Ray Dalio would rather own Bitcoin than bonds. Breaking down the bond market. “Inflation speak” starts with food.
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The Bitcoin Economic Calendar:
Week of Monday May 31st to Sunday June 6th.
Rate announcement: We're proud to announce our savings rates as of June 1st, 2021. On this date, our Bitcoin Savings Account rate will remain unchanged, at 6.10% APY for balances up to 2 BTC, and balances over 2 BTC earning 2.25% APY. Our USDC Savings rate will be slightly reduced from 12.50% to 11.00% APY.
Market Commentary:
Bitcoin: Bitcoin caught a bid last week on the low $30ks after having dropped from ~$65k in the 2 weeks prior. It made a run up to the $40k level mid-week before settling at $35,677, up +2.80% on Sunday evening.
The biggest development in bitcoin this week was Ray Dalio’s “I’d rather own bitcoin than a bond” comment.
For context, Mr. Dalio is defined by Wikipedia as “one of the greatest innovators in the finance world, having popularized many commonly used practices”.
Next, let’s talk about the bond market.
The size of the global bond market as of August 2020 was estimated to be $128 trillion. From that, ~$41 trillion is in corporate bonds and ~$87 trillion is in SSA bonds (Sovereign, Supranational, and Agencies).
According to the same data, the U.S. made up $22.4 trillion of the SSA debt (26%), and $10.9 trillion of the total Corporate debt (27%). These numbers are over a year old and the current numbers are likely even higher. For context, bitcoin’s total market cap is currently sitting at $672 billion.
As the Fed starts to consider tapering and eventually raising interest rates, bond investors in the U.S. could be in for a world of pain. The reason for that is the inverse relation between bond interest rates and their prices.
As bond interest rates rise, the market value of the bonds goes down. While a bond will have a set face value (the amount that the issuer will pay the holder at maturity, assuming it doesn’t default), in the secondary market, bonds can trade at prices below or above their face value. When “interest rates rise” it is because the market value of these bonds is decreasing, but their face value and interest payments are staying the same.
With bond market prices set to potentially decline, and investors like Ray Dalio stating that they would rather own bitcoin than bonds, it is interesting to consider some hypothetical scenarios:
If 1% of the capital deployed in the U.S. Corporate bond market was reallocated to bitcoin, this would represent a ~15% increase in bitcoin’s market capitalization. For context, the U.S. corporate bond market alone is about as large as the total market capitalization of gold.
The bitcoin futures curves seem to be pricing in a sideways summer with prices into September and October escalating way faster.
S&P 500: The S&P 500 closed the week at 4,206 points, up +1.07% for the week. Stable treasury bond yields and a flat U.S. dollar index contributed to the move, as well as the spending plan presented by Biden’s administration.
Biden's $6 trillion budget maintains pre-pandemic spending levels, and tries to reduce the deficit with higher taxes. The plan will add over $1 trillion in debt to the U.S. annually and was enough for markets to make some ground higher - albeit with little volume. For context, the 2020 budget was $6.6 trillion, and the 2019 budget was $4.5 trillion.
The only thing holding back the markets is the potential for the Fed to start moving towards tapering and higher interest rates.
Although it's a shorter trading week in U.S. capital markets, there will be Fed activity for most of the week starting tomorrow. On Tuesday (tomorrow) at 2 PM EST Fed Governor Lael Brainard will give a speech about the Fed’s economic and monetary policy outlook. Fed Vice Chair Randal Quarles has a speech on Thursday at 3.05 PM EST where he will be discussing financial regulation. Lastly, on Friday at 7 AM EST, Jerome Powell will speak about central banks and climate change. With so much riding on the Fed, the market will be listening to every detail.
Gold: Gold continues to have its moment and it is starting to get noticed by financial media again. It closed the week at $1,902, up +1.19%.
As we’ve covered in previous issues, all recent data continues pointing towards inflation in the U.S. and gold prices seem poised to continue riding that narrative higher. The chart also looks poised for continuation.
DeFi: DeFi and ethereum also caught a bid this week. The DeFi index closed higher by 23.39% at 9,178 and ethereum finished the week higher by +13.90% at $2,389.
Perhaps the most meaningful development in the sector was the fact that Goldman Sachs leaked a report that states that “ethereum has a high chance of overtaking bitcoin as a store of value”. It also goes on to refer to ethereum as “the Amazon of information”.
It is interesting to note that institutional investors are expanding their curiosity into crypto beyond bitcoin. There has also been a lot more talk about DeFi in traditional finance publications like the OddLots podcast from Bloomberg - which has dedicated 2 episodes recently to decentralized exchanges and yield farming.
Difficulty Commentary: Saturday brought us a sizeable downward difficulty adjustment, dropping almost 16% to 21 TH.
Mempools have also stabilized and seem to be on the way down. The weekend provided a great opportunity to transact with transaction costs as low as 1 sat/vbyte for next block confirmation.
Additionally, this difficulty epoch is well on its way to surpassing the required 90% of blocks signalling for taproot, which would be a massive step forward for this historic bitcoin upgrade. The signalling ratio is currently at 97.44%!
What's ahead for the week:
Inflation is often discussed around financial circles, and particularly within the bitcoin community. However, little is ever said about inflation in mainstream media. When this narrative starts, it usually starts with food.
From grocery stores...
...to restaurants…
...food prices are going up all across the U.S.
From my experience in Venezuela, price increases in the staple proteins (chicken & beef), tend to be of particular focus when this narrative starts. Look for politicians to start addressing this narrative in the very near future - and U.S. chicken/beef farmers and producers should come into the spotlight any second now...
To make matters worse, the U.S. average household net worth may be up in dollar terms - but the chart below paints a different picture.
What you are seeing here is the average U.S. household net worth in Fed balance sheet terms (shoutout to Raoul Pal for sharing this on Twitter).
Despite the average U.S. savings rate being higher than pre-pandemic levels, despite property prices increasing all across the country, Americans on average are still less wealthy in Fed balance sheet terms.
For the average household net worth to increase, a few things would have to happen. The average household savings rate should stay high - this requires high salaries. The real estate market should stay healthy and rising, and the stock market needs to keep rising. The latter 2 require low interest rates. Those are all addressing the numerator in the equation. To fix the denominator, the Fed needs to stop printing new cash. At this rate, it looks unlikely that Americans will be able to become wealthier in Fed balance sheet terms any time soon.
The Fed is starting to see inflation targets yet is still far away from its unemployment target. The natural rate of unemployment is 4.4% vs the current 6.1%. This has many questioning whether the Fed will ever be able to raise rates.
It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account @hodlwithLedn
Canadian Central Banking Updates:
Current Target Interest Rate: 0.00 - 0.25%
Current Overnight Money Market Rate: 0.23%
Source: https://www.bankofcanada.ca/rates/
U.S. Central Banking Updates:
Current Fed Interest Target Rate: 0.00 - 0.25%
Current Effective Federal Funds Rate: 0.09%
Source: https://apps.newyorkfed.org/markets/autorates/fed%20funds
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This article is intended for general information and discussion purposes only, it is not an offer or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. A professional advisor should be consulted regarding your specific situation. The information contained in this publication has been obtained from sources that we believe to be reliable, however we do not represent or warrant that such information is accurate or complete. Past performance and forecasts are not a reliable indicator of future performance.