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Smart Borrowing Has Made Monetary Policy “Laggier”

Smart Borrowing Has Made Monetary Policy "Laggier"

By Peter Tchir of Academy Securities

Milton Friedman made the term “long and variable…



Smart Borrowing Has Made Monetary Policy "Laggier"

By Peter Tchir of Academy Securities

Milton Friedman made the term “long and variable lag” famous. Everyone involved in markets and the economy has been struggling with the question of “what is the amount of lag” that we currently face on monetary policy. “Conventional” wisdom, as I understand it, is that it takes 3 to 6 months for economic policy to be truly felt. I think that is far too short of a “lag” effect.

I’m going to ignore the fact that there was ongoing stimulus when the Fed started to hike. For example, things like the so-called “Inflation Reduction Act” came out during the hiking cycle. In addition, the Fed was still expanding its balance sheet almost until the time of the first hike. Finally, student loans were in moratorium and there were promises (and attempts, with limited success) of debt forgiveness.

Basically, I will ignore all the reasons why the lag effect was impacted early on. I will instead focus on the reason why it is still taking so long to kick in.

Borrowers Were Smart

What we will try to demonstrate is that borrowers were very smart and that “smartness” is translating into a much longer lag time for monetary policy to kick in than “normal”.

We will focus on the U.S. investment grade bond market as it is what I live and breath and feel most comfortable discussing (and I have good access to information).

I do think that it applies well to all corporate borrowers, especially since we saw private credit markets explode in size.
I expect that if we did a similar analysis on the auto loan market and mortgage market, we would see that consumers also made some very smart decisions in recent years (minimizing the immediate impact of monetary policy).

We will show that in the corporate credit market, issuers took advantage of incredibly low yields to lock in borrowing costs for longer (and in bigger sizes) than we’ve ever seen.

The more you borrowed at low rates (for extended maturities), the longer the monetary policy lag time is going to be as it will take years for the real impact to be felt (i.e., not in 3 to 6 months). This applies to corporations and households and it should not surprise us that 18 months after the first hike (and barely 6 months after the “slowing” of hikes) we aren’t seeing the impact that many expected.

We tried to describe this using the “birthday paradox” in 99 Problems but the Fed Ain’t One. It is also part of the reason why (only recently) we have been warning that The Real Story is Real Yields.

Without further ado, let’s start analyzing the “smartness” and why we have yet to see much of an impact from what seems like an unprecedented cycle of hikes.

IG Borrowers Were Very Smart

The Fed created ZIRP and some of the easiest monetary conditions ever seen. Not only were they growing their balance sheet with Treasuries, but they also figured out (in conjunction with the Treasury Department) how to buy corporate bonds and even fixed income ETFs!

In any case, we will show that corporations responded to this opportunity and that response is why the lag effect is “laggier” than ever.

Average Coupon

While I tend to live in a “mark to market” world, most companies live in an “accrual accounting” world. It might be fun to watch (and trade) the gyrations in bond markets, but the reality is that current yields are largely irrelevant to most borrowers. What matters is the average coupon. For all the following charts we use data based on the Bloomberg Corporation Bond Index.

The current average coupon is 2.99%. It is creeping higher (towards 3%), but it is still much lower than current yields are anywhere on the curve.

Historically, that is an incredibly low average coupon. Prior to July 2020 this index wasn’t below a 3% coupon in well over 20 years (2000 is as far back as I went for today’s purposes).

Almost 60% of the time (prior to July 2020) the average coupon was above 4%!

So, even after a series of aggressive hikes, average coupons are still low by historical standards.

Despite the Fed hiking rates by 5.25% in less than 2 years, the average coupon has only trickled up to 2.99%. The low was 2.42% in January 2020. So, we’ve seen the average coupon increase by less than 60 bps in the almost 2 years since the hiking cycle began. It will continue to go higher as there is no place on the yield curve to hide. The 10-year at 4.57% is at the lowest point on the Treasury curve and that is before adding any credit spread.

The average coupon is impressive, but it only tells part of the story of just how well borrowers (at least corporate borrowers) navigated ZIRP. However, I strongly believe that individuals, small businesses, and leveraged companies did this well too.

Average Maturity

While traders tend to live in a world driven by duration and DV01 (dollar value of a basis point), most people focus on how long they borrowed money for. How long you’ve locked in your debt for is how you manage your roll risk (for better or for worse, though we will demonstrate that corporations did it for the better).

While not quite as high as it was back in 2000, the average maturity is at 8.5, which is longer than average for this index. It climbed steadily, dipped a bit in 2019, and then rose rapidly while curves were inverted and yields were low. It has come down now, presumably because companies are less interested in issuing longer-dated bonds and some (as we will see next) are apparently paying down debt (unlike our government, but that is a story/rant for another day – US Govt Credit Rating).

Since April 2020, the average maturity went from 7.6 to almost 9 – an incredibly fast rise.

All else being equal, the average maturity declines over time as bonds come closer to their maturity date (it takes an impressive amount of long-dated issuance to drive that maturity extension). It is still coming down, but from elevated levels.

The fact that investment grade borrowers (and I’m sure consumers and other borrowers) extended their maturities to take advantage of historically low yields and inverted curves means that it will take even longer for today’s current high yields to work their way into the system (i.e., it will make monetary policy effects even laggier).

Debt Issuance

Maybe “net” issuance is the right number to look at, but for now, let’s just see what happened to debt issuance (based on the Bloomberg league table data).

2023 isn’t finished, but IG debt issuance has been reasonably stable. 2020 saw a 57% increase from 2019! While 2021 slowed down a bit, it was the 2nd highest in the past decade (behind 2020) and we still saw 25% more debt issued that year compared to 2019.

While net issuance is probably the correct metric, outright issuance alone is enough to send a strong message that companies took advantage of ZIRP to issue lots of debt! That helps explain why the average maturity increased relatively rapidly (and the average coupon dropped reasonably quickly). Typically, a surge in issuance helps overcome the inertia inherent in broad market indices.

Better Preparation Leads to Longer Lag Times

The more people prepared for a change in the rate environment, the longer it will take for that change to impact borrowers.

It seems clear that companies (and borrowers of all types) locked in lower for longer, which by definition (or maybe it is axiomatic) means longer lag times.

I think that the Fed should be very cautious (more cautious than they already have been) about raising rates as the impact is only beginning to be felt and piling on will cause more trouble down the road (especially if the Fed doesn’t want to cut any time soon, which they don’t).

Smart borrowers need to be accounted for in thinking about lag times and many of you on this distribution list deserve a pat on the back for being so well prepared to mitigate an aggressive Fed!

Tyler Durden Sun, 10/01/2023 - 12:50

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Ferrari to accept crypto payments in the US

Ferrari’s decision to accept cryptocurrency payments was driven by market demand and dealer requests, with numerous clients investing in digital currencies.



Ferrari’s decision to accept cryptocurrency payments was driven by market demand and dealer requests, with numerous clients investing in digital currencies.

Ferrari will accept cryptocurrency payments for its luxury sports cars in the United States due to customer demand. The carmaker also plans to accept crypto payments in Europe.

According to an Oct. 14 report from Reuters, Ferrari’s chief marketing and commercial officer, Enrico Galliera, confirmed the intentions of the luxury car brand. Ferrari’s choice to accept cryptocurrency payments was driven by market demand and dealer requests, with numerous clients, including crypto-savvy young investors, having invested in digital currencies.

Although Galliera didn’t specify the number of cars Ferrari expects to sell via crypto payments, he reportedly stated that the carmaker’s strong order portfolio is fully booked until 2025. Ferrari aims to test this expanding market to connect with potential buyers beyond its usual clientele. The luxury automaker plans to introduce cryptocurrency payments in Europe by the first quarter of 2024 and expand to other crypto-friendly regions after.

For its initial phase in the U.S., Ferrari has reportedly partnered with major cryptocurrency payment processor, BitPay. This collaboration enables transactions in Bitcoin (BTC), Ether (ETH) and USD Coin (USDC).

Galliera confirmed that there will be no additional fees or surcharges when using cryptocurrency, as BitPay will promptly convert cryptocurrency payments into conventional fiat currency for Ferrari’s dealers, ensuring they are shielded from cryptocurrency price fluctuations.

BitPay will also verify the legitimacy of the digital currency, ensuring it does not originate from illicit activities, money laundering or tax evasion.

Related: Madeira announces creation of Bitcoin business hub for innovation

Many large corporations have hesitated to adopt cryptocurrencies due to their price volatility and associated transaction impracticality. Among these companies is Tesla, the electric vehicle manufacturer, which initially started accepting payments in Bitcoin in 2021. However, CEO Elon Musk suspended this payment method due to environmental concerns.

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Caroline Ellison wanted to step down but feared a bank run on FTX

Former Alameda CEO Caroline Ellison recognized she wasn’t doing a good job months before the company filed for bankruptcy, but Sam Bankman-Fried persuaded…



Former Alameda CEO Caroline Ellison recognized she wasn’t doing a good job months before the company filed for bankruptcy, but Sam Bankman-Fried persuaded her to stay.

Caroline Ellison wasn’t doing a good job leading Alameda Research in 2022, and she did not hide it. Excerpts from her personal notes shared as evidence by prosecutors in Sam Bankman-Fried’s trial revealed details about the trading firm’s struggles and its CEO’s desire to resign weeks and months before FTX collapsed.

Ellison spent over 10 hours testifying during Bankman-Fried’s trial this past week, notably entering through the front doors of the United States District Court for the Southern District of New York in Manhattan, joined by her attorneys. Ellison said she had not seen Bankman-Fried since the crypto empire failed in November 2022, but their communication had eroded months before.

In April 2022, their romantic relationship ended, and Caroline started avoiding meetings with Bankman-Fried even though they still lived in the same luxurious apartment in the Bahamas. Alameda’s growing liabilities with FTX and the breakup with Bankman-Fried made her consider leaving the company altogether.

“I feel like neither [Sam] Trabucco nor I have been doing a great job of pushing on stuff,” she wrote in the document to Bankman-Fried, which was shared as evidence during her cross-examination by the former FTX CEO’s defense counsel.

Bankman-Fried asked her to stay on, saying that her departure could create rumors about Alameda’s financial health, thus harming FTX’s credibility, so Ellison remained CEO.

Ellison joined Alameda as a trader in 2018. By 2020, she handled most of the company’s operations, while Bankman-Fried focused on his newly launched crypto exchange, FTX. In August 2021, she became co-CEO alongside Sam Trabucco, who stepped down a few months later, leaving her in charge of the company. In August 2022, Trabucco officially resigned as co-CEO.

Ellison was against creating FTX, she revealed. “I didn’t think of myself as ambitious before I started at Alameda, but I believe I became more ambitious” under Bankman-Fried’s incentive, she said.

As CEO, Ellison was in charge of handling Alameda’s crypto lenders. In mid-2022, after the Terra ecosystem failed, the company’s open-term loans stood at $1.3 billion. The market downturn drained liquidity from crypto assets, prompting Alameda’s lenders to demand loan repayments.

According to Ellison, Bankman-Fried instructed her to keep repaying creditors via Alameda’s line of credit with FTX. In other words, Alameda would use FTX’s customer assets to repay crypto lenders. At the time, its line of credit with the exchange stood at $13 billion.

As lenders demanded loan repayments and Alameda’s balance sheets, Bankman-Fried suggested Ellison use “alternative means” for presenting the company’s financials. In the following months, Ellison would create many additional versions of a balance sheet to deceive creditors.

Early in November 2022, an alternative version of Alameda’s balance sheet was leaked. Ellison was on vacation in Japan at the time, but she had to travel to FTX Hong Kong’s office to deal with the company’s crisis.

While the balance sheet data didn’t reflect the company’s reality, it was enough to spread rumors and trigger a bank run on FTX a few days later, exposing an $8 billion gap between the companies.

Having cooperated with the U.S. Department of Justice since December 2022, Ellison will soon receive her sentence regarding the seven counts of fraud and conspiracy to commit fraud she was charged with.

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ProShares prepares to launch unique Short Ether Strategy ETF

ProShares’ SETH ETF will start trading soon, following the first Ethereum futures ETFs by about two weeks.
ProShares introduced a trio…



ProShares' SETH ETF will start trading soon, following the first Ethereum futures ETFs by about two weeks.

ProShares introduced a trio of Ethereum futures ETFs in the recent weeks. Presently, the company is gearing up to provide a distinctive offering.

ProShares' Short Ether Strategy ETF (SETH) from the fund group is poised to commence trading shortly, following the debut of the initial Ethereum futures ETFs by about two weeks.

SETH, scheduled for listing on the NYSE Arca exchange, aims to achieve daily investment outcomes that mirror the inverse of the daily S&P CME Ether Futures Index performance, as indicated in a filing made on Friday, Oct. 13.

The fund does not engage in direct shorting of ether (ETH); rather, it seeks to capitalize on potential declines in the asset's value, as stated in the prospectus. On Friday, the price of ETH stood at approximately $1,540, reflecting a decrease of approximately 6% over the past week.

Screenshot of the ProShares SETH filing     Source: SEC

ProShares anticipates that the registration statement for SETH will become effective on Oct. 15 and plans to introduce the fund in early November, as reported by Blockworks.

However, the three existing ProShares ether futures funds — including two that invest in both ether and bitcoin futures contracts — debuted on Oct. 2 alongside similar products by VanEck and Bitwise.

The US Securities and Exchange Commission approved ether futures ETFs two years following the introduction of the initial bitcoin futures ETF, the ProShares Bitcoin Strategy ETF (BITO), which entered the market in Oct. 2021.

Related: SEC reportedly won’t appeal court decision on Grayscale Bitcoin ETF

ProShares continued its release of bitcoin futures ETFs with the Short Bitcoin Strategy ETF (BITI) in June 2022. As of now, BITO has accumulated around $850 million in assets, while BITI has approximately $75 million.

In August, Cointelegraph reported that Ether futures ETFs may be approved in October, causing an 11% spike in ETH prices at the time.

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