Macro Is Back!
For the past nine months, overall macro conditions have taken a back seat to the idiosyncratic failures (FTX, Luna/UST, BlockFi, Genesis) and success stories (ETH 2.0 Merge, Layer 2 launches) that drove most of the price action. But macro regained its position behind the wheel over the past few weeks. The banking crisis and subsequent policy response have taken center stage—only this time, it is affecting digital assets positively at the expense of other asset classes. A quick look at BTC price versus the regional banking ETF (KRE) tells you all you need to know about the winners and losers since the first week of March.
While digital assets gain, macro investors are dipping back into the recession playbook:
The Fed has lost credibility. The 2-year Treasury yield has fallen from an intra-month high of 5.08% to its current 3.75% yield, which is a startling enough move as it is, but even more dramatic when you factor in the Federal Reserve’s decision to raise its benchmark rate 25 basis points to 5.00% at the same time. That’s the market’s way of telling you it’s calling the Fed’s bluff. The Fed Funds rate started the month below 2-year yields, and is currently 125 bps higher… this spread is now the largest between the Fed Funds rate and 2-year Treasury yield since 2007 and has historically led to quick and aggressive rate cuts.
Spread between Fed Funds Rate (upper bound) and 2-year Treasury Yield
Further, the “Fed put” is back in play as assets on their balance sheet increased $392 billion over the last two weeks, wiping out 60% of the Quantitative Tightening since last April.
Not to be outdone, the Treasury has also lost credibility. After joining the Fed and the FDIC in their explicit defense of depositors of a select few failed regional banks, Treasury Secretary Janet Yellen can’t decide whether to offer full support explicitly or instead avoid moral hazard. In the last 3 days, Yellen has flip-flopped multiple times on her position regarding an increase in deposit insurance. And Yellen’s previous remarks on the state of the economy haven’t aged well. In 2017, she confidently stated that she didn’t believe we would see another financial crisis “in our lifetime.”
And lest we forget about Credit Suisse—a forced shotgun marriage to UBS left shareholders and many CoCo bondholders dead or nearly dead, but the Swiss bank has been a problem child for at least 15 years. As Bloomberg reported:
“Credit Suisse’s failings have included a criminal conviction for allowing drug dealers to launder money in Bulgaria, entanglement in a Mozambique corruption case, a spying scandal involving a former employee and an executive and a massive leak of client data to the media. Its association with disgraced financier Lex Greensill and failed New York-based investment firm Archegos Capital Management compounded the sense of an institution that didn’t have a firm grip on its affairs. Many fed up clients have voted with their feet, leading to unprecedented client outflows in late 2022.”
With this backdrop—a Fed that has lost control, a Treasury secretary who has lost touch, and an accelerating global banking crisis—it’s perhaps not surprising that crypto app downloads jumped 15% last week while those of banking apps have fallen around 5%. The market is showing its lack of confidence in our governments and financial systems via a renewed interest in a potential alternative—which is hilarious when you consider that this increase in crypto adoption is happening concurrently with the SEC’s war on digital assets. The SEC most recently issued an investor alert urging caution when investing in digital assets, which reads fine and accurate in isolation—you should be cautious when investing in digital assets. But the timing of this statement, amidst a series of other enforcement actions year-to-date, seems disingenuous considering all of the other much larger problems in the global financial markets. Meanwhile, the SEC also sent Coinbase a Wells Notice, setting the stage for an epic court battle between two obstinate behemoths.
Try as the SEC, Treasury, White House, and Fed may, there’s just no way to put the genie back in the bottle at this point. The bull case for crypto is on full display as banks shutter, and their depositors and investors hit the eject button. Granted, this will cause operations and the flow of capital to be even more cumbersome for digital asset participants as well. We are already starting to see the effects as liquidity is sucked out of the digital assets spot market. However, the real battle isn’t between digital asset investors and regulators but between banks and stablecoin issuers. Stablecoin issuers still depend on banks to keep their reserves, and banks have been very resistant to help a sector that is trying to put them out of business—which, of course, makes sense. Arthur Hayes wrote a great piece at the end of last year about the friction between banks and stablecoins before any of the banking failures commenced. The very heart of the problem is that rising rates is great for stablecoin issuers since they keep all of the interest income themselves and pass none of it on to token holders, whereas rising rates cause a real problem for banks who lose depositors when they don’t pass along the interest, and also become underwater on their longer-term loans.
“... do you understand why banks HATE these monstrosities? Stablecoins do banking better than banks since they operate on almost 100% profit margins. Any time you read FUD about this or that stablecoin, just remember: the banks are just jealous.”
And getting rid of current iterations of stablecoins in favor of a Central Bank Digital Currency (CBDC) isn’t much better. In a 2022 report, McKinsey estimated that globally banks stand to lose $2.1 trillion in annual revenue if a successful retail CBDC is introduced.
The reality is even though we are trying to build a digital infrastructure that runs in parallel to the existing financial system, the ecosystem is still very intertwined with the traditional banking system. So, ironically, trying to kill crypto while saving the banks ultimately saves crypto too. It’s a win-win right now for blockchain enthusiasts.
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