The Year Ahead In Crypto
Comment of the Day

March 24 2022

Commentary by Eoin Treacy

The Year Ahead In Crypto

This note from Panterra Capital may be of interest to subscribers. It is more of a retrospective look at what happened in 2021 but includes some interesting copy on the broad macro environment. Here is a section:

The next step in their complicated minuet – after “taper” comes “run off”.  That’s not going to get it done either.  The Fed’s holdings make it impossible to fight inflation by waiting for higher interest rates based on runoff.  More than 97% of the $2.6 trillion in mortgage-backed securities owned by the Fed won’t mature for at least ten years.  Only 20% of the Fed’s $5.6 trillion in Treasury securities will come due in the next year.  42% have maturity dates longer than five years out. 


“Inflation persistently below its goal”?  This is embarrassingly behind the curve.  Measured inflation is at 7.0%.  That includes the spurious owners’ equivalent rent of only 3.1%.  If real housing inflation were included it would be double-digits – all 1970’s style.  (The lagged effect of true housing inflation will show up in CPI over the next two years.)


Eoin Treacy's view

The Fed is talking about accelerating pace of the balance sheet run off. With 20% of its holdings maturing in the next 12 months, that offers significant leeway to make run-off the primary tool for restricting inflationary pressures.

Owners’ equivalent rent massively understates inflationary pressures but is having a massive effect on the ability of renters to find affordable accommodation. It has a much greater effect on purchasing decisions for all other goods and services than oil prices. Manufacturing sentiment is already declining, suggesting future growth declines are already being priced in. 

Quantitative tightening has caused deflation scares in both Europe and the USA when it has been tried in the past. There is no reason to expect this occasion will be any different.

In the classic Milton Friedman model, if inflation is always and everywhere a monetary phenomenon, then reducing the balance sheet is clearly deflationary.

The difference on this occasion is the debt load is significantly higher today than it was during other tightening phases. Therefore, sensitivity to interest rates is also more acute.

This article covers the challenge of rising illiquidity in the commodity markets. Here is a section: 

“It’s simply a general concern across the marketplace that

we’re losing participation,” Vitol Group Chief Executive Officer Russell Hardy said. “Capital generally across the market is thinly spread and can’t do as much as it might have been able to do a year ago because the cost of doing businesses has increased.”

The surging volatility may increase as some participants get stopped out of derivatives positions and it becomes more expensive to put on new ones.

Several trading-house executives also said there has been a noticeable shift toward companies placing over-the-counter commodities hedges and bets through banks, rather than on exchanges.

This is yet another example of how private capital is taking greater control over the global economy. That means prices are likely to be more volatile and the health of the private capital markets will be ever more important.

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