Untethered: breaking the buck

Tether breaks the buck

A few years ago I started writing a blog post about the unaudited backing of the Hong Kong company Tether - which was ultimately charged with lying about its misstated reserves and fined - but after a couple of thousand mostly fruitless words I gave up on writing it. 

Firstly, because it gradually dawned on me, not for the first time, that I didn't have a single original thought in my head.

And secondly, because since the company was both unaudited and basically unregulated I couldn't see a way it would actually blow up in any case.

Unstable coins

After public blockchain protocol Terra (and Luna) face-planted and blew up 100 per cent of its tokens and $45 billion in market cap this week, not-so-stable stablecoins have suddenly crept back into the financial news pages as a topic of note.

And then Tether temporarily caused a stir when it also broke the buck. The $1 peg remained broken for some time, and briefly traded as low as 95.1 cents. 

A Herculean effort from the instos saw the dollar peg 're-Tethered' in time, for want of a better phrase, but there may be a twitchy week or two ahead.

Any bank or currency run which gains momentum can be devilishly difficult to stop in its tracks, and in the unregulated Wild West there is no lender of last resort if the shit does prove to hit the fan.

Steadying the ship

Tether previously claimed that its gargantuan market cap was largely backed by billions in Chinese commercial paper, although ostensibly nobody in financial markets has ever heard of them making a trade. 

With the huge Chinese developer Evergrande lurching onto the precipice of default, there had been some nervous speculation that Tether might be adversely impacted.

But now - somewhat ludicrously - the company claims it has changed tack, apparently offloading their Chinese "commercial papers" (sic), and stating to the Financial Times that it can't disclose any details of its new ~US$40 billion investment in US T-Bills for fear of revealing its "secret sauce".

Which is to say - since the company refuses to be audited - nobody knows which organisation holds the assets, where exactly they hold them, or for that matter which firms are handling the trading on Tether's behalf. 

There were already more red flags than a matador fight here, but not knowing the lexicon cf. "commercial papers" also seems...sub-optimal. 

Anyway, redemptions appear to have steadied for now, so hopefully there will be no further significant withdrawals this week, as even at a trimmed down US$76 billion Tether is no small cookie in the game.

Thar she blows

Nobody can pretend to know what happens next in financial markets, but it's worth noting that some of the valuations have been obliterated at the more speculative end of the tech space, before the Federal Reserve has even tightened interest rates beyond 1 per cent. 

With the Fed set to tighten by another 50 basis points in June, and then another 50 basis points in July, as the central bank's balance sheet now shrinks in the second half of 2022 it appears pretty likely that something else might blow up.

It's impossible to say what, exactly, but for investors managing their own capital it's something to bear in mind. 

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Super scheme

The Coalition has announced that first homebuyers may be able to use $50,000 of superannuation to buy a first home, if it wins the election.

Unlike previous moves Labor can't or won't match this policy, as the union super funds wouldn't allow superannuation to be used in this way (since it would reduce their management fees).

So this is one point of difference between the major parties going into polling day. 

If it gets up, then it's obviously a bullish moving for housing, not least because wealthy parents may gift funds to their kids sooner to grow in a low-tax superannuation environment for their first home. 

Arrivals filtering back, slowly...

Borders open

Arrivals into Australia increased in April, having declined to almost zero in last year's lockdowns. 

Source: ABS

Preliminary arrivals figures of 575,000 were still absolutely miles below their decade average (in April 2019 there were 1.67 million arrivals into Australia, for example). 

Source: ABS

Arrivals are becoming to filter back from New Zealand, India, the UK, and other key countries in Asia and Europe. 

To date, however, Chinese arrivals have not bounced, mainly due to China's domestic travel restrictions.

This has implications for Australia's Universities, until normal service can be resumed. 

Only 28,000 international students arrived in March, some 60 per cent lower than the 2019 figure. 

A long way to go, but at least international travel is off the lows. 

Inflation peaks, but...

Core inflation still punchy

Grateful to econodata wizard James Foster for staying up last night to analyse the all-important inflation figures from the US, especially given that this certainly isn't my wheelhouse. 

Headline inflation fell sharply to 0.3 per cent in the month, largely driven by declines in energy prices (-2.7 per cent).

That's the good news!

However, the core rate of inflation was stronger than expected, at 0.6 per cent.

Headline inflation slowed to 8.3 per cent for the year, and core inflation slowed to 6.2 per cent.

Durable goods inflation has now peaked, but food prices were still rising. 

Overall, it was good to see year-on-year inflation has now peaked, and will decline from here.

But services inflation was still strong, largely because shelter makes up 40 per cent of it, although there was a broader-based punch to this figure than just rising rents.

To my untrained eye, I assume this means that sticky services inflation won't slow down until rents and other shelter costs start to roll over significantly, which may take some time.

All of which means further rate hikes will follow over the second half of 2022. 

Market reaction

The NASDAQ fell a further 3.2 per cent overnight, with ARKK down another 10 per cent, and Beyond Meat getting murdered after hours on its latest released numbers to be down 33 per cent over the day (so that's another big growth story stock that's lost 90 per cent of its value). 

MicroStrategy dropped another 27 per cent fell back to where it was in 2020, when it began hoovering up Bitcoins in earnest on a leveraged bet. 

And listed exchange platform Coinbase fell another 30 per cent, to be down 85 per cent from 6 months ago, reflecting some pain in that space. 

Of the tech stocks, some of the big names are starting to look more attractively priced than they were, having kicked off 2022 with some sharp declines. 

Disclaimer: who knows where the bottom is, and there may be more to come. 

In summary - and I'm no expert in the dynamics of US inflation - but from market pricing and breakevens it looks like the Fed is still behind the curve given the surge in services inflation, and will be hiking rates towards 2-3 per cent forthwith. 

Stay safe out there.

Lessflation

Tech sentiment declines

Investor sentiment has been getting flogged, as almost everyone must be aware by now from the news headlines, with the NASDAQ dropping by a quarter from the highs. 

Plenty of the pandemic favourites - such as Netflix and Zoom - have lost up to three-quarters of their valuation.

Coinbase reported its results and fell dramatically again on underwhelming revenue after hours to a share price of $60, down from above $340 in November.

ARK's famous "Innovation" ETF has followed Coinbase in falling to under $40/share after hours today, having peaked at over $155/share early last year. 

There's also been some volatility in crypto world after Terra's stablecoin, the world's 4th largest, broke its peg and crashed, while Bitcoin briefly touched below $30k yesterday.

Upstart Lending fell 40 per cent after hours, and many buy-now-pay-later stocks fell 30 per cent over the past 24 hours. 

This suggests consumers binged on their stimulus cheques, and overspent on credit, but now the bills are falling due. 

Goldman and Citi have announced that they are exiting the wild west SPAC business, as speculative sentiment has unravelled. 

For those of us with more of a value bent there's been some belated gratification, with the energy sector now a clear outperformer since the 2020 meltdown, and Warren Buffett finally unloading the elephant gun in recent months to buy billions of dollars of Occidental Petroleum and other energy stocks. 

Peakflation?

The interesting thing is that the Federal Funds rate has only reached 1 per cent (although US fixed mortgage rates have spiked dramatically over the past few months). 

Consumer credit use has shot up at the fastest pace on record in the US, and there's been some significant demand destruction already.

In fact it's possible, if perhaps unlikely, that the US may already be in a technical recession.

Many commodity prices have also been getting walloped back down. 

All of the talk of late has been about global inflation getting out of control, but Goldmans are now out revising their year-end personal consumption expenditures (PCE) inflation figures down for the first time since prices took off last year. 

They are now growing more confident that both headline and core PCE inflation have already peaked in year-on-year terms.

Source: Goldman, Hatzius

That doesn't mean there's no inflation around - these revised figures might still imply quite a lift in core prices over the next two years of up to, say, 8 per cent - but we might start to see some of the more alarming inflation predictions tapering off from here. 

Tech investors are probably hoping so - one to watch with interest this week. 

Simon Kuestenmacher: Don’t bet against Australia

Property Pod

This week on the Property Pod, Simon Kuestenmacher from The Demographics Group explains how the pandemic changed living trends and demand for property.

He also explains why he wouldn't bet against Australia.

Tune in here (or click on the image below):

You can also tune in at Apple podcasts, Spotify, and anywhere else you get your podcast fix. 

And, of course, you can listen at Youtube:

US unemployment flat at 3.6pc

Unemployment flat

The U.S. economy added a solid +428,000 jobs in April, pulled back slightly by net revisions of -39,000 to the February and March totals. 

The net result wasn't a million miles away from market forecasts in the end. 

The unemployment rate was unchanged at 3.6 per cent, a slight miss on expectations. 

And average hourly earnings were 5.5 per cent up from a year earlier, at $31.85, perhaps hinting at a slight easing of inflation pressures. 

Currency markets weren't much moved, and the stock market was a little lower, with some commentators expecting the Federal Reserve to hike by 0.75 percentage points next up.

How property will fare with rising rates

ausbiz news

I joined Annette and Scutty to discuss on ausbiz TV here (or click on the image below):

The Big Picture podcast

Big Picture

I joined Michael Yardney to discuss the Big Picture trends.

Tune in here (or click on the image picture):