Casey Wagner

<div id="highlights-block_61b3c1d18206e" class="highlights">
        <ul>
                <li>Inflation rose slightly more than expected in November to 6.8% over the year </li>
                <li>Both gold and bitcoin rose on the news that inflation is rising at the fastest pace since 1982 </li>
            </ul>
    
</div>



<p>Inflation rose at the fastest pace since 1982 in November, the Labor Department reported Friday. The spike has sent investors searching for stores-of-value and some are eyeing bitcoin and gold as a hedge.&nbsp;</p>



<p>The <a href="https://www.bls.gov/news.release/cpi.nr0.htm" target="_blank" rel="noreferrer noopener">Consumer Price Index</a> (CPI) rose 0.8% in the month of November, putting inflation at a 6.8% increase over the year. The data came in slightly higher than analysts had expected. Core CPI, which excludes food and energy, was up 0.5% for the month. </p>



<p>Energy prices have increased 33.3% over the last 12 months, with gasoline prices alone surging 58.1%.&nbsp;</p>



<p>Both five- and 10-year Treasury yields fell on the news. Equities largely remained flat and bitcoin rose as much as 3.7% before paring gains.&nbsp;</p>



<p>“[Investors’] appetite for equities remains undeterred as traders appear to be confident that eventually at some point in the middle of next year a lot of these pricing pressures will fade,” said Edward Moya, senior market analyst at Oanda Corp, in a note Friday.&nbsp;</p>



<p>Treasury yields are often correlated with inflation because higher inflation means lower purchasing power of bond interest. It’s indicative that investors need to be hedging against rising prices, analysts say.&nbsp;</p>



<p>“Declining bond yield – to me, that’s more significant for bitcoin than CPI because CPI is a lagging measure,” said Mike McGlone, senior commodity strategist at Bloomberg.&nbsp;</p>



<p>“Bond yields are a leading indicator, and bond yields declining enhances the value of this store-of-value asset that’s in a nascent period.”&nbsp;</p>



<h3><strong>No sign of slowing</strong></h3>



<p>Experts are not anticipating inflation to slow significantly for some time. The Federal Reserve has warned that even when prices do start to fall, which they insist will eventually happen, inflation will likely settle at a level higher than consumers have experienced for the past few decades.&nbsp;</p>



<p>“Our view is that it&#8217;s going to continue to stay hot and sticky through the first quarter,” said Kathy Bostjancic, Oxford Economics chief US financial economist, on a Bloomberg podcast Friday, referring to inflation. “And you&#8217;re not going to really get some reprieve until the second quarter, but even then, it&#8217;s going to remain elevated.”&nbsp;</p>



<h3><strong>Gold and bitcoin</strong></h3>



<p>Fed Chairman Jerome Powell <a href="https://cms.blockworks.co/powell-we-can-retire-the-term-transitory-inflation/" target="_blank" rel="noreferrer noopener">pivoted recently</a> and admitted that higher prices are not going to be ‘transitory,’ a term he embraced for months. The trend has investors seeking out stores of value assets, including bitcoin and gold. The precious metal gained slightly following the CPI report. </p>



<p>“Gold is slowly getting its mojo back after a hot inflation report mostly matched estimates,” Moya said. “A lot of the inflation is stickier than anyone wants and that should keep gold’s medium- and long-term outlooks bullish.&nbsp;</p>



<p>A key testing point for gold will be how its price is impacted by Fed rate hikes, Moya said. Once investors know how many hikes to expect, gold will be an asset to watch. In terms of bitcoin, the Fed’s upcoming policy meeting will also be telling.&nbsp;</p>



<p>“Some traders are anticipating a sideways market until the Federal Open Market Committee policy decision on Wednesday, so hesitancy to hold over the weekend might grow,” Moya said. “Hodlers will likely remain unfazed and feel mostly confident as need for inflation hedges will grow given the widespread rising pricing trends.”&nbsp;</p>



<p>As investors and analysts weigh how to interpret Friday’s CPI numbers, others question the accuracy of the gauge, which relies on Bureau of Labor researchers asking stores for prices.&nbsp;</p>



<p>Because the pandemic has impacted consumer spending and behavior, the numbers might not be relatable, some argue. Others point to the history of the measurement, which changed in 1980 to account for substitutions and product quality improvements. For example, it’s inaccurate to compare iPhone prices between years if a new model was released.&nbsp;</p>



<p>“Let&#8217;s remember, if CPI was measured using the original formula in 1980, it would be over 14% year over year,” said Greg Foss, executive director of strategic initiatives at Validus Power Corp. “It was ‘reported’ as 6.8% year over year today and was still the highest print in 39 years.”&nbsp;</p>



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<p>The Fed’s preferred measure of inflation for policy decisions is the Core personal consumption expenditures price index, which, like Core CPI, also excludes food and energy. The next PCE data release, which will include November’s data, will be released on Dec. 23, 2021. </p>



<hr class="wp-block-separator"/>



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Bitcoin Joins Gold as an Inflation Hedge While Inflation Spikes

Macauley Peterson

<div id="highlights-block_61b3756bdbc06" class="highlights">
        <ul>
                <li>Evergrande’s bonds and stock have been trading near their all-time lows this week</li>
                <li>“Watch credit default swap spreads on sovereign debt” for signs of credit contagion, advises Greg Foss</li>
            </ul>
    
</div>



<p>After many close calls for the embattled Evergrande property developer, a failed interest payment earlier this week led Fitch Ratings to <a href="https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-evergrande-subsidiaries-hengda-tianji-to-restricted-default-09-12-2021" target="_blank" rel="noreferrer noopener">downgrade Evergrande’s credit rating</a> to RD (restricted default) — on Thursday.</p>



<p>Markets have been anticipating the potential for defaults on distressed debt from Evergrande <a href="https://cms.blockworks.co/evergrande-is-suspending-trades-friday-heres-what-that-means/" target="_blank" rel="noreferrer noopener">for months</a>. The company <a href="https://cms.blockworks.co/update-evergrande-has-paid-part-of-148-13m-interest-due-yet-dmsa-begins-bankruptcy-proceedings/" target="_blank" rel="noreferrer noopener">narrowly averted</a> a default in November, with last-minute interest payments, but on Monday, two bonds issued by Scenery Journey Ltd., passed their 30-day grace period, <a href="https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-evergrande-subsidiaries-hengda-tianji-to-restricted-default-09-12-2021" target="_blank" rel="noreferrer noopener">Fitch wrote</a>, triggering the downgrade.</p>



<p>Evergrande subsidiary ​​Tianji Holding Ltd. owed the specific interest payments. Their non-payment opens up the potential for cross defaults on the parent’s offshore notes as well, totaling $19.2 billion of dollar debt, as <a href="https://www.bloomberg.com/news/articles/2021-12-09/evergrande-defaults-for-first-time-as-china-debt-strains-spread" target="_blank" rel="noreferrer noopener">reported by Bloomberg</a>.</p>



<p>Fitch noted in their downgrade notice that the “restricted” classification comes as “there has been no initiation of bankruptcy filings, administration, receivership, liquidation, or other formal winding-up procedures as yet with business operations continuing.”</p>



<p>In <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1203/2021120302119.pdf" target="_blank" rel="noreferrer noopener">an exchange filing</a> a week ago, Evergrande stated it plans “to actively engage with offshore creditors to formulate a viable restructuring plan of them Company’s offshore indebtedness for the benefit of all stakeholders.”</p>



<p>Evergrande’s bonds <a href="https://www.bloomberg.com/news/articles/2021-12-09/evergrande-to-be-handled-in-market-oriented-way-pboc-s-yi-says" target="_blank" rel="noreferrer noopener">have been trading</a> for 20 cents on the dollar, near their September lows, and its stock fell Monday to a new low.</p>




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<h3><strong>Government reaction</strong></h3>



<p>People’s Bank of China (PBoC) Governor Yi Gang sought to downplay the risks to financial markets during recorded remarks on Thursday for a seminar held with the Hong Kong Monetary Authority, <a href="https://www.wsj.com/articles/market-can-weather-evergrande-crisis-chinas-top-central-banker-says-11639040788">according to the Wall Street Journal</a>:</p>



<blockquote class="wp-block-quote"><p><strong>“The risk caused by a few real-estate firms in the short run would not undermine the market for the medium and the long run,” Mr. Yi said.</strong></p></blockquote>



<p>The PBoC <a href="https://cms.blockworks.co/btc-market-starts-monday-neutral-after-major-weekend-washout/" target="_blank" rel="noreferrer noopener">cut the reserve requirements</a> for banks on Monday, injecting the equivalent of about $188 billion of stimulus, a sign of its efforts to contain the crisis.</p>



<blockquote class="wp-block-quote"><p><strong>“The [PBoC] eased to help smooth the ‘default.’  In reality, the default has been priced in and anticipated for six months. The real issue will be credit contagion. Watch credit default swap spreads on sovereign debt as a warning signal,” Greg Foss, executive director of strategic initiatives at Validus Power Corp, told Blockworks.</strong></p></blockquote>



<p>That contagion could hit offshore creditors hard, as any restructuring plan <a href="https://www.bloomberg.com/news/articles/2021-12-05/china-braces-for-evergrande-restructuring-after-months-of-tumult" target="_blank" rel="noreferrer noopener">would likely prioritize</a> the millions of Chinese homeowners who put up down payments on Evergrande developments, as well the company’s employees and local suppliers, and any other investors who have more senior claims.</p>



<p>One question is where the Chinese leadership’s priorities will lie if credit conditions worsen. In Thursday’s comments, Yi Gang <a href="https://www.nytimes.com/article/evergrande-debt-crisis.html" target="_blank" rel="noreferrer noopener">blamed</a> Evergrande’s problems on its “own poor management and reckless expansion.”<br>Political concerns are trumping economic ones, <a href="https://www.csis.org/analysis/evergrande-dilemma-and-beijings-credibility" target="_blank" rel="noreferrer noopener">according to analysis</a> from the Center for Strategic &amp; International Studies.</p>



<p>“Beijing’s reaction to financial stress has clearly changed…One of the reasons that the Evergrande crisis is spreading to global markets is that investors can no longer be certain that Beijing is trying to maintain the same economic growth rates as in the past,” ​​Logan Wright, director of China markets research at Rhodium Group, wrote in October.</p>



<p>Bitcoin was down 7% yesterday, and has failed to get back above the $50,000 mark in Friday trading. In the past, Evergrande&#8217;s problems <a href="https://cms.blockworks.co/crypto-market-loses-250-billion-as-evergrande-fears-mount/" target="_blank" rel="noreferrer noopener">have been correlated</a> with weakness across the asset spectrum, although major international equities markets have remained relative unfazed this time around compared with major digital asset names.</p>




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Evergrande Default Adds to Market Jitters

Morgan Chittum

<div id="highlights-block_614ce267ecb77" class="highlights">
        <ul>
                <li>In an effort to curb a potential financial crisis, the People’s Bank of China injected more than $18 billion into its banking system</li>
                <li>The real estate giant has amassed roughly $300 billion worth of debt, the equivalent to 2% of China’s GDP</li>
            </ul>
    
</div>



<p>As Evergrande China Group faces a series of massive bond payment due dates, Chinese authorities reportedly asked local governments to start preparing for the debt-saddled real estate developer’s potential downfall, the <a href="https://www.wsj.com/articles/china-makes-preparations-for-evergrandes-demise-11632391852" target="_blank" rel="noreferrer noopener">Wall Street Journal</a> reported Thursday.</p>



<p>Sources in the journal who are familiar with the matter said Chinese authorities told certain state-owned enterprises and government agencies to step in if Evergrande doesn’t manage its affairs in an orderly manner. Local-level agencies were reportedly instructed to help mitigate Evergrande’s impact on China&#8217;s economy.</p>



<p>Sources described the government’s guidance as a way of “getting ready for the possible storm.”</p>



<p>In an effort to limit potential impacts on the broader economy, the People’s Bank of China injected more than $18 billion or 120 billion yuan into its banking system on Wednesday.&nbsp;</p>



<p>The company reached an agreement with bondholders on a bond payment due Thursday north of $84 million, according to a stock exchange filing on Wednesday.</p>



<p>Greg Foss, executive director of strategic initiatives at Validus Power Corp, said it was “very uncertain” whether or not they would bail out offshore bondholders. </p>



<p>“Do they invoke something where offshore bondholders are penalized and they protect local claims, local claims being housing?” Foss told Blockworks. “Out of $300 billion of debt, $200 billion of this is from prepaid housing, [as in] citizens of China that have pre-paid for their house. Does the Chinese government protect those liabilities, versus the bank debt and publicly-traded bond liabilities? I really don’t know.”</p>



<h3>‘World’s most indebted real estate developer’</h3>



<p>In recent weeks, Evergrande has dominated mainstream headlines. However, the real estate giant has been in financial trouble for much longer, amassing roughly $300 billion worth of debt.&nbsp;&nbsp;</p>



<p>This followed years of unrestrained expansion during which Evergrande’s debt grew alongside its assets and size, not to mention a global pandemic that hit property sales. Its share price has steeply declined this year, and trading of its bonds has repeatedly been disrupted by stock exchanges. (Evergrande shares were down 13.2%, as of press time.)</p>



<p>Once <a href="https://cms.blockworks.co/evergrande-is-suspending-trades-friday-heres-what-that-means/" target="_blank" rel="noreferrer noopener">news</a> broke that Hengda Real Estate Group Co Ltd, the parent company of Evergrande, would suspend trading of onshore corporate bonds, markets reacted accordingly. A series of volatile trading days followed as Wall Street and digital asset investors assessed how the company’s travails could impact the global economy.</p>



<p>Cryptocurrency prices <a href="https://cms.blockworks.co/crypto-market-loses-250-billion-as-evergrande-fears-mount/" target="_blank" rel="noreferrer noopener">declined </a>on Monday as its total market cap plunged 9% on-day, in part due to lingering speculation that <a href="https://www.reuters.com/business/finance/stablecoin-tether-says-holds-no-evergrande-commercial-paper-2021-09-16/" target="_blank" rel="noreferrer noopener">Tether</a> was holding securities issued by the embattled developer.&nbsp;</p>



<p>“The scare over Evergrande defaulting on their bonds roiled the markets earlier this week as well as crypto markets, especially with the speculation that Tether may be holding Evergrande’s commercial paper,” said Kevin Kang, founding principal of BKCoin Capital. “However, Tether announced that they did not have any exposure to Evergrande, but that wasn’t enough to stop the risk-off sentiment across the markets.”</p>



<h3><strong>Cryptos regain footing</strong></h3>



<p>Since Monday’s broad sell-off, major cryptos have slowly regained footing. Bitcoin and ethereum have made modest gains, advancing 3% and 4% in the afternoon.&nbsp;</p>



<p>&#8220;Evergrande seems to be supported by mainland China&#8217;s banks for the time being, assuaging much of the market&#8217;s concerns about triggering a 2008 Lehman&#8217;s Brother-style effect on the global markets,” said Edward Deleon, CEO of Anatha. “That said, the strategy of ‘big-budget bailouts or bust’ the world’s leading economies continually find themselves forced to deploy is literally the reason BTC was invented. This should prove net positive for the entire crypto market on the macro scale.”</p>



<hr class="wp-block-separator"/>



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Report: Chinese Authorities May Be Preparing for Evergrande’s Collapse

<div id="highlights-block_612ceed43cc75" class="highlights">
        <ul>
                <li>If bitcoin replaces the US dollar in the petrodollar system, it is realistic to believe that the digital asset may capture 5% of total global financial assets</li>
                <li>The petrodollar system is broken, Foss said, and bitcoin offers a solution </li>
            </ul>
    
</div>



<p>Greg Foss, executive director of strategic initiatives at Validus Power Corp, sat down with Blockworks at the Bretton Woods: The Realignment conference to discuss why a $2 million price target for bitcoin might not be as far off as many think.&nbsp;</p>



<p>“Total global financial assets in the world total $900 trillion in US dollars,” said Foss. “I believe that bitcoin is going to be used to price energy, and if that happens, I bring up the idea that it could be considered a global reserve asset.”&nbsp;</p>



<p>If bitcoin replaces the dollar in the petrodollar system, Foss said, it does not seem unlikely that bitcoin could eventually capture 5% of $900 trillion dollars.&nbsp;</p>



<p>“I don’t think it’s crazy at all,” he said.&nbsp;</p>



<p>Watch the full interview below to hear Foss’ thoughts on other digital assets, the threat of regulation and how bitcoin could actually overtake the petrodollar system.</p>



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</div></figure>



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Greg Foss: Bitcoin Hitting $2 Million is Plausible

Jacquelyn Melinek

<div id="highlights-block_611ff15d8b4d0" class="highlights">
        <ul>
                <li>“By converting an additional $500 million to crypto, what they&#8217;re doing is sending a message to the market. This message should be taken seriously because Coinbase is in a privileged position,” said Hans Hauge, head of quant strategy at Ikigai Asset Management</li>
                <li>“It’s game of getting people engaged on their platform,” said Greg Foss, executive director for strategic initiatives at Validus Power Corp.</li>
            </ul>
    
</div>



<p>Coinbase, one of the largest cryptocurrency exchange platforms in the world, announced plans yesterday to change its investment policy and some sources said this initiative is sending a strong message to the market that crypto is here to stay, while others said that the company’s investment is a “game” to attract more users.&nbsp;</p>



<p>Specifically, Coinbase announced it will buy $500 million in cash and cash equivalents to crypto in addition to allocating 10% of its quarterly net income into a diverse portfolio of crypto assets, the company’s Chief Financial Officer Alesia Haas said in a <a href="https://blog.coinbase.com/coinbase-updates-investment-policy-to-increase-investments-in-crypto-assets-a68c752ea786" target="_blank" rel="noreferrer noopener">post</a>. </p>



<p>That same day, Coinbase CEO Brian Armstrong tweeted, “I expect this percentage to keep growing over time as the cryptoeconomy matures.”</p>



<p>Friday, Armstrong <a href="https://twitter.com/brian_armstrong/status/1428747306300592139" target="_blank" rel="noreferrer noopener">tweeted</a>, “What&#8217;s cool is that our investment allocation will be driven by our customers: matching our custodial crypto balances.”</p>



<p>While some might consider the moves as a corporate strategy showing the strength of the overall crypto currency market, others consider it a marketing ploy. “It&#8217;s a game of getting people engaged on their platform,” said Greg Foss, executive director for strategic initiatives at Validus Power Corp.&nbsp;</p>



<p>With the announcement yesterday, Coinbase will become the first publicly traded company to hold Ethereum, proof-of-stake assets, DeFi tokens and many other crypto assets supported by its platform. These crypto assets will be in addition to bitcoin on the company’s balance sheet, Haas wrote.&nbsp;</p>



<h3><strong>Rapid expansion</strong></h3>



<p>The cryptocurrency ecosystem is expanding rapidly as the space continuously evolves. Coinbase’s latest plan to create a crypto portfolio, sends a message that this market is one that players should take seriously, said Hans Hauge, head of quant strategy at Ikigai Asset Management.&nbsp;</p>



<p>However, it’s important to understand that companies like Coinbase already have a long position in the market to whatever scale they need to keep the business going, Hauge said. “By converting an additional $500 million to crypto, what they&#8217;re doing is sending a message to the market. This message should be taken seriously because Coinbase is in a privileged position,” he added.&nbsp;</p>



<p>Both Hauge and Foss said Coinbase is “putting their money where their mouth is” with this investment and in turn, attracting investors to their exchange.&nbsp;</p>



<p>“It’s making money for their shareholders by putting more speculative tokens on there,” Foss said. “If they have it on their balance sheet it&#8217;s a commitment from them,” Foss added.&nbsp;</p>



<p>While Coinbase started the company in 2012 by only allowing buying and selling of bitcoin, they eventually grew and added ethereum, litecoin and a host of other cryptos, Hauge noted.&nbsp;</p>



<p>“The thing that people don&#8217;t understand is that the whole space is growing. It&#8217;s not bitcoin versus this or that, it&#8217;s an entire ecosystem unfolding. The logical continuation is that companies will hold other cryptos on their balance sheets eventually,” Hauge added. “What I&#8217;m saying is it&#8217;s not a knock on bitcoin that Coinbase isn&#8217;t towing the BTC maximalist party line. In all likelihood BTC will be their largest holding, but they have their fingers on the pulse of the industry and it makes sense for them to place long-term investments where they see opportunity.”</p>



<h3><strong>Coinbase building bigger&nbsp;</strong></h3>



<p>Earlier this week Coinbase announced it is launching a partnership with Mitsubishi UFJ Financial Group (MUFG) to <a href="https://cms.blockworks.co/coinbase-partners-with-mufg-for-japanese-expansion/" target="_blank" rel="noreferrer noopener">help bring its platform to Japan</a>, Blockworks previously reported. The company did not disclose an exact date of the launch in Japan. But Japanese customers in the country can currently buy bitcoin, ethereum and litecoin through Coinbase’s platform, according to its website. </p>



<p>Earlier this month, Coinbase reported <a href="https://cms.blockworks.co/coinbase-2-23b-q2-earnings-exceeds-estimates/" target="_blank" rel="noreferrer noopener">higher-than-expected second quarter earnings</a>, bolstered by trading volumes and an increase in users. Profit for the second quarter was $1.6 billion, compared with $32 million in 2020, Blockworks reported. </p>



<p>For the first time in its history, Coinbase reported a higher trading volume of ethereum than bitcoin with 26% of trades being in ETH. Twenty-four percent of trades were in bitcoin, the exchange reported.</p>



<p>The company’s $COIN share was up $9.17, or 3.69%, to $257.41 per share as of 2:20 pm Eastern Time on Friday. </p>



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