crisis becomes opportunity.

When stocks get hammered because of negative news seemingly raising the threat of recession, of earnings slowdown, or increased geopolitical threats and instability, then, yes, the market will over-react and there will be bargains, because companies do have utility: they make, sell and do things that ultimately produce value.

When bond yields soar higher on inflation and recession fears, then bond traders look for the moment just before the monetary authorities intervene to stem crisis by supporting bond prices. They buy expecting yield to drop and therefore prices to rise..

But crypto? What’s the backstop to crypto? What’s its fundamental value maintenance support line? Who ultimately keeps the scam myth going? That the Winklevoss Twins will put $100 bln into supporting the market, that other Whales are “too-invested” in supporting the market to let it fail? That too many big fund managers are saying they can see the very beautiful and well cut garments only very clever people can see covering up the very naked emperor?

Good luck with fundamental value in crypto… I shall remain outside… not staring in.

Meanwhile, back in what we laughingly call the grown-up markets… what have we got this week? Confusion and distraction…. Including many of our old favourites.

  • How weak are the banks? I have read lots about how loses in bank “hold to maturity” bond portfolios (which will become more apparent in the coming reporting season) puts many banks into negative equity. This becomes a problem if it triggers further ongoing depositor flight from weak banks. It’s not really a long-term solvency issue for banks unless they have to sell these HTM portfolios now to address deposit flight – these bonds will still repay at 100.00 when they mature.
  • How bad will the earnings season be? US corporate earnings in recent years have surprised to the upside (or do we just forget the bad ones?) Will this season reveal deeper consumer, retail and corporate weakness?
  • Rates and inflation?             Last week’s stronger than expected US jobs number hints at a stronger economy where inflation remains a threat to address. Yet, the underlying weakness in banking is crying out for intervention – which explains why stock markets continue to think Christmas will come early in terms of lower for longer rates!

What worries me more is the way the economy is supposed to work: bright entrepreneurial folk have moments of genius, go to the bank for the capital to start their business, and within a decade have successfully innovated the next $1 billion market niche. Today… the bank ain’t lending because is worried about economic conditions, and, to-be-frank lending ain’t really what banks do any more… sure, if you want a 60% LTV mortgage secured on your home, but not for a risky business concept they can’t be bothered to understand unless is got a AAA rating on it..

Instead, smart entreprenuers now go to the “shadow-banking” sector – which sounds like something out of the James Bond villain roster – but is end investors lending or investing direct through private debt and equity. I was on the radio last week talking about it and described Shard Credit Partners (part of Shard Capital) are an example of non bank lending – our Credit guys lend direct to UK SME’s based on thorough due diligence and understanding of management and the numbers. It works – if you want details, contact me.

However, many observers are concerned that transferring risk from the highly regulated banking sector to the largely unregulated shadow banking, investment sector means all that has been achieved it sweeping risk out of banking and hiding it under the carpet of funds! Simplistic, but last week we saw a coordinated effort by the IMF, Central Banks and Government Treasuries warning about hidden risks in Shadow Banking and the need to regulate the sector.


  • Most “shadow bankers” I’m dealing with understand the risks they are managing extremely well. The more esoteric the assets are, the greater the level of expert understanding there generally is. The problem occurs when more mainstream financing, like RMBS or recently the crisis in UK Gilts when Liability Driven Investment leverage causes a crisis.
  • A raft of “regulation” to impose limits and reporting restrictions on “shadow bankers” and to ensure they report and manage valuations on the private financial assets they hold will create an immediate impasse in the market – slowing down private investment at the same time banks are pulling back from markets, thus deepening the credit crisis where corporates and individuals struggle to refinance and borrow, therefore deepening recession.
  • The most important aspect of capitalism is the “right to fail”. Remove that and it fails – completely and at its most basis level.

Five Things to Read this Morning

BBerg              Bond Veteran is Buying Debt of Polluters As Rivals Back Away

FT                    Andy Haldane: Crises have left us stuck in a “doom loop” of insuring risky behaviour

FT                    El-Erian: Banking tremors leave a legacy of credit contraction

Torygraph        Twice as many French Companies will go bust than British ones, forecast reveals

WSJ                 At FTX, Multimillion-dollar Expenses Were Approved by Emoji

Out of time and back to the day job

Bill Blain

Strategist – Shard Capital