Table of Contents
Powell’s Testimony
Commercial Real Estate
Powell is a Deadhead
Crypto Stablecoins
Two more Rate Hikes
Staying Power
BoJ Minutes
Interest Rates
Swiss
British
Crypto Macro
Price Action
TUSD and Binance
Conclusion
Internal References
1. Powell’s Testimony
As usual, these senate and congressional events are long, there were two days of testimony and the full videos are shared below if you wish to listen to a 3-hour and 2-hour C-SPAN event.
Day 1 - House Financial Services
Day 2 - Senate Banking Committee
I don’t expect you to watch the whole thing, they’re mainly opportunities for members of the legislature to grandstand rather than ask any meaningful questions, and only a handful of members of the legislature will actually ask any meaningful questions.
I understand why they grandstand as many people do not understand what the purpose of these hearings and testimonies even is. You can imagine the average Democrat cheering as Sen. Sherrod Brown rambles on about executive bonuses at banks, forgetting that this is one of the few times the legislature gets to ask the head of the central bank questions while he’s under oath. Similarly, you can imagine the average Republican cheering as Sen. Tim Scott posters Powell about how Biden’s unbalanced budget is causing inflation while Powell is trying to remind him that our budgets have been unbalanced for over 100 years and this isn’t a problem that’s unique to the Biden presidency.
Our legislature is profoundly partisan and excels at wasting the precious time they’ve been given to actually do something or learn something of value. That being said, let’s jump into some of the useful bits of information we got out of Powell.
Commercial Real Estate
Starting at 1:09 in the video above Congresswoman Young Kim (R-CA) asks Powell directly about the estimated $1.5 trillion of commercial real estate loans that will be maturing in the next 3 years (does she read Flirtcheap?). She asks him about capital requirements and risks to this market in the near future.
Powell states that a large portion of commercial real estate loans are focused on smaller banks and that the large area of risk is in the office sector. Powell doesn’t state much about how many banks there are with this sort of exposure but it’s important to note that not only does the overnight Federal Funds rate impact interest rates offered by banks, but so too do capital requirements. It’s important to be cognizant of the trade-off being made between safety (high capital requirements) and affordable interest rates (low capital requirements). Since banks can’t turn anyone down, the only way they can decrease demand for loans when their capital requirements are raised is by raising their interest rates. It’s very easy for lawmakers to sit back and complain about banks behaving unsafe and pushing to raise capital requirements, but these same lawmakers must remember that they were the ones who lowered capital requirements so that loans would be more equitable. It would be nice if they just picked a side and stayed there instead of bouncing back and forth every couple of years. I don’t think the average legislator is capable of remembering what they did a few years ago though, so here we are.
Powell is a Dead Head
This is just here for the Lols. Apparently, Powell is a deadhead and has been for 5 decades. For those of you out of the know the Grateful Dead is a psychedelic rock band from the ’60s that has been touring for the last several decades. While their music is only tangentially associated with psychedelics just about anyone who follows their tours and camps out on the tours is doing LSD crystal, handfuls of psilocybin mushrooms, and probably knew about Molly crystal before it was discovered by college students in 2010.
It suddenly makes a lot of sense why Powell has been such an advocate for marijuana banking for the last decade.
I guess we need to be a little grateful when it comes to the bureaucrats we’re given. Where Powell is concerned, it could always be a whole lot worse than it is. Yellen could never.
Crypto Stablecoins
Congresswoman Maxine Waters (D-CA) takes time to tell Powell that stablecoins should be issued exclusively by banks with the Federal Reserve being the sole arbiter of which entities should be able to issue stablecoins.
Powell states that they do see payment stablecoins as a source of money. He states that there should be a robust federal role for the Fed to play in regulating stablecoins.
Waters then makes an unconstitutional statement in support of her bill that will never pass by asking the Federal Reserve to play a role in racial economic inequality. Powell reminds her that the Federal Reserve has no ability to take part in those issues since they are only in control of the overnight lending rate offered to banks. It’s more time-wasting grandstanding, but no doubt there are many Americans that would cheer to know the question was being asked despite this not being an appropriate place to do that.
The takeaway here is fairly straightforward, the Fed sees stablecoins as a source of money. Whether that means they want to recognize all existing stablecoins as money, a select few existing stablecoins as money, or if they wish to only recognize stablecoins that they issue as money is left unsaid.
I would guess that a big player like Circle’s USDC through their partnership with the Atlantean worshippers of the Black Cube would likely be one of the select few to be officially recognized by the Federal Reserve in that future of mixed regulation.
Tether being owned by Hong-Kong-based iFinex Inc. (operators of Bitfinex CEx, which was chased out of the US by the SEC earlier this year) might not be given the same treatment as USDC in such a future. Of course, I have more long-term interest in algo-based stablecoins or stablecoins backed by crypto, and I wonder if the Fed will even really bother trying to regulate assets such as those in such a future. Who can say, but it is good for us to muse on the potential digital money of the future and who might win that battle in the eyes of the regulators. Most US crypto businesses deal in USDC for a reason, and that reason is that it’s most likely to win the favor of regulators for off-ramping, and at some future date being IRS-auditable. If you intend to on and off-ramp this is going to be the stablecoin of choice for doing that if regulators intend to accept some of the already existing crypto infrastructure.
Two More Rate Hikes
Earlier this year I said that it would be key to watch some of the ancillary central banks to see if they were pausing/slowing their rate hikes at this point in time to get a picture of if the Fed was going to stop after this pause. We’ve seen surprise hikes from Canada, Australia, and now this week the British having their first 0.5% rate hike after sticking to 0.25% hikes. These surprises to the upside indicate that the prevailing Western central bank thought doesn’t see this as the end of the hiking cycle. So I lean more towards the last hike not being the last and I think we shouldn’t be surprised if we get another hike from the FOMC at their next meeting. We still have to expect liquidity to get pulled out of asset markets, but at this point (ironically) the SEC has been making it harder for Americans to pull liquidity out of the crypto markets, so we may see US interest rate hikes having less of an impact on crypto prices as we are constrained for off-ramps.
Staying Power
I apologize for the meme format of this video. It’s the only clip of this on youtube that I can embed into Substack. About 3 hours into the House Financial Services hearing, Congressman Warren Davidson (R-OH, from the subcommittee on digital assets) asks Powell if he thinks crypto and bitcoin have staying power as an asset class and Powell assents that “it appears to have some staying power.” Powell goes on to comment on the volatility (incorrectly) and Davidson follows up by mentioning the two bills that the subcommittee is pushing forward to allow some stability to this asset class. Let’s be grateful we have anyone defending us at all.
Davidson also asks Powell about the RRP, but he phrases the question vaguely to ask what effect it has on the American economy. Powell says it has little impact on the American economy and that it’s just a place where money market funds park their money. True.
Davidson also asks about the RRP crash in 2019 but again asks the question poorly, and Powell simply responds by describing the situation in 2019 and then letting Davidson know that the RRP is shrinking at a regular pace now. True.
I like Davidson, just like Donalds, he seems like he is one of our guys, and I suspect he just had notes to ask about the RRP, without really understanding what he was asking or why. I think a better question would be asking if the RRP is shrinking and flowing into the treasury markets due to how many outstanding treasuries have to be sold to cover the debt. The question then becomes:
“What happens to the treasury markets once the RRP is empty?” Are there any concerns about effectively marketing treasuries when there is simply not enough liquidity available to buy them? How does the Fed communicate this to the US legislature and the US treasury if they were to come into a situation where there is not enough available liquidity-seeking yield in the financial markets to meet treasury demand?”
If Davidson asks the question by pointing to the future risks, then I think he gets a better answer from Powell, or at least a non-answer.
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