Podcast Summary
Bitcoin ETF false alarm causes market volatility: Excitement for Bitcoin ETF approval led to market volatility from false reports, emphasizing the importance of verifying information before acting.
The Bitcoin market experienced significant volatility recently due to false reports and rumors about the approval of Bitcoin ETFs. The ticker for an iShares Bitcoin ETF was listed on the DTCC website, causing a surge in Bitcoin's price, only to be delisted later. The market reaction highlights the excitement and anticipation for a Bitcoin ETF, but it also underscores the importance of verifying information before acting on it. Despite the false alarm, the signs point to the eventual approval of a Bitcoin ETF, and the market continues to closely watch for developments on that front. The conversation on the Bitcoin Fundamentals podcast also touched upon other macro topics, including the reverse repo market and its impact on liquidity. Overall, the discussion provided valuable insights into the current state of the Bitcoin market and the potential implications of upcoming events.
SEC prioritizing clear rationale for Bitcoin ETF decisions: SEC is taking a formal approach to Bitcoin ETF approvals, setting a clear precedent with a formal rationale, unlike the initial launch of futures ETFs.
While the approval of Bitcoin ETFs is expected, the SEC is prioritizing setting a clear precedent by providing a formal rationale for their decisions. This is in contrast to the initial launch of Bitcoin futures ETFs, which did not include an order explaining the rationale. The comment period for the iShares ETF ends on November 8th, and approval is predicted to come in the middle of November or early December. The SEC is aware of the approval well in advance and will not be influenced by external pressure to break their standard operating procedure. The success of Grayscale in proving the SEC's treatment of futures markets as arbitrary and capricious was a significant win that likely influenced the SEC's current stance on ETF approvals.
Navigating the Launch of a Bitcoin Spot ETF: Launching a Bitcoin spot ETF involves securing a ticker, creating a CUSIP, and navigating the SEC's review process. Careful planning and attention to detail are crucial for a successful launch.
The process of launching a Bitcoin spot ETF involves numerous steps, including securing a ticker and creating a CUSIP for a securities filing. These tasks are often delegated to teams of product managers and are considered routine checks to ensure a smooth launch. The SEC's review process is also a significant part of the timeline, and receiving comments from the SEC is a normal part of the filing process. The market excitement surrounding recent Bitcoin-related news, such as the Grayscale court ruling and potential BlackRock listing, led to a short squeeze and price increase, but much of the news turned out to be a "nothing burger" once the details were clarified. Overall, the launch of a Bitcoin spot ETF requires careful planning and attention to detail, with regulatory approval being a crucial factor in the timeline.
SEC review process and government holidays impact Bitcoin Spot ETF launch timeline: The approval of a Bitcoin Spot ETF is expected in February, but the timeline is subject to SEC review process and government holidays
The approval of a Bitcoin Spot ETF is expected to happen soon, but the timeline is subject to the SEC's review process and government holidays. The SEC generally waits until the public comment period is closed before allowing an ETF to launch, and the comment period is expected to close on November 8th. However, due to government holidays and the 75-day clock until the actual launch, it's unlikely that anything will be approved before November 17th. The SEC typically wants about 30 days after the approval to review the prospectuses and make sure all risk disclosures are correct. Therefore, a launch in February is a more realistic expectation. Additionally, Grayscale did not file a new refiled 19b-4 following the SEC's mandate, and it's unclear whether they will use the old application or file a new one. Overall, while the approval of a Bitcoin Spot ETF is looking promising, the timeline is subject to the SEC's review process and government holidays.
Preparing for Regulatory Approval in the Financial Industry: Nervous Nellies, Old Pros, and the Middle: Stay informed about market news and trends, prioritize lawsuit prevention, and be prepared for potential chaos when launching on the same day with multiple entities.
There are different approaches to preparing for a regulatory approval in the financial industry. Jason Brett identified three camps: the nervous nellies who quickly update and amend, the old pros who take their time to ensure everything is correct, and those in the middle who are unsure and may hurry up or wait. The discussion also touched on the logistical possibility of multiple entities launching on the same day and the potential impact on APs and lead market makers. Trey Lockerbie expressed confidence in the ability to launch on the same day, although there might be some chaos. Jason Brett mentioned that the conviction for an approval comes from lawsuit prevention against the government. Another key point was the importance of staying informed about market news and trends, which was emphasized by the mention of Yahoo Finance as a valuable tool for staying up-to-date. Overall, the conversation highlighted the importance of being prepared and informed when dealing with regulatory approvals and market changes.
SEC's approval of Bitcoin ETF: Gradual Impact: SEC's approval of Bitcoin ETF may bring gradual institutional investment, but price impact may not be immediate or massive
The approval of a Bitcoin ETF by the Securities and Exchange Commission (SEC) is expected to bring significant attention and investment to the cryptocurrency market. However, it may not lead to an immediate massive bull run as some believe. Instead, the impact could be more gradual, with institutional investors and cautious individuals gradually entering the market. The comment period for the proposed rule change is an important indicator of the SEC's intent to move forward with the approval process. The speakers also discussed the potential timing of the approval, with estimates ranging from Q1 2024 to later in the year. Overall, the approval of a Bitcoin ETF is seen as a positive development for the cryptocurrency market, but its impact on price action may not be as dramatic as some anticipate.
Treasury Market Facing Potential Crisis as Overnight Reverse Repo Market Dries Up: The Treasury market could face a crisis due to the dwindling liquidity in the overnight reverse repo market, potentially leading to increased dependence on private markets and a possible return to quantitative easing by the Fed.
The overnight reverse repo market, which has been absorbing a significant amount of Treasury issuance, is rapidly running out of liquidity. If this trend continues, it could lead to a potential crisis in the Treasury market, making it increasingly dependent on private markets to absorb the massive issuance of Treasuries. The Fed could eventually step in as the buyer of last resort, leading to another round of quantitative easing. The convergence of these factors, along with the ongoing utilization of the Treasury General Account to provide liquidity and the sell-off in bonds, could lead to a significant increase in bond volatility in Q1 or Q2 of 2024. The speakers also discussed the possibility of a debt spiral and the potential impact of ongoing conflicts and issues that could further drive the money printer. Ultimately, the question remains, when and how will the Treasury market respond when the Fed turns the printer back on?
Fed's actions and Treasury decisions impacting yield curve dynamics: The Fed's shift from bill issuance to longer-term bond issuance, coupled with the Treasury's decision not to issue bonds for market liquidity, have disrupted traditional yield curve dynamics, causing yields to rise and bond prices to fall.
The current economic situation and the yield curve inversion are not typical of what we've seen in the past 40 years. The panelists discussed how the dynamics of supply and demand in the bond market have shifted, and the Federal Reserve's actions have played a significant role. Since late 2022, the Fed has primarily used bill issuance to fund the government, but with the debt ceiling being resolved, they have started issuing longer-term bonds, which has led to a sell-off in the long end of the yield curve. This is in contrast to previous recessions where treasuries were bid and rates compressed. The panelists also noted that the Fed was hampered by the Treasury's decision not to issue bonds to provide liquidity to the market. Now, the Fed is issuing bills to rebuild the Treasury General Account and keep a balanced composition of bills and bonds on its balance sheet. These changes in supply and demand dynamics have led to the current situation where yields are rising and bond prices are falling.
Bond market dynamics during economic downturns and recoveries: In a structural bear market in bonds, yields may trend up and then decline during a recession but not reach the previous low.
The dynamics of bond markets are influenced by supply and demand, and these dynamics can shift significantly during economic downturns and recoveries. During periods of economic growth, yields tend to rise as a sign of strength, while during recessions or downturns, yields may fall. However, in a structural bear market in bonds, instead of yields falling to set a new low and then rising again, you might see yields rise and then decline during a recession, but not reach the previous low. This is because of the interplay between economic conditions and market trends. As Jason Brett pointed out, the 30-year chart of the 10-year yield shows a stair-step pattern, with yields trending down during periods of economic weakness and then rising during periods of growth. The opposite is expected during a bear market in bonds, with yields trending up and then declining during a recession but not reaching the previous low. This is just one possible scenario, and markets don't generally follow a straight line but instead go through cycles.
Long-term trend of rising interest rates and inflation: Potential for significant yield increases, exceeding 5.5% for the 10-year bond, followed by a drop during a recession. High debt-to-GDP ratio is a concern, but era of 0% interest rates is likely over.
We're in a long-term trend of rising interest rates and inflation, similar to the 1970s, due to large government debt and potential fiscal irresponsibility. Preston Pysh believes this could lead to significant yield increases, potentially reaching 5.5% to 6% for the 10-year bond, followed by a drop during a recession. However, he also acknowledges the possibility that the debt situation could defy expectations and continue to be bid. The current high debt-to-GDP ratio, exceeding 120%, is a significant concern. Despite the potential for large yield swings, Pysh emphasizes that the era of 0% interest rates is likely over. Public.com offers a high yield cash account with a 5.1% APY, providing a higher interest rate than many competitors.
Large capital pools shifting away from treasuries in high inflation: In a high inflationary environment, large investors are turning to higher yielding assets like ABS, MBS, high yield bonds, and private equity instead of treasuries for safety
In a high inflationary environment, large pools of capital, such as pension funds and insurance companies, are not likely to buy treasuries for safety as they need higher yields to meet their obligations. Instead, they are turning to higher yielding products and assets like asset-backed securities, mortgage-backed securities, high yield bonds, and even private equity. This trend is reflected in the Bank of America chart showing a significant increase in debt flows as a percentage of assets under management for private clients in the last decade. For individual investors, it's essential to stay informed about market trends and make smart financial decisions, such as finding a travel credit card that maximizes rewards to make future travels more affordable. Don't miss out on opportunities to earn more miles or rewards. Visit NerdWallet.com to compare and find smarter credit cards, savings accounts, and more today.
Older investors continue buying bonds for safety and stability despite declining prices and low real yields: Older investors prioritize safety and stability, making bonds attractive even during economic uncertainty, while the Fed's efforts to combat inflation can also increase their appeal
Despite the constant decline in bond prices and low real yields, retail investors, particularly older folks, are still buying bonds due to the perceived safety and stability they offer. The Federal Reserve's efforts to combat inflation by raising interest rates have made bonds more attractive on a real yield basis, and in a recession or uncertain economic environment, bonds may continue to be in high demand due to their perceived safety compared to other assets. The US Treasury market, despite its size and perceived safety, is not immune to market volatility, as evidenced by Bill Ackman's recent bond short and the subsequent market reaction. However, some money managers view the risks of being short bonds as outweighing the potential rewards, making the US Treasury market an attractive option for those seeking safety and stability in their portfolios.
The proportion of U.S. debt held by foreign entities is decreasing: Despite the growing total public debt, concerns over foreign entities selling their U.S. debt are overblown due to the majority being held by domestic buyers, including the Federal Reserve.
While the total public debt of the United States continues to grow, the proportion held by foreign entities is decreasing, and the Federal Reserve now holds the largest share of U.S. debt. Jason Brett argues that the concern over foreign entities selling their U.S. debt holdings and causing volatility is overblown, as domestic buyers, including the Federal Reserve, hold the majority of the debt. Brett also believes that the debt-to-GDP ratio will continue to increase, but this does not necessarily indicate a debt spiral or hyperinflation. Instead, he sees it as business as usual. Preston Pysh added an anecdotal point, mentioning that he has recently added fixed income to his fund for the first time since 2014.
Rising bond yields present investment opportunity but also potential losses for 60/40 portfolios: Investors face a challenging market environment with rising bond yields, potential losses for 60/40 portfolios, and uncertainty due to inflation, a bond bear market, and geopolitical tensions.
The current rise in bond yields presents an alternative investment opportunity after a decade of unattractive returns. However, as bond yields rise, bond prices fall, leading to potential losses for those with a 60/40 stock-bond portfolio. This dynamic may cause passive investors to sell equities and rebalance into bonds, negatively impacting the equity market. While some believe bonds could catch a bid due to structural reasons, others remain bearish and advise against loading up on fixed income. The current market environment, marked by high inflation, a generational bond bear market, and a potential recession, is unlike anything most investors have experienced, making it difficult to predict the future. Additionally, geopolitical tensions, including ongoing wars and the potential for World War III, could further complicate matters. Ultimately, it's crucial for investors to stay informed and adapt to changing market conditions.
High yield spreads as a recession indicator: Jason Kielinski watches high yield spreads closely when they exceed 5% for potential recession signs, while the S&P Composite Index and net liquidity remain expansionary, small caps underperform, and global liquidity decreases may impact risk assets like Bitcoin.
High yield spreads, which is the difference between the yield of junk bonds and U.S. Treasuries, can be an indicator of an approaching recession. Currently, the spread is around 4.5%, which is below the level that concerns Jason Kielinski, who shared this insight during a discussion. However, once the spread exceeds 5%, he starts to pay closer attention. The S&P Composite Index, another expansionary indicator, is still in the expansionary phase, and the net liquidity in the U.S. has been range-bound since April 2022. Additionally, the underperformance of small caps relative to the NASDAQ and other mega-cap tech stocks could be due to their status as U.S.-based assets, making them less attractive as safe havens in a global context. Furthermore, a decrease in worldwide liquidity, as indicated by M2, could be contributing to the lackluster performance of risk assets, including Bitcoin.
Diverging Financial Indicators: Monetary Easing vs. High Yield Risks: Monetary easing may be on the horizon due to rising M2 money supply, but high yield spreads are artificially low and could widen, posing risks for investors. Companies have yet to significantly respond to higher rates, adding uncertainty to the current market cycle.
The current economic environment is showing signs of divergence between different financial indicators, leading to varying perspectives on the market outlook. Jason Brett presented a chart showing the global M2 money supply, which has bottomed and is trending higher, suggesting potential monetary easing and QE in the future. In contrast, Jason Peterson pointed to high yield spreads, which he believes are artificially low due to institutional investors reaching for yield and disregarding potential risks. He warned of a potential disaster in the high yield bond market if spreads do not widen to reflect the current environment. The net interest cost chart discussed by the group indicates that this cycle may be different from past ones, as companies have not yet responded significantly to higher rates. Overall, the consensus seems to be that there are potential risks and opportunities in the market, but it's important to keep a close eye on economic indicators and market trends.
Impact of Fed's interest rate hikes on net interest payments: Companies and individuals took advantage of historically low interest rates to load up on long-term debt, which will result in increased net interest payments as these debts roll over starting in 2023. Smaller companies with lower credit ratings are most at risk of default due to higher interest rates.
Despite the fastest interest rate hiking cycle in the last 40 years, net interest payments as a percentage of post-tax profits for many companies have declined. This is due to the fact that companies and individuals took advantage of historically low interest rates by loading up on long-term debt, particularly in the form of 5-10 year paper. The impact of the Fed's hiking cycle won't be fully felt until these debts begin to roll over, starting in 2023 and peaking in 2025. Smaller companies with lower credit ratings, which are more likely to issue shorter-term debt and refinance frequently, will be hit the hardest by higher interest rates and are at greater risk of default. This risk is reflected in the performance of micro cap ETFs like IWC and IWM, which have underperformed the broader market and are hovering near their 2022 lows. The correlation between the underperformance of these ETFs and net liquidity further supports the notion that the current market environment is driven by liquidity concerns. Ultimately, the companies that will be least affected by higher interest rates are those with strong balance sheets and international assets, which are in high demand and can offer attractive yields to investors.
Diverging liquidity between major indices and global market: Investors should be aware of the widening gap between worldwide liquidity and major indices, potentially due to passive index investing or a need for indices to fall. Follow experts like Joe Carlasare, Steven McClurg, Jeff Sharpen, and Jason Brett for more insights.
The S&P 500 and other major indices, particularly due to their large tech stocks, have exhibited different liquidity characteristics compared to the global market in recent months. This divergence, which has resulted in widening "jaws" between worldwide liquidity and the indices, may eventually need to be resolved. Jason Brett, a guest on the show, suggested that this could be due to passive index investing or a potential need for the indices to fall in order to close the gap. It's unclear which scenario will play out, but investors should be aware of this dynamic. Additionally, the speakers encouraged listeners to follow them on social media or visit their websites for more information. If you're interested in Bitcoin or have been wronged by a bad actor in the crypto space, Joe Carlasare is a good resource. For macro insights, follow Steven McClurg. Jeff Sharpen runs a hedge fund and can be found on Twitter as Bill Shirecap. Jason Brett hosts the We Study Billionaires podcast and encourages listeners to follow the show for more insights on Wednesdays. Remember, this information is for entertainment purposes only, and consulting a professional is recommended before making any investment decisions.
