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23rd March 2023 - Banks again.


It is still all about the banks, but that’s not my fault. I have some bad news, and I have some good news.

Market Snap

Market Wrap

I don’t know about you, but anyone who has mixed feelings about yesterday’s 25bp rise in US interest rates should read the commentary below.

The only sane conclusion is that Central Banks should go back to their core mandate of being lender of last resort, possibly retaining siegniorage (though that does not happen in Scotland, a point that is always overlooked in the economic debate regarding the feasibility of Scottish independence) and relinquishing their role as the biggest market manipulator of all time. Interest rates need to be set by the market, and only by the market.

Curious Cryptos’ Commentary – The Fed’s balance sheet

All the QT (quantitative tightening) in the US that had taken place has already been reversed. The scale of the problem is graphically illustrated here:

So, on the one hand, the US Fed (Federal Reserve Bank) is raising interest rates (and it is hard to see how they can stop doing so given the massive overshoot of inflation versus their legally mandated target) whilst simultaneously engaging in some excessive QE (quantitative easing).

Meanwhile it was reported yesterday that the Fed is sitting on a half a TRILLION dollars of unrealised loss, which it is in the process of realising because of QT (aka selling government debt). In effect, the Fed is replacing government debt which it assumes to be risk-free (we all know that’s a fiction of the highest order), taking real-world losses whilst it does so, and replacing it with loans to banks of dubious credit quality on an uncollateralised basis.

Each interest rate rise adds to the pain in bond portfolios, further eroding banks’ ability to withstand deposit withdrawals, ramping up the demand for both BTFP (Bank Term Funding Program) and emergency borrowing, hence adding ever more liquidity at a time of runaway inflation, the response to which demands more rises in interest rates.

Rinse and repeat.

This is utter madness. I am sure the technocrats sleep easily, with their gold-plated taxpayer funded pensions in a job where no-one ever gets fired for incompetence, but the rest of us can’t.

The devils (*) that have been brought to life because of QE have bided their time and are now only starting to play with us. This is just their first tickle - wait until they get serious about it.

The flight to safety in cryptos becomes more alluring by the day.

Curious Cryptos’ Commentary – The future of banking

Xapo Bank is a regulated bank based in Gibraltar.

It has a unique business model in the banking world. Rather than engage in fractional reserve banking, it invests all deposits in short-term, highly liquid assets, takes a margin on the returns from those assets, and the remainder is passed on to their depositors. Xapo does not leverage its deposits, reducing the potential gains to shareholders.

On the upside, the risks this bank is subject to are very different to most other banks. There is a role for the traditional banking model, but I think there would be very strong demand for the Xapo approach, if only depositors knew about it. And for equity investors too, there is always room in the portfolio for low yielding but very safe assets.

Xapo has announced:

“Today, we are proud to announce that, we (sic) are the first bank to fully integrate with USDC, allowing our members to quickly and safely move money from fiat to USDC and back again. Thanks to our innovative partnership with Circle, we can effectively use non-traditional rails in the movement of money globally.”

This is quite extraordinary news.

Oh, and did I mention they also provide a BTC trading and custodial service?

The pace of crypto adoption into the real-world economy has just got a lot faster.

And I am just about to get a new bank account.

(*) I have previously been told off for using the word “evil” in the context of mask-wearing dictats made in one of my many rants that provide colour to the CCC commentary.

Those criticisms probably came from those who are not familiar with Masklophobia, a condition that overwhelmingly affects children. Children were the least likely to suffer from Covid, but they are the ones whose lives have been the most disrupted by the illegal, illiberal, and unjustifiable restrictions placed on our liberties and freedoms by a political party that previously claimed to cherish such freedoms.

That disruption will play out for a generation and more.

To avoid such discussions this time around, I have taken the liberty of adding a “d”.

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