Welcome we will be reviewing macro events from this past week from The Post I made at the beginning of this week on 9/5/22.
I have added a Definitions page which will include all of the terms and abbreviations that I use from now on and will be referred to on every post.
Substack has launched an iOS app for those of you using apple devices. I am an android peasant and can’t tell you if its good or not yet, but I will know soon. Substack has announced a waitlist for their android app, which they claim is nearly ready. I’ve signed up for the waitlist and the link is here in case you wish to do so.
Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
I was recently a guest on the Against The Mob Podcast where we discussed the changes in international forex invoicing over the past decade and how this impacts global commerce and currency value over time. Specifically in relation to the Petrodollar. If Section 1 and 2 of the post from 9/5 confused you or you want more detail, definitely give this one a listen.
Table of Contents
Bonds are the Price of Money
US Interest Rates
Japanese Interest Rates
Swiss Interest Rates
English Interest Rates
Crypto Macro
Price Action
Jobs in Crypto
Conclusion
1. Bonds are the Price of Money
Prior to the US Rate hike, if you were listening with me on Bloomberg, you heard what the sentiment is at the institutional level. As rates rise, bonds become more attractive for institutions. This is the primary reason why risk assets are responsive to the US macro and why the treasury markets are what sets the price of money. All investment decisions flow out from here.
You may remember back in January how I was making fun of major hedge funds because nearly all of them could not out perform used cars. I was being partially disingenuous here as investment decisions change the larger your AUM (Assets Under Management) grows. It’s a lot easier to catch 20% on a $10,000 investment than it is on a $2 billion fund. The larger the funds are that you have to deploy the less opportunities you have to deploy all of it and catch a good % return on it. Catching 3% on $1 billion is a lot more impressive than catching 10% on $1 million. At smaller amounts of money, you can measure an asset manager on their % performance, but once you get into mid 9 figures, opportunities are scarce.
This is why the treasury markets are in control of all risk assets and the price of money. For a fund with several billion under management, if you start seeing treasuries offering 5% returns, your decision making simplifies because the sovereign debt markets can soak up that kind of liquidity and you can fully deploy it. If it’s your job to find a return for investors who just want to see a nominal return (of which you take a cut on a 2 and 20), the push to simply just deploy into the bond market grows as interest rates grow. This is how and why liquidity gets pushed/pulled around the markets based on the bond markets. With the Fed in QT and no longer offering liquidity to support US sovereign debt, interest rates had to rise until liquidity could be attracted from the market to fill the needs of a profligate US government.
Treasury yields are continuing to push higher as there is not enough liquidity yet coming in to these markets to lend to the US government to stop these rates from continuing upwards. All of this liquidity is coming from the risk markets and asset markets, which is why the macro is flat/down and continues to be so.
Treasury bonds are essentially the price of money. If your project, investment, etc. can’t outperform treasury bonds on a nominal level, fund managers will choose treasury bonds over your investment. Long term, it’s far better to be paid in a deflationary asset than an inflationary one. But in the short term, if you are operating as a fund manager, how do you justify ignoring a 4% treasury bond return if an investor accuses you of failing to meet your fiduciary duty? The risks to fund managers personal lives are too great, the SEC has ruined many people, and if you’re collecting a 2 and 20 off of the money you’re managing you eventually get to the question of “why don’t I just buy these people some treasury bonds and collect my paycheck in peace?”
There is a concept in the investment world known as the “cost of capital.” This concept is also driving the macro, but in a slightly different way. If you can borrow money at 3% for an investment, then your cost of capital is 3%, and you can’t afford any investment that pays less than 3%. So as interest rates rise, the general cost of capital rises as well, which is why we describe policies that withdraw liquidity from the lending markets as “tightening.” This is because the lending market itself is becoming tighter as capital becomes more scarce, or more expensive.
These two functions are the primary drivers that push the macro-pricing of all other assets. The interest rate paid out by the treasury is the price of money. The higher it goes, the more it costs to attract that money away from treasury bonds. Crypto is the WNBA after all, and is dominated by the macro-cycles ruling the price of fiat money. Until crypto can see wide regular use in commerce, it will never find a way to determine it’s own price of money, and create its own capital cycles. I have often said that we are still very early in the transition to a separation of finance and state. You might feel like you are late to the game, but I guarantee you that you’re still early. At best, this is the top of the 2nd inning (baseball)… there’s still a lot of game left to be played before a winner emerges.
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