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PERSONAL/BUSINESS COACH | PROPERTY BUYER | ANALYST

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Sunday 15 May 2022

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.