US Economy Steady & Russia Looms Large Over Europe
Domestic equities rebounded slightly this week as the Jackson Hole woes began to subside. The S&P 500 was up around 3% from the market close last Friday and Europe’s STOXX 600 rose around 1% despite the ECB rate hike. Meanwhile, Bitcoin also legged up 6% on the week.
In the United States, more data has rolled in that is likely to validate the Fed’s push to tighten monetary conditions. The good news is that Manufacturing PMI came in at 52.8 which is unchanged from July and indicates a slight expansion in the manufacturing sector. As for jobs data, around 315,000 were added in August, with about 200,000 net additions after accounting for the recent revisions made to the downside for prior months. Unemployment marginally increased to 3.7%, from 3.5% in July, leaving plenty of wiggle room for the Fed in the coming months. The next major point of data the Fed is waiting for to guide decision-making is on the horizon, as the August inflation report releases on September 13.
While it is easy to contend that the goings on within the United States in the months leading up to midterms have been newsworthy, my eyes have remained fixed on the disaster happening in slow motion overseas. The ECB performed its single largest rate hike since it began to set monetary policy in 1999 by raising the deposit rate by 75 bps to 0.75%. With more rate hikes on the horizon, tightening in Europe is occurring at a much-accelerated rate.
To rub salt in the wound, Putin has threatened to cut off all energy supplies from Russia to Europe, dramatically increasing the risk of energy rationing this winter. With Russia being the EU’s largest supplier of oil and natural gas (around 40% of natural gas consumption comes from Russia) this could leave the continent in dire straits. Russia is already well on their way to making this threat a reality as “technical issues” have left the Nordstream 1 pipeline down indefinitely since late last week. It is likely that the EU’s calls to reduce gas consumption by 15% this fall and winter will be insufficient to offset the reduced supply from Russia and further measures will need to take effect soon to mitigate this impending disaster.
All this talk of energy crises inevitably brings to the forefront the importance of energy independence and a diversified stream of suppliers. The unfortunate reality of the current circumstances is that Europe is no longer fully in control of its destiny while many other parts of the world are very much profiting from this imbalance. Take for example Saudi Aramco, whose net income for Q2 came in at $48.4 billion, the highest quarterly net income of any company in recorded history. In times like this, being an energy rich nation with the ability to ramp up production pays dividends by providing unique opportunities to improve local outcomes and potentially alleviate price pressures abroad.
This brings us to the final topic for this week as Russia and China strengthen their ties while increasing their separation from the West. The two nations participated with a few other nations to conduct joint military exercises this past week, heightening concerns over their growing alliance and the ramifications this may have globally, and particularly in Taiwan. In addition, Gazprom and China National Petroleum Corporation have struck a deal where the Rouble and Yuan may now be used for gas payments, furthering testing the narrative of dollar supremacy. In summary, the confluence of events we are now dealing with is not unprecedented, but it is new to the 21st century. There are tenuous times ahead and maintaining awareness of the great interplay before us is crucial to make prescient decisions.
In Other News
Crypto native companies are still raising capital in a steep bear market thanks to the monster fundraises that asset managers pieced together in the last 18 months. Mysten Labs raked in $300 million at a $2 billion valuation from investors such as Binance Labs, Coinbase Ventures, and Andreesen Horowitz.
Brevan Howard revealed more information about their massive crypto hedge funds in a recent slew of SEC filings.
Gamestop continued its foray into crypto by striking a partnership with FTX.US. In addition to promoting e-commerce and marketing initiatives, FTX is labeling Gamestop as the preferred retail partner in the US. Some Gamestop stores will begin carrying FTX gift cards because who doesn’t want to buy crypto/stocks on their birthday?
China has continued to push its zero-covid policy with partial/full lockdowns impacting 65 million people across 33 cities. Out of 1.4 billion people, just over 1500 new cases were reported in the 24-hour period at the time of reporting, making the government’s response seem exaggerated at best.
In the first dramatic step of many in Europe, the UK government unveiled a plan to cap annual household energy bills to $2500 pounds until 2024.
Mining Metrics
Bitcoin Price: ~$21,100
Hashrate (amount of computing power used by the Bitcoin network): 227EH/s
Hashprice (expected value of 1 TH/s of mining power per day): ~$0.087
ASIC Prices (the computing machines used to mine BTC): $33.55/TH
Bitcoin’s turbulent week led to a momentary decline in hashprice. With hashprice residing just below .08c for much of the week, revenue figures are at their lowest since Q3 of 2020 when the last Bitcoin halving reduced the block reward to 6.25 BTC.
ASIC prices continued to hover around the local bottom, declining around 2% this week. Bitcoin miner CleanSpark took advantage of the declining prices for new hardware by acquiring 10,000 new S19J’s for around $28 million. This brings the acquisition cost of their new hardware to $28/TH, even lower than the index data that we track on a weekly basis. Hindsight is proving their strategy to be laudable, as their focus on developing infrastructure in 2021 instead of overpaying for hardware has seemingly paid off by allowing them to make purchases when others are capitulating. For reference, many miners acquired hardware between $90-110/TH around the market cycle top, dramatically impacting payback periods at current prices.
In an unprecedented move, Poolin temporarily froze withdrawals this week, citing liquidity issues. The Bitcoin mining pool accounts for approximately 10% of the world’s hashrate and operates by paying miners based on contributed hashrate to the pool instead of paying based on blocks found. This means if the mining pool falls on a particularly unlucky streak where blocks are found at a lower frequency than expected, actual revenue for the pool could fall out of alignment with the payouts they distribute. The law of averages eventually dictates that the % of hashrate would accurately represent the % of payouts over a sufficiently large time frame but minor deviations can occur over smaller samples.
Lastly, SEC chairman Gary Gensler made comments that ruffled some feathers throughout the crypto industry. Gary Gensler believes that the regulatory agency’s existing rules provide a clear roadmap for crypto companies and that they do not need additional guidance. He further spurned industry participants who have clamored for additional regulatory clarity by commenting:
“Not liking the message isn’t the same thing as not receiving it.”
While we disagree with the present stance taken by the SEC of regulation through litigation, it is unlikely that additional clarity will come in the near future as the United States has bigger problems to chew on at this time.
Until next week,
Artem