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Fed day

“In the end, the market sets the interest rate”

I generally write this column early in the week and I started on Monday when I had this to say:

So we got the predictable cut of 25bps, everyone seemed relieved. The market was happy because what they thought would happen, happened and we can all head into the weekend relaxed. “I was right” etc. 

That’s not what happened though. Rather than delete it I thought, I’ll just leave it because something unexpected has happened. 50 bps ended up being favourite by the time we got to Wednesday this week but I guess people might be wondering why. It’s not like inflation is well below the 2% target. Unsurprisingly, stocks were all over the place as people tried to work out what the Fed knows that we don’t.   

Perhaps it is time for a gentle reminder too, that the Fed controls only the short term rate. Powell is aware of that and he continually remarks the Federal Government spends too much. 

We know what happens when the government does not listen. In the UK, former Prime Minister Liz Truss and her Chancellor tested the water back in 2022. Their radical tax cutting plan meant (if it didn’t work) Britain would be required to borrow a lot more. The reaction of the market was absolutely savage. Bond yields went through the roof and instantly made some of Britain’s pension funds insolvent. 

Liz Truss became Britain’s shortest serving Prime Minister, ignominiously lasting 49 days. Her Chancellor lasted a mere 38 days. It wasn’t that they were bad people. It was that the market sets the interest rate, and if it has to sack a few politicians to make that happen, it does. 

What of Bitcoin though? It barely moved amongst the noise of Wednesday. I view the larger cut as good news. Aside from anything else we know the American government cannot sustainably finance itself at 4-5%, so we can only pretend high rates for a while. We further know that if rates are cut it “helps the economy” but causes higher inflation for longer. That will erode the value of the American debt stack more quickly. The whole mirage can continue for a while yet; and it’s all to our net benefit. 

This strategy was rather neatly laid out in a Russell Napier podcast I shared a few years ago about financial repression. In essence, it involves selling as many bonds as possible while simultaneously depressing the interest rate and pretending inflation is lower than it is. That’s where we are today. It’s exactly why Satoshi Nakamoto invented bitcoin. Here is Satoshi in 2009.

It was true then. It is true now. 

Lavish spending

As if to emphasise the point, viral tweet of the week came in appropriately lavish form. 

A single month deficit in the US of $0.4 trillion. As usual it’s slightly misleading because this is not a big month for tax collections and spending continued as usual. All the same, over $1,000 for every American was borrowed in August. 

Too risky

A common question from bitcoin-users arises around “can I borrow against my bitcoin”. At present this is rather difficult to do. To address this issue Coinbase has launched its cbBTC, what is known as a wrapped version of bitcoin. It works thus:

• Bitcoin is converted to cbBTC and the Bitcoin is held in custody for the client

• cbBTC is issued to the client

cbBTC is issued on the Ethereum blockchain. Essentially it makes bitcoin more interoperable with other protocols on Ethereum. Many users want that because they can ‘stake’ the assets in protocols which earn interest. Staking protocols like mellow.finance provide users with such opportunities (which are in my view far more risky than the 4.3% they pay).

This all introduces new risks of course. The user now bears the custody risk with Coinbase (albeit they have a ten year record there which is rather good). You now have a new asset they have to take care of. If you stake these assets in protocols like mellow, they can go wrong and you will lose your bitcoin if you don’t pay Coinbase back. 

Not a particular fan of this product but it emphasised something to me; the purest collateral in the world is bitcoin. Why? Because custody is verifiable, you can only pledge it once and the lender has absolutely certainty of that. I expect this market to evolve into something far more sophisticated. Currently it’s “pledge your collateral for digital cats”. I expect very soon it will be for houses, cars and more.  

When that happens, bitcoin will be on the doorstep of the retail banks. I doubt they will like it.  

Meme of the week

Euro-Trash

“I am glad to be back in the press room. A very warm welcome to you,  Mario Draghi. Thank you very much for being here today to present your much expected report – the report on the competitiveness of the European Union. I think no one was better placed than you, dear Mario, to carry out a thorough analysis of Europe's competitiveness.”

“Dear Mario” was once the President of the ECB during the Euro’s greatest crisis where he gave birth to the catchphrase “whatever it takes”. He was appointed by the European Commission to produce a report on European Competitiveness, or lack of it. The report is really good and doesn’t pull any punches. Some of the highlights below from the section on AI show that the EU has managed to almost totally outlaw cloud computing and AI within its borders. 

“The EU cloud services market is also largely lost to US-based players.”

“Finally, while the ambitions of the EU’s GDPR and AI Act are commendable, their complexity and risk of overlaps and inconsistencies can undermine developments in the field of AI by EU industry actors.”

Why? Well it's not possible to comply with the legislation without incurring overwhelming expense. No business in their right mind would set up in Europe and Mario says exactly that. 

Looking forward too, nextgen tech has absolutely zero grounding in Europe either:

Europe suffers from very limited private investments in quantum technologies vis-à-vis other geo-blocs.

The most interesting feedback though came from the Dutchman known as @levlesio on Twitter. He is rather famous for being a one-man software engineer that churns out a new money making website every few weeks. Levels had a one-on-one call with Mario and pointed out that it is impossible in Europe to get a pan-national compliant company. Maybe you incorporate in France and in theory that should be acceptable in Holland and legally, it is. In practice though it’s not the case. 

How do you get a “European Company”? His suggestion was there should be a website where you can register your EuroCo. Get a company, get a bank account and be good to go throughout the Bloc and if your revenue is less than $10m you can ignore all their regulatory madness. It goes to the heart of the matter, talent is simply going to gravitate towards wherever you can do business with the minimum of fuss. 

Here was his feedback on AI and technology generally which I thought was excellent. 

Draghi’s prescriptions for Europe though, are more of the same. “Investment at the EU level”, which means issuing bonds at the EU level, something Europe currently cannot do. He points out that most European governments have no more capacity to borrow and so perhaps the EU could do it for them. It seems to me given the enormous spending of European governments over the last 30 years has left them where they are, how could more of it be any good for anyone? 

They got advice from a guy who represents the modern world more than anyone I know. He has a $2000 laptop and makes $750,000 every month. He is young and talented, he is European (but left), they need 100,000 like him. He told the EU what to do. 

How did they respond? With the usual madness: “we need to build an electric railway from Brussels to Gibraltar, it will have solar panels, EU-AI and cloud-hosted GDPR compliant ticket machines. With this new train, we will win!.

In fact, they are losing and all the signs are they will continue to lose. 

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