Dispatch #29 – 2021
September 10th, 2021
Looming Social Security insolvency, highlighted in the 2021 Trustees Report, is the lead story this week. The retirement Trust Fund (called old-age insurance) is set to run out in 2033 and the Medicare Trust Fund will be empty even earlier in 2026. How’s that for just around the corner! We barely hear a peep about either of these near insolvent programs, though, as our polarized political systems focus on spending more to stay/regain power. The glass half-full observation is that the numbers weren’t that much better in years past, they’ve just got slightly worse.
This multi-trillion dollar financial deficit will have to be tackled in our lifetime, and the most obvious outcome is to print more money to cover benefits. As a society we have shown no desire to raise taxes or cut spending, which is why the money-print option is most likely.
The Dispatch hopes readers think about the broader repercussions of how printing money to cover this funding gap will impact their other assets and cost of living. We analyze more below, but this subject is best discussed 1-on-1, as individual circumstances are different.
Following are this week’s discussion subjects:
- Social Security Insolvency: Trust Fund to run dry after 2033 and Medicare Fund after 2026!
- NFTs and Metaverse: What’s the Metaverse?
- SEC threatens to sue Coinbase, right after warning Uniswap
- Sotheby’s Bored Ape auction clears at $24.4m!
- COIN SCHOOL – $10m+ bitcoin transactions rise–> Institutional adoption?
Social Security insolvency: Trust fund to deplete by 2033 & Medicare fund by 2026!
The main retirement fund (Old-age and survivor insurance trust fund) will deplete after 2033, which is one year earlier than previous projections. After that, payroll taxes will only cover 76% of schedule benefits according to the Trustees report. There’s also the Social Security Disability Insurance Trust Fund. This will deplete after 2057, which is a full 8 years earlier than previous projections. One bullet point of the report is shown below. The full 276 page report is here, but we recommend this summary of the Trustees report. This WSJ article provides a good synthesis as well.
The Hospital Insurance Trust Fund, which supports Medicare Part A, will deplete after 2026, the report states. After that, the fund will be able to cover 91% of scheduled benefits.
Knowing about Social Security insolvency, what do you do?
At the most conservative end, one can assume zero social security payments if retiring after 2034, plus having to pay for healthcare. Unfortunately, your future income will not suddenly rise just because these two Trust Funds are near empty. Therefore, lowering expenses is the only viable option to make up for lower or lack of retirement/health benefits.
At the other end, assume that the US will print its way out of this shortfall, just like the Covid response, and nominal payments will remain as promised. The Dispatch leans to the latter view as no sitting politician will be able to go back on promised retirement benefits. We have not shown a desire to cut spending/benefits or raise taxes as a society. Now that we have discovered the ability to print money to cover shortfalls, it’s hard to imagine politicians won’t embrace this approach. The NY Times headline below illustrates the narrative that downplays the grave financial condition by leaving out the year when insolvency is reached.
What does monetizing Social Security insolvency mean for other assets and cost of living?
The more important question to ponder is if the government monetizes social security liability (just a fancy term for printing money to make up the hole), what impact will that have on your other assets and cost of living? This is a complicated subject with multiple permutations, and one that requires a longer discussion. However, The Dispatch considers the potential range of outcomes when making client asset allocations.
This is also where digital assets may play a role with their exponential adoption-led growth. The network effect/adoption expansion has already led to exponential returns from leading digital assets. There have been plenty of flameout projects, which is rarely discussed due to our survivorship bias. Historic returns are no guarantee of future returns!
Digital Assets offer exponential adoption
However, we continue to see exponential adoption of decentralized services that have only been around for 2-3 years. For example, NFTs weren’t a thing 12 months ago, and now it’s likely that artists adopt this new use of blockchains. Decentralized Finance (Defi) was just emerging 12 months ago, and total value lock (TVL) in Defi has grown from $6bn a year ago to $164bn now. This is what exponential growth looks like. TVL is a measure of money deposited to earn an interest on your crypto holdings.
Source: Defi Llama on 11th September, 2021
Futhermore, expansionary Central Bank monetary policy should continue to drive adoption of scarce assets like bitcoin. In the traditional asset world, Apple shares are scarce assets too.
NFTs and the Metaverse. What the heck is the Metaverse?
Dispatch 28 highlighted the startling NFT price action recently. While we question the sustainability of prices near term, the Dispatch believes NFTs are here to stay. They provide creators – artists, musicians, athletes – a new channel to market and sell their craft. Plus, some NFTs offer status in a world where we spend increasing amounts of time in the digital world. Covid has accelerated that trend.
For a deeper, more philosophical dive into the digital world, it’s important to understand the Metaverse. The Metaverse is essentially the digital world we occupy, and it will have far-reaching socioeconomic consequences, not just Cryptopunks replacing Rolexes. This Bankless essay, The Metaverse Emerges, provides a solid exploration of the Metaverse as we can imagine it today. It takes time to absorb the subject if you aren’t someone deeply in the space. If you prefer, here’s a 30 minute Youtube reading of the article.
SEC threatens to sue Coinbase, right after Uniswap probe
The SEC has threatened to sue Coinbase if the company goes ahead with its Coinbase Lend product. Coinbase Lend would pay 4% interest on USDC stablecoin balances, like offering from Blockfi, Crypto.com, Celsius and others. Dispatch 24 highlighted the US States’ cease-and-desist orders on Blockfi, which are still pending as discussions progress between Blockfi at State Attorney Generals.
The WSJ covers the story well. Coinbase CEO Brian Armstrong called the SEC action “sketchy” in this Tweet thread. The action against Coinbase follows SEC launching an investigating of Uniswap Laps, the developer of Uniswap, the largest Decentralized exchange.
The issue at stake is whether Coinbase’s interest account is a security. If a crypto interest-bearing account offered by an exchange is a securities, then it needs to be registered with the SEC. The main problem is that our securities law was written in 1933! The definition of a security is very broad, as the American Bar Association website description shows below.
US regulations are in desperate need of updating to catch up with technology advances. There are several proposals floating in Congress to provide clarity on Digital Assets, specifically to lay out when a digital asset will be deemed a security. Until then American consumers will be shut out of the some of the wealth being created in the digital asset ecosystem.
The SEC action, in the guise of consumer protection, will remove Americans’ ability to earn a yield on their crypto holdings. US consumers are already ineligible to receive crypto token distributions by blockchain service companies. Just this week, dYdX, one of the fastest growing Defi services, distributed $100m worth of tokens to users, but US residents were ineligible because of SEC regulatory fears. How is the free distribution of tokens to community users a risk to consumer protection? Similarly, developers are likely to locate outside the US to avoid the uncertainty and threat of prosecution that Uniswap Labs may face. If you’d like to dive deeper into the issues, this is a blog post with a skeptical view of decentralized services.
Remember the Sotheby’s auction of Bored Ape NFTs?
Highlighted last week in Dispatch 28, the auction closed at $24.4m, well above the $12-18m Sotheby’s estimate. Only time will illustrate if this particular set of JPEGs were good value, fools gold or something in between. This Forbes article has more details.
COIN SCHOOL – Rising $10m+ transactions on the Bitcoin network
Does this point to institutional adoption?
This chart from Glassnode provides their interpretation of blockchain data, which shows a notable jump in transfers larger than $10m. The ratio has risen from ~10% of transfers in October 2020 to near 30% today. It’s fair to assume that a $10m plus movement of bitcoin value is mostly institutions and not individual whales trading more actively.
Bitcoin Relative Transfer Volume Breakdown by Size (entity adjusted, 30d moving avg)
Source: Glassnode
Stay safe, enjoy the waning days of summer 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. |
