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Welcome to the On the Margin Newsletter, brought to you by Felix Jauvin and Casey Wagner. Here’s what you’ll find in today’s edition:
- You watched the debate, but did you watch the bond market?
- Jerome Powell is in Sintra, but it sounds like he’s more concerned about inflation than getting a tan. We recap his remarks below.
- Silvergate Bank may have shut its doors last year, but that doesn’t mean it’s off the SEC’s radar.
As Biden’s odds of winning implode, so goes the bond market
Everyone saw the debate. Everyone’s seen the memes. I don’t need to get into that here. But one thing is for certain: The odds of a Republican sweep in the election are soaring.
The probability of a Trump win has one of the largest spreads between two frontrunners that I’ve ever seen:
And more importantly, the odds of a Republican sweep have now increased substantially:
In terms of market impact, the increasing likelihood of a sweep is what interests me. To start, one thing is certain: Both parties want to spend and print money and run a deficit, but each will do so differently.
- If Democrats win, expect large fiscal stimulus bills, debt forgiveness and outsized investment in government sectors such as health care.
- If Republicans win (especially under Trump), expect major tax cuts for individuals and corporations, a heavier hand in forcing dovish monetary policy and further incentives for corporations through removal of regulatory red tape.
Either outcome will lead to increased deficits regardless of where we are in the business cycle. However, what is uncertain is where Congress will end up (a split or a sweep). I believe this is what the market is beginning to wrap its head around.
Like I said, a Republican sweep is looking increasingly likely. This means they will have no issue passing any bill they want, allowing them to easily pursue policy objectives like tax cuts. Sure, a Trump presidency will lead to some executive orders that are friendly to corporations. But for real policy change to occur, he needs control of Congress.
I believe that the increasing odds of a Republican sweep is what set the bond market ablaze this week.
As Biden’s odds of winning the election imploded, so did long end bonds:
As bondholders saw the likely Republican sweep crystalize, they also realized that deficits are going to remain wider, leading to more debt needing to be issued and absorbed. Plus, inflation is likely to remain secularly higher.
In this brave new world of huge fiscal spending, you don’t want to be the sucker holding fixed income that is getting eroded by more debt issuance and higher inflation.
This is a crossing of a Rubicon-type moment as the US global monetary system increasingly resembles an emerging market rather than a global reserve currency one.
Someone who’s been all over this is regular On the Margin Podcast guest Luke Gromen, who tweeted the following:
Indeed, since the end of the debate, the bond market has sent a clear message: Things are changing, and fast.
— Felix Jauvin
$107 million
The total value of crypto the German and US governments collectively moved on Monday.
German officials moved 1,500 BTC (valued around $95 million), while the US government transferred 3,375 ETH (worth about $12 million), according to analytics firm Arkham Intelligence.
“While this isn’t an indication of immediate selling, it can weaken buyer enthusiasm, contributing to recent sell-side dominance,” analysts from Wintermute said of the moves.
Powell’s European summer
Fed Chair Jerome Powell appeared alongside ECB President Christine Lagarde and Central Bank of Brazil President Roberto Campos Neto during the ECB Forum on Central Banking.
The trio talked inflation, interest rates and just a little bit of politics.
Powell said he expects US inflation to drop to the “mid-to-low” 2% range within a year, i.e., just above the Fed’s target. He added that central bankers need to see further economic data before they can confidently cut rates. When specifically asked about September — which Fed fund futures markets are still eyeing confidently — he was evasive.
“I’m not going to be landing on any specific dates here today,” Powell said.
“Let me also say that we’re well aware that if we go too soon, that we could undo the good work we’ve done in bringing down inflation, and if we go too late, we could unnecessarily undermine the recovery and the expansion… we’re aware that we have two-sided risks now, more so than we did a year ago,” he added.
Lagarde, unsurprisingly, evaded questions herself, declining to comment on the results of the French election. She did say the ECB is highly attuned to how markets react to political developments. We imagine Powell feels similarly, but he kept his answer diplomatic when asked if a second Donald Trump presidency would threaten central bank independence.
“I am not focused on that at all,” he said. “I worry about getting the job right.”
On a lighter note, Europe does have something we don’t this summer: a Taylor Swift tour. Nomura analysts say Swift’s US tour last summer generated total consumer spending of $5 billion, almost half of which was retail sales. The Philadelphia Fed even said the Eras Tour boosted tourism across the region.
Powell can rest easy, though — Swift will be returning for a second US leg in October.
— Casey Wagner
Another day, another lawsuit
If I had a dollar for everytime I wrote “the SEC sued…,” I probably wouldn’t have to keep writing about lawsuits. But I won’t quit my day job just yet.
Yesterday, the SEC announced charges against Silvergate Bank, the crypto-friendly financial institution that collapsed last year.
The securities regulator says Silvergate misled investors in the aftermath of FTX’s implosion by intentionally downplaying the impact. The bank was also deceptive about its anti-money laundering and Bank Secrecy Act compliance programs, the SEC alleges.
Also named in the suit were three former Silvergate executives: CEO Alan Lane, Chief Risk Officer Kathleen Freher and CFO Antonio Martino.
Silvergate, without confirming or denying the allegations, agreed to pay $63 million to federal and state regulators, plus $50 million to the SEC in a settlement agreement. Lane and Fraher also settled for $1 million and $250,000, respectively.
These settlements are always interesting. They allow firms to avoid costly and time-consuming litigation without admitting defeat or risking a loss in court.
But in Silvergate’s case, it’s a bit different. The bank is already in liquidation. Plus, the breakdown of the fines means Silvergate is paying $43 million to the Fed and $20 million to California’s Department of Financial Protection & Innovation.
Silvergate won’t have to pay the $50 million fine the SEC assessed as long as the Fed and California regulators get paid.
Silvergate in March announced it was entering into “voluntary liquidation.” At its peak, Silvergate reported assets of more than $16 billion.
The settlements are all subject to court approval.
— Casey Wagner
Bulletin Board
- Crypto equities have notched a solid first half of the year. MicroStrategy is up 380%, while Coinbase and Robinhood have gained 329% and 122%, respectively. Crypto mining stocks Hut 8 and Bitfarms are up 86% and 34%, respectively, since the halving.
- Circle has received a license to operate in the EU under the Markets in Crypto Assets (MiCA) regulation. The news comes amid ongoing confusion about how stablecoins would operate in the post-MiCA era.
- In case you missed the viral opinion piece Blockworks published on being a single-issue crypto voter, catch up with the Empire Podcast, which recently featured crypto-founder-turned-Trump-ally Ryan Selkis. Listen here, or wherever you get your podcasts.