The Breakdown - As Bank of England Intervenes, Druckenmiller Sees Crypto Renaissance

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, September 28th, and today we are talking about how, as the Bank of England intervenes in their bond market, famed hedge funder Stanley Druckin-Miller sees the potential for a crypto-o-eastern. Renaissance. Before we dive in, however, a quick note. There are two ways to listen to the Breakdown Podcast. You can hear us on the Coin Desk Podcast Network feed, which comes out every afternoon and also features other great Coin Desk shows, or you can hear us on the breakdown only feed,

Starting point is 00:00:49 which comes out a few hours later in the evening. Wherever you were enjoying the show, if you would take the time to leave a five-star rating or review, it would make such a difference, and I would so appreciate it. Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. And finally, I want to tell you about CoinDesk's new event, the investing in digital enterprises and asset summit or Ideas is designed to facilitate capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience where you can source and invest in the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass and register today at coindesk.com slash ideas.

Starting point is 00:01:33 All right, folks. boy, oh boy, did today start with a bang. We've been discussing for about a week and a half now that it feels like we have been in a very big in-between liminal period where something large and potentially bad was brewing. And boy, have we started to get the first fireworks. Yesterday, we discussed the dramatic moves in the market for the British pound. To quickly sum up, at the end of last week, the new trust government announced its budget plans. The centerpiece of that plan was a huge tax cut. Basically, they hacked off the top tax

Starting point is 00:02:09 bracket, arguing as did new finance minister Quasi Quartang, quote, high tax rates damage Britain's competitiveness. They reduced the incentive to work, invest, and start a business. And the higher the tax, the more ways people seek to avoid them, or work elsewhere, or simply work less, rather than putting their time and money to more creative and productive ends. While some commentators in the country were excited, there was also some pretty severe incredulity. I'm going to read this one from the Daily Mirror editorial staff again just for its savagery. Short of burning 50-pound notes in front of the poor, Quarteng could not have delivered a more insulting budget. His plans are economically incoherent, fundamentally unequal, and fiscally dangerous.

Starting point is 00:02:49 Indeed, while there would be much debate about whether markets were reacting to the specifics of the plan or the questions of competence that seemed to raise about the people who proposed it, what mattered most in the short term was what markets thought, and the pound was down 3.5% on Friday. That was one of its five largest intraday moves in decades. That continued over the weekend when the GbP hit its lowest levels against the U.S. dollar ever. At the same time, the British bond market was selling off as well. And so where we left the story yesterday was that people were massively unimpressed with the Bank of England's statements around how they were ready to step in in support, but by this morning, we got more clarity on what that meant. On Wednesday morning, the UK's

Starting point is 00:03:27 finance ministry said that Bank of England intervention would be needed to calm, quote, significant volatility and market disruption. The Ministry released a statement saying, The Bank of England, in line with its financial stability objective, carefully monitors financial markets and any potential risk to the flow of credit to the real economy, and subsequent effects on UK households and businesses. Global financial markets have seen significant volatility in recent days. The bank has identified a risk from recent dysfunction in guilt markets. Editor's note that's their equivalent of treasury markets, so the bank will temporarily carry out purchases of long-dated UK government bonds from today, 28th of September.

Starting point is 00:04:00 in order to restore orderly market conditions. These purchases will be strictly time-limited and completed in the next two weeks. To enable the bank to conduct this financial stability intervention, the operation has been fully indemnified by HM Treasury. The Chancellor is committed to the Bank of England's independence. The government will continue to work closely with the bank in support of its financial stability and inflation objectives. Now, in its statement, the Bank of England said, the Bank of England stands ready to restore market functionality and reduce any risks from contagion to credit conditions for UK households and businesses. The purposes of these bond purchases will be to restore orderly market conditions. The purchases will be carried out on whatever

Starting point is 00:04:36 scale is necessary to affect this outcome. This is a little bit different from what we saw on Monday when the central bank said that it would not try to counteract the government's massive fiscal spending with an emergency rate hike, stating that it would prefer to wait until its scheduled meeting on November 3rd. Paul Dales, the chief UK economist at Capital economics, gave the bank reasonable mark, saying, the bank is going to do all it can to prevent a financial crisis and it is already working. While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position. It wouldn't be a huge surprise if another problem in the financial markets popped up before long.

Starting point is 00:05:09 So that's the mainstream media version of the story, but it's certainly not how people are talking about it. As you can imagine, the money printer-go-bur memes were dusted off and just waiting in the wings for exactly this moment. Dan Held made a job. joke that it's Great Burton? Dario Perkins from T.S. Lombard wrote, It's not QE. It's just a short-term operation to address an immediate risk to UK financial stability. Reassured yet? Some talked about it being a self-inflicted wound. Chris Giles, the economics editor at the Financial Times, wrote, this is bad. Entirely self-inflicted wound, forcing the Bank of England to restart the printing presses to bailout pension funds,

Starting point is 00:05:46 which were falling over this morning, because no one in financial markets liked the mini-budget. This is now financial crisis territory limited to the UK. Bank of England will seek to stabilize, as it did after Brexit vote. Let's hope so. Perhaps a more interesting part of the discussion was about causality and why this had to be done now. Macro Alf tweeted big news, hearing from several sources in the UK that some pension funds are quickly becoming insolvent due to huge margin calls they can't meet. The massive move in 30-year UK swaps and bonds, coupled with risk assets tanking behind the problem. That explains, quote-unquote, the B-O-E action. Sam Coates, the deputy political editor at Sky News, wrote,

Starting point is 00:06:25 I'm told pension funds getting hammered and losing huge amounts of capital. Banks forcing them to make margin calls and liquidate assets, so guilt's. Some pension funds losing large amounts of their fund. Hence, BEOE stepped in. They are worried about systemic risk and without move today, some pension funds could have gone under. They still might. Ed Conway at Sky wrote, Am told the BOE were responding to a quote-unquote run dynamic on pension funds,

Starting point is 00:06:48 a wholesale equivalent of the run which destroyed Northern Rock. Had they not intervened, there would have been mass insolvencies of pension funds by this afternoon. Bitcoin Jack tweeted so many questions today. How bad is the pension fund situation? Are they in time? Or does this become a Lehman moment? What's the possible spillover? What happens across the pond to both sides?

Starting point is 00:07:08 How f***ed is the pound? List goes on, you see, this isn't easy. It's not as straightforward as saying QE is back, market go up. But it could very well be that easy. But this kicks off a butterfly effect. This certainly continues kicking gears on the pound and while central banks may have good intentions, panic is spreading. And panic leads to unintended consequences. In my opinion, this is the endgame starting. Self-preservation remains goal number one. Let things

Starting point is 00:07:31 unfold for a bit until we have more pieces of the puzzle. Nexo is a security first platform built for the long run with everything you need for your crypto. Five key fundamentals, including real-time auditing and insurance on custodial assets, safeguard your funds. making nexo the right place for you to buy, exchange, and borrow against your assets safely. Learn more about nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, chainelysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence,

Starting point is 00:08:23 and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash CoinDesk. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors.

Starting point is 00:08:55 There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCS app today and use referral code breakdown to support the show. Some folks made an argument that the British intervention actually worked. As Joe Wisenthal pointed out, quote, 30-year guilt yields just experienced their biggest one-day fall in history, right after the

Starting point is 00:09:34 biggest jump in history. He also wrote, B.O.E probably pretty happy with the initial market reaction to the QT delay and long-end purchases. Guilt yield solidly lower while the pound is actually up a little higher. The pound, in fact, was up 1.26% on the day. Another question was whether we'd see something similar in the U.S. Oil and gas investor Josh Young wrote, BOE warns of risk to UK financial stability as it intervenes in gilt market. or, in other words, the UK is back to quantitative easing with inflation at 10% to avoid pension

Starting point is 00:10:03 blowups and other similar issues. Will this happen in the U.S. soon? The Bank of England is now the second central bank to panic in the past week, after the Bank of Japan's intervention in the currency market as well. Raul Paul wrote stabilizing bonds markets. First the B.O.J, then the B.O.E., next the ECB. The markets will keep pushing until it gets what they want. More cowbell.

Starting point is 00:10:24 More fx devaluation. Muhammad L. Erion tweeted a chart of the U.S. two-year treasury yield going down and wrote, The inherent optimism of U.S. markets is evident as Bank of England's intervention is seen as pointing to a more doveish Fed. Alex Kruger wasn't so sure, writing, BUE doing temporary QE out of the blue could be a short-term trend changer. But also, quote, the risk is that QE should lead to higher inflation expectations which cannot become unanchored or its game over. Make sense for the market to get excited about the possibility of the Fed doing the same. They won't do it, though. They wouldn't risk.

Starting point is 00:10:55 not even remotely there. So summing up where we are in England right now, Lin Alden tweets RIP, Bank of England's quantitative tightening 22 to 2022. Muhammad El-Eyrian again pointed out the difficulty that policymakers are faced with. Bank of England is off the sidelines with direct intervention in the government bond market, he writes. It just announced temporary purchases of long-dated U.K. bonds. This for a central bank that was on the verge of doing QT and hike, illustrating the intensification of its policy dilemma. An Omura analyst wrote, we are now finally proving that central banks are trapped into a BOJ-like forever state of balance sheet expansion, as they are once again forced to bend the knee to market forces. Lynn had written about this

Starting point is 00:11:34 in her June 22 newsletter. Sharing an excerpt from that piece, she writes today, the BOE now joins the BOJ and ECB and having to print money despite high inflation in order to support their sovereign bond markets. In June, she had written, I think major central banks, including the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan are nearing the losing side of a checkmate scenario, where economic realities dwindle their set of possible choices to zero. The latter two have already likely been put in checkmate while the former two are hanging on for the moment. This is primarily due to the long-term debt cycle described earlier in this issue, where their economies were stimulated to higher and higher debt as a share of GDP and lower and lower interest rates over decades,

Starting point is 00:12:11 until they hit super-high debt levels with zero or slightly negative rates. Then they grind through the low-rate disinflationary period for a while until they finally work through excess capacity and reach a period of scarcity, stimulus, and inflation. Checkmate in this context happens when a central bank encounters inflation that is above its target level, but still can't stop printing money, due to lack of buyers of their country's government debt, or due to other critical liquidity problems in their financial markets. In other words, it's what happens when a country with a super-high debt ratio gets hit with acute commodity shortages, and thus has to keep doing quantitative easing on its government bonds even during high inflation. This historically only rarely happens to

Starting point is 00:12:48 developed market central banks, and until recently hasn't really happened to any of them since World War II, the prior inflationary part of a long-term debt cycle. When it happened back then, it occurred to several regions at roughly the same time, and that seems to be the case today as well. Summing up where we are even more crisply, Sven Henrik wrote, we intervened so much we caused an inflation crisis, then we tighten so much we're causing a global economic crisis. Now we must intervene to prevent a financial meltdown. And putting it in a crypto or Bitcoin context, checkmatey writes, about four hours ago, every analyst under the sun was in the there will be no pivot camps. They forgot about how big the debt problem was. Now the BEO is back doing QE, FX markets

Starting point is 00:13:28 looking like a day on finance, and government debt is radioactive. Fun times. Laser eyes on. And that brings us to the crypto-twitter side of the story. As all this chaos was happening, there was a blaring headline from Bloomberg that said, Druckett Miller says cryptocurrency could have a Renaissance, if people lose trust in central banks. Where this quote came from was CNBC's Delivering Alpha Investor Summit in New York City this morning, where the famed hedge fund manager, who has never had a down year, sounded a harsh warning. A week ago, he said, there's a high probability in my mind that the market at best is going to be kind of flat for 10 years, sort of like this 66 to 82 time period. And at today's summit, he expanded on that thesis.

Starting point is 00:14:09 Our central case is a hard landing by the end of 23. I will be stunned if we don't have a recession in 23. I don't know the timing, but certainly by the end of 23. I will not be surprised if it's not larger than the so-called average garden variety. He also said that he didn't rule out something worse. Discussing how quantitative easing and zero interest rates created an asset bubble, he said, all those factors that caused a bull market, they're not only stopping, they're reversing, every one of them. We are in deep trouble. He called the transitory theory of inflation ridiculous and said that the Fed didn't do enough to fix it fast enough. Quote, when you make a mistake, you've got to admit you're wrong and move on that nine or

Starting point is 00:14:48 ten months that they just sat there and bought $120 billion in bonds. I think the repercussions of that are going to be with us for a long, long time. Druck and Miller went on that Federal Reserve policymakers have, quote, put themselves in the country and most importantly the people of the country in a terrible position. Inflation is a killer. To maximize employment over the longer term, you need to have stable prices. He also made a point that I think far too few people have been discussing, arguing that going after inflation now is fundamentally more difficult than it was in the 1980s, in the storied Volker period.

Starting point is 00:15:20 Back then, he said, quote, the economy wasn't nearly as leveraged and we had not been through an asset bubble. Overall, he said, you don't even need to talk about black swans to be worried here. To me, the risk-reward of owning assets doesn't make a lot of sense. Now, he still pointed out that in any environment there are ways to make money. Drucken Miller said he's still bullish on biotechnology. And this is where he also said that cryptocurrencies might benefit if distrust and central banks swells. And for all those who will clamor over the next day or weeks or months or however long this narrative lasts, to suggest that this

Starting point is 00:15:53 is just yet another crypto narrative shift, I would only like to point out that I have said on this show too many times to count that the thing that got me excited about Bitcoin in the first place was not as an inflation hedge and not as an uncorrelated asset, in market terms at least, but is in a non-state controlled hedge against unstable monetary regimes, wherever those regimes might be. I think the simple fact that there is a choice of an asset class that is currency-like, that isn't controlled by the government, is inevitably going to be an important hedge for a growing number of people. And by the way, Druckin-Miller's also been on this for a while as well. He wasn't quite as loud as people like Paul Tudor Jones, but he still spent a lot of the fall in

Starting point is 00:16:38 2020 talking about Bitcoin and where it might go. Anyways, guys, another really interesting day. I think we might firmly be in it now. But for me, I want to say thanks again to my sponsors, nexus.io, chain aliasis and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - As Bank of England Intervenes, Druckenmiller Sees Crypto Renaissance

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.