War and markets | Finance times

good morning. Shares had a bad first quarter; The S&P fell by almost 5 percent. In view of the hot inflation, a tightening of the US Federal Reserve, high ratings and a war in Europe, one could ask why the losses were not greater. Some thoughts below. Are we too negative? Send us an email to lighten our mood: robert.armstrong@ft.com and ethan.wu@ft.com.

War and Shares

do we live in a dream world? That is the question that I was concerned with after I wrote the contribution from Thursday for our collaboration with ChartBook. Inflation is burning and the Fed is vigilant. We flirt with an inverse interest curve. And yet the markets, measured by the Fed Fund Futures curve, the stock prices and other indicators, say that we will slide through the next few years without the US Federal Reserve only having to raise interest rates to 3 percent, and without getting into a recession.

Not to mention the small fact that war prevails in Europe. But the shares don't seem to worry about it. Even in Europe, where many expect at least mild recession, the shares have basically been unchanged since Vladimir Putin's invasion in Ukraine:

high -interest bonds are similarly sleepy:

The only dissenter of the atmosphere of airy indifference is the 10-year/2-year return curve that flirted with the inversion (but only flirted). Well, war is not always bad for the economy, and markets are not the economy anyway. Nevertheless, this is a strange situation, especially because this war has a great inflationary effect on oil, gas and industrial metals.

My colleagues Robin Wigglesworth, Philip Stafford and Tommy Stubbington wrote a good reading about which markets may be missing. In addition to the fact that the war -related inflation burdens the economy, they emphasize that a failure of Russian government bonds could have unpredictable systemic consequences. While Russia has previously avoided a loss of payment, a $ 2 billion bond is due on Monday, and it could be a tight matter.

There is probably a certain systemic risk due to a failure. However, since Russian bonds- state and corporate bonds- only make up a single-digit percentage of the armored dices of the emerging countries, the bond analysts and dealers I have spoken to believe that there are only a small number of specialized investors and maybe a few small Eastern or Central European banks to take big hits.

What worries me is the effects of war on raw materials - the way it will drive into the tightness, the slow economy and central banks. Why no longer worries the stock and pension markets? I only have two simple ideas that only apply to the share page:

• tina - the idea that "there is no alternative" to shares - is still in force despite increasing bonding. In an inflationary environment, higher returns may not compensate for the possibility of capital losses if interest rates continue to increase. According to Bank of America, the tributaries in equity funds remain positive in contrast to pension funds for the year.

• companies had a few very profitable years and use their treasure to buy large amounts of their stocks back, which supports the market.

There is also the possibility that the war is simply not so important financially. The sheer frightened the terrible misery that brings it over a few million people and its devastating effects on the economies of the two countries involved could make us overestimate its global economic effects.

Paul Gruenwald, economist at S&P Global Ratings,, for example, estimates that the war will push the global gross domestic product to 3.6 percent this year. Europe will carry the worst of it. That doesn't sound bad. But Gruenwald follows the market on the assumption that the Fed will not be forced to push interest over about 2.5 percent. This means that he assumes that inflation will go calm. This seems to me to be an uncertain bet and I am surprised that the markets are so confident.

El Salvador is strange

Most bitcoins are held by a few large investors or whales that rarely sell. According to an estimate, 82 % of the bitcoins simply sit there. So if you are the Salvadorian President Nayib Bukele, who is trying to sell an uneconomical Bitcoin-bound bond worth 1 billion USD in order to avert your country's default, the whales could be an obvious source of demand. From an FT report on Wednesday:

The demand of Bitcoin "Walen"-investors who hold large quantities of the world's largest cryptocurrency-should be of crucial importance for the procurement of the efforts to get the efforts.

Paolo Ardoinino, Chief Technology Officer at Bitfinex-which is supposed to provide the technical platform for the deal-said that the crypto exchange had "received half a billion dollars" of their users.

Potential buyers of the EL Salvador bond are also missing basic information about the legal framework for the [bonds] or which position they will issue.

People who are close to the project bet on the fact that large companies in the crypto community, despite the relatively low returns and uncertainties they surround, will see as an attractive investment.

In particular, this is a linchpin of Bukele's earlier approach, which was to offer the bond of small investors. The plan was to sell the bond in $ 100 to Meme investors. Christine Murray from FT submitted this report from San Salvador less than a month ago:

Josué País, owner of a taxi company in El Salvador, which accepts payments in Bitcoin by the tourists who use the service, supports the country's latest plan to capitalize on the country's recent plan.

"The curiosity drives me," said País, 36, the plan to buy about $ 200 of the "Bitcoin bond" of the Central American country, which is to be launched this week. "Firstly, I will do it to support the country. Number two because it is a large, attractive bet."

The country's president of the country, Nayib Bukele, rely on the interest in the Bitcoin-supported bond of País and small investors worldwide. According to analysts, this was one of the few remaining options to save the nation from its financial hole.

Now the bond is delayed, and Bukele says that El Salvador has to concentrate on the pension reform instead. Who knows the reason, but here is a guess: too few buyers. What if Bitcoin small investors are bored? Since the announcement of the Bitcoin bond in November, the Bitcoin stock exchange volume has dropped by a third:

The chatter in connection with Bitcoin also decreases, as this Bloomberg diagram shows:

Could Bukele instead harpoon some willing buyers among the whales? Professor Michael Pettis from the Beijing University believes this. Here is Pettis in a Twitter Wednesday:

Bitcoin investors probably have no choice but to invest in the bond. A failed deal would probably lead too much greater loss of value of their Bitcoin stocks than direct losses in bond.

The problem is that if the bond is successful, El Salvador will not only spend more bonds, but investment banks will start to suggest similar business for other marginal government bonds.

Maybe the spectacle that Bukele's Bitcoin bond is on fire would harm Bitcoin prices, but I am not sure whether the effect would be long. The downside of the volatility of the cryptoma markets is that they develop quickly.

A player who could really lose due to the failure of the bond sale is Bitfinex, the crypto exchange and the technology partner of El Salvador. The parent company also controls Tether, the largest stable coin. Tether is covered by reserves to ensure the bond with the dollar. But it used to play quickly and easily with these reserves, including unadorned investments in Commercial Paper. Ardoinin from Bitfinex said the FT that this would not contribute to marketing the EL Salvador bond, but Jaime Reusche from Moody’s, a close observer of El Salvador, speculates that the company could help in other ways:

If Bitfinex supports this emission, you could possibly also have a fairly interesting source of financing from the resources [Bitfinex’s Parent Company] invested in the reserves for Tether. It is not outside the area of the possibilities that you use part of these means to make this emission successful.

Maybe you only need $ 500 million in promises from investors, and then the other $ 500 million can come from investments from tether reserves.

to repeat it again, this is speculation. Creating reserves in this way would be incredibly reckless. Reserves should receive the value and put them in a unique Bitcoin bond could lead to legal problems. However, it is not unthinkable. In 2018, Bitfinex used Tether reserves to cover a lack of liquidity on the stock exchange, as a known case of the New York authorities unveiled. It would certainly not be the strangest turn in the Bitcoin saga by El Salvador. ( ethan wu )

a good reading

Nobody understands how real interest rates work. Really - nobody.