Lehman 2.0 and Praying for a Pivot
Markets came into the last weekend chomping at the bit thinking that they had found the next Lehman Brothers. The tale of the week revolved around Credit Suisse, a global investment bank and financial services firm with well over $1 trillion in AUM. After a report came out circulating rumors that a major investment bank was in danger of capitulation, the witch hunt began with fervor. Market participants quickly settled on Credit Suisse as the likely culprit, as their woes this last year have not gone unnoticed. With their investment banking division spinning off and a slew of headlines involving bad investments, fraud, and turnover at the highest level, people thought that they had found the target of the report.
For a couple of days everyone seemed convinced that this was the straw that would break the camel’s back. With Credit Suisse in their crosshairs, the case was quickly assembled against the struggling financial services giant:
Their stock is down 55% on the year
Bad investment in Greensill (freezing of $10 billion in supply chain finance funds)
Bad investment in Archegos (lost $5.5 billion)
Defrauding investors over a tuna bond to Mozambique ($475 million settlement with US and UK)
Failing to prevent cocaine-related money laundering
Credit default swaps (effectively an insurance premium you pay to eliminate default risk) on Credit Suisse surged to their highest level in two decades.
And yet, despite all of this noise and clamor, Credit Suisse thus far remains intact. While the industry giant is indeed going through some turbulent times, history is not likely to play out like it did in 2008. Regulations have changed since then with safety margins for banks becoming much more stringent. For example, since 2008, reserve ratios for banks have increased to guard against such collapses. So while Credit Suisse may have worse liquidity than many of its peers today, they remain in a much better financial position than their counterparts in 2008.
Outside of the drama surrounding Credit Suisse, markets rallied this week hoping that the UN’s calls to the Fed to stop rate increases would not fall on deaf ears. With Australia raising their key rate by only 25 bps instead of the expected 50, optimism for a slowing of hikes and a potential reversal resurfaced, with rate cuts in 2023 beginning to be priced in. At this time, the market moves appear to be more of a relief rally than a genuine reversal of the recent woes.
The reason for this is that the Fed’s with inflation is ongoing and the economy remains quite resilient. It would take an impressive act of altruism towards the rest of the world for the Fed to reverse course and cease hiking. With the United States Dollar as the world reserve currency, the ripple effects of our monetary policy are far more profound than that of other central bank’s but if history is any indicator, preserving domestic interests will almost always take precedent over international interests when it comes to matters of the dollar.
In Other News
In the most on again then off again business deal of all time, Elon Musk does an about face and once again seems poised to buy Twitter at a price of $54.20/share.
Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates, officially transferred his majority stake in the firm to the board. This marks the end of his multi-year transition out of the vaunted firm. Bridgewater manages well north of $100 billion.
Argentina’s state-owned energy company YPF is adding an 8 MW flared natural gas mining pilot by the end of the year, citing interest in sustainability.
Before blocking withdrawals and their subsequent bankruptcy, the top 3 Celsius execs cashed out over $42 million in cryptocurrency.
Russia approved crypto for cross-border payments only a couple weeks ago only to have Europe put a blanket ban on Russian wallets interacting with European entities.
Mining Metrics
Bitcoin prices continued to hover around $20k as hashrate surged to new heights. With deliveries of next generation hardware coming online over the last few weeks, the Bitcoin network has by definition never been stronger from a hashrate perspective. Unfortunately for miners, this network growth is often accompanied by margin compression and hashprice is expected to fall once again during next week’s difficulty adjustment.
In a pleasant twist from the recent grim tidings, the Bitcoin mining story of the week is actually a piece from the Texas Tribune speaking to the impact that crypto mining operations have had on rural communities. Unlike most new business installations that favor dense urban environments, crypto mining data centers tend to gravitate towards more rural areas due to the higher likelihood of cheap excess power and land.
The value of the economic infusions to these rural communities is immense, with the Texas Tribune citing a slew of benefits from Argo Blockchain’s facility in Dickens County. These include:
Employing a couple dozen locals
Adding $17 million to the local tax base which allowed for
a 1.5% county property tax cut
small raises to county staff
and road and bridge improvements
With positive press like this beginning to circulate more frequently and dozens of these types of projects being built/already built throughout the country, crypto miners are continuing to ingratiate themselves more deeply with some of the communities in the country that need these opportunities the most.