Krypto scares everyone | Finance times

good morning. The returns of government bonds continued yesterday and broadcast a dark and increasingly familiar message about growth in the coming months. But the headlines were dominated by crypto. A few words and for rental price inflation below. Send us an email: robert.armstrong@ft.com and ethan.wu@ft.com.

Why Tether grabbed

A sudden and short break -in price of the StableCoin Tether - who came just like any other cryptocurrency that was sold hard - yesterday put a little heart attack:

A tether wacking is so worrying because-theoretically-it is linked to one to one to the dollar by a bundle of Fiat assets. Like a country that defends its currency before devaluation, the issuer company (Tether Limited) can buy Tether-token with Fiat money to support the token price.

The cone has already frayed beforehand. During the "cryptow interior" 2018, Tether was only traded for 91 cents for several days. But it recovered and the episode contributed to consolidating the belief that crypto is volatile but resistant and ultimately develops upwards. Crypto enthusiasts have assured everyone that this latest sale is a repetition of 2018.

However,

tether limited refuses to fully disclose the fiat assets he has held, so it is impossible to assess the resistance of the binding. The supervisory authorities fear a wave of mass returns at Tether and his competitors - an old -fashioned bank run. A run on Tether would be particularly dangerous because it is of fundamental importance for the entire liquidity of the cryptoma market. It is the primary medium to switch between crypto-assets and dollars. His failure could force the entire crypto ecosystem into its knees. As one of the founders of Dogecoin It "When Tether dies, everything is over, friends."

The worries were reinforced by the fact that a different cryptocurrency, terrausd, also melted this week. Although Terrausd also describes itself as a stable coin, it has little in common with Tether. Instead of being covered by dollar assets, it is an "algorithmic stable coin". This is how his PEG - if you want to call it that - works:

• Terra has a counterpart cryptocurrency called Luna.

• A system of intelligent contracts enables dealers to exchange Luna worth $ 1 (at market prices) for a single Terra token or a single Terra token for Luna worth $ 1.

• arbitrage intervenes.

• When Terra is overvalued with $ 2, buy a Luna for $ 1, exchange for a terra and sell your terra for $ 2.

• When Terra is undervalued with 50 cents, buy a terra for 50 cents, exchange LUNA worth $ 1 and sell your luna for $ 1.

• If there are enough purchases and sales, Terra should stay near $ 1.

that seems to be a house of cards because it is. The system is based on an active market, which in turn requires the dealers to believe that they don't get stuck and hold the bag. When everyone gets angry on Terrausd at once, the whole thing crumbles. The fragility of this system has long been obvious for close crypto observers. Here is Nevin Freeman, co -founder of the Stablecoin Reserve, who predicts what has just happened 2020 :

I think that is the greatest risk [for] stable coins if there is an algorithmic stable coin that has no support that only has an algorithmic mechanism that is supposed to keep it stable. . . . One of them could be introduced and marketed very effectively and accepted to a significant extent. . . . If this protocol then explodes economically and the price drops by half or almost to zero, [you could have] regulatory setback.

Yesterday the bad mood led to sales pressure at Tether, although the underlying mechanisms are very different. So far, Tether has defended his bond. But the whole thing has drawn attention to the spillover effects for traditional markets. Yesterday there was speculation that a crypto collapse ruin the mood of the small investors, lead to flight from stocks, trigger a rally in safe ports such as government bonds or destabilize short-term financing markets.

We don't know what will happen, but the risk is not to be dismissed. Stable coins have an overall market capitalization of more than $ 150 billion. If all the pens break - and you could - there will be waves far beyond crypto. ( ethan wu )

Real estate, inflation and the Fed

A chorus that has often been heard in the Wall Street commentators in the past few weeks is that the Fed cannot control inflation if it cannot first control real estate prices and rents.

In a sense, this is tautologically true: rent and owner equivalent rent (OER) make up more than 30 percent of VPI inflation and 40 percent of the core VPI inflation. When these two are involved in a quick increase, the Fed fights in a lost position.

It also applies that CPI measurements are left behind the rental indices of the private sector, for the simple reason that the measurements of the private sector only take into account spot rent increases (the increase, which occurs when a tenant signs a new rental contract for a property). But rents usually increase annually or even more irregularly, and the CPI measurements consider a mixture of new and existing rental contracts, which leads to delays. Recent academic works put the delay on about 16 months. The rental inflation that we now see in the real world-17 percent year after year, according to Zillow-will be shown in CPI inflation 2023 and 2024 (more here).

It is also true that house prices are still rising quickly (by about 20 percent, although the data is somewhat outdated) and generally following rent increases on house price increases. Since the range of housing in the USA is so scarce, the higher mortgage interest we are now seeing could only slow down the further increase in home prices, but do not stop. So it could look as if we are locked up in unusually high inflation rates in the coming months and years, and the Fed can do little.

But the picture shouldn't be that dark. Two points are particularly worth mentioning.

The first point is simple and methodical. The equivalent rent of the owners is in no direct connection with the real estate prices. As sometimes assumed, it is not achieved by asking homeowners what they would ask for the rental of their house. Rather, it is based on surveys to rents similar objects.

Secondly, you have to see that the Fed cannot primarily reduce rents by increasing the mortgage interests to reduce real estate prices and thus lowers rents. Most people do not borrow money regularly to pay the rent. The rental money comes from wages. The ability of the Fed to change the credit costs therefore does not affect rents directly.

But it affects it indirectly. If the FED tightens the financial conditions, companies spend less, even for wages. And that explains why the rents correlate more directly and more closely with wages than house prices. Here is a diagram of Skanda Amarnath at Employ America, in which CPI rent and Oer are applied to a wide range of wage growth:

The punch line here is that the Fed can probably get rents and Oer under control if it gets wages under control. Yes, there will be a time delay, but the ongoing real estate price inflation and the scarcity of the range of housing should not prevent the Fed from putting the overall inflation under control - provided that it can dampen the overall demand and thus wages. As Amarnath said, we only need to be more slowly growth, slower wage growth and time to get the costs of accommodation under control.

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