5MF (WEEK 10): LIFE AFTER SILVERGATE, BIDEN’S TAX PROPOSAL, NEW RECESSION INDICATOR
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The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.
Let’s see what’s going on this week:
- Powell’s Testimony Reveals Another Known Recession Indicator
- Biden’s Tax Proposal: How Will it Impact You?
- Judge Siding with Grayscale in Case vs. SEC: Spot Bitcoin ETF?
- Silvergate Dies — What’s Next for Crypto
- Missouri’s Proactive Bill to Protect Crypto Mining
Powell’s Remarks at the Senate Banking Committee Testimony Roast
- Federal Reserve Chair Testifies on Monetary Policy Report (link)
Disinflation Over Employment
On Wednesday, the Federal Reserve Chair, Jerome Powell, came under heavy scrutiny at the Senate Banking Committee.
Politicians across the political aisle used the opportunity to grill Powell on his intent to continue raising rates to combat inflation.
Following January’s Personal Consumption Expenditure (PCE) increase by +0.6%, Powell recalibrated his stance, warning that a hike acceleration, higher for longer, may be warranted.
The Fed increased the money supply (M2) by an unprecedented +38.5% from 2019 to 2021. This required equally intense interest hikes in 2022, to neutralize the inflationary effect, creating the fastest hike cycle in the last 40 years. Image courtesy of the Federal Reserve.
Senator Elizabeth Warren was particularly worried about the hikes’ effect on (un)employment.
“According to the Fed’s own report, if you continue raising interest rates as you plan, unemployment will be 4.6% by the end of the year, more than a full point higher than it is today.”
This percentage point in the unemployment rate would translate to 2 million people out of jobs. More importantly, Warren pointed out that in all 12 instances in US history when such an increase occurred, the economy entered a recession.
Powell responded by essentially rephrasing the old Star Trek pearl of wisdom — ‘the needs of the many outweigh the needs of the few’.
“Inflation is extremely high and it’s hurting the working people of this country badly — all of them — not just 2 million.”
Powell further noted that, even if unemployment would go up to 4.5%, it would still be “well better than most of the time for the last 75 years”.
Indeed, the present unemployment rate of 3.4% is the lowest since 1969. The Fed’s dual mandate clearly outlines price stability and low unemployment as top missions. Of the two, the latter will have to take a back seat.
Powell has been hinting since last May that unemployment would have to go up for inflation to go down to the original 2.2% target.
After all, more unemployment, less spending. Less spending, lower inflation (in theory). The trick is to pull this off without causing a recession, which may not be feasible if the terminal fed funds rate goes above 6%.
Historical data on how much hiking would be optimal to bring inflation down is quite clear. It has always been well above the core PCE (without food or energy) inflation rate.
And when it wasn’t in the 1970s, the botched monetary policy unleashed historic inflation levels.
Image credit: Fidelity Investments
The Fed will make its next hike determination on March 22. As expected, the target rate probability flipped from a previous 76% chance for a 25 bps bump to now a 61% chance of a 50 bps bump. Like clockwork, the reinvigorated talk of accelerated hikes plunged the markets into negative territory, affecting both stocks and crypto.
The Powell effect on full display over the week. Bitcoin’s steeper drop was compounded by Silvergate’s official demise. Image credit: Trading View
For the last decade, the Fed has been using talking itself as a tool to spook the market and create such liquidity traps. But investors are less confident than ever if Powell is blustering.
Moving forward, Powell noted three combined major factors that will set the scale at the next FOMC deliberation — Friday’s jobs report, Consumer Price Index (CPI) and the Producer Price Index (PPI).
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Diving into Biden’s Tax-the-Rich Budget Proposal
- Biden to Urge 25% Billionaire Tax, Levies on Rich Investors (link)
Debt Needs to Be Fed
At the same Wednesday’s Senate hearing, Powell uttered a telling admission. If you’ve been following Tokenist newsletters for at least three weeks, you wouldn’t be surprised one bit. Powell said this to Senator John Kennedy:
“We’re on an unsustainable path. Debt is not at an unsustainable level, but the path is unsustainable — meaning it’s growing faster than the economy, meaningfully faster than the economy.”
So…the road ahead is crumbling to a cliff, but the present ground is kinda paved just before the cliff?
In technical terms, Powell is saying that the government’s ability to repay its debt is fine. Specifically, that tax receipts revenue is above the US interest expense, now exacerbated with Fed hikes.
But how can this be true if the US interest expense is already above 100% as a % of US tax receipts?
Image credit: @peruvian_bull
The future outlook is quite gloomy, as the US government’s debt payments alone would constitute greater cost than spending on the country’s societal pillars:
Interest on national debt is poised to accumulate to $10 trillion total by the end of the decade. Image credit: Peter G. Peterson Foundation
Therefore, unless the Fed cuts rates eventually, the government will have no option but to either raise taxes or cut spending. The Biden admin is signaling for the former in a big way, by proposing a $6.8 trillion budget for 2024, adding a $1.8 trillion shortfall next year.
Here are its key highlights:
- Personal income tax rate up to 39.6%, from 37%, applied to single taxpayers making over $400k, or couples making over $450k annually.
- Minimum 25% tax on Americans making over $100 million, from 8%.
- Raise the corporate tax rate from 21% to 28%.
- Tax capital gains the same as regular income for those earning over $1 million, going up from 20% to 39.6%. Yes, this includes Bitcoin because it is treated as a commodity (subjected to capital gains tax).
- Quadruple tax on companies’ stock buybacks, from 1% to 4%.
- Eliminate certain tax breaks for crypto investors, such as wash selling where investors sell assets at a loss, making them eligible for tax breaks, and then immediately repurchase those same assets.
- 30% tax on electricity used in cryptocurrency mining.
The last bit hasn’t been received well.
Of course, given that Republicans control the House of Representatives, these provisions are likely to fail as they go through legislative gears. Nonetheless, the budget holds far-reaching starting points for negotiation.
Judge’s Surprising Stance as Grayscale Brings SEC to Court over Spot Bitcoin ETF
- US Court Questions SEC’s Rejection of Grayscale’s Bitcoin Fund Proposal (link)
SEC’s Arguments Exposed as Less-than-Coherent
Since 2013, the crypto industry has been waiting on the SEC to approve a spot-traded Bitcoin ETF.
This would give exposure to Bitcoin without directly buying it. Investors could access BTC without actually buying it and storing it.
Though, there are several different types of ETFs. A spot-traded BTC ETF provides exposure to BTC ‘on the spot’ — meaning, at the current price of BTC.
In contrast, the present institutional landscape focuses on Bitcoin futures ETFs, involving Bitcoin derivatives. This so-called ‘paper Bitcoin’ doesn’t really move Bitcoin’s price because no on-chain transactions are happening.
This distinction is critical for multiple reasons:
- Both retailers and institutional investors would gain easier exposure to Bitcoin through a spot ETF. This is because ETFs are considered less riskier than futures, as derivatives on the CME exchange revolving around speculative long and short positions.
- Unlike more complex futures contracts that require rollovers and are settled in cash instead of BTC, spot-trading Bitcoin ETFs are more liquid. That’s because futures trading typically incurs higher fees and higher margins, resulting in lower market depth (fewer buy and sell orders).
- Boosted legitimacy — a spot Bitcoin ETF would mark a regulatory milestone, attracting investors and spiking demand. This would then spill into the entire crypto space.
Moreover, futures contracts are priced differently than spot Bitcoin, so this makes it difficult for investors to gauge the true value of Bitcoin. In this light, can you guess the stance of the Securities and Exchange Commission (SEC)?
The regulatory watchdog failed to approve a single spot-traded Bitcoin ETF. Simultaneously, the SEC approved at least 10 futures-trading Bitcoin ETFs.
But — the SEC’s hand may be forced soon.
After the SEC rejected yet another spot Bitcoin ETF application, through the Grayscale Bitcoin Trust (GBTC), Grayscale Investments brought the commission to court. Grayscale argued that the same fraud-preventing mechanisms applied to Bitcoin futures-based ETFs, could be erected for spot-trading.
Judge Neomi Rao agreed.
“it seems there’s quite a bit of information here on how these markets work together, and the SEC has not offered any explanation… that the petitioners here are wrong,”
She continued to doubt SEC’s reasoning.
“The Commission really needs to explain how it understands the relationship between Bitcoin futures and the spot price of Bitcoin…it seems to me that…one is just essentially a derivative. They move together 99.9% of the time. So where’s the gap, in the Commission’s view?”
Experienced legal tacticians James Seyffart and Elliott Z.Stein now believe the SEC’s rejection of GBTC is likely to be voided.
Image credit: Bloomberg Intelligence
Some 10 years after its first attempt, the US might see a spot-traded Bitcoin ETF afterall.
Silvergate is Gone. What’s Next for Crypto?
- Crypto-Friendly Silvergate Bank To Be Liquidated by Parent Company (link)
Y’all Got Any More of them Crypto Banks?
As forecasted last week, Silvergate bank is no more.
Silvergate Capital announced it will close the bank on Wednesday, with assets liquidated and operations shut down. This includes the halt of Silvergate Exchange Network (SEN), the critical 24/7 USD rail between customers and crypto exchanges.
Thankfully, this is not another FTX situation where billions of funds are gone. Silvergate intends to fully repay all deposits.
As ever, Twitter is abuzz with speculation on the true causes of Silvergate’s downfall.
FHLB refers to the Federal Home Loan Bank of San Francisco that issued a $4.3 billion loan to Silvergate. The bank lost $1 billion in Q4 ’22 as it was forced to prematurely sell debt securities to repay an oddly recalled FHLB loan. Image courtesy of Twitter.
The general consensus however, is that the collapse of FTX ultimately led to Silvergate’s downfall.
Given the significant role played by Silvergate and its SEN, what’s next for crypto?
With Silvergate out of commission, this leaves Signature Bank in play, the other primary bank for crypto companies based in New York. Signature is the same bank that severed ties with Binance and restricted SWIFT transactions under $100k, prompting the Kraken exchange to pull out.
At the same time, Coinbase switched to Signature last week to process fiat deposits and withdrawals. As of March 1st, Signature Bank reported a $826 million drop in spot deposit balances owing to a “deliberate decline in digital asset client related deposits of $1.51 billion.”
Ominously, Signature Bank concluded the highlights by emphasizing that “Signature Bank does not trade, does not custody, and does not lend against or make loans collateralized by digital assets.”
Less it meets Sen. Warren’s wrath, perhaps?
The bigger question is, with fiat processing for exchanges on shaky legs, how does it affect crypto liquidity?
Quite predictably. The market depth (availability of buy and sell orders) on US-based exchanges dropped into negative territory, while international exchanges saw a surge.
Image credit: Kaiko
Outside of Signature, some big players are now looking for new fiat rails in Switzerland.
Digital Asset Capital Management, a crypto hedge fund holding $400 million, is looking into the pioneering Alpine nation due to its positive reputation with crypto banking licenses. SEBA Bank AG is the first beneficiary.
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Bill of Miner Rights
- Missouri Passes Bill Protecting the Rights of Cryptocurrency Miners (link)
Missouri Goes Crypto Proactive
Did you know that the EU delivered the Corporate Sustainability Reporting Directive (CSRD) in January?
Sure, it sounds dry but hang with me for a sec.
The directive is the precursor for making companies more reluctant to engage in any ventures that could be deemed as sustainability-deviant. The easy target here of course: crypto mining.
This movement isn’t happening just in the EU, but all over the world. Look at Biden’s latest budget proposal, with a 30% tax on electricity used in crypto mining.
The US State of Missouri has already forecasted where this is going, and they’re working on legislation that would protect miners within the state.
On Tuesday, Missouri State legislators amended the Digital Asset Mining Protection Act, aimed at protecting both business mining operations and home miners.
Having passed the Missouri House committee before going for the final House vote, the bill bars local or higher authorities from restricting crypto mining, as long as they are in the designated industrial zone.
As for home miners, they can do so in residential zones. In both cases, crypto miners are protected from discriminatory energy rates, such as the recently proposed 30% tax hike on electricity.
Further, home miners are exempt from being treated as ‘money transmitters’. For those iffy on Bitcoin’s energy usage, Senator Cynthia Lummis had an enlightening 5-min exchange at this week’s Hearing on Crypto-Asset Mining and Environment.
Tweets of the Week
NEW: An alarming number of Americans are already struggling, even if they have jobs
20.5 million are behind on utility payments
Nearly 25 million people are behind on their credit card, auto loan or personal loan payments. We haven’t seen that since 2009
Currency debasement is to blame for the lack of home ownership by the millennial generation.
Home prices in 2022 are over 7x median income.
WARNING: the Money Supply is officially contracting. 📉
This has only happened 4 previous times in last 150 years.
Each time a Depression with double-digit unemployment rates followed. 😬
Silicon Valley Bank, November 2021 peak to today…
Share price: $755 → $106 (-86%)
Market Cap $44 billion → $6.3 billion
If you’re keeping score:
White House announces plan to add a 30% tax to energy used to mine $BTC or any other digital asset.
NYAG sues KuCoin and dubs $ETH a security.
Elizabeth Warren celebrates the Silvergate $SI bank run and liquidation.
Gensler pens op-ed and tweet claiming nearly all of crypto is out of compliance.
**all within 48 hours.