BRICing it

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BRICS

Brazil, Russia, India, China and South Africa. The original members of the BRICS group. They first met in 2009 and frankly, for a very long time, it was a nothing-burger. 

On the 1st January this year, the intention was that Saudi Arabia, the United Arab Emirates and Iran would also join the bloc. The BBC half reported it here although it was unclear whether Saudi Arabia had actually joined or not. The Saudi’s said they had not quite joined yet because there was ‘a delay’. Nowhere does it appear that they have actually confirmed their membership. However last week they were present at the expanded meeting in India including all the new members.

It all seems pretty low key, but 40% of the world's population are now represented by this group, as well as most of the oil. It is a more significant economic assembly than the European Union, so it seems rather odd that we don't read more about it in the West. What’s more, the BRICS group plans to launch their own currency in the next few years in order to settle intergroup trades. Again, it is unlikely to immediately rival the dollar but there will be a huge incentive for this group to use the BRICS currency and not the dollar as soon as it launches, simply to unhook themselves from the centre of American power.

Recall the same was once said of the Euro. Finally we would have a rival for the dollar, but the European economy is not vibrant at all like the BRICS. They are growing fast, they are energy dominant and have things that other countries want to buy and will have a currency that others will want to hold. Why, for example, would you want Euros? You can’t buy oil with it, or do much else, besides go on holiday. 

The centre of gravity for power is clearly shifting here. The Saudis might be reluctant to confirm their membership because it will obviously upset America, but they very clearly are involved. Coincidentally, Bloomberg rolled out an interview with HSBC this week setting out why the USD will be the dominant currency for the next 30 years, asserting there is almost no chance anything could come close to it. 

That’s probably true, but when it is definitely true, you don’t need to say it.

Give us Tether

On a similar theme, former speaker of the House of Representatives Paul Ryan popped up in the Wall Street Journal last weekend telling us that ‘crypto’ can help the US dollar reign. I agree with him. USD stablecoins are incredibly useful and much safer than dollars in a bank account.

$1 of stablecoin is backed in most cases by $1 of US treasuries. A 100% reserve. Even if you think Tether is really dodgy and removed their non-treasury assets altogether it is still 90% backed by immediately liquid treasuries. $1 in a bank account is backed by about $0.07 cents of liquid assets, on average. Obviously you have all the other assets a bank has on its balance sheet but many of these are real estate related and in the US, commercial real estate looks sick and it certainly isn't liquid. You could reasonably argue too that even then US deposits at banks are guaranteed by the FDIC but that is limited to $250,000 per depositor which does not help corporations and large holders. 

The fact this conversation is even being had is quite something. There is a very real opportunity to embed US dollars in this new ecosystem and the US should probably wake up and seize it before someone else does.

None of this should come as any surprise to people who have used stablecoins. They happen to be useful and much less onerous to use than actual dollars. Keep in mind transacting internationally in USD can take days and getting a USD bank account is nearly impossible. For stablecoins, you need a phone and not much else; expect their growth to accelerate particularly if the US lends its support.

It also strikes me that it was an incredibly smart strategic move from Tether a few years ago to back their coin with US Treasuries rather than cash. They are now the 10th biggest financier of the US Government. People (and countries) tend to be nicer to those that lend them money than those that owe them. Can it be a coincidence that we hear much less negative press about Tether these days?

Pals

An overseas visitor hit Aussie shores this week. Raoul Pal of Global Macro Investor. GMI is a very expensive newsletter at something like $50,000/year. You can find a few extracts here.

Raoul also made his way into the Fin Review too which will give you a bit of background into the way he thinks.

He covers a great deal of ground with both GMI and his retail platform Real Vision. Broadly the themes are:

• Embrace technology, it will accelerate your wealth.

• The world is so indebted, there cannot be a deflationary collapse because it does not suit anyone

• The only way out is tech with its large productivity gains, and money printing. That is what they will (are) doing.

• So investing is not difficult; be long tech; be long crypto; hold through the inevitable dips.

• When a crash comes they will print hard; indeed people will demand it.

• Finally, don’t bet against the trend.

The main thing is that second point. We had Krugman last week simply pointing out that the way to deal with debt is just to inflate it away. There isn’t really another option. Larry Fink was saying it again this week:

When all the talking heads say the same thing, it’s time to sit up and listen.

If you think about the aging population and the extent to which they will rely on asset prices for their retirement, can they really be allowed to collapse? Irrespective of the complaints of Millennials and Gen Whichever. The largest cohort of voters has the loudest voice.

Quantum computing

It’s been all quiet on the Quantum front for a while now while everyone has been busy talking about AI. Last month though, the Australian government decided to give $2 billion of your money to a few of their mates who currently don’t have a working quantum computer.

The whole thing revived the discussion with potential investors about what the impact of quantum computing might be on bitcoin and encryption in general. For background, one of the very first things a working quantum computer would be asked to do would be to break encryption. This is not because the government wants to read your WhatsApp messages. It's simply because if we have a quantum computer and it produces a result of some previously intractable problem, how would we check if it were correct? Well cracking encryption is currently intractable, and obviously if the quantum computer can do it we will know immediately if the answer is correct because it will give you the password that you did not previously have. 

So, immediately we have a quantum computer working at any sort of scale, we will have a problem. My view here is that this is a long way off, because of the many engineering problems that these sorts of computers present. Even so, the problem is worth considering.

A short exposition of the issue is presented on the Bitcoin Optech website. If that’s a bit techy for you, this report by Deloitte is written in something approximating English and might be more helpful. 

Despite the fact that we are some way from having such a machine, this problem is already being considered in some detail. A solution was proposed this week by anonymous contributor, ‘Hunter Beast’. I’m fairly sure that is not his or her real name but Bitcoin rather works like that, lots of anonymous people spending their time on what in fact are very hard problems. It’s amazing when you think about it.

The main point of the proposal is to change the signature key used by bitcoin to something rather harder to crack. As proposed, this is just a soft fork to the code which is much easier to bring about than a hard fork which requires all users to change their software.

So this solution is partial only, it addresses how it could be done with many open questions about the practical applications. Nonetheless, people are thinking about it and there is a solution when the time comes. Incidentally, I’m backing some random group of enthusiasts with deep understanding over those being showered with government money to come up with the first working machine. “Retired Vicar, cracks encryption” seems more likely than anything else at this point. 

In the end, it will boil down to this: can we make the encryption problems harder at a faster rate than quantum computers can improve? Right now, yes. In 100 years? I do not know.

Euro-Trash

Things were bad. Now they are worse. The French elections will now take place in three weeks time; essentially Macron has called the bluff of the French people. “You pretended not to like me because it was just the European elections, let’s see how you vote in a National election”. It’s a gamble.

The pressure will come on the ECB over the next few weeks because the market is not keen on the potential makeup of the new French government. It will likely include agitators for a complete withdrawal from the Eurozone. French bond yields are spiking as a result; not crisis levels but heading north.

It’s a very difficult situation for the ECB now. As Robin Brooks points out below, the ECB intervened heavily prior to the last Italian election which calmed economic nerves and helped the more radical Meloni get elected.

Essentially they simply carried out their objective of normalising bond yields across the Eurozone. If they do the same this time around they will directly assist Marine Le Pen, who is not opposed to France leaving the European Union. Do you help someone who wants to kill you, even if you are legally obliged to do so?

Suffice to say it’s a difficult choice, debt crisis or political crisis. I believe they will choose a short term debt crisis, hope Le Pen is not as successful as she was recently in the Euro elections and then move to calm nerves after the election. In so doing, they would prove the point that they are in fact very much a political institution.

We’re down to 1.07 EUR/USD. It’s going to be a rough few weeks for Lagarde and co.

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