Bitcoin stumbles because it’s a scam

Plus inflation & COVID threaten markets and India, Greens & Yang campaign

It’s Monday, time for another round of Contention! Here we’ve got seven-ish minutes of fully hedged dissident business news. Our stories:

  1. Markets slow as COVID, inflation accelerate

  2. Bitcoin stumbles because it’s a scam 

  3. Rapid Round: India suffers, Germany weighs Greens, Yang courts NYC execs

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Markets slow as COVID, inflation accelerate

Stocks nudged barely ahead last week following a Friday rally, with the Dow up 0.7%, the S&P 500 1.1%, and the Nasdaq 1.4%. Equities had slumped before the end-of-the-week boost, despite continued record outperformance from corporate earnings.  

The question now: have markets hit their peak just as new risks emerge for the people least able to account for them? 

Two weeks into earnings season, public companies have confirmed reports of rising fortunes: 90% of them are beating earnings estimates, with an average outperformance of 20% -- three times the historic average. Earnings per share have grown 63% year-over-year, outstanding even with the 2020 shutdown’s “base effects” amplifying the gains.

But these upside surprises have not translated into rising stock values. In fact, so far this earnings season companies that beat expectations have lost an average of 0.62% of their stock value the day they announce their wins. This is in contrast to an historic 1.86% price gain for earnings beats. It seems that the historic runup in stocks since late last year has already priced in all of the good news.

Hanging over the “reopening trade" and the market at large: a global COVID surge quietly putting the vaccine recovery at risk. Nowhere are things worse than in India, which we cover below. So far, real-world data indicate that current vaccines work against the variants now most common in Western countries, but epidemiologists say it is “inevitable” that a strain will break through their protection. Two-thirds of the experts surveyed by Oxfam estimate that we have less than a year until they are ineffective. 

The United States and its rich country allies have aggravated this risk. Last week, World Trade Organization representatives met in Geneva to discuss proposed waivers to “Trade-Related Intellectual Property Rights” (TRIPS) rules that would allow India, South Africa, and other Global South nations to produce their own vaccines. Pharmaceutical companies have lobbied heavily against the move, and while U.S. Trade Representative Katherine Tai expressed concerns about unequal vaccination access, the U.S. government continues to oppose the waiver.  

This ongoing uncertainty bodes poorly for the other force weighing on markets: inflation. Virtually every major earnings message so far has alluded to rising input costs and mounting pressures on profit margins. 

Proctor and Gamble followed its report with news that it would raise prices on infant, adult care, and menstrual care products starting in September. This follows similar recent announcements by Kimberly-Clark, Coca-Cola, and General Mills. Bloomberg’s Agriculture Spot Price Index hit a nine-year high last week, weighing on all of these brands. 

But remember: we might not see these costs in official inflation stats. Proctor and Gamble said they hoped to add new features and product improvements along with their price increases. Those could justify “hedonic adjustments” that would erase the price increases according to the government. 

The real prices -- like all prices -- are signals between buyers and sellers, communicating what observers have been calling “supply chain disruptions.” But when supply chains from ketchup to ride share drivers to scientific supplies are all experiencing shortages it makes sense to step back and see the big picture of an entire system of production buckling under rapid, successive waves of misallocated capital. 

Policymakers whistling past the charnel grounds of a new pandemic wave and sustained dependence on novel central bank interventions believe that these waves are now over. Surging insider stock sales indicate that the smart money may be preparing for more turmoil to come.  

For those with fewer options -- the people who notice when food, diapers, or tampons cost more -- the risk is especially acute. Stay tuned. 

Bitcoin stumbles because it’s a scam 

Bitcoin capped off a week of losses on Friday with a 7.3% plunge, wiping out more than $200 billion in market value. The losses were part of a two-week selloff, with the benchmark cryptocurrency losing 20% from its recent record high

This move should surprise no one: Bitcoin remains a purely speculative asset backed in large part by fraud, despite what price-chasing Wall Street behemoths want to believe. 

Nobody knows what sparked the rout, but it started with a 17% plunge, half of which came in 20 minutes. Once the drop began, highly leveraged offshore crypto derivatives markets began forcing liquidations, with a record $10.1 billion in compulsory sales on Sunday, April 18 alone.

These liquidations are yet another margin call: speculators can buy Bitcoin futures contracts for pennies on the dollar -- crypto exchange Binance was allowing 125 to 1 bets, i.e. $0.80 would expose you to price moves on $100 worth of Bitcoin -- with 90% of them betting on the price to go up. When instead the price went down, punters had to put up more collateral or the exchange would sell off their position for them to contain losses. This selling caused further price drops, triggering new margin calls, prompting more selloffs.

This was not supposed to happen. With the arrival of major institutional investments, JPMorgan told its clients just this month that cryptocurrency volatility had “normalized.” Validation from the likes of Goldman Sachs and Morgan Stanley had transformed the speculative vehicle into an “inflation hedge.” New data indicates that capital allocated for inflation hedging is now rapidly moving from gold to Bitcoin.

This is total nonsense. Hedging works when: 

  • the economic forces driving down the value of one asset simultaneously drive up the value of another

  • an investor takes both sides of a bet simultaneously

  • when an insurance-like contract pays out. 

Gold is a commodity used in a variety of consumer and industrial applications. Inflation = money values dropping = commodity prices rising. It is a natural inflation hedge. Buying an inflation-protected Treasury bond would obligate the government to cover anticipated inflation costs. 

But cryptocurrencies have no underlying assets or obligations. People believe they will hedge inflation because when inflation goes up people will want to buy more crypto. Why? Because crypto prices will rise from increased demand relative to shrinking supply. The rationale is entirely circular: Bitcoin is an inflation hedge because people believe it’s an inflation hedge.

This underscores the fundamental volatility of the asset class, and any significant blow to crypto demand could mean major, sustained losses. One risk we’ve mentioned before: Tether, the “stablecoin” allegedly backed 1:1 by U.S. dollars is responsible for 55% of Bitcon’s transactions. It is almost certainly a scam, settling a major investigation by the New York Attorney General last month with a $18.5 million fine

That was a slap on the wrist, and subsequent moves by the company suggest that the fraud continues. A “Consolidated Reserves Report” issued at the end of February closely resembled similar reports the company made in 2017 and 2018 which the NYAG found to be faked. Tether’s owners moved assets from their other company, crypto exchange Bitfinex, onto Tether’s books when accountants took a look, and then moved the money back afterwards. 

Not only this, but the accountants that signed off on the report used abnormal accounting methods that could let Tether/Bitfinex claim long defunct “altcoins” as assets valued at the prices paid for them long ago. This may be what backs a large portion of Bitcoin’s market cap. 

As for who might do something about the crime, Tether has also emerged as a major vehicle for illegal capital flight out of China. Up to $50 billion might have left the country this way, a situation Beijing could seek to rectify at any moment. Their swiftness dealing with their domestic tech companies suggests Tether’s time could be up any day.

The situation is almost hard to believe: major investors have moved hundreds of billions of dollars into a patently speculative bet on the flimsiest of circular logics, its price inflated by thinly-regulated mega-leverage and supported by a proven fraud, all dependent upon the Communist Party of China turning a blind eye to financial crimes undermining their country’s financial system. 

In that context the question isn’t why did Bitcoin drop last week, it’s why does anybody buy it at all? 

Rapid Round

India COVID, economic crises deepen

India set another global daily record of COVID-19 cases over the weekend with 346,786 infections, bringing the total to 16 million cases with 185,000 confirmed deaths -- likely a drastic undercount. “This storm has shaken the nation,” Prime Minister Narendra Modi said in a radio address.

This “storm” has overwhelmed India’s health system and crematoriums. Hospitals face critical shortages of oxygen, made worse by the Indian government doubling oxygen exports over the fiscal year. Rising cases are threatening India’s consumer-driven economic recovery, with analysts paring down previously optimistic forecasts as retail activity contracts and migrant workers flee the cities for their villages.

India is also experiencing an inflationary upsurge with the official wholesale price index for March coming in at 7.39% higher than in March 2020. The most important reason: rising fuel prices caused by the government cutting subsidies, raising the cost of production for commodities such as fertilizers. 

“Government policy amounts to a combination of stoking inflation and decimating the viability of peasant agriculture,” economist Prabhat Patnaik wrote.

German Greens could win, fight Russia

Germany’s federal election isn’t scheduled until Sept. 26, but the country’s major political parties finalized their candidates for chancellor last week. The Greens nominated Annalena Baerbock, a 40-year-old parliamentarian from Brandenburg. Initial polls surprised observers, as Baerbock’s Greens lead the long-dominant Christian Democratic Union (CDU), which settled on Armin Laschet, chief executive of North-Rhine Westphalia. Benefiting the Greens’ rise: turmoil within the CDU over Laschet’s nomination.

Baerbock has promised a tougher line to control the pandemic and a struggle between “authoritarian forces versus liberal democracies,” referencing the Greens’ pro-NATO, anti-China, anti-Russia stance. Baerbock has called for canceling the $11 billion Nord Stream 2 Russian natural gas pipeline which passes directly under the Baltic Sea and will double Russia’s export capacity to Germany. Laschet and incumbent CDU Chancellor Angela Merkel both support the pipeline.

What’s at stake: the potential for Russia to undercut U.S. liquified natural-gas shipments across the Atlantic -- including climate-hostile fracked gas. In March, the U.S. State Department threatened to enforce sanctions on European companies involved in the pipeline, which is 95% complete.

Wall Street goes Yang Gang 

Businessman Andrew Yang remains well ahead of his rivals in New York’s Democratic mayoral primary scheduled for June 22. He’s also getting a boost from business. Yang, a technocrat and advocate of universal basic income, is reportedly courting executives in one-on-one meetings. 

“Andrew Yang has begun to be seen in a much more favorable light because he doesn’t demonize the business class,” Mary Ann Tighe of the commercial real estate giant CBRE told the Financial Times.

Weighing on the shift among business is the poor polling for former CitiGroup investment banker Ray McGuire, endorsed last week by Jay-Z and Diddy. Yang meanwhile has scaled down his UBI proposal to $2,000 per year for those living in extreme poverty as a start. Another plan: establish a “People’s Bank” to provide banking services to low-income and undocumented residents -- and capital to credit unions in a similar manner to the Bank of North Dakota, the only state-owned bank in the United States. 


Our only investment advice: Watch out for the wolf.

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