From the rapid growth of crypto to the dramatic volatility of the asset class, governments around the world are responding through regulatory and legislative actions. Some jurisdictions have announced clear and accommodating frameworks in the hope to create the crypto hubs […]
“Thankfully, persistence is a great substitute for talent.”
― Steve Martin
Thursday Hidden Alpha Mailbag
Q: Wen August Fed meeting?
There isn’t one: Sometimes they meet once a month and sometimes it’s every other month. There are no meetings in February, April, August, or October, for I-don’t-know-what reason.
They should re-think that, in my opinion: The market gets restless without a constant stream of news to react to, and in a month with no FOMC meeting we do silly boredom trades like selling bonds because we think Powell is speaking to us through the Wall Street Journal: Two-year Treasury yields spiked 5 bips as soon as Nick Timiroas’s article Jerome Powell’s Dilemma hit the WSJ website.
It’s like a sports gambler placing bets on midweek college softball games because they can’t wait for the NFL games on Sunday.
I’m pretty sure the market knows that Timiroas isn’t a secret spokesperson for Powell, but it doesn’t care: Fed policy is entertainment now, and we need to be entertained.
Powell will entertain us tomorrow with his talk in Jackson Hole, which the market will treat like an ersatz FOMC meeting because that's what we do.
Q: What do you think of the Inflation Reduction Act?
I think they nailed the timing: The bill’s passage will look nearly coincident with the peak in CPI and everyone conflates correlation with causality, so it’ll look very much like the government fixed inflation.
That, of course, will not be the case: A best-case scenario of cutting deficit spending by $30 billion a year over ten years is a rounding error in a $20 trillion economy.
And the way they are raising it — by taxing book income — is a pretty egregious sleight of hand: It’s crossing the never-to-be-crossed livewires of book and tax accounting systems. You’re not supposed to do that.
Corporations pay taxes on their, well, taxable income because it follows the accounting laws passed by Congress. Book income accounting rules are set by the FASB (with investor protections in mind). So taxing book income is tantamount to outsourcing tax policy to that unelected board of accountants.
More than anything else, the change is an amazing make-work scheme for accountants and tax lawyers.
That aside, I do like one thing about the bill: Its name.
Even though the Inflation Reduction Act doesn’t have much to do with the reduction of inflation, naming it such is an acknowledgment that lawmakers are, in fact, accountable for it.
The government has ducked that responsibility ever since outsourcing it to the Fed with the dual mandate in 1977. This bill feels to me like they are insourcing it back (partly, at least).
That’s good; fiscal policy is a much larger driver of inflation than monetary policy (I think), so making price stability solely the Fed’s job was misplaced.
The government will be taking credit they don’t deserve for declining inflation, but that will at least set the expectation that they continue to do something about it thereafter.
Q: What’s the weirdest thing you learned about crypto this week?
There’s always a lot of competition for that distinction, but this week I’d say it’s what I discovered about crypto mergers.
In reading about the mechanics of the Rari/Fei combination that created the TribeDAO, I learned that crypto mergers are entirely voluntary.
That’s different from TradFi where, if you own a stock that gets bought or merged, you generally don’t have to do anything: Your broker will process the corporate action for you, and the bought or merged stock will presto-chango be replaced with cash or new stock.
To participate in the TribeDAO merger, however, Rari and Fei token holders had to proactively send their tokens to a smart contract, which would return new TRIBE tokens in exchange.
But you didn't have to exchange your tokens and, up until this week, those RGT holders who didn’t were better off.
RGT token holders were offered 26.71 new TRIBE per RGT.
Before this week's news of the planned dissolution, 26.71 TRIBE tokens were worth about $4. But one RGT was still trading at $5.
That is weird because all of RGT’s assets were transferred to TribeDAO in the merger.
So TRIBE, with all of the combined entity’s treasury, TVL, developers, and smart contracts, was deemed by the market to be worth less than RGT, which retained none of those things — just an empty token.
It’s a weird, wacky, fun asset class where, if your token gets merged or acquired, you have to decide on whether the empty shell is going to be worth more than the active protocol.
Q: Has OFAC shut down DeFi yet?
Not yet, no. And I imagine they are pretty happy with our compliance so far.
Circle was of course quick to fully comply (while also voicing their objections).
More surprising was the response from several of DeFi’s most important protocols, which promptly over-complied by blacklisting not just the addresses listed by OFAC but also any accounts that interacted with those addresses.
This appears to have been accidental, though: All the big protocols seem to use the same data feed from TRM Labs to block addresses at the front-end level.
That created the impression that OFAC sanctions were perhaps more Draconian than they truly are. But it appears to have been an easy fix, with DeFi protocols just adding some nuance to how they implement TRM’s data.
On the other end of the spectrum, Tether is under-complying: They have not yet blocked any accounts because they have not been “explicitly asked” to do so.
I didn’t think you needed a personalized invitation to comply with OFAC sanctions, but I guess if you’re based in Hong Kong (allegedly), maybe you do?
OFAC only applies to US persons, so Tether might be right to wait for a phone call. But before you switch all your USDC to USDT, know that a phone call is all it should take: Most all of the assets Tether backs its stablecoin with will touch the US banking system in some way, so I don’t think they will be able to hold out for long.
On the other hand, Tether also pointed out that Paxos, the New York-based stablecoin issuer, has not yet frozen the sanctioned addresses.
Last I checked, New York was still part of the United States (geographically, at least), so I’m not sure what that’s about.
Maybe OFAC is less all-powerful than my TradFi brain thinks it is?
Q: Get any good responses to the newsletter this week?
I did, yes.
In response to my note on why cryptos are still so expensive, an astute reader said it’s more about a reluctance to sell than a willingness to buy. That would make bombed-out-but-still-expensive altcoins comparable to a company that “is clearly bankrupt but the stock trades at $1.50” because holders long much higher up can’t be bothered to sell it.
I think there’s an element of that in crypto: a “standard stable disequilibrium,” so to speak.
And it probably explains some things in TradFi, too, like why AMC’s newly listed preferred shares, APE, get assigned a $5 billion market cap.
Somebody is buying, however, and that’s still a bit of a mystery to me.
Q: What’s that Only Murders in the Building photo got to do with this mailbag?
But it’s a great show, so here’s your alpha: watch Only Murders in the Building.
(Sorry for making you wait until the end. Try Ctrl+F next time.)
Thanks for reading all the way and see you tomorrow for some obvious-alpha charts.