tl;dr
Arthur Hayes always gets a shout. For those who wish otherwise, I promise you the EU isn’t dying soon.
Market Snap
Market Wrap
Perp O.I. just keeps heading south, and that is a good thing.
Curious Cryptos’ Commentary – Arthur Hayes
Arthur’s latest essay has landed:
https://cryptohayes.substack.com/p/reality-test
It is always a good read. Today he quotes Winston Churchill, one of the UK’s finest, who allegedly said:
“You can always count on politicians to do the right thing, after they have exhausted all other possibilities.”
A sentiment to which we shall return in due course.
Curious Cryptos’ Commentary – Ledger Scam
I received this highly suspicious email just yesterday:
Clicking on the link takes you to a scam website which pretends to update your Ledger software (if you were foolish enough to connect it) and ends by telling you that you must input your seed phrase to complete the process. I know none of you would ever fall for that trick, so I did it on your behalf (I suggest you click on the pic below):
I do hope the feral scammers are annoyed with me.
Curious Cryptos’ Commentary – Stablecoins and the EU
Yet another podcast claiming that the EU, and specifically the Euro, is facing the threat of disintegration, this time because of the US’ regulatory embrace of cryptos:
https://www.youtube.com/watch?v=5jYCDzHbM6g
Just for the record, the EU is never going away, for reasons we discuss below. However, the issues raised by Michael Howell, of Cross Border Capital are pertinent and worth some of our time. I will summarise for you his main points, amplified with my understanding and interpretation of the financial world.
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Howell starts with the claim that there is no safe asset in the Eurozone except for the Bund, Germany’s sovereign debt. This isn’t exactly true, for the ECB has implicitly sold puts on every other EU nation’s debt, but in a strict legal sense he is correct. This is reflected in Italian 10-year spreads over bunds at 78bps, wider than any other country within the EU. Note that the UK at nearly 2 full points above bunds suggests we have some serious problems, but that is not of concern to us in today’s CCC, though it is a damning indictment of UK governance over the last decade or more.
Howell goes on to highlight the growing discrepancy between German fiscal discipline and the fiscal incontinence of all other EU nations, not least that of France. The Franco-German axis that underpins the credibility of the EU is not being taken seriously enough within the walls of the Élysée Palace. Be scared though – every one of Macron’s putative replacements are going to cause even greater problems, in my humble opinion.
One of the regulatory flaws adopted by all Western governments is the idea that sovereign debt is risk-free meaning that under Basel rules, no capital needs to be put aside for it. This is not only utter nonsense – UK 0.5% gilt maturing 22nd October 2061 is trading at a measly £24 for a £100 nominal – it is hugely distorting to the capital markets. This directly and negatively impacts the cost of capital for all business, lowering productivity, and making us all poorer.
EU-domiciled banks that hold sovereign debt on the balance sheet marked at par, when that debt trades well below that price, have capital tied up that cannot be released, effectively weakening the balance sheet but without recognising that impairment in the accounts. Within a functioning fractional reserve banking system, the main job of banks is to extend credit. The bureaucratic obsession with the idea of risk-free sovereign debt deliberately undermines private banks to our detriment.
Now, finally, we get to the crypto part of the discussion, which comes back once again to the stablecoin revolution.
As US-regulated dollar stablecoin adoption grows – not least for the diaspora of the world’s poor and dispossessed – dollar hegemony becomes ever more entrenched. Instantaneous settlement with tiny, tiny fees is just too good a product to ignore. Increasingly, across the globe, USD stablecoin functionality will be adopted for most day-to-day transactions. Covid accelerated the move away from cash to tapping your credit card or phone to buy goods in shops. The exact same action is required to spend USD stablecoins cutting out the TradFi banks and their outrageous fees to fund senior executive bonuses. The stablecoin revolution has many benefits but one of them has been largely overlooked – it is a one-off disinflationary shock equal to, or greater than, the emergence of China as a producer of cheap goods funded by slave labour and environmental costs we all happily ignore.
Howell claims that this enhanced dollar hegemony bodes ill for the Euro. That might be true, but it is equally true for all other currencies too. His advice is simple and direct:
“Keep dancing, but dance near the door.”
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I think he gets his core conclusion entirely wrong.
During the eurozone crisis, when the spreads of peripheral EU countries’ government debt were exploding versus bunds, Mario Draghi, the predecessor of Convicted Criminal Christine Lagarde at the helm of the ECB, uttered the immortal words “We will do whatever it takes (to save the Euro).” And he delivered on that promise.
The ECB spent a decade monetising government, agency, and corporate debt to the tune of trillions of euros. Germany became the implicit guarantor of Greece, Cyprus, Spain, Italy, Portugal, and even France. In exchange, Germany, via the ECB, got its pound of flesh in the form of a haircut on all bank deposits above EUR 100,000 in Cyprus. Those deposits were mostly dirty Russian money stolen from legitimate businesses or sourced from drug-dealing, terrorism, or fraud, the three activities that Russia particularly excels at. Greece was forced into a period of austerity that would be utterly unacceptable to any independent sovereign nation. Democratically elected governments in Italy and Spain were replaced with technocrats appointed by the EU to do as the EU wished. These were steep prices paid by the plebs to ensure Euro stability. No-one should be in any doubt that even more draconian measures will be applied if necessary to keep the EU whole.
After all, no-one wants to see the EU implode.
Not least the army of hundreds of thousands of ex-EU bureaucrats who now enjoy very fat, tax-free pensions paid by workers in private industry.
And who would be churlish enough to block current and prospective future bureaucrats the opportunity to be paid handsomely for very little work, with virtually no chance of being fired, allied with a monthly one-week all expenses paid holiday in Strasbourg when the EU parliament adjourns there from Brussels. I, for one, would not deny such a wonderful opportunity for countless generations of future bureaucrats who have such little imagination and wit about them that they would simply be useless in the private sector.
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The main takeaway is that the fiscal incontinence we see on display is simply not sustainable.
To be fair, it isn’t entirely the fault of the political class. As Jean-Claude Juncker once said:
“We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
We bring our own misfortune upon ourselves.