Why Elections are a Good Thing, and The Crypto Bubble Pops

Blain’s Morning Porridge – Nov 10th: Why Elections are a Good Thing, and The Crypto Bubble Pops

“Monorail. You know it’s the right solution. Monorail.” 

This morning: “Elections are a wonderful way to unravel the risks of political incompetency by letting the people, rather than politicians, decide. Meanwhile, the collapse of another thing in Crypto comes as no surprise. If it did, consider a career change.”

Two topics for the Porridge this morning: Politics and Bonds, and Crypto – the collapse of yet another leg of something everyone should have known better about.

Politics are a noise, but In Bonds there is truth…

This week’s Shard Market Litebite Markets Podcast should be available soon – and will be posted on both the Shard and Morning Porridge websites later today or tomorrow. This week we look at how political incompetency can roil markets. On the recording my colleagues and I were arguing about the implications of political risks.

My conclusion from our chat is that elections are a very, very good thing.

Compare and contrast:

• The UK is going to struggle with Political Competency for a very long term as the Conservative Party desperately clings on to power to avoid inevitable electoral wipe out – should it be forced to let the people judge them at the polls. They are hoping against hope for an unexpected economic pickup, or the other parties self-immolate. Meanwhile, next week’s autumn statement/budget will lead the UK down the route of economic austerity, because that’s the only option open to the beleaguered Tories after the incredible incompetency of the Truss/Kwarteng regime.
• The US just had a vote and delivered a simple escape route from the potential political calamity a resurgent Trump could have represented – if he’d been able to claim credit for a Republican Red Wave success in the midterms. Instead, his chosen endorsed candidates were generally thrashed, and it’s clear he’s more hinderance than help to his party..

The lesson: let the people chose, not politicians desperate to cling to power.

Suffice to say my colleagues did not all agree with my analysis. It’s clear Rishi Sunak is about 100% more effective than Truss (although 100% of nothing is still nothing…) That led us on to a discussion of what that means in market terms.

The US election should re-affirming for the Dollar, Treasuries and US assets as the threat of a disruptive Trump driven polarized and vengeful US political landscape recedes – sane Republicans appear to have the upper hand.

In contrast, the UK looks vulnerable to ongoing political and economic instability as Sunak tries to hold his fraxious party together while avoiding an increasingly buckled economy – witness the first ever Nurses strike. Next week’s Autumn Statement budget looks likely to be a risk point as tinkering with taxes and budget cutting confirms the UK is entering austerity in tandem with a destructive recession. That bodes badly for jobs, services, inequality and destitution – and will reverse any growth opportunities. It will deepen a painful winter of industrial strife and discontent. Austerity politics into the teeth of a raging global recession is a bad choice, but it’s the only choice open for the Tories. We need other options.

Looking at the UK gilts market, its still trading at a higher yield than pre-Truss. Investors know the UK is not going to default and they’ve been reloading on Gilts – but there are major concerns. For overseas buyers the value of sterling is critical. Further political mistakes and policy errors could impact sterling, and push up bond yields further to compensate. Meanwhile, inflation has not peaked and this week’s food inflation showed wage demands will increase. Higher rates, and a concurrent rise in mortgages will further roil the markets. The government may want to spend less, but during stagflation, rates will rise, further impacting the economy.

There are alternative policies.

Liz Truss got one thing right – the need for growth. That will require fiscal expansion into a recession – exactly what Chancellor Hunt will not give us. He can’t. His hands are tied by her incompetence. But a political reset, allowing a new government to put together a fully costed borrowing programme to boost growth, government spending and a rebuild of the broken welfare, NHS, and educational services could work.

If it was done properly, fully explained and done credibly a new government’s options would be much wider than simply balancing the books through destructive austerity. The government doing what governments should – keeping growth on track, and managing borrowing to move the economy forward.. well, that would be nice….

My conclusion? Elections allow a political reset. Time the UK learns that lesson.

Crypto Shenanigans… Again

This week’s Crypto horror is FTX. Let’s see..

An imaginary exchange dealing in imaginary crypto assets investing its real liquidity its own imaginary crypto currency, which someone then calls out as an imaginary asset, causing the imaginary value of that imaginary asset to collapse, allowing that same person to make an imaginary offer to rescue the imaginary exchange of imaginary assets, before pulling the imaginary rescue of the imaginary exchange, causing one of biggest big-noises in Crypto to lose about 97% of his net worth of imaginary gazillions in days….

Is that about it? Think so. The only question is – WHERE IS THE MONEY? Someone has it.

Gosh… what a surprise to discover my Coinbase wallet is now worth 21% of what I originally put into it. Shock. Horror. Told-ya-so. (I can withstand my crypto losses – it gives me something to talk about. I bet FTX king-pin Sam Bankman-Fried is a tad less happy as a $36 billion January FTX valuation hits zero today.)

This morning I got asked on the Radio about the risks to the wider market; the possibility systemic weakness in Crypto will spread across real financial markets. A number of funds (round up the usual suspects) have lost billions – but if your investment manager had gambled your savings on Crypto – then shoot them. It makes banks and big investors pontificating about the wealth creation in Crypto Assets look stupid. They were stupid before, and will remain stupid after FTX and Binance.

Pop goes the bubble.

Crypto will be remembered as this era’s Market Bubble – an opportunity like Florida Real Estate in the 1920s, South Pacific Investment in the 18^th Century, or Tulips in the 17^th Century, fuelled by credulity and overly cheap money. I’ve been writing for years about the real underpinnings of crypto coins, tokens and the multiple nefarious opportunities to be relieved of real money by crypto shills. They are never what they claim to be.

The boom/bust cycles in crypto are exploited and fuelled by two of the oldest fears on the planet: Fear of Missing Out, and Fear of Looking Stupid – FOMO and FLS.

I’ve said this so many times: Crypto coins have absolutely no intrinsic value. If you are ever tempted – then have it tattooed on your eyeballs. They are worth only what you are persuaded to believe they are worth. Persuading you they are worth more is the basis of all crypto scams – basically everything in the space… Some poor self-delusional fools cling to the belief Crypto is some form of evangelical money. They are Idiots – pity them.

Neither is crypto an industry – as some suggest. I’ve taken time to delve into the systems, coding, structures and the way in which digital ledgers are supposed to work, (and how they actually do), and it’s all left me non-plussed. Imagine lifting the lid on supersonic jet fighter and discovering its driven by a hamster on a wheel. Theoretically, it’s all terribly, terribly clever, but for the life of me, I can’t see the point. Crypto currencies are incredibly inefficient and basically pointless.  I’ve called out nearly every single aspect of crypto – from its pointless energy consumption, to its facilitation of the Dark Web, to the obvious scams and confabulations of NFTs.

I keep asking the same question – in the realms of what is legal, what do Crypto Assets and Currencies do better or uniquely that real money doesn’t already do? In 10-years, no one has answered that question – except in terms of vague nonsenses about it being free of government control, usually expressed in terms from Libertarianism for Dummies 1.01.

Yet this morning I read Bitcoin “analysts” talking sagely of market support levels, and value in “alternative tokens” at certain levels, as if they were talking about real stocks, currencies or bonds. They are not. A bitcoin is not worth anything except what the next greater fool will pay for it. Because if cost $15k in energy costs to mine, does make it work anything.

The brutal truth is cryptos are not money and never will be, they are not liquid, they are not stores of value, they are not inflation hedges, they are not functional, they are not green. So, what are they? I find it amusing that on every crypto scandal, no matter who has been robbed, defrauded or left penniless by a crypto theft or collapse, the losses are always defined in terms of real money.

Yet, maybe, just maybe, from the deceits and lies that make up crypto scams, maybe something may eventually emerge that is useful with real utility. Yeah, sure, I can guarantee if anything with real utility ever emerges from crypto it will be regulated to the point of uselessness.

Five Things To Read This Morning

FT                     Time to open up UK Bond markets to give investors more options

BBerg               JPMorgan Team Say Crypto Markets Face “Cascade” of Margin Calls

FT                     Mutual crypto-destruction assured

Thunderer        Foreign Investors Dumped Gilts in Mini-Budget Crisis

WSJ                  Frustrated Republicans Try to Explain Lack of Midterm “Red Wave”

Out of time, and back to the day job…

Bill Blain

Strategist – Shard Capital