FIVE MINUTE FINANCE: THE CHINA-US TREASURY RELATIONSHIP, EXPLAINING BURRY’S NEW BET, MORE

Five Minute Finance

Published in

Coinmonks

11 min readAug 18, 2023

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:

China’s Fragility Gets Worse
What Do Burry’s Bets Against the Market Mean?
Coinbase Opens Paper BTC and ETH Floodgates
AMC to Cease APE Trading — but Apes Aren’t Happy
PayPal Streamlines Crypto Assets

China Pumps Huge Risk into Global Economy

China’s $3T Shadow Banking Exacerbates Contagion Risk (source)

Global Financial Crisis 2.0 in the Making?

Global systemic financial risk is ramping up.

Remember the Great Recession of 2008?

Credit conditions were lax in the housing market. Subsequently, poor credit was transformed into securities, enabling banks to issue more loans and generate more returns. This was the final cog that broke with Lehman Brothers and paved the way for the Great Recession.

Well, this scenario is eerily similar to what is happening in China right now.

And if it’s happening to China, the world’s manufacturing and consumer hub (~19% of global GDP), the effects are bound to spill over.

China is even more vulnerable due to its GDP composition. Unlike most countries, nearly 30% of China’s economic output goes to real estate,

a trend that intensified post-2008.

Image courtesy of Financial Times.

And guess what just happened?

Recently, Evergrande, China’s second-largest property developer, declared bankruptcy, specifically Chapter 15 protection against US creditors. With liabilities approximating $330 billion, it’s the world’s most indebted developer.

But there’s more.

China is known to have an ominous-sounding ‘shadow banking sector’, estimated to be worth around $3 trillion. This is equivalent to the UK’s entire economy.

This system is composed of trust companies and wealth management products (WMPs), typically less regulated than traditional banking.

And what does a less regulated system do?

Of course, it takes riskier loans and offers higher yielding products.

And because China’s economy is so heavily geared towards property development, trust companies have massive exposure to it.

Now, red flags are starting to emerge as signs of property value depreciation is reminiscent of the period leading to the Great Financial Crisis.

70% of China’s average household wealth is tied into properties, now running a 17-month depreciation streak across smaller cities. Image courtesy of Bloomberg.

Due to this exposure to a falling market, China’s trust companies as “shadowy banks” are now running into a brick wall — dried up liquidity.

Case in point: Zhongrong halted 30 yield products slated to deliver $5.4 billion this year to various Chinese businesses.

Zhongrong is a part of China’s own mini-BlackRock, Zhongzhi Enterprise Group (ZEG), holding $138 billion in assets, equally exposed to property development.

It is this cascade that is causing troubling news from China this week:

Suspension of official youth jobless data reporting.
Discouraging economists from public discussions about China’s economic landscape.
Restricting investment funds from selling equities, raising questions about their true value.

The global market is spooked. Hedge funds are pulling out of China en masse, causing the largest sell-off spike of Chinese equities in the last five years.

But wait, it could get worse.

Who holds US government debt, monetized as US Treasurys?

After Japan, China is the largest holder.

For three consecutive months, China has been selling US Treasurys, now at $835.4 billion from $859.4 billion in January.

Image courtesy of SCMP, source: US Treasury.

The crux of the debt-based monetary system hinges on nations purchasing US debt.

If countries need to shore up their losses by selling US debt, then the US is in deep trouble. This could trigger a surge in interest rates, hindering borrowing capabilities and thereby exacerbating deficits and stalling economic growth.

However, a silver lining emerged when Belgium and the UK stepped up and increased their US Treasuries holdings. The US Treasuries selloff could have likely been worse without Janet Yellen’s conciliatory visit to China in July:

“I hope that we can work together to address the challenges that we face and to build a more stable and productive relationship between our two countries.”

- US Treasury Secretary Janet Yellen

It remains to be seen if China’s troubles need further US debt sell-off. The Fed will always buy it. Counter-intuitively, that would make the dollar stronger because bond yields would go up.

With the global economic landscape in its current delicate state, the dollar is poised to be a refuge currency for some time. Such is the advantage of preserving the global reserve currency (GRC) status.

The Big Short Star Hackles Animal Spirits

Is Dr. Michael Burry Shorting the US Economy Again? (source)

$1.6 Billion Bet against the US Stock Market

The week abounded with explosive headlines along the lines of “Michael Burry bets against the US stock market.”

What exactly happened?

First off, Burry is a heavyweight investor, deservedly so. After all, he did short the US housing market, foreshadowing the Great Recession of 2008.

This not only earned him $100 million in personal profits, and over $700 million to his Scion Asset Management clients, but it marked him as a contrarian with foresight.

In the stock market, this carries a lot of weight. So much so that you get Christian Bale to immortalize you.

Given the present turbulence in China’s over-leveraged housing sector, it’s plausible this influenced Burry’s Scion Asset Management to stake the following positions as put options:

$739 million in put options against Invesco QQQ Trust ETF, an exchange-traded fund composed of Nasdaq 100 companies.
$886 million in put options against S&P 500.

In essence, Burry has hedged a $1.6 billion position against the US stock market. However, the Form 13F filing itself is not that clear.

It does show exit from China exposure (Alibaba and JD.com no longer present from previous 20% portfolio exposure). But this required filing has a 45-day reporting lag to the SEC.

The filing also doesn’t show puts’ expiration dates, so we could be looking at an outdated bet.

Moreover, predicting stock market movements is more art than science. In fact, even inverse-memed Jim Cramer made the right call at the end of January when he said the market is in bull mode.

At the exact same time, Michael Burry took the doomsday approach, only to temporarily delete his Twitter account soon after.

Image courtesy of Twitter.

All said, Burry’s disclosed bet may be outdated. The trouble is, China goes out of its way to obfuscate the true state of its economy, so no one really knows the extent of the possible spillover.

Over the month, Nasdaq 100 (NDX) and S&P 500 (SPX) performance doesn’t look so hot.

Image courtesy of TradingView.

Could Burry’s disclosed position have precipitated this decline?

It’s worth considering John Maynard Keynes, the creator of modern economic theory, referred to ‘animal spirits’ to capture the unpredictable nature of markets.

More Paper Bitcoin Incoming

Coinbase Can Now Offer Bitcoin and Ethereum Futures in the US (source)

Coinbase’s Bottom Line Bolstered — but at What Cost?

Major bullish news for Coinbase ($COIN).

Coinbase has recently secured a green light from the National Futures Association (NFA), enabling qualified US customers to dive into the world of crypto futures trading.

Coinbase is now a registered Futures Commission Merchant, offering Bitcoin (BTC) and Ethereum (ETH) futures contracts.

But what does this signify for the broader cryptocurrency market?

The answer lies in the nature of futures. As the name suggests, this type of contract allows people to speculate on the future price of the underlying asset. The key word is “underlying”.

This means that trading in futures doesn’t spark actual blockchain transactions because these contracts are merely derivatives of the principal asset.

For example, let’s say you buy a futures contract for BTC. The contract would set the BTC price at $30,000 at a delivery date of August 20th. With these conditions set, you would be obligated to buy 1 BTC at $30,000 on that date -August 20th.

And what happens if the BTC price drops? The contract seller would make a profit.

Otherwise, the contract buyer would have the upper hand.

The catch? No actual BTC exchanges hands. These contracts are settled in cash, both profits and losses.

But if that is the case, how do we get an accurate snapshot of the market — supply and demand? There’s a potential for misconceiving liquidity, potentially misleading investors about the actual market demand.

Additionally, this realm heavily tilts in favor of institutional investors, given their financial muscle.

In practice, they could manipulate the market by shorting retailers. Speculatively, even platforms like Coinbase might be in a position to wield such influence.

Coinbase Global filing to the Securities and Exchange Commission (SEC).

This is a double whammy for Coinbase. First, they sell crypto. Then, they open long or short positions against customers’ own positions. Presumably, it evens out at the end of the line.

But if Coinbase is doing it, what about anonymous whales?

They have ample motives to manipulate paper demand via futures, buy the dip, and then drive the price up with long positions.

They already know that short-term holders would hurry to sell at a loss, as it just happened on Thursday when Bitcoin dropped to $26.2k.

Image courtesy of glassnode.

The crypto market liquidated ~$1 billion on Thursday, as open interest (total number of futures and options contracts that have yet to be settled) collapsed.

Image courtesy of TradingView.

So, is more paper BTC and ETH bearish or bullish?

While this move bodes well for Coinbase’s prospects, it may introduce volatility and uncertainty to the broader crypto market.

Perhaps this is why a physical avenue in the form of a spot-traded Bitcoin ETF has been forestalled for so long.

Enjoy 5MF? Click to forward it to three friends.

Adam Aron in Hot Ape Water

AMC’s APE to Cease Trading from 25th Aug (source)

Forced Dilution as Productive Consolidation?

The popular meme stock is having a controversial week.

The catalyst for this controversy was a recent verdict by the Delaware Chancery Court on Friday. The court endorsed AMC’s initiative to implement a reverse stock split, implying that AMC Preferred Equities (APEs) will cease trading post-August 25th.

Originally, AMC Entertainment launched the APEs in Q2 2022, offering them to all AMC stockholders as an innovative means to manage debt repayment. And it has been successful at doing that, having raised $435 million in APE sales.

The controversy is that APEs were issued at a 1:1 ratio to AMC shareholders, colloquially referred to as “apes”.

The fresh reverse split, however, adopts a 1-for-10 approach, leading to a noticeable disparity in the AMC/APE price dynamics since the court’s decision.

Image courtesy of TradingView

AMC CEO, Adam Aron, is not budging. He envisions a brighter trajectory for the theater chain by streamlining its equity, emphasizing the inefficiencies observed with the current system at stock brokerages.

As for stock the 1-for-10 stock split reversal, he rationalizes:

“If someone takes ten $1 bills from your left hand but puts one $10 bill in your right hand, would you be losing 90% of your money?”

-Adam Aron, AMC CEO in an open letter to shareholders.

Investors are not budging either, tapping into lawfare.

In their quest for justice, they initiated legal proceedings on Wednesday, lodging a class-action lawsuit. Their primary grievance: the belief that the new conversion model undervalues APE holders.

PayPal Streamlines Stablecoins alongside Cryptos

PayPal’s Cryptocurrencies Hub to Start Rolling Out Soon (source)

PayPal’s Total Crypto Integration at Hand

CashApp has been quite successful for Jack Dorsey, the founder of Twitter.

In Q1, it racked up $4.99 billion, up +26% year-over-year, of which $2.16 billion belongs to Bitcoin.

Image courtesy of Block shareholder letter.

PayPal is making waves in the crypto sphere.

After unveiling PayPal USD (PYUSD) stablecoin last week, the largest payment processor is moving into Cryptocurrencies Hub. This represents a holistic integration of PYUSD, standard PayPal accounts, and a variety of crypto assets.

Here’s a quick breakdown of the Cryptocurrencies Hub:

Visibility and Access: At a glance, Cryptocurrencies Hub shows crypto balances and access — buy, sell, receive, send.
Flexibility: They are then convertible between PYUSD and any other supported crypto.
Eligibility: To become eligible for Cryptocurrencies Hub, users’ PayPal accounts must be in “good standing”.
Integration: Same identity verification procedures apply, including government-issued ID.

If all goes through, PayPal will automatically link Cryptocurrencies Hub to your personal PayPal account.

However, there’s a cavet: Paxos Trust, PayPal’s stablecoin issuer, will also be the custodian of your crypto assets.

While “not your keys, not your crypto” would then apply, this is actually quite reassuring for most customers.

Just like PayPal itself, Paxos Trust is the most regulated blockchain-based firm in the US, under heavy scrutiny of the New York Department of Financial Services (NYDFS).

In essence, the fusion of mainstream financial platforms and cryptocurrency is reaching an unprecedented zenith.

Is it a sign of bullish times ahead for the market?

Tweets of the Week

$1B in LIQUIDATIONS! $800M REKT in the last hour
160K accounts gone!
-12% $BTC candle $24K
$ETH below $1500
$SOL below $20
Wicks will get filled!
What a day!

@CryptoEmy_

The Base Effect
Less than a week after launching its beta on Base, @friendtech
has more users than all of Ethereum’s largest NFT platforms combined.

@MessariCrypto

China looks to be ruling out the kind of household focused stimulus that many (myself included, but also the Dr. Cai and others in China) believe would be most effective —
largely, in a sense, on ideological grounds …

@Brad_Setser

SpaceX selling #BTC news came AFTER the dump
It was not the catalyst
And that news is NOT confirmed
And even if they did sell, it was not today, it was based on a past report
Todays drop was due to China economic news & U.S. Stock Markets bearish pressure on risk assets

@KevinSvenson_