Good Friday Morning! We still don’t know who leaked Justice Alito’s majority opinion in the Supreme Court’s Dobbs case. The best theory is still a clerk, but we don’t know who just yet. Though, I suspect we will learn who leaked the draft opnion at some point. Politico sent out a second report with more leaks:
Justice Samuel Alito’s sweeping and blunt draft majority opinion from February overturning Roe remains the court’s only circulated draft in the pending Mississippi abortion case, POLITICO has learned, and none of the conservative justices who initially sided with Alito have to date switched their votes. No dissenting draft opinions have circulated from any justice, including the three liberals.
That could explain why no second draft of Alito’s majority opinion has been distributed, as typically the two sides react to one another’s written arguments and recast their own.
We know the Supreme Court met on Thursday for the first time since the leak. And from that meeting, the Court announced that Monday, May 16, would be the next opinion release day. People are jumping on that announcement speculating that the Dobbs opinion will get released then. I doubt it — if the Alito opinion is the only draft circulated, it’s unlikely the Dobbs opinions are ready to get published.
Until we learn more, it’s impossible to tell where things go. The leaks make the vote sound good. But without the finalized opinions, we don’t know what will happen next.
This week, I’m talking about a significant meltdown in the cryptocurrency world and what that could portend in the broad economy – links to follow.
Where you can find me this week
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[05/09/2022] Ultra-MAGA isn’t the problem, Ultra-Biden is – Conservative Institute
[05/13/2022] Tribalism and factions will never go away – Conservative Institute
The cryptocurrency meltdown.
I’ve struggled to write this edition of the newsletter because I’m watching a meltdown in cryptocurrencies in real-time. And by meltdown, I mean hyper-inflation within a cryptocurrency that made it worthless in a week. I’m making this the topic because there are real concerns now that this week’s contagion in crypto prices could spread into other markets.
The 30,000-foot view is this: essential parts of the cryptocurrency infrastructure are dissolving — wiping out more than $1 trillion and counting over the last month. That sell-off accelerated this week, especially into Thursday, as $200 billion got wiped out in one day. One of the larger stablecoins, Luna, went from collapse to wholly vaporized. That brings into question many other parts of the cryptocurrency universe.
What’s the risk? A contagion spread into other parts of the US economy.
Let’s start with the cryptocurrency in question: Luna.
Luna is what’s called a stablecoin. At all times, it is supposed to match the US dollar. The concept is that you can trade some cryptocurrencies for LUNA/UST and be guaranteed the value of your gains in other cryptos. Cryptocurrencies have had wild swings, so traders have used stablecoins to lock in profits during downturns and jump back in when crypto improves.
The WSJ provides this simple explanation:
Stablecoins are a pillar of crypto’s parallel financial system. Crypto enthusiasts need to maintain a link to the government-backed currencies of traditional finance, where rent is due, cars are bought and bills are paid. But they want to trade and invest in cryptoland only, not in dollars or euros or pounds. So stablecoins act as a kind of reserve currency, an asset whose value everyone understands—and that shouldn’t change.
Professional traders and individual investors alike use stablecoins, and had stashed around $180 billion in them as of Tuesday. A trader might sell a bitcoin for TerraUSD, then use the TerraUSD to buy ether, another cryptocurrency, without ever touching a dollar or a bank account.
Think of stablecoins a bit like a money market account. Your money is safe, earns interest, and escapes wild swings. Why does this matter? In a way, this forms the backbone of crypto banking. Matt Levine at Bloomberg illustrates the concept like this:
Crypto users want a stablecoin to support their transactions, gambling, yield farming, etc., and Tether is a popular one.
- The way Tether works is that if you buy one Tether for a dollar, Tether parks that dollar in some interest-earning dollar-denominated asset.
- In practice this means making billions of dollars of loans to real companies and financial institutions to finance their businesses. 2 You know, like a bank.
- Tether thus provides financing to the real economy much like a bank does, and because it is … regulated differently? … it can perhaps be more nimble in financing good but risky projects.
In that model, a run on the Tether bank — that is, a run on the crypto bank, on the safe assets of the crypto world — would be bad in much the same way a run on a real bank would be bad, or the way a run on the 2008 shadow banking system was bad: It would cut back on credit to real businesses and be bad for the economy.
Stablecoins provide the backbone to this model. Tether, the stablecoin Levine references, is similar to Luna. They both peg to the US dollar providing a “safe haven.” A run on one of these entities is identical to a bank run, with all the ripple effects.
And we had a bank run this week.
Luna/UST collapsed because they could not keep the promise that you’re guaranteed $1 for your cryptocurrencies. They had a run on their services, couldn’t meet demand, and made the executive decision to hyper-inflate their cryptocurrency to make those payouts — and, in the process, destroying value.
In fall 2021, Luna topped out at $116 per coin. The value had dropped for Luna, but as recent as last week, you could get around $80-$85 for a coin. As of this writing, it’s lost essentially 100% of its value and has a per-coin price of $0.007 — less than a penny, and it’s still falling.
At its peak, the Luna ecosystem had a market capitalization of $40 billion, and now it is worthless. That’s $40 billion wiped in the equivalent of a bank run, and most of those who lost their money are everyday people. One of those examples is KSICrypto, who invested $2.5 million in Luna last month and now has nothing. He sold his holdings and only had $1,000 remaining.
Not a typo.
The crypto-bank-run on Luna has spread to other stablecoins. Levine, in that Bloomberg piece, mentioned the largest: Tether. It has also de-pegged from being able to achieve a dollar. Rumors swirl it could go down next. Tether currently has a total market capitalization of $80 billion. If Tether follows Luna, we’re talking $120 billion in safe-haven money destroyed in less than a month.
If all the stablecoins get wiped out, cryptocurrencies will no longer have any safe-havens. And that is occurring in an environment where cryptocurrencies are in the middle of a bloodbath.
This narrative is generally true of the tech industry as a whole. The Nasdaq has lost 30% of its value from the November high, wiping out $2 trillion. The Down Jones Industrial Average and S&P500 are close to entering Bear Market territory with the Nasdaq (a drop of at least 20% from 52-week highs). But while a bear is rolling through the Nasdaq, Godzilla is stomping crypto.
Why does this matter? As I mentioned at the top, the fear is contagion. Bloomberg reports:
Cryptocurrencies were once touted as a risk hedge. Now they look more like a risk spreader.
As markets slumped in unison on Thursday, traders pointed to the chaos in crypto as a focal point of their concern. Strategists are increasingly worried that small traders, already nursing losses from the meme stock craze, will be wiped out on their crypto holdings and sell everything else.
“Contagion here is not via linkages between the crypto ecosystem and the traditional financial system, but via retail investors sentiment,” said Nikolaos Panigirtzoglou, global market strategist at JPMorgan Chase & Co. “If the $1 trillion capital loss in crypto markets causes broad-based retrenchment by retail investors in other risk assets such as equities, then that’s where the spillover is.”
That’s the direct threat. Crypto was once not a threat to the more extensive economic system. That has changed tremendously in the last 2 to 5 years. Matt Levin lays it out:
Ten years ago, if you had waved a magic wand and every cryptocurrency went to zero, not much would have happened. A few oddballs experimenting with a newfangled money called Bitcoin would have seen their experiment fail. “Oh well, that was cool for a while,” they would have said.
Five years ago, if every cryptocurrency went to zero, a lot of people would have lost a lot of money. But they would mostly be crypto people: Some individuals and some hedge funds that bought crypto would lose their money. The contagion to the real financial system would have been small. Lamborghini dealerships would have a rough year. But most people would barely notice.
Five years from now, if every cryptocurrency goes to zero … well, I don’t know what the next five years will be like, but a plausible story (as of last week anyway!) is that there will be continuing integration of crypto into the real economy. More crypto companies will be big and important and intertwined with other companies; their stock will be in the indexes and they will borrow money from banks and use their own money to finance real businesses. More traditional investors will own crypto, and will make levered bets on crypto, and if those bets blow up they will naturally sell more liquid traditional assets, causing contagion from crypto markets to stock and bond markets. Crypto platforms will be used for real economic activity; ordinary people will invest their savings in those platforms, and those investments will be used to finance real, non-crypto business activity. You’ll get your mortgage from a decentralized finance platform or whatever.
We’re in this weird place where crypto is more accepted and used by the general financial system, but it’s still not mainstream. Kevin O’Leary of SharkTank fame is high on crypto and thinks that in a decade, it will be the 12th sector of the S&P500.
We’re not there just yet. But we’re somewhere in-between, which means these brutal selloffs have broader implications. How much more, we don’t know just yet. But as in 2008, you never know which person going belly-up on a mortgage is the butterfly wings that kick off a global recession.
Inflation is on the table, by the way. This is not me speculating. Fresh off a vote confirming him as head of the Federal Reserve, Jerome Powell gave an interview to Kai Ryssdal of Marketplace. I recommend the entire thing, but this quote is vital for us:
Ryssdal: You also talked about a pathway. You said it’s going to be challenging, to get to this mythical soft landing. What does that pathway look like?
Powell: So a soft landing is, is really just getting back to 2% inflation while keeping the labor market strong. And it’s quite challenging to accomplish that right now, for a couple of reasons. One is just that unemployment is very, very low, the labor market’s extremely tight, and inflation is very high. So it will be challenging, it won’t be easy. No one here thinks that it will be easy. Nonetheless, we think there are pathways, as you mentioned, for us to get there. And really what that means is just as we raise rates, we — so the problem, what causes inflation, is that demand and supply are out of whack. There’s too much demand. For example, in the labor market, there’s more demand for workers than there are people to take the jobs, right now, by a substantial margin. And, because of that, wages are moving up at levels that are unsustainably high and not consistent with low inflation. And so what we need to do is we need to get demand down, give supply a chance to recover and get those to align. So how might we do that? Right now, in the labor market, there are two job openings for every unemployed person. It’s historically high-level. So in principle, and I’m not saying this will be easy to do, in principle, you could moderate demand, reduce demand to the point where job openings move down substantially, and the labor market gets much closer to being in balance. And that would affect … wages would still be moving up at healthy levels. They wouldn’t have to go down, but ultimately they would be at levels that would be consistent with 2% inflation.
A “soft landing” is market-speak for ending inflation without triggering a recession. When the Fed talks about going after labor markets, they’re talking about triggering a recession. The odds of a soft landing are non-existent, and markets are pricing that into valuations now.
I realize I’ve written about multiple things that could trigger global issues—China’s property sector, a global food crisis, and now cryptocurrencies. I’m not backing off those observations. It’s just a bizarre moment in the economy where multiple threat vectors are emerging at once. I wouldn’t even call it a perfect storm, so much as multiple storms forming at once to coalesce around a more dangerous threat.
Where do we go from here? The Federal Reserve is going to continue hiking rates to hit inflation. The latest inflation report is getting praised for a slightly lower top-line number (8.3% in April vs. 8.5% in March). But inflation is still running red hot, spreading into the labor market. Increasing wages are driving prices up further, which terrifies the Fed. A wage-price death spiral is something they want to get under wraps ASAP.
But the immediate thing in front of everyone right now is the implosion of cryptocurrency. Libertarians believed they’d found a perfect hedge, the new gold. It’s proving to be anything but. A “bank run” has wiped out tens of billions and could be hundreds of billions soon. And once there are no more safe havens in crypto, people will focus on their stocks even more.
Links of the week
‘I lost my life savings’: Terra Luna cryptocurrency collapses 98% overnight: Users of popular crypto forum fear they will become homeless after wipeout – Anthony Cuthbertson, The Independent
Crash of TerraUSD Shakes Crypto. ‘There Was a Run on the Bank.’: The stablecoin, pledged to maintain a value of one dollar, plunged as low as 23 cents this week, showing cryptocurrencies’ vulnerability – WSJ
An inflation conspiracy theory is infecting the Democratic Party – Catherine Rampell, Washington Post
By a wide margin, Americans view inflation as the top problem facing the country today – Pew Research Center
Akhil Amar Calls Out Post-Roe Fearmongering – Carrie Campbell Severino, National Review
Twitter Thread(s) of the week
Satire of the week
Thanks for reading!