Friday Morning Reads
- Regulating Digital Currency
- ECB Policymakers Set for Showdown
- U.S. Warns Investors on Hong Kong
- Building Solar Farms May Not Build the Middle Class
- More OPEC+ Crude is Needed
- Fall to Pandemic Lows
- Yellen Sees ‘Several More Months of Rapid inflation’
- Cryptocurrencies Are A ‘Failed’ Payment Mechanism
- Building A Bitcoin-Inspired Financial Services Business
- ‘The Market Is Insane
- Xiaomi Overtakes Apple
- Intel Is in Talks to Buy GlobalFoundries
- ‘Shuttle Diplomacy Gone Bad’
Open Interest Changes:
How much will it cost? Uncle Sam is shelling out $105B for the program, which will be sent out monthly for half of this year's subsidy, with the rest to come as a tax refund in 2022. "It's the most transformative policy coming out of Washington since the days of FDR," said Senator Cory Booker (D-NJ). "America is dramatically behind its industrial peers in investing in our children. Even families that are not poor are struggling, as the cost of raising children goes higher and higher."
To qualify, a) One must have filed a 2019 or 2020 tax return and claimed the child tax credit on the return, b) Had a main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year, c) Had a qualifying child who is under age 18 at the end of 2021 with a valid social security number, d) Made less than certain income limits (credits phase out after $150K for married taxpayers, $112.5K for heads of household and $75K for all other taxpayers).
Go deeper: Commenting on the new child tax credit, Treasury Secretary Janet Yellen noted that the funds would provide an additional spending boost for the economy. She also called for the monthly installments to be permanent, saying the program is "something that's very important to continue." "It certainly will add to spending, but most importantly, it provides support for families to take care of the needs of children." (9 comments)
Talk about digital currencies is heating up after the ECB launched the investigation phase of its digital euro project. However, many are still asking how the tender would differ from the electronic money we use today via credit cards, online banking and popular payment app Venmo (NASDAQ:PYPL). Definitions first... While there are many descriptions of "digital currencies," they are broadly broken down into three categories.
Decentralized cryptocurrency: These are unregulated offerings like Bitcoin (BTC-USD), Ethereum (ETH-USD), Ripple (XRP-USD) and Dogecoin (DOGE-USD). Since they are issued by a network, and not any central authority or government, they are often volatile, but can also be exchanged for goods or services like traditional currencies. Cryptos often use distributed ledger technology (like blockchain) that can confirm valid tokens and log transactions.
Stablecoins: These also use distributed ledger technology, but they attach the value of tokens to something that already exists. By pegging the asset to the dollar, a basket of currencies, or commodities like gold, these currencies are more grounded and reduce volatility. The most famous example of this is Facebook's (NASDAQ:FB) Libra project, now known as Diem, which recently relocated its main operations from Switzerland to the U.S. as it scaled back its global ambitions.
Central bank digital currency: Otherwise known as CBDCs, these tokens represent a nation's fiat currency. They are a way for central banks to have a voice in the emerging industry as more "digital money" comes into the economy. Some central banks are looking to get some skin in the game by issuing CBDCs, while some are more concerned about the threat of stablecoins and decentralized finance.
How do CBDCs differ from electronic cash? When you deposit money into a bank account, the commercial entity takes responsibility for the sum. The cash is then held in electronic form and can be used across a variety of platforms, but it's limited to the bank's ledger. Companies like Venmo can even track electronic transactions on its own internal ledger system, but the money is still being held and tracked by a commercial bank provider. In the case of CBDCs, the government is the counterparty and takes liability for the money, while the ledger that's being used (known as the rails) can be a very different structure than a commercial institution.
Meet the rails: In the U.S., the ACH Network is the national automated clearing house (ACH) for electronic funds transfers. It typically takes three days to clear a transaction as it travels along the payment highway infrastructure. There are also wire transfers and credit card payments that are handled by separate networks. In creating a CBDC, the Fed would develop a new set of rails that could allow money to move faster, meaning rapid transfers for things like unemployment benefits and stimulus checks.
Outlook: Besides being quicker, Treasury Secretary Janet Yellen has said the rails would be cheaper and safer. While the central bank would want to maintain competition with its new offering, it would also seek to operate its innovations in tandem with cash and other forms of payment. There are additional privacy concerns that would have to be addressed, like the ability for a central bank to monitor every transaction that is using CBDCs in real-time. (129 comments)
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Over the last few days, the major averages have been fighting a battle for direction as investors continue to reassess the inflation outlook. Stocks are still powering near record highs as policymakers attempt to calm investor concerns following this week's sizzling CPI report, which came in at a whopping 5.4% for June (the fastest pace since 2008). Equity futures hugged the flatline overnight as the inflation story continues to play out, with the hope that the "transitory" chapter will be finished before an overheated villain appears.
Quote: "We will have several more months of rapid inflation," Treasury Secretary Janet Yellen said on Thursday. "So I'm not saying that this is a one-month phenomenon. But I think over the medium term, we'll see inflation decline back toward normal levels. But, of course, we have to keep a careful eye on it."
Fed Chairman Jerome Powell also defended the central bank's accommodative approach during Day 2 of his semiannual monetary policy testimony before Congress, but he did flag some caution. "This is a shock going through the system associated with reopening of the economy, and it's driven inflation well above 2%. And of course, we're not comfortable with that. To the extent it is temporary, then it wouldn't be appropriate to react to it, but to the extent it gets longer and longer, we will have to continue to reevaluate the risks that would affect inflation expectations."
Thought bubble: Modest inflation can be good, but when things grow too fast and exceed a nation's fundamental capacity, the economy can overheat. The sharp rise in costs could result in inefficient allocations as suppliers overproduce and create excess production capacity, while the inflation expectations themselves could lead to relentless price increases. When things slow down, a recession can hit, and central banks may attempt to raise interest rates before then to lower the amount of spending and borrowing in the economy.
If inflation is on the rise, and tapering talk is making headlines, then why are U.S. Treasury yields heading lower? "It's because of all the liquidity in the system," DoubleLine Capital's Jeffrey Gundlach told CNBC. "Banks are so flush with deposits" that it is creating disorder in the broader financial markets. In fact, the New York Fed's overnight reverse repo program has started touching record levels around $1T as excess liquidity overwhelms U.S. money-market funds and a parking space for cash becomes harder to find.
On the greenback: "Ultimately, the size of our deficits - both trade deficit, which has exploded post-pandemic, and the budget deficit, which is, obviously, completely off the charts - suggest that in the intermediate term - I don't really think this year, exactly, but in the intermediate term - the dollar is going to fall pretty substantially," proclaimed the so-called bond king. "That's going to be a very important dynamic, because one of the things that has helped the bond market, without any doubt, has been foreign buying, with the interest rate differentials having favored hedged U.S. bond positions for foreign bond investors."
Hasn't the dollar gone up over the past month? "It's a question of what your horizon is. In the short term, the dynamics have been and will continue to be in place for the dollar to be marginally or moderately stronger. In the longer term, I think the dollar [is] doomed." (29 comments)
Crypto boost: PayPal (PYPL) is increasing its weekly cryptocurrency purchase limit fivefold to $100,000 and is scrapping its annual purchase limit. "These changes will enable our customers to have more choice and flexibility in purchasing cryptocurrency on our platform," the company declared, adding that it's continuing to update in-app guides and educational materials on the subject. PayPal first started letting users buy crypto in October 2020, marking another step toward the asset class' mainstream adoption, and later added the capabilities to its mobile payment app Venmo. (21 comments)
De-Fi breakthrough: Square (SQ) is forming a new business that pulls together Seller, Cash App & Tidal to focus on "building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services," CEO Jack Dorsey announced in a tweet. "Our primary focus is Bitcoin (BTC-USD). Like our new #Bitcoin hardware wallet, we're going to do this completely in the open. Open roadmap, open development, and open source." (61 comments)
Digital payment revolution: The largest Indian IPO in more than a decade is underway as Paytm filed to raise up to $2.2B in an upcoming offering. The startup, which has over 333M users and is backed by Alibaba (BABA), SoftBank (OTCPK:SFTBF) and Berkshire Hathaway (BRK.A, BRK.B), dominates India's Unified Payments Interface. UPI has emerged as the most popular digital payments method in India, due to New Delhi's invalidation of more than 85% of the paper cash circulation in late 2016. (Comment here)
In Asia, Japan -1%. Hong Kong +0.4%. China -0.7%. India flat.
In Europe, at midday, London +0.2%. Paris -0.5%. Frankfurt flat.
Futures at 6:20, Dow flat. S&P flat. Nasdaq flat. Crude -0.3% at $71.45. Gold -0.5% at $1819.10. Bitcoin -2.1% at $31278.
Ten-year Treasury Yield +2 bps to 1.32%
Today's Economic Calendar
What else is happening...
U.S. crude oil tumbles near one-month low as OPEC deal looms.