Dispatch #20 -2021
June 18th, 2021
This week, the Fed disclosed that their rate expectations have risen to 0.60% by the end of 2023 from near zero previously. This caught some markets by surprise and could well be a dress rehearsal of market action if the Fed brings forward rate hikes. In the short-term, bonds and the Dollar are likely to rally as overly bearish positions are unwound. However, longer risks from the friction between continued government deficit spending, Fed’s promise to taper QE and rising debt service remains a risk. In the Bitcoin world, we had a slew of mainstream financial institutions announcing crypto services, and we look at the leading US States that are forging ahead with crypto regulations despite a frostier Federal Government position. Both stories point to how digital assets are becoming mainstream. Here’s a list of all of the subjects in this Dispatch.
- Fed started talking QE taper and raised rate expectations
- State Street Bank launches crypto division
- The most crypto-friendly States in the US
- Traditional banks’ crypto announcements
- SEC delays Van Eck bitcoin ETF approval once again
- What’s the fuss about lumber?
- BITCOIN SCHOOL – bitcoin technical analysis
Fed starts talking taper and rate hikes
The Fed finally adjusted to the months of strong economic data by announcing this week that they anticipate higher rates than previously expected. This is still a distant event as the Fed only expects the funds rates to be 0.60% by the end of 2023 from near zero prior expectation. The chart below from this WSJ article provides a good summary of the June Fed meeting and how rate projections have changed. The price action on Wednesday, when both stocks and bonds sold off together, is a warning of how the two largest asset classes might react when the Fed finally takes the QE punch bowl away. For the moment, the Fed has just started talking about thinking about tapering, but will continue to pump $120bn of QE each month for the foreseeable future. However, before the Fed can move off zero interest rates, it will first need to stop QE purchases that have kept bond yields ultra low.
Fed Dot plot changes
The chart below from this Bloomberg article shows what this “dot plot” is all about. It’s essentially each individual FOMC Member’s future rate projection. When the Dispatch says the new Fed forecast for rates is 0.60% by end 2023, it is the median projection of FOMC members. And the “rate” in question here is the Fed Fund Rate, which the Fed sets and is currently hovering near zero.
Professional investors have been positioned bearishly against both the dollar and treasuries, resulting in both assets rallying this week. This is likely to reverse some of the reflation/value vs. growth stock market positioning. However, it’s unclear to the Dispatch if this reversal will be anything other than a trade for a few months. The inflation vs. deflation debate will be impacted by many external factors, including passage of an infrastructure bill and subsequent stimulus package via reconciliation. The US will need to issue debt to fund these spending programs. This tweet below from Real Vision’s Raoul Pal shows the technical set-up and provides color on positioning on the USD.
2Q Fed QE far above Treasury issuance matter to bond yields
Furthermore, as this tweet from Robin Brooks of the Institute of International Finance illustrates, the Fed purchased meaningfully more Treasuries in 2Q than the amount issued by the government. This alone should have raised bond prices, which lowers the yield. This balance could well change in the coming quarters, just as the Fed might be forced to taper QE, as additional Government stimulus requires rising debt issuance. This could be a particularly difficult time for markets to digest, and an event that the Dispatch is watching closely.
State Street launches cryptocurrency division
State Street, a custody bank that oversees more than $40tn, is setting up this new division following in the footsteps of industry leader Bank of NY Mellon (BNY). BNY’s entry into crypto back in February was covered in Dispatch #4. As these CNBC and Blockworks articles explain, State Street is responding to rapid growth in customer demand for digital assets. For example, Van Eck picked State Street as the custodian for its Bitcoin ETF that is awaiting SEC approval.
Permissionless blockchains can verify and settle transactions instantaneously, and at almost zero cost, which poses an existential threat to custody banks. It is, therefore, no surprise that these banks are rapidly embracing digital assets as blockchains could make obsolete the trust function provided by custodians like State Street and BNY Mellon.
The most crypto-friendly US States
In the US, it is States that are taking the lead in creating crypto friendly legislation with Federal authorities being less accommodative. This week, Texas affirmed that state registered banks could offer crypto services to clients. This Bitcoin Magazine article provides a good summary of the news and the Texas Department of Banking notice is available here.
A comprehensive look at the leading States and how they are addressing digital assets is provided by the Coinbase article that the Dispatch has copied below. It has extensive links to the many states that are advancing crypto legislation if you’d like to dig further. Most crypto observers will agree that Wyoming is taking the lead in crypto legislation.
The Coinbase article is italicized below
After multiple U.S. regulatory and financial agencies announced initiatives to review crypto, Michael Hsu — new head of the Office of the Comptroller — called for inter agency coordination on Monday. While crypto regulation remains a patchwork effort at the federal level, 31 states are proceeding with their own legal blueprints. Who’s leading the charge?
- Wyoming, whose elected officials own crypto, has attracted crypto-focused firms for years. In April, Wyoming became the first state to recognize decentralized autonomous organizations (DAOs) as LLCs, paving the way for online collectives governed by blockchain-based smart contracts to have the same legal status as companies.
- Nebraska approved a regulatory framework for digital assets in May, providing two main ways for institutions to manage crypto. Existing state-chartered banks can create digital asset divisions, and digital asset firms can seek charters to become digital currency banks.
- A pending bill in South Carolina would make the state an “incubator” for blockchain innovators. The bill would also enable companies to issue “certificate tokens” instead of traditional stock certificates.
- Arizona formalized a crypto “study committee” in early May, and last week, Democratic Arizona senator Krysten Sinema and GOP Wyoming senator Cynthia Lummis announced the Financial Innovation Caucus, which aims to “highlight responsible innovation in the United States financial system.”
Why it matters… A majority of U.S. states have passed or proposed digital asset legislation — from allowing banks to hold crypto for customers to simply defining “digital assets.” As states make progress with laws that have federal implications, the pressure is on for regulatory clarity from Washington.
Traditional Banks entering Crypto
There are too many weekly announcements by banks either wading into crypto, launching additional services or vocalizing opposition to the asset class for the Dispatch to discuss in length. Therefore, this is a collection of the announcements this week, with links for additional reading. What is becoming obvious is that crypto is no longer a fringe financial asset. It is now entered mainstream finance, in the Dispatches view.
- Goldman to offer Ether futures trading, following previously announced bitcoin trading for clients. This Decrypt story has the details. Give credit to the large global banks who poo pooed (yes, it’s a technical term!) crypto for years. Their crypto-embrace has been impressively smooth and fast.
- Goldman partners with Galaxy Digital to offer crypto liquidity services. Goldman is really partnering with Bitgo, which is the custodian that Galaxy is acquiring. This Blockworks article provides more details.
- Spain’s BBVA is opening bitcoin trading to wealth management clients out of Switzerland. This Coindesk article has more details.
- Danske Bank in Denmark says it will not offer crypto access, despite a sharp rise in client demand. More details in the Bloomberg article.
SEC has again delayed Van Eck bitcoin ETF approval
This is no surprise to the Dispatch, as SEC Commissioner Gensler has repeatedly said that crypto markets lack investor protection. We should expect oversight of crypto trading venues before ETFs are approved. This Coindesk article provides background on the latest delay.
What’s all the fuss about lumber?
This chart shows you why this usually barely noticed commodity is a hot subject. Prices doubled in a few months in 2021 and still remain well above normal levels. This one asset where the price hike is likely to be transitory in the Dispatch’s view.
BITCOIN SCHOOL – Bitcoin Technical Analysis
Technical analysis = using price charts to make predictions
The Dispatch does not attempt technical analysis, but respects it. To provide a peek into bitcoin technicals, we go back to Fidelity’s Jurrien Timmer’s thought. The charts below are from these two Twitter threads from June 1st and June 8th. Timmer quite fluidly moves from pure technical analysis to blockchain analysis data from Glassnode, which the Dispatch values.
That’s it for this week. If you made it all the way to the end, not that the Dispatch will be off next week but always keeping an eye on markets. Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.
Asi
Important Disclosures
| This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results. |