Maybe once a month, I read something that I feel is a sneak peek into the future.
Greg Foss’s pdf on CDS and bitcoin is such a thing.
If you are interested at all in: macro, stocks, crypto, bitcoin, sovereign individual, investing…then this paper is well worth your time. Some of the terminology and concepts are complex, but he does as good a job as anybody of explaining them in clear and simple terms.
Below are a few highlights to give you a taste (all copied verbatim):
My experience with insolvent money centre banks in 1988 would be re-experienced in 2008/2009 when Libor rates and other counterparty risk measures shot through the roof PRIOR to equity markets smelling the rat.
Asymmetric trades define careers, and ABCP was the best asymmetric trade versus risk, I had seen up until that point in my career. But Bitcoin is a better trade than ABCP, in my opinion. Bitcoin is the best asymmetric trade I have ever seen.
The global response to the Covid pandemic has ensured that our kids’ futures are doomed to eternal Fiat currency debasing. Again, simple math.
Fiats are worthless, yet they have “subjective value” today. However, they are programmed to debase. Bond investors are really just a “derivative” to this reality. Choose your SoV wisely. Think physics and math and code.
Secondly, if the common equity pays a dividend, this dividend is NOT a FIXED income instrument. The dividend is NOT contractual,
The shape of the yield curve is a subject of great economic analysis, and in an era when rates were not manipulated by Central Bank interference, the yield curve was useful in predicting recessions, inflation, and growth cycles.
Almost all government debt, from the same borrower ranks parri passu, that is to say, there is no priority of claim within the debt structure of governments because there is no subordination and no equity.
Interest rate risk and inflation risk are synonymous. Both have been declining for my entire trading career. That is because over the last forty years, the general level of interest rates (YTMs) have declined globally, from a level in the early 1980s of 16% in the USA, to today’s rates of close to zero, or even negative in some countries.
When G-20 government balance sheets were in decent shape, and operating budgets were balanced, and accumulated deficits were reasonable, the implied risk of default by a government was almost zero. That is for two reasons. Firstly, their ability to tax to raise funds to pay their debts. Secondly, and more importantly, their ability to print Fiat money.
…the turmoil in the (Great Financial Crisis) essentially transferred excess leverage in the financial system to the balance sheets of Governments. The can was kicked to the Govies. Printed money was the painkiller. Unfortunately, we are now addicted to the pain medicine.
In many cases, if you were to line up the operating cash flows of the government and its leverage statistics compared to a BB corporate, the corporate would look better.
Contagion in the bond market is much more pronounced than in equities. For example, if provincial spreads are widening on Ontario bonds, most other Canadian provinces are widening in lockstep, and there is a trickle- down effect thru bank spreads, car paper spreads, high grade corporate spreads and even to junk spreads.
It was rumoured that one of the main reasons the Fed stepped into the credit markets to be able to buy HY debt in 2020, was due to the impending downgrades of four very large IG borrowers who are on the cusp of crossing over (to the dark side?). General Motors, Ford, AT&T and GE have cumulative debt that is larger than the entire HY market.
When Central Banks decide to intervene in the equity markets to stabilize prices and reduce vol, it is not because they care about equity holders, it is because they need to stop the negative feedback loop and its ultimate impact on widening spreads and the seizing of credit markets. Remember, Credit is a dog. Its tail is the equity markets.
“Communism only works until you run out of other people’s money” – Margaret Thatcher
Credit concerns will overwhelm inflationary concerns, particularly if the deflationary impact of technological advances continues. However, technology does NOT solve credit risk in sovereigns/Fiats.
“Fulcrum Index”, an index that calculates the cumulative value of CDS Insurance on a basket of G-20 Sovereign nations multiplied by their respective funded and unfunded obligations. This dynamic calculation could form the basis of a current valuation for bitcoin (the anti-Fiat).
I believe Bitcoin is the best asymmetric trade I have seen in my 32yrs of trading, and why I believe EVERY fixed- income investor needs exposure to Bitcoin in order to reduce portfolio risk.
Liquidity is best defined as the ability to sell in a bear market.
According to the Institute for International Finance, in 2017, Total global debt / global GDP was 3.3X. Global GDP (then US$67Trillion) has grown a little in the last three years, but Global debt has grown much faster. I now estimate that the debt/GDP ratio is over 4X. At this ratio, a dangerous mathematical certainty emerges. If we assume the average coupon on the debt is 3% (likely low), then the global economy needs to grow at a rate of 12% just to keep the tax base in line with the organically growing (the coupon obligation) debt balance. This does not include the increased deficits that are contemplated for battling the recessionary impacts of the covid crisis.
The Federal government has over US$25Trillion in outstanding debt. According to Jeffry Gundlach, it also has US$157T of unfunded liabilities in Medicare and Medicaid obligations.
Others will argue that bitcoin is too volatile. I quote Bill Miller, “Volatility is the price of return”. No Vol, no return. And finally, given its asymmetric return distribution I believe “It is more risky to have zero exposure to bitcoin than it is to have a 5% portfolio weight. If you are not long bitcoin, you are irresponsibly short”.
The tipping point (or Fulcrum point) for that event is when bitcoin is adopted as a global unit of account for the trade of energy products. When oil, natural gas and electricity are priced in bitcoin, bitcoin will supplant the USD as world reserve
Secondly, sovereign credits do default even though they can print money. Remember the LDC crisis in 1988. Or Venezuela in 2020 where Fiat is shovelled to the curb as garbage.
Beyond Covid19: the automotive way
Sunday April 11, 2021
BEYOND COVID19 project has been develop examining and explaining the automotive market trends, considering the disruptive impact of Covid-19. The mission is to help our clients, surrounded by tangible uncertainty, in making balanced and fair business decisions. Strategic moves To survive the crisis and emerge even stronger, car manufacturers players must adapt to the new […]
Thành công ấn tượng của Việt Nam trước thềm Đại hội XIII
Tuesday January 12, 2021
Trước thềm Đại hội lần thứ XIII, báo chí nước ngoài liên tục đăng tải nhiều bài viết ca ngợi những thành công của Việt Nam trong năm 2020, trong đó đặc biệt nhấn mạnh vai trò lãnh đạo của Đảng Cộng sản Việt Nam. Báo Nga: Dấu mốc thể hiện sự phát triển của […]
The post Thành công ấn tượng của Việt Nam trước thềm Đại hội XIII appeared first on Celadon Saigon.