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Futures Dip As Traders Await Fed Minutes

Futures Dip As Traders Await Fed Minutes

US equity futures and global markets were flat in listless trading as investors assessed the outlook for economic recovery and awaited the latest Federal Reserve minutes to gauge the direction of monet

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Futures Dip As Traders Await Fed Minutes

US equity futures and global markets were flat in listless trading as investors assessed the outlook for economic recovery and awaited the latest Federal Reserve minutes to gauge the direction of monetary policy while tracking the latest covid lockdown in New Zealand and on edge ahead of possible turbulence in Friday's OpEx. Overnight the MSCI Asia Pacific Index added 0.4% while Japan’s Topix index closed 0.4% higher. In Europe the Stoxx 600 Index was broadly unchanged. S&P 500 futures pointed to a small move lower at the open, the 10-year Treasury yield was at 1.277%, oil rose and gold moved higher, while cryptos rebounded from a late Tuesday selloff.

Viacom CBS advanced 1.9% in premarket New York trading after Wells Fargo Securities raised the stock to overweight from equal weight, citing the media company’s success with streaming-video services. Targets slumped more than 3% in premarket trading despite posting stronger than expected results as sales growth moderated after the pandemic boom. Here are some of the other biggest U.S. movers today:

  • TD Holdings (GLG) shares soar 38% following the China-based company’s second quarter results, where revenue surged 2,981% y/y to $59.84 million.
  • Tilray (TLRY) shares rise 6.7% with Cantor Fitzgerald saying its deal to buy a majority position in senior secured convertible bonds issued by MedMen “adds credence” to its U.S. growth aims.
  • Virpax Pharmaceuticals (VRPX) rallies 63% in premarket trading, extending Tuesday’s surge after the firm said it received a pre-investigational new drug response from the U.S. Food and Drug Administration for an antiviral barrier product.
  • Weibo Corp. (WB) shares rise 5.6% in U.S. premarket trading after the Chinese social media platform reported second- quarter results that topped estimates.

A sense of caution was visible in markets notes Bloomberg, with most assets posting small moves, amid the growing spread of the delta virus variant, the prospect of reduced stimulus support and elevated inflation. While the Fed minutes Wednesday may give some clues about the timeline for tapering stimulus, the next catalyst for markets may not come before the central bank’s Aug. 26-28 conference at Jackson Hole, Wyoming.

“Investors are trying to balance the reopening of economies as vaccination rates go up, but also seeing the effects of the spreading Delta variant and that’s being reflected in the slowing economic data most of which has been surprising on the downside in the last two weeks,” said Kerry Craig, global market strategist at JPMorgan Asset Management.

In a town hall meeting Tuesday, Fed Chair Jerome Powell flagged that the pandemic is “still casting a shadow on economic activity” but didn’t discuss the outlook for monetary policy or specifics on growth and the risks from the delta variant.

“The market remains cautious,” Mizuho strategist Peter Chatwell wrote in a note. Unless Fed minutes “reveal something substantively different from recent source stories, the market is unlikely to react significantly, and choppy trading may continue.”

Today Investors will scan the Fed minutes due 2pm ET for further clues on when the bank might start tapering its bond purchases. “To see a successful taper in the next few months, we need to see more of those strong job prints,” said John Luke Tyner, fixed income analyst and portfolio manager at Aptus Capital Advisors. “I don’t see the Fed backing out of support yet, I think we need to see the unemployment rate fall below 5%.”

European shares rebounded from an early weakness, and edged up with the benchmark STOXX index rising 0.05%. The Euro Stoxx 50 is 0.2% lower, FTSE 100 and CAC lag peers at the margin. Miners, autos and retail names weigh; utilities and health care are the strongest sectors. European utilities stocks outperform, buoyed by gains for Fortum and Verbund with gas prices edging higher, bullishness on the outlook for carbon prices in Europe and a PT raise for the Finnish company. Stoxx 600 Utilities index up as much as 0.9%, touching the highest since April 23; benchmark index little changed. Here are some of the biggest European movers today:

  • Alcon shares rise as much as 11%, the most intraday since March 2020, to hit a record high. The eye-care products maker’s 2Q results and raised guidance should be taken positively, with an upbeat read on the recovery in surgical procedures, analysts say.
  • Tecan shares rise as much as 6.8% to a record after the Swiss laboratory-equipment maker posted 1H results that Vontobel says “clearly” beat expectations.
  • Future shares rise as much as 5.3% as Berenberg (buy) says the media company remains a “top pick,” with multiple synergy opportunities and upside potential. Broker increases price target to a Street high.
  • Nel gains as much as 5.4% after entering partnership with SFC Energy.
  • Zur Rose fell as much as 7.6% after 1H results as analysts note widened losses as the company steps up marketing and gets ready for the German e-prescriptions system.
  • Ambu drops as much as 5.2% as the medtech maker gets downgrades from Nordea and JPMorgan, with both seeing downside to consensus estimates.

Earlier in the session, Asian stocks rebounded, led by cyclicals, after a four-day selloff dragged the regional benchmark to its lowest level in almost eight months. The MSCI Asia Pacific Index rose as much as 0.8%, with financials and information technology sectors being the top performers. Chinese tech shares gave up gains after bouncing back following a five-day rout while a gauge of Southeast Asian equities jumped the most in about a month.  Wednesday’s respite comes after the MSCI Asia Pacific Index slumped 1.3% in the previous session to close at its lowest level since Dec. 28. Investors are assessing the economic impact from the spread of the delta variant of the coronavirus while also waiting for the release of the latest Federal Reserve minutes.

"Fed minutes due later tonight should show further indications that the Fed is leaning towards taper by the end of the year," Eugene Leow, a strategist at DBS Bank in Singapore, wrote in a note. “We do not think that the delta variant changes the timeline for Fed normalization.” Equity benchmark in the Philippines, dominated by old-economy names, was the biggest gainer amid the broad rally in Asia on Wednesday.

Japanese equities rose, erasing early losses, as investors looked beyond a well-flagged extension of the latest coronavirus state of emergency. “It’s a technical rebound,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management. “There is some anticipation that the spread of virus cases could ease with the state of emergency now officially extended and expanded.” Electronics makers were the biggest boost to the Topix, which gained 0.4%. Fast Retailing was the largest contributor to a 0.6% advance in the Nikkei 225, which ended a four-day losing streak. Prime Minister Yoshihide Suga announced measures Tuesday evening that extend the state of emergency to Sept. 12 from its previously scheduled end of Aug. 31, and widen it to 13 prefectures from 6.  Meanwhile, the finance ministry reported Wednesday that the value of Japan’s exports increased 37% in July compared with last year’s depressed level, slowing from a 49% jump in the prior month

India’s benchmark equity index snapped a four-session streak of gains to slip from record highs, led by ICICI Bank.  The S&P BSE Sensex fell 0.3% to 55,629.49 in Mumbai, while the NSE Nifty 50 Index dropped by a similar amount to 16,568.85. Both indexes had climbed to fresh peaks on Tuesday. Out of 30 shares in the Sensex index, 10 rose, while 20 fell. Thirteen of the 19 sector indexes compiled by BSE Ltd. declined, led by a gauge of metal stocks. ICICI Bank Ltd was the biggest drag on both indexes, declining 1.8%.  “We remain cautious on the markets as there is no clear direction over the next move,” said Ajit Mishra, vice president of research at Religare Broking Ltd. “High volatility and profit taking in broader markets are adding to the participants’ worries. We suggest investors to remain selective and prefer investing in defensive sectors such as consumer goods, IT and pharma.” 

In rates, the yield on benchmark 10-year Treasury notes rose to 1.2767% compared to its U.S. close of 1.258% on Tuesday. Germany’s 10-year yield, the benchmark for the euro area, was down 1 basis point at -0.475% by 0805 GMT, above the lowest in nearly two weeks of -0.501% touched on Tuesday.

In FX, the South Korean won led gains among Asian currencies after a six-day hammering prompted the finance ministry to monitor the currency market more closely. The New Zealand dollar recouped losses made after the Reserve Bank of New Zealand delayed a widely expected rise in interest rates as the country was put into a snap COVID-19 lockdown. The kiwi fell to a nine-month low of $0.6868 after the decision although it soon recovered, climbing back to $0.6919, as investors absorbed RBNZ projections showing policymakers still expect to raise rates over coming months.

“They’ve said no go, because you’ve got COVID and too much uncertainty. Give it a few weeks, let the smoke clear then the tightening cycle is still on the table,” said Imre Speizer, head of NZ strategy at Westpac.

The Bloomberg Dollar Spot Index is little changed, faded Asia’s modest strength. SEK and GBP top the G-10 scoreboard, NZD lags although ranges are small. The euro touched a fresh year-to-date low earlier before reversing its losses; sentiment in options suggests a breach of the $1.17 handle is probable. The pound drifted in a narrow range after U.K. inflation eased in July. It’s the first time in four months that inflation rose less than economists had expected. Aussie steadied after yesterday’s loss; iron ore extended its rout as BHP Group warned it sees an increasing likelihood of “stern cuts” to China’s steel output this year.

In commodities, West Texas Intermediate crude rose above $67 per barrel after the American Petroleum Institute’s report that inventories fell last week outweighed concern over the impact of the pandemic on demand leading to four days of straight declines. Brent trades near $69.50. Spot gold trades a narrow range, holding in the green near $1,787/oz. Base metals are in the red with LME lead and aluminum under-performing.

Bitcoin advanced after two days of losses and traded around $45,500 apiece.

Looking at the day ahead now, the main highlight will likely be the release of the FOMC minutes from the July meeting, while St. Louis Fed President Bullard will also be speaking. On the data side, there’s also US housing starts and building permits for July, along with the UK and Canadian CPI readings for that month. Finally, earnings releases include Nvidia, Cisco, Lowe’s, Target and TJX.

Market Wrap

  • S&P 500 futures down 0.1% to 4,437.25
  • STOXX Europe 600 little changed at 473.73
  • MXAP up 0.4% to 196.54
  • MXAPJ up 0.5% to 644.48
  • Nikkei up 0.6% to 27,585.91
  • Topix up 0.4% to 1,923.97
  • Hang Seng Index up 0.5% to 25,867.01
  • Shanghai Composite up 1.1% to 3,485.29
  • Sensex down 0.2% to 55,657.43
  • Australia S&P/ASX 200 down 0.1% to 7,502.15
  • Kospi up 0.5% to 3,158.93
  • Brent Futures up 0.5% to $69.40/bbl
  • Gold spot up 0.1% to $1,787.22
  • U.S. Dollar Index little changed at 93.07
  • German 10Y yield rose 1.5 bps to -0.478%
  • Euro little changed at $1.1719

Top Overnight News from Bloomberg

  • New Zealand’s central bank refrained from raising interest rates during a coronavirus outbreak and nationwide lockdown, but signaled it intends to start tightening monetary policy soon.
  • New Zealand found six additional cases of Covid-19 as it began a nationwide lockdown, all connected to a single delta infection discovered Tuesday with a link to an outbreak in Australia. New South Wales state saw a surge in infections as the virus spreads throughout Sydney despite Australia’s largest city being in lockdown for almost two months.
  • Japan’s export recovery showed signs of peaking in July, with shipments to China and Europe losing strength amid a global resurgence of the coronavirus.
  • Oil held a four-day drop driven by escalating concern that the spread of delta coronavirus variant is setting back the recovery in key economies, potentially jeopardizing a revival in energy consumption.
  • President Xi Jinping said China must pursue “common prosperity,” in which wealth is shared by all people, as a key feature of a modern economy, while also curbing financial risks.
  • The U.S. has frozen nearly $9.5 billion in assets belonging to the Afghan central bank and stopped shipments of cash to the nation as it tries to keep a Taliban-led government from accessing the money, an administration official confirmed Tuesday.
  • Norway’s $1.4 trillion sovereign wealth fund, the world’s biggest, generated a 9.4% return in the first half of the year after its investments in energy, finance and technology companies helped drive double-digit gains in its stock portfolio
  • President Xi Jinping put China’s wealthiest citizens on notice Tuesday, offering an outline for “common prosperity” that includes income regulation and redistribution, according to state media reports

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac bourses gradually improved and managed to shrug-off the early cautiousness stemming from the weak handover from Wall Street where the major indices snapped their streak of record closes. Upside in Asia was limited as participants digested a plethora of earnings releases. ASX 200 (-0.1%) was indecisive with outperformance in utilities and financials offset by losses in the mining-related sectors, while there was an abundance of earnings releases including BHP and Woodside Petroleum although their shares failed to benefit despite printing firmer results and the announcement a petroleum merger, with the headwinds due to weakness in underlying commodity prices. NZX 50 (+0.7%) was underpinned after the RBNZ surprisingly kept rates unchanged at 0.25% in which it cited the lockdown and uncertainty for its decision to refrain from a lift-off, while Nikkei 225 (+0.6%) gradually strengthened despite the initially choppy mood which was at the whim of the domestic currency and after mixed machinery orders and trade data. Hang Seng (+0.5%) and Shanghai Comp. (+1.1%) conformed to the mild positive bias with focus shifting to incoming earnings including Tencent which are due later today, while reports also noted that China vowed to increase the proportion of the middle-income group and is said to be seeking to raise rural consumption to as much as CNY 10tln. Finally, 10yr JGBs were lacklustre amid mixed data from Japan and with demand sapped after risk sentiment in Tokyo gradually improved, but with downside also stemmed given the BoJ’s presence in the market for over JPY 1.3tln of JGBs with 1yr-10yr maturities.

Top Asian News

  • Japan’s Faster Vaccine Rollout is Good News for the Economy
  • Japan Cancels F1 Grand Prix for Second Year in a Row
  • Taliban Ring Kabul Airport With Checkpoints: Afghanistan Update
  • Korean Firm Moves With IPO to Fund Eco-friendly Ships: ECM Watch

European equities (Eurostoxx 50 -0.3%) trade with a mild negative bias as gains in the futures markets faded ahead of the cash open. Hopes had been for a firmer start to the session given the more upbeat tone seen in Asia-Pac bourses, however, a lack of fresh macro impulses from a European perspective saw enthusiasm wane amid holiday-thinned conditions. Stateside, futures are hugging the unchanged mark as investors await minutes from the FOMC’s July announcement and pre-market earnings from US retailer Target while Lowe's beat on top and bottom lines alongside raising FY21 guidance. Sectoral performance in Europe is relatively mixed with modest outperformance in Real Estate and Travel & Leisure names. Basic Resources lag peers as BHP gives back some of yesterday’s earnings-inspired gains with the Co. facing criticism over its decision to abandon its FTSE 100 listing in favour of Sydney. Individual movers are somewhat sparse as the region heads out of earnings season. That said, results from Alcon (+11.0%) and a subsequent guidance raise have sent their shares to the top of the Stoxx 600. Carlsberg (+2.8%) is also gaining post-earnings with the Co. increasing guidance and announcing a share buyback following a recovery in beer volumes. To the downside, Persimmon (-2.5%) sit near the foot of the FTSE 100 despite noting that current forward sales are up around 9% from pre-pandemic levels.

Top European News

  • World’s No. 1 Wealth Fund Makes $110 Billion as Stocks Soar
  • Tesla Wins Volkswagen’s Support in Push for India EV Tax Cut
  • Carlsberg Raises Earnings Forecast Again as Bars Reopen
  • Philip Morris Buys 22.61% of Vectura’s Shares on the Market

In FX, the Sterling has pushed forward past its G10 peers with no clear catalyst behind the rise. UK CPI metrics fell short of expectations for July across the board with clothing and footwear, and a variety of recreational goods and services made the largest downward contributions, whilst the upside was led by rises in second hand vehicles. Pre-data, desks flagged a cooling of inflation as a by-product of the base effects from 2020 - with the August report expected to mark a pickup in inflation. GBP/USD rebounded from its current 1.3729 base back above 1.3750 ahead of its 200DMA at 1.3778. EUR/USD trades just north of 1.1700 having tested the level to the downside in the early hours, with technicians flagging 1.1695 as the next support point (38.2% fib of the 2020-21 move), a dip below that opens the door to 1.1688 (16th Oct low) ahead of the psychological 1.1650. The pair was unmoved by unrevised EZ CPI metrics across the board.

  • DXY - The Buck is on a mildly softer footing as risk sentiment is seemingly more constructive than it had been earlier this week - with some desks also noting of a reversal in the crowded long USD. The Fed Chair kept his cards close to his chest during yesterday's appearance and ahead of tonight's FOMC minutes (full preview available in the Newsquawk research suite). DXY threatens a breach of 93.000 at the time of writing having had waned from its earlier 93.150 high, whilst the next point of support is still some way off at yesterday's 92.611 low.
  • NZD, AUD, CAD - The non-US Dollars resided near the top of the G10 bunch in early European trade with mild gains but then lost the top spots to the EUR and GBP. Overnight, the RBNZ opted for a hawkish hold in its OCR vs dwindling expectations for a 25bps hike heading into the confab. The central bank's stance is being framed as hawkish nonetheless as it remains on a course towards removing monetary stimulus given the backdrop of strong economic data, with this decision merely a "pause" in the face of a COVID threat, whilst banks suggest that lockdown downfalls can be addressed by fiscal policy. NZD/USD saw a knee-jerk lower to a new YTD low (0.6868) upon the surprise hold but immediately retraced it and reclaimed a 0.6900 handle as the rate path saw sizeable upgrades across the board. NZD/USD however encounters some mild pressure as US players enter the fray and react to the RBNZ. The AUD/NZD cross similarly fleetingly spiked above 1.0500 to match yesterday's 1.0540 best before relinquishing the level. Meanwhile, AUD/USD traded subdued overnight as base metal prices continued to be impacted by Chinese intervention with the AUD/USD pair around the 0.7250 mark within a narrow 0.740-69 range. Elsewhere, the Loonie looks ahead to its inflation figures later in the session with the USD/CAD pair just north of 1.2600 but off the 1.2640 overnight high. Analysts at SocGen suggest that the pair above its 200 DMA (1.2560) opens the door for a rise closer towards 1.3000 - with the CAD-WTI correlation also strengthening over the past month to 0.5 from 0.25.
  • JPY, CHF - The traditional safe-havens are flat with not much to report as traders look for the next catalyst. USD/JPY found support at 109.50 and just about eclipsed its 100 DMA at 109.65, with the 50 DMA then seen at 110.15. USD/CHF is sandwiched between its 50 and 100 DMA at 0.9148 and 0.9124 respectively.

In commodities, WTI and Brent front-month futures are on a mildly firmer footing, with the former around USD 67/bbl (vs low USD 66.42/bbl) and the latter around USD 69.50/bbl (vs low USD USD 68.90/bbl). However, in the grander scheme, prices are consolidating amid a lack of catalysts ahead of the FOMC policy decision. Last night's inventory report turned out to be mildly bullish but participants await confirmation from the EIA metrics later, with the headline seen drawing 1.055mln bbls. Another development to keep on the radar - India has begun selling oil from strategic reserves after a policy shift and as part of a plan to commercialise its storage and lease space. Meanwhile, spot gold and silver are overall little changed ahead of the FOMC minutes, with the former hitting interim resistance at USD 1,794/oz (vs low USD 1,787/oz). Some reports that have been gaining focus - US-listed Palantir has bought USD 50.7mln in gold bars and will be accepting payment in gold as the firm prepares for a "black swan event". Turning to base metals, LME copper is flat within a tight range amid a lack of catalysts. Elsewhere, Dalian iron ore future and Shanghai rebar futures again saw a session of hefty losses, with some traders citing steel producers re-selling iron ore bought under longer term contracts to miners after China cut its steel output target. Further, China's Dalian commodity exchange is to increase speculative margin requirements for September coke futures to 20%, as of the August 20th settlement.

US Event Calendar

  • 7am: Aug. MBA Mortgage Applications -3.9%, prior 2.8%
  • 8:30am: July Building Permits MoM, est. 1.0%, prior -5.1%, revised -5.3%
  • 8:30am: July Housing Starts MoM, est. -2.6%, prior 6.3%
  • 8:30am: July Building Permits, est. 1.61m, prior 1.6m, revised 1.59m
  • 8:30am: July Housing Starts, est. 1.6m, prior 1.64m
  • 2pm: July FOMC Meeting Minutes

DB's Jim Reid concludes the overnight wrap

Global equity markets continued to lose ground yesterday as investor angst ratcheted up further about the spread of the delta variant and the economic consequences of further virus outbreaks. Indeed, recent weeks have shown that even among those countries with a relatively good track record on containing the virus, a number have had to deal with repeated flareups, which suggests that there could be sustained disruption in the coming months, particularly as the northern hemisphere winter begins and people spend more time indoors where respiratory viruses spread more easily. New Zealand is just the latest example of this (more on which below), but separate surges in Australia and China of late have also magnified fears of a potential growth slowdown. And even in the US, which hasn’t been following an elimination strategy, they’ve moved from a situation in June where cases were rising at the slowest rate since March 2020, to now where they’re experiencing the most fastest increase in over 6 months.

Amidst these jitters, the S&P 500 (-0.71%) fell back from its all-time high the previous day, with cyclicals leading the declines as part of a broad risk-off move. In this recent low-volatility market, that was actually the largest single-day drop for the S&P since July 19, which roughly erases the gains of the past three sessions. Given the delta concerns, some of the more Covid-sensitive assets were among the biggest underperformers, with the S&P 500 airlines index falling -2.68% yesterday in its 4th consecutive move lower. That leaves it -23.7% down from its closing high in April, back when there was far more optimism about a return to normality later in the year given the vaccine rollout. And other US indices fared badly as well, including the NASDAQ (-0.93%) and the small-cap Russell 2000 (-1.19%). Meanwhile on the earnings front, Home Depot (-4.27%) saw the largest decline in the Dow Jones after weaker-than-expected results, though Walmart (-0.03%) was “just” flat even after the company raised their full-year outlook.

The decline in risk appetite was reflected in other asset classes too, with oil prices continuing to fall as delta fears saw increasing questions being asked the strength of economic demand over the coming months. By the close, Brent Crude (-0.69%) and WTI (-1.04%) had both posted their 4th successive losses for the first time since March, and other cyclical commodities like copper (-2.80%) witnessed similar downward pressure. One exception to this were European equities, which were a bit more resilient having closed before the later selloff, and the STOXX 600 was up +0.07% by the close. That said, this masked a sharp regional divergence as southern European assets struggled in particular, with Italy’s FTSE MIB (-0.85%) and Spain’s IBEX 35 (-0.68%) both moving lower, just as the spread of Italian (+1.1bps) and Spanish (+0.8bps) 10yr yields over bunds widened for a 3rd day running.

Overnight, one of the big pieces of news has come from the Reserve Bank of New Zealand, who maintained their Official Cash Rate at 0.25 per cent given the imposition of a nationwide lockdown. That lockdown was confirmed shortly after we went to press yesterday, and follows the discovery of the first community case for New Zealand since February. In response, the New Zealand dollar fell sharply, with the currency experiencing the worst performance in the G10 yesterday (-1.44% vs USD), although it’s recovered +0.28% this morning after RBNZ projections pointed to them still hiking rates at least once this year. Nevertheless, it was also confirmed last night that there were a further 6 cases on top of that, which raises the prospect of a further extension to the lockdown as New Zealand seeks to maintain its Covid elimination strategy. Meanwhile in Australia, which is dealing with its own surge, New South Wales recorded a record 633 new cases yesterday.

Elsewhere in Asia overnight, the risk-off sentiment has eased up this morning with the Nikkei (+0.74%) and the Hang Seng (+0.75%) on track to end a run of 4 successive declines, the Shanghai Comp (+0.67%) poised to end a run of 5 declines, and the Kospi (+0.92%) looking to end a run of 8 declines. Elsewhere, futures on the S&P 500 are up +0.10%.

Back to yesterday, safe havens were once again one of the few winners given current conditions, with the US Dollar index (+0.54%) climbing to its highest level since late March, even as yields on 10yr US Treasuries were mostly unchanged (-0.3bps) at 1.262%, as were those on 10yr bunds (-0.2bps). We did hear from Fed Chair Powell in a town hall discussion with educators, but he said very little of relevance to investors, who are instead focusing on his speech at the Jackson Hole symposium next week.

In terms of the latest on the pandemic, New Zealand has been a major focus over the last 24 hours as mentioned, and the latest lockdown will see schools and most businesses closed over this period. In the US meanwhile, Reuters reported that the government is planning to extend mask mandates for travellers on airplanes, trains, and buses through January 18 at the earliest. Separately on the US, we’re expecting to hear from President Biden today on booster shots at 4:30pm ET, with the New York Times reporting that the recommendation will be that vaccinated individuals get a booster shot 8 months after their second dose. This would mean that some of the elderly and at-risk who were first vaccinated would be eligible as soon as next month.

On the ongoing crisis in Afghanistan, NATO chief Stoltenberg said the US, UK, Turkey, Norway, and other allies are working to securing Kabul airport and continue evacuations. The US announced they are aiming for a flight every hour, eventually hoping to fly 5-9k people out of the country per day, and that the operation could continue for a few weeks. That came as the Washington Post reported that the Biden administration had frozen Afghan government reserves in US bank accounts.

Looking at yesterday’s data, there was a mixed bag of releases from the US that did little to clarify the outlook ahead Jackson Hole symposium. On the one hand, retail sales fell by -1.1% in July (vs. -0.3% expected), but industrial production was more resilient with growth of +0.9% (vs. +0.5% expected). Separately, the NAHB housing market index for August unexpectedly fell to 75 (vs. 80 expected). That’s its lowest level in over a year, though for context that still leaves it some way above its pre-pandemic levels.

There was more positive news on the UK labour market however, where the unemployment rate in the 3 months to June unexpectedly fell to 4.7% (vs. 4.8% expected). The report also showed that the number of payrolled employees was up +182k in July, marking the 8th consecutive increase, while the number of job vacancies in the three months to July rose to a record high of 953k. That leaves the focus on this morning’s CPI report, which follows the last couple of releases both surprising to the upside.

To the day ahead now, and the main highlight will likely be the release of the FOMC minutes from the July meeting, while St. Louis Fed President Bullard will also be speaking. On the data side, there’s also US housing starts and building permits for July, along with the UK and Canadian CPI readings for that month. Finally, earnings releases include Nvidia, Cisco, Lowe’s, Target and TJX

Tyler Durden Wed, 08/18/2021 - 07:35

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Bonds

The Debt Ceiling Is A Cliff — And We Keep Raising It

Fiat money extends the debt cycle and traps citizens in ever-increasing inflation — but bitcoin forces a reckoning.

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Fiat money extends the debt cycle and traps citizens in ever-increasing inflation — but bitcoin forces a reckoning.

The Longer We Wait, The Harder We Fall

On Friday, October 15, 2021, U.S. President Joe Biden signed legislation raising the government’s borrowing limit to $28.9 trillion. Many Americans are now accustomed to this recurring bureaucratic process and don’t think much of it or its consequences. Two sides fight, they get close to a deadline (and sometimes pass it!) and eventually raise the “debt ceiling” so they can fight over it again some months later.

We Americans, as a collective and a government, are deciding to delay paying our bills. At an individual level, we understand what happens when we don’t pay our own bills. But what happens when the most powerful nation today stops paying bills? To understand the effects of this — and how we got here in the first place — we need to study history. Let’s start with a simple short-term debt cycle.

Lending And The Short-Term Debt Cycle

The short-term debt cycle arises from lending. Entrepreneurs need capital to bring their ideas to fruition, and savers want a way to increase the value of their savings. Traditionally, banks sat in the middle, facilitating transactions between entrepreneurs and savers by aggregating savings (in the form of bank deposits) and making loans to entrepreneurs.

However, this act creates two claims on one asset: The depositor has a claim on the money they deposited, but so does the entrepreneur who receives a loan from the bank. This leads to fractional reserve banking; the bank doesn’t hold 100% of the assets that savers have deposited with it, they hold a fraction.

This system enabled lending, which is a useful tool for all parties — entrepreneurs with ideas, savers with capital, and banks coordinating the two and keeping ledgers.

Lending aids the creation of new goods and services, enabling the growth of civilization (Source).

When Times Are Good

When entrepreneurs successfully create new business ventures, loans are repaid and debts are cancelled, meaning there are no longer two claims on one asset. Everyone is happy. Savers and banks earn a return, and we have new businesses providing services to people thanks to the sweat and ingenuity of the entrepreneurs and staff.

The debt cycle in this case ends with debts being paid back.

When Times Are Bad

When Alice the entrepreneur fails at her business venture, she is unable to repay her loan. The bank now has too many claims against the assets that they have, because they were counting on Alice repaying her loan. As a result, if all depositors rush down to the bank at once to withdraw (a “run on the bank”) then some depositor(s) won’t get all of their money back.

Depositors rushing to withdraw from a bank they believe to be failing (Source).

If enough entrepreneurs fail at once, say because of an “Act of God” calamity, this can cause quite an uproar and a lot of bank runs. However, the debts are still settled, either through repayment to depositors or default, leaving depositors without their money.

The debt cycle in this case ends with some portion of debts defaulting.

The debt cycle either ends with payment or default — there is no other option. When borrowing overextends, there must be a crash. These crashes are painful but short and contained.

The Mini Depression Of 1920

The year 1920 was the single most deflationary year in American history, with wholesale prices declining almost 40%. However, all measures of a recession (not just stock prices!) rebounded by 1922, making the crash severe but short. Production declined almost 30% but returned to peak levels by October 1922.

This depression also followed the 1918–1920 Spanish Flu pandemic and came one year after the conclusion of the First World War. Despite these massive economic dislocations, the crash was short and now relegated to a footnote in history.

Finance writer and historian James Grant, founder of Grant’s Interest Rate Observer, noted about the 1920 Depression in his 2014 book “The Forgotten Depression, 1921”:

​​"The essential point about the long ago downturn of 1920–1921 is that it was kind of the last demonstration of how a price mechanism works and the last governmentally unmediated business cycle downturn.”

The Free Market And Hard Money Curtail Debt Cycles

When an economy runs on a hard money system, free market forces rein in excessive borrowing and thus keep the debt cycle short.

What Is Hard Money?

Hard money is a form of money that is expensive for anyone to produce. This ensures a level playing field: Everyone has to work equally hard to gain money. Nobody can create money and spend it into the economy without incurring a cost almost equal to the value of the money itself. Gold and bitcoin are two examples of hard money, mining them requires so much time and energy that it’s almost not worth it to do so.

All those miners won’t run themselves (Source).

How Do Free Markets Rein In Borrowing?

Free market forces are crucial to limiting speculative manias. On one side, you have lenders and savers who hope to make a return on their capital, while on the other, you have borrowers hoping to take borrowed money and turn it into more money.

In a free market that utilizes hard money, there are two options to conclude the extension of credit: Debts are repaid, or debts are defaulted on. The greed of lenders wanting more return on their capital by making more loans is kept in check by the risk of default. The greed of borrowers wanting more capital is kept in check by the burden on their future self or business from increased debt.

This applies at an individual level as well: As any borrower increases their debt pile, they become riskier and riskier to lend to. That risk means lenders will demand to be paid a higher interest rate on their loan. That higher rate makes it harder for the borrower to borrow more, leading them to either turn toward paying down some of their existing debts or default outright.

These forces keep lending in balance, cutting down speculative manias before they go too far.

The Lengthening Of The Debt Cycle

Powerful entities — like governments — can use their sheer power to make them a less risky borrower.

Over the past century or so, we’ve seen many governments take on debt so that they can lend to individuals and businesses, especially during hard economic times. Those loans help individuals and businesses pay their bills and debts, easing the pain of a crash. However, this lending by governments does not resolve debts; it simply transfers debt from private individuals to the government, putting it in a large pile of public debt.

That debt didn’t disappear (Source).

Governments can build such a huge pile of debt because lenders know that a government has special tools for paying back that debt. You and I may not be able to seize the property of others in order to pay our debts, but a government can. Even the bastion of the free world, the United States, seized the privately held gold of its citizens in order to keep itself afloat in 1933.

This government debt issuance leads to a lengthening of the debt cycle. The depth of each drop is tempered, but the unwinding of debts is not completed — it is only delayed. Frequent short and sharp downturns are transformed into longer cycles with infrequent but devastating collapses.

This brings us back to the debt ceiling: The reason our politicians keep having this debate is thanks to ongoing debt issuance by our government in order to fund bailouts during downturns as well as government outlays that exceed government revenues. All this debt climbs on top of that massive $28+ trillion pile of public debt.

The U.S. Debt Clock (Source).

However, at some point, even powerful governments feel the heat from angsty lenders and need a new set of tools. Throughout history, governments in a corner have employed another tool to service their debt and continue to prolong the debt cycle: debt monetization. The U.S. government opened this toolbox in 1971 by disconnecting the U.S. dollar — and all global currencies — from gold thus creating the fiat currency system we still live with today.

Fiat Currency And The Third Tool for Ending Debt Cycles

Fiat currency, like that friend who only calls when he needs something, shows up often in history but never stays for long. “Fiat” roughly translates from Latin as “by decree.” Fiat currency is thus money which derives its use — and value — by decree from a governing body. Fiat currency is not hard money; the governing body often (solely) reserves the right to create the currency and distribute it through some mechanism.

In a fiat currency system where depositors are placing fiat currency into banks, we have a new trick for unwinding debts.

Monetization: A New Tool For Ending Debt Cycles

Remember how bad times in the debt cycle led to the bank having more claims against their assets than assets on their books? Within a fiat currency system, the governing body can now solve this little ledger problem by just creating more currency. Poof, everyone gets paid.

We call this tool for ending debt cycles monetization, because we “monetize” the debts by paying them with newly created currency.

Today, we often call these governing bodies that create currency “central banks,” and together with their partners in government we believe these entities are capable of “softening” the frequent crashes endemic to an economy with any kind of lending. We like lending, because when it goes well, everyone benefits, so this fiat currency system appears to be a decent way of easing the pain of downturns.

The Effect Of Monetizing Debt

We already know that paying down debts costs the borrower, whereas defaulting on them costs the lender. Many central bankers and politicians would like to drown you in jargon at this point, leaving you with the impression that monetization solves the painful dilemma of pay or default, even if they can’t articulate just how.

So who foots the bill when we monetize debts?

When debts are monetized, new currency enters circulation, diluting the value of all the existing currency in circulation. This dilution of value of new currency is felt through inflation, which we’re hearing a lot about lately.

Those citizens who work on a fixed salary or wage and keep most of their net worth in the currency suffer from inflation the most, while those closest to the government and banking system with most of their net worth in non-cash assets benefit. It is those former citizens, the ones furthest away from the currency “spigot” and least aware of the effects of inflation, who pay for debt monetization.

The endgame of debt monetization is hyperinflation, which occurs when the central bank decides to go bananas and print, print, print to pay down every debt. Zimbabwe, Venezuela, and pre-WWII Germany come to mind. This is not a pretty event for anyone involved. Unlike defaulting or paying down debt, where effects are contained to the lenders and borrowers involved, monetization leads down a road ending in not just economic collapse but societal collapse.

The cost of one kilogram of tomatoes in Venezuelan bolivars in 2018 (Source).

Monetizing debt has serious costs, so operators of fiat currency systems must act cautiously. However, monetizing debt throughout history has often been more politically favorable than paying or defaulting, likely owing to the fact that it’s harder for people to understand who is footing the bill.

Governments And The Never-Ending Debt Cycle

Now that we understand how fiat currency enables debt monetization, let’s jump back to governments and their giant debt piles.

The government debt to national GDP ratios of every nation in the world, pre-COVID (Source).

As a government’s pile of debt grows, it becomes ever more difficult and painful to pay it down, default on it or monetize it. Nobody from the politician to the politically connected elite to the welfare recipient wants budget cuts in their area, especially in the name of paying down the public debt. Defaulting would mean lenders would lose confidence in the government, demanding higher interest rates in order to make further loans thus forcing budget cuts. Debt monetization, taken too far, rips apart the fabric of society.

This results in an increasing desperation by the government to keep the status quo intact. Just keep the debt growing and push the problem onto the next generation.

The free market can bring an end to this debt cycle by simply “shorting” (selling) government bonds (loan contracts), making it more expensive for the government to borrow. However, a fiat currency system makes this difficult, because the central bank can print unlimited fiat currency and use it to buy bonds. Since the central bank incurs no cost to print currency, they are the ultimate player in the market. An investor who sells government bonds is destined to lose to a central bank that will never stop buying, so most investors go along with the game. This destroys the free market’s ability to bring an end to overborrowing.

Central banks for the past 50 years have proven to us, unequivocally, that they will support their governments’ borrowing habits and fight off the free market that would keep the debt cycle in check.

Interest rates for major government bonds have trended down since the early 1980s, following the birth of a global fiat monetary system in 1971 (Source).

When central banks buy government bonds, they pay for them with newly printed currency. This is what I mean by monetizing debt. Too much of this, and we get the hyperinflation scenario we all want to avoid.

As debts climb, all options — from paying and defaulting to monetizing — become more and more painful. So what is a government to do in order to continue lengthening the debt cycle?

We’re Doing This For Your Own Good

Continuing the borrowing bonanza without an unwinding force by the free market requires governments to employ tools of a more authoritarian or subversive variety. The United States has a long and well-hidden history of these tactics, from seizing the gold of its citizens in the 1930s to partnering with oil-rich despots in the 1970s to issuing jargon-clad explanations for quantitative easing during the Global Financial Crisis of 2008.

Monetary debasement is the powerful government’s tool of choice to forego the inevitable, but sustaining that tool’s power requires preventing free individuals from forcing a return to rationality. As public debt rises, governments will consider new measures to kick the can such as:

  • Raising revenue through increased taxation like unrealized capital gains.
  • More intense financial surveillance and controls to stabilize the currency’s value.
  • Legal workarounds to mint trillion dollar coins to further dilute the currency supply and “monetize” the problem of excessive government spending.

As long as governments like the United States continue to overspend, bailing out every short-term debt cycle, they will simply delay paying the bills and either increase the severity of an eventual unwinding — via payments or default — or trigger a collapse of society through debt monetization. We will all pay for a century of foregone debts through some combination of increased taxation, inflation and loss of freedom.

Waking Up

When will we wake up and see this system for what it is? Unfortunately, most probably never will. They will blame immigrants or billionaires, depending on their political bent, for the ills of our time. They will continue to defend the system, even as the tightness of its controls and severity of its punishments increase.

“Many of them are so inured and so hopelessly dependent on the system that they will fight to protect it,” (Source).

This knowledge is your power. Now that you see the trajectory of the long-term debt cycle, what steps will you take to bring a better future?

The realizations I’ve written here are the reasons I buy, hold and support Bitcoin — an accessible form of hard money that can support a modern, digital and global economy. Bitcoin is a lifeline extending to a world where debt cycles are kept short and crashes are contained, where governments are robbed of a critical tool for lengthening the end of the debt cycle into a societal collapse. Supporting Bitcoin forces governments to be rational yet again, to balance their budgets and pay down debts, to avoid monetization.

Will you be part of the solution or part of the perpetuation?

This is a guest post by Captain Sidd. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

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Fear of the unknown: A tale of the SEC’s crusade against synthetics

DeFi built on blockchain and legacy financial systems is on the verge of clashing in one of the most tumultuous battles in economic history.
On the opening day of Messari Mainnet 2021, New York City’s long-awaited first crypto conferen

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DeFi built on blockchain and legacy financial systems is on the verge of clashing in one of the most tumultuous battles in economic history.

On the opening day of Messari Mainnet 2021, New York City’s long-awaited first crypto conference since the start of COVID-19, reports came blazing in via a viral tweet that the United States Securities and Exchange Commission had served a subpoena to an event panelist at the top of an escalator in broad daylight. While it’s still not entirely clear who was served (or why), this isn’t the first time the SEC has encroached upon the crypto industry in full view of the public. Let’s go back a mere two months.

On July 20, 2021, SEC Chair Gary Gensler issued his remarks outlining the SEC’s scope of authority on cryptocurrency:

“It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.”

Just like the SEC’s bold arrival at Mainnet, Gensler’s remarks definitely did not arise out of the blue. They arose because Gensler — along with his regulatory entourage — finally arrived at the terrifying realization that cryptocurrency’s tokenized, synthetic stocks are just like stocks, but better.

Related: Powers On... Don't worry, Bitcoin's adoption will not be stopped

So, what are synthetics?

Synthetic assets are artificial renditions of existing assets whose prices are pegged to the value of the assets they represent in real-time. For instance, a synthetic share of renewable energy giant Tesla can be purchased and sold at exactly the same price as a real share of Tesla at any given moment.

Consider average stock traders for whom profit margins, accessibility and personal privacy take precedence. To them, the apparent “realness” of TSLA acquired from a broker-dealer will not hold water next to the cryptoverse’s many synthetic renditions, which can be acquired at a fraction of the cost at 8:00 pm on a Sunday evening. What’s more, it’s only a matter of time before traders will be able to stake synthetic TSLA in a decentralized finance protocol to earn interest or take out a collateralized loan.

Related: Crypto synthetic assets, explained

The role of synthetics

Decentralized platforms built on blockchain and legacy financial systems are on the verge of clashing in one of the most tumultuous battles in economic history, and Gensler’s remarks merely constitute a shot across the bow. Make no mistake: decentralized finance (DeFi) and traditional finance (TradFi) have already drawn their battle lines. They will remind powerful incumbents and new entrants alike that, contrary to what contemporary wisdom may suggest, systems of exchange imbue assets with value — not the converse. The ramifications cannot be understated: Synthetic assets establish a level playing field where centralized and decentralized systems can compete for users and capital — a free market for markets.

Typically, digital marketplaces support an assortment of assets that compete by being exchanged against one another. But when the asset side is fixed — that is, when identical assets exist across multiple platforms — it is the marketplaces that compete for the largest share of each asset’s daily trading volume. Ultimately, traders settle the score, determining where assets should live and which systems should die.

On that accord, while Bitcoin (BTC) competes indirectly with fiat currencies as a unique form of money transacted over a decentralized network, it is the array of emergent fiat currency-pegged stablecoins that pose the most pernicious and immediate threat to national governments and their directors in central banking. Unlike Bitcoin, which often proves too volatile and exotic for outsiders, fiat-backed stablecoins cut down the complicated tradeoffs and keep the simple stuff: Around-the-clock access, low-cost international transfers, kick-ass interest rates and 1:1 redemption into fiat.

Related: Stablecoins present new dilemmas for regulators as mass adoption looms

Even to skeptics, stablecoins drive a strong bargain, and the U.S. Congress put forth its own token of acknowledgment with its December 2020 legislative proposal of the STABLE Act, which would require stablecoin issuers to acquire the same bank charters as their centralized counterparts at Chase, Wells Fargo and so on.

Incumbent institutions have a long history of seeking out, acquiring and, at times, even sabotaging their competition. It’s not difficult to see where legacy banking’s aversion to synthetics comes from. As decentralized platforms become more user-friendly and tread further into the mainstream, significant buy-side demand will migrate from legacy platforms and their formerly exclusive assets into digitally native synthetics.

Robinhood saga: The remix

Imagine what might have transpired if Robinhood users had access to synthetic shares of GME and AMC on Jan. 28, 2021.

If even a small minority of the buy-side demand for those stocks — say 10% — migrated from Robinhood to Mirror Protocol’s synthetic stocks, it would have effectively inflated the supply of shares outstanding and consequently suppressed the share price. In turn, GameStop’s C-level executives would have been in for a real tough board call.

Related: GameStop inadvertently paves the way for decentralized finance

And then, consider also the implications of investors staking their synthetic GME and AMC in DeFi protocols to receive mortgage and small business loans at drastically reduced interest rates, definitively cutting banks and other incumbents out of the equation.

Such a scenario would behoove GameStop and AMC to migrate a fraction of their shares to blockchain-based platforms in order to restore robust pricing mechanisms. Meanwhile, investors on the retail side, who only seek a superior user experience and the benefits of interoperability with DeFi protocols, would ultimately win — something you don’t hear too often in modern financial markets.

From stocks to commodities, real estate instruments, bonds, and beyond, the emergence of synthetic assets will disrupt pricing mechanisms, catalyze unprecedented turbulence in financial markets and produce unforetold arbitrage opportunities, unlike anything the world has ever seen. Although the consequences of such a dramatic shift are beyond prediction, centralized incumbents will not voluntarily cannibalize their business models — free markets must be entrusted to select winners.

The future of synthetics

As demand for synthetic assets reaches and exceeds that of their purportedly regulated TradFi counterparts, the capitalists and investors of the world will be forced to contemplate what in fact makes an asset “real” in the first place, and will ultimately determine not only the direction of free markets but their very constitution.

In the heat of an existential crisis, financial institutions and governments will undoubtedly get all hands on deck: The SEC will battle to eradicate synthetic stocks, Congress will commit to subduing stablecoin issuers from challenging the international banking elite, the Commodity Futures Trading Commission (CFTC) will step in to tame platforms dealing in derivatives and Financial Crimes Enforcement Network (FinCEN) will continue to target those aiming to protect user privacy.

Related: The new episode of crypto regulation: The Empire Strikes Back

Rough days lie ahead — and it is already too late to turn back the hands of innovation. Compound’s cTokens, Synthetix’s Synths and Mirror Protocol’s mAssets have already opened Pandora’s box, while Offshift’s fully private zk-Assets are slated to launch in January 2022. Whatever unfolds, the rigid barrier separating the realm of traditional finance from that of emergent decentralized platforms will be permanently dismantled, and a new age of financial freedom will spring forth.

May the best systems win.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Alex Shipp is a professional writer and strategist in the digital asset space with a background in traditional finance and economics, as well as the emerging fields of decentralized system architecture, tokenomics, blockchain and digital assets. Alex has been professionally involved in the digital asset space since 2017 and currently serves as a strategist at Offshift, a writer, editor and strategist for the Elastos Foundation, and is an ecosystem representative at DAO Cyber Republic.

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Bitcoin And The Internet Are Bringing The End Of Nation States

Like the printing press before them, the internet and Bitcoin’s blockchain innovation are irrevocable forces driving the end of nation-state power.

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Like the printing press before them, the internet and Bitcoin’s blockchain innovation are irrevocable forces driving the end of nation-state power.

This article was originally published in Uncharted Territories.

It’s 2050. The U.S. government just defaulted on its debt. It’s not meeting its social security payments. Hospitals are going down: they can’t operate without Medicare and Medicaid income. Old people line up outside the hospitals, hospitals don’t service them, they can’t afford it. There's a run on the banks that held too many dollars, they are collapsing. All of the governments around the world caught with too much U.S. debt are defaulting. Those with their savings in dollars have been wiped out. They are looking at the last few decades of their lives like an empty ravine.

What happened? The internet and blockchain technology.

Every time a new information technology is discovered, our power structures change. Speech allowed chiefdoms. Writing allowed kingdoms, empires and churches. The printing press replaced the Catholic Church and feudalism with the nation state. Broadcasting made totalitarianism viable by allowing the efficient transmission of propaganda.

This time, we have not one but two new information technologies: the internet and blockchain technology. How will they undermine the nation state?

The Nation State Becomes Inconsequential

In the 19th and 20th centuries, nation states became the ultimate powers, thanks to their control of gatekeepers. This was nowhere as true as in broadcasting.

The government established the agenda of what was going to be discussed. It controlled what broadcasters would say. Information flowed from newspapers, TV, and radio to citizens. You could hardly influence it in democracies, forget about autocracies.

Then came the internet.

The Sovereign Individual

When I wrote “Why You Must Act Now,” I couldn’t conceive that it would be read by over 40 million people. When I wrote “The Hammer And The Dance,” I couldn’t fathom that governments around the world would draw inspiration from it.

A normal guy, surrounded by children in his San Francisco apartment, reading scientific papers in sweatpants, put out a piece that took governments around the world by surprise on the most important topic of their careers.

This would have been impossible 20 years ago: Back then, information flowed from gatekeepers with a tight relationship with governments, from newspapers to TV and radio stations. That establishment decided what people would think that day, and you couldn’t influence it.

You couldn’t search for the scientific papers you needed, because they weren’t available on the internet. And even if you got your hand on the data, you couldn’t let others know because we didn’t have social media. The internet gives you the inputs and outputs to short circuit the nation state and its gatekeeping gang.

That’s how QAnon spread like wildfire, convincing 15% of Americans that its conspiracy movement is legitimate (only 40% reject it), stoked by a pseudonymous person with intimate knowledge of game design.

That’s also how another pseudonymous person, Satoshi Nakamoto, created a trillion-dollar asset class by solving a math problem, writing about it, posting his article on the internet, and coding the Bitcoin blockchain.

Now people form their opinions online and spread them online. They interact online and transact online. Most of the time, governments don’t even know that this happens. Traditional gatekeepers are bypassed. No more approval from them.

Given how many authors are killed because of their creations, it’s not a coincidence that both QAnon and Nakamoto were pseudonymous: fake names allow more subversive changes without retaliation. Who’s going to cancel QAnon? Who is going to arrest Nakamoto to bring down Bitcoin?

What is new is not the value of pseudonymity or anonymity: historically, over half of books were pseudonymous or anonymous. What’s new is how easy it is to remain hidden. While crypto-Jews feared for their lives under the Inquisition, Nakamoto could be walking past you and you would never know it.

If a nation state can’t retaliate against creators, how can it prevent them from subverting the nation state?

The Sovereign Individual” predicted most of this rise in individual power nearly 25 years ago. However, it focused more on the decentralization of power, which would flow from nation states to individuals. But the internet also has a centralization force.

The Rise Of Multinational Organizations

Who enables the search of scientific papers? Google. Who enables the spread of information? YouTube, Twitter, Facebook, LinkedIn, TikTok….

QAnon, the Bitcoin white paper, my COVID-19 articles, or any other person’s posts would have been highly unlikely to be created or distributed without the rise of behemoth tech companies.

The change goes beyond social media.

Who replaces your cabs? Uber. Lyft, too, if you’re in the U.S. And a couple more players internationally.

Who replaces your travel agencies? Booking.com, Google Flights, Expedia… Not thousands of companies.

Many of the industries that had millions of companies around the world now concentrate that wealth and influence in just a handful.

How much power do you think they wield? And where do you see that going?

Network effects account for 70% of the value created by tech companies. The more these network effects grow, the bigger these companies become, and the bigger share of the economy they represent.

As these companies grow, they start treating nation-states not as masters, but as peers:

“The director of public affairs of one of these companies pointed out that when he was in charge of relations with public authorities within a large traditional American company, he obeyed the regulators' instructions without negotiating: ‘then, we complied.’ Today, on the contrary, he states: ‘we don't surrender without negotiating hard first.’

Gilles Babinet, Institut Montaigne

When Spain wanted to tax Google News, Google just stopped serving the country with the service. When nation states wanted to preserve their monopolies on cabs, Uber rolled over them until they accepted it. Airbnb disrupts local supply and demand of housing. Tesla challenges dealership laws. Cryptocurrency supporters push back on threatening laws. Apple did not give the FBI backdoor access to phones.

Social media is particularly powerful, by filtering what is acceptable for people to believe, by nudging them in some directions with their algorithms, and sometimes by taking the megaphone away from nation-state leaders.

And SpaceX will give everybody everywhere free access to the internet. Governments won’t be able to do much against it.

Source

How will Venezuela censor the free flow of information that falls from the sky?

Look at the sad show of the U.S. Congress hearings of tech executives, or the deplorable show of the Federal Trade Commission case against Facebook. The nation states see the rise of alternative powers like the Church saw the rise of the Protestant Reformation. Both tried to fight, but they’re fighting against the unstoppable progress of technology, which drives the economy, so it will eventually win.

As a result, companies undermine nation states in two ways: On one side, by making information available, they extract power from nation-state gatekeepers and local companies to empower individuals to become more independent. But they also keep some of that power for themselves, becoming new gatekeepers.

Blockchain Technology

This centralizing force of corporations is countered by the decentralization force of blockchains. But blockchain technology means a lot of things to a lot of people. What is it?

There is, of course, bitcoin as a store of value alternative to gold, and stablecoins and fiatcoins as alternatives to fiat currencies, making it that much harder for nation states to print money.

There is Ethereum, Cardano, DeFi, NFTs, and all the rest of the crypto economy, which is building an alternative to the existing economy that bolsters nation states.

But the solution to the Byzantine Generals Problem devised in Nakamoto’s Bitcoin white paper goes further. Why? Because it made decentralized majority rule possible.

Historically, how did you trust that your cab was legit? Because it had a license from the government. How did you know to eat in that restaurant? Because it was certified to be safe by the government. How did you know your house was yours? Because it was registered by the government. How did you know somebody was American? Because they had a passport from the government

You always needed a gatekeeper.

What about money? How did you certify you had money? You either showed the cash or you needed an attestation from your bank. How did you prove you knew something? You needed to show a certificate provided by an academic institution. How did you prove anything was true? You got a seal from a notary public.

You always needed a gatekeeper.

Nation states were the ultimate gatekeepers, because not only did they control their own services, but they also controlled the rest of the gatekeepers via regulation. They drew all of their might from this control.

Since the Bitcoin white paper was published, that power is gone. We haven’t needed gatekeepers to certify most of these things. You don’t need the corruption, absurd regulations, and abuse of power that goes with it. We can build better solutions with more crowd-sourced feedback, faster feedback, crypto-oracle verification. We just haven’t built all of these solutions yet.

The future is already in the brain of the 200 million cryptocurrency holders, who can be better understood as a country, as an alternative community to nation states.

A nation-state citizen doesn’t question the sovereignty of the government, doesn’t question the validity of its currency, doesn’t fathom a world without the TVs and radio stations and notary publics and certification organisms that make the nation state what it is. They wrap their heads around 20th-century country flags. They can’t fathom the end of the nation state, just as 1500s-era Europeans couldn’t fathom the end of the omnipotent Catholic Church.

None of this is true for blockchain citizens. They get it. They hodl (It’s the term for crypto — "hodling" instead of holding) crypto because they don’t trust fiat currencies. They build DAOs because they understand the corporation is on its way to the grave. They insist on smart contracts because how else are we going to trust each other? 

Who do you think they have more in common with, their patriot neighbors or their crypto siblings? Do you see alternatives to nation states emerging already?

The Supranational Entities

If you’re alone, you don’t need a political system. The point of the government is to agree on how we will coordinate. The more people there are, the more coordination problems emerge, and the more we need to regulate. The size of governments has always grown with the size of the problems to solve.

It’s not a coincidence that the League of Nations appeared just after WWI, and the UN after WWII. New governance follows the size of the problems. Since then, a globalized financial system has birthed the International Monetary Fund and the World Bank to help countries in need of money in exchange for… a bit of their sovereignty. Or a lot. Ask Argentina. The World Trade Organization coordinates countries so that they can better trade between each other, at the expense of some of their sovereignty. They can’t do whatever they want in trade.

The only reason why the World Health Organization (WHO)’s failures have been so salient during the pandemic was because it was so needed. Who cares about a useless organization failing? But we do care about the WHO because we realize that pandemics are not a national problem. They’re global. The Delta variant didn’t care about the Indian soil that saw its birth. As long as countries let people in, it was going to travel with them.

In fact, the main reason why the WHO failed is because of nation states. It was China’s secrecy and its censorship over Taiwan and the American defunding and all this governance that depends on the dysfunctional nation states.

But eventually, some governance systems will emerge to fill the need of global pandemic coordination. Because that problem isn’t going away, and now we know.

Something similar can be said of climate change. Why, despite wildly popular support, are most countries not taking enough action? Because that support has not translated into the political action that nation states monopolize today. No wonder: nation states were never built for global action. They are obsolete to the problems we need to solve.

But why can’t a community emerge where citizens around the world can pledge support to the politicians who do want climate change policies? Why can’t they make that pledge a public, automatic commitment on the blockchain? It hasn’t happened yet because we haven’t gotten around to it. But it will. When that community emerges, will it be more or less powerful than nation states? Or simply another group that nibbles sovereignty away from nation states?

Somewheres Vs. Anywheres

The Somewheres identify with their locality: their city, local sports team, church, regional state, country. The Anywheres don’t care as much. They feel comfortable anywhere with liberal values, from Buenos Aires to Tokyo; places where they can connect to the internet to work, socialize, read… They have more affinity with those who think like them globally than those who live with them locally.

As more of our daily activities move online, as we interact more with people from across the world, identity will continue moving online. The more it does, the more people will leave the ranks of the Somewheres to join the Anywheres.

Comment from “Internet and Blockchain Will Kill Nation-States”

We know this because it already happened in the past.

Before the printing press, people in Europe talked mostly with their neighbors in their very local vernacular, while the Catholic Church spoke a universal Latin that gave them power. As the printing press started publishing in whichever local vernacular was most widely spoken — i.e., that of the biggest cities — it accelerated Latin’s demise while the local vernaculars of the biggest printing centers slowly grew in popularity until they became national languages that shared ideas and identity across geographies. This is what eventually led to the rise of nation states.

Now that people can talk with anybody in the world, exchange their ideas, find soulmates, and people who think alike, naturally their identity will outgrow nation states.

This will be accelerated because we have one clear winner as local vernacular:

Source: International Strategic Analysis

Which results in the entire world learning English.

The more life happens online, the more content gets produced in the winning vernacular — English — and the more people learn it. As it spreads over the world, so do ideas and identity.

And the only way English doesn’t become the world’s lingua franca is if we get a universal translating device that really works, which would simply achieve the same goals faster.

So, let’s summarize. Nation states will become irrelevant as:

  • Individuals become more powerful because they have access to more information, they can spread more information, and they can do so without national gatekeepers controlling their opinions
  • The emergence of pseudonyms makes retaliation against individuals hard
  • Corporations keep some of the sovereignty they take away from nation states, and start treating them as equals
  • Blockchains decentralize power, making government gatekeepers obsolete
  • Supranational organizations rise to solve global problems, extracting sovereignty from nation states along the way
  • Communities of anywheres emerge globally, accelerated by the internet and blockchain technologies, the desire to fight global problems, the emergence of global governance systems, and an ability to better understand each other through a universal English or its equivalent translation technologies, diluting the patriotic sentiment

All of this erosion of sovereignty happens just as nation states go bankrupt. Even if they haven’t realized it yet.

The Nation State Is Broke

As nation states lose power, their ability to tax and print money will plummet, just as their costs skyrocket. How are they going to keep their promises then?

Corporate Taxation

It’s not a secret that big corporations use international loopholes to avoid paying taxes. What is new is the nation states finally trying to rein them in.

Recently, about 135 countries agreed to fix a minimum floor to global corporate taxes. This is quite a feat: coordinating two-thirds of countries into anything is very hard. Look at climate change. If only countries had the same incentives in that area…

But that agreement obscures the reality that an agreement between 135 countries still leaves 60 countries that don’t participate. Sixty countries for loopholes.

More importantly, some countries’ existence depends on having lower taxes.

Before it reduced corporate taxes in 1995, Ireland was a pretty poor country. Now it’s the richest one per capita in Europe. This is mostly leprechaun economics, a reporting effect due to the oversize impact of big corporations — the average Irish person is not as rich. But it reflects how much Ireland has attracted companies thanks to lower taxes, companies that can then be taxed, even if just a little, thus filling the coffers.

So, why would Ireland agree to such a deal? Maybe because it does not intend to respect the spirit of the law?

Corporate tax rates: official vs. effective (for foreign firms). E.g., Ireland’s official corporate tax rate might be 12.5%, but foreign companies manage to pay only 4%. Source.

None of this is new. Pharma and finance companies, among others, have been doing this forever, because their value depends mostly on intellectual property, so they’ve been avoiding taxes for a long time.

But this problem is about to enter turbo mode because companies are more global than ever. It’s easy to pressure the local mining company to pay their taxes, or the local manufacturing plant. But how do you tax a company that can put its servers, its lawyers, and its intangibles anywhere it wants? How do you tax the Anywhere companies?

Until now, the answer was: “wherever the headquarters is”. But what if there’s no headquarters anymore?

Remote Work

Remote work is inexorable. Before now, the headquarters were defined as wherever the main office was and that was where a company had its leadership and the most white-collar employees.

What if companies don’t have a headquarters anymore, and go fully remote, like Automattic (the maker of WordPress.com), Invision, GitLab, Gumroad, Twitter, Square, Quora, Notion, Zapier, Coinbase, Basecamp, Fujitsu, Hims, Shopify, Dropbox, Skillshare, Spotify, Stripe, Hubspot, Coda, Figma, Trello, Upwork, VMWare, Box, Affirm, Okta, CrowdStrike, Reddit, Docker, Atlassian, Coinbase, Snowflake and REI?

Sure, as we go back to a certain post-COVID normality, many people will go back to the office. But only a few white-collar jobs will be fully office based, while the vast majority will be hybrid.

I estimate that between 10% and 25% of all U.S. jobs will be fully remote after the pandemic, and I believe that will keep going up. Evidently, fully-remote companies can decide to put their headquarters wherever they want. The more they grow, the more they will avoid taxes.

And that’s corporate taxes. What about individual income taxes?

If Musk can pack up and leave for Texas despite leading not one, but two very industrial companies, what do you think all the remote workers will do? Those who can work from a café on the Lisbon beach and pay a flat 20% income tax? Do you think they will stay around in high-tax jurisdictions in the long term?

And as corporations and founders and workers start optimizing for their taxes, how do you think countries will react?

Already, digital nomad visas have been approved in countries like Costa Rica, Georgia, Dubai, Cayman Islands, Bermuda, Antigua y Barbuda, Mexico, Australia, Thailand, Germany, Czech Republic, Portugal, Norway, Estonia and Croatia.

These same countries have started offering lower tax rates to compete for the same remote workers, with a 24% flat income tax for newcomers in Spain, 20% in Portugal, a maximum of 22.5% in Greece, between 5% and 12% in Italy, and no local taxes in Croatia. These are countries that usually have top marginal tax rates close to 50%.

And of course, as an American, the one place in the world where you can reduce your federal income taxes is Puerto Rico, where you could pay as little as 4% in income tax and 0% in capital gains incurred while living there.

To be clear, this is a good thing, for them and for remote workers. These countries are just understanding these dynamics earlier than anybody and adapting to the new world before everybody else because people are less mobile than companies, but they are mobile, too. The same way tax havens lower taxes for all corporations by competing for corporate tax income, so will countries keep lowering their taxes to compete with remote workers.

The way they do this today is by keeping a high taxation rate for locals while luring in people living abroad, so as not to drop their current tax income. But you can imagine that as more people do this, these incentives will become more long term. Spain is already proposing to extend the tax benefits of remote workers from six to 10 years.

So as companies and people become more mobile, they will keep shopping around for the best tax deal, lowering overall taxes. That is, when they even pay taxes.

Crypto Taxes

The more that blockchains power the economy, the harder it will be for nation-state governments to track all of these money movements, and the harder it will be for them to tax these movements.

Today, the way governments do it is by regulating local banks, by getting direct data feeds from them, by intervening the international money flows through the SWIFT system, by freezing assets… But how do you do that in a world where all exchanges are decentralized?

This is why the U.S. government freaked out about cryptocurrencies and tried to force every crypto player to report everything. It’s why when El Salvador announced bitcoin would be legal tender, the World Bank refused to help and the International Monetary Fund warned of dire consequences — both of these organisms are controlled by nation states, particularly the U.S.

The nation state fears the loss of its grip on the financial system, without which it’s much harder to force the tax payments it needs. But that trend is imparable.

And if you think nation states will reduce international tax avoidance, ask yourself: are politicians interested in closing these loopholes?

Where are the 336 politicians mentioned in the Pandora Papers from? Source: Pandora Papers, ICIJ.

Politicians are the first to take advantage of these rules. They will never close the loopholes.

Limited Fiat Printing

Of course, at the same time, it’s harder to finance yourself by printing money when people don’t use your money.

Countries like Weimar Germany, Venezuela, Argentina and Zimbabwe know well what happens when you print too much money: dramatic inflation and dollarification — people escape from the local currency and start using dollars instead.

Since 2009, however, governments like in the U.S. and the EU discovered that they could print money without dramatic penalties. So they started pumping the printing press.

It took 96 years for the Federal Reserve to print $1 trillion, but six years to reach $4 trillion (after 2009). Since the beginning of the pandemic, the money supply has doubled. But this time, it wasn’t without consequences.

And you have to realize this is the government printing the money and the government telling you the inflation rate. If the normal escape from local inflation is the dollar, where do you escape from the dollar?

This is one of the key reasons why the stock market has been doing so well in the middle of a pandemic. But stocks aren’t a perfect alternative. Cryptocurrencies are, because they’re not denominated in dollars.

The more of the economy that happens through cryptocurrencies, the less the government will be able to rely on the printing press to fund itself.

All of this, of course, is happening at the time when the governments will break under the weight of pensions they can’t pay from taxing workers that don’t exist.

The Demographic Ticking Bomb

All of this is happening while at the same time we’re having fewer kids.

Children per woman. Source.

But — thankfully — we’re living much longer.

Life expectancy between 1770 and 2015. Source.

Unfortunately, most nation-state governments are incapable of raising the retirement age accordingly. As a result, workers must support ever more retirees.

Dependency ratio. Source.

This graph means that a retiree in the 1980s in developed countries like Japan, China and the European Union had more than five workers to pay for her old-age benefits like healthcare and pensions. In Japan, every retiree only has two workers to support her. Europe will get there in 10 to 20 years. The U.S. will follow soon after.

Already today, over 20% of European governments’ spending is dedicated to old-age benefits. If that doubles, how much money will be left? Especially since a big chunk of government income must be spent to service the debt — to pay back all of these bonds we happily buy at “risk zero.”

Meanwhile, the debt keeps piling up in the developed world.

Governments in developed countries are more in debt today than after WWII.

This is the Congressional Budget Office’s (CBO) projection of U.S. federal government debt:

According to the CBO, in 10 years the U.S. federal government will spend half of its discretionary budget on those aged 65 and older.

Escape Velocity

So, just to summarize here:

  • Nation states with developed economies won’t be able to fund themselves as they’ll have a hard time taxing corporations and individuals because of the internet, remote work and blockchains.
  • At the same time, they will have a harder time printing money because of cryptocurrencies
  • They won’t be able to emit debt forever either, because their debt is already through the roof. Servicing it will cost more and more.
  • This happens just as their costs increase because their population is aging

Instead of doing what they should — realizing they overpromised and correcting accordingly by raising the retirement age — they try to control their technological foes: social media, multinational corporations, mobile individuals, blockchain technologies…

We know how this ends. It happened five centuries ago, when the Catholic Church tried to suppress the printing press instead of reforming itself. It failed because it couldn’t stop the avalanche of technological progress. Within decades of the invention of the printing press, it had splintered, never to return to its glory days again.

For nation states moving forward, there are only two paths. The first one is totalitarianism. They can do like China, split from the rest of the world, and control everything that happens internally, at the cost of destroying development and erasing individual freedom.

The other alternative is choosing freedom, which means competition between many of the 195 countries that exist today, the extreme difficulty of collusion between them, and the unavoidable result of the demise of the nation state.

The only question left is: What will replace nation states? I will cover this in upcoming articles. Subscribe now to receive them.

This is a guest post by Tomas Pueyo. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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