Is the Bitcoin bubble inflating iron ore?

Check out this fantastical piece of speculation by Gordon Johnson of GLJ research:

WHAT’S UP? While Evergrande’s bonds and equity trended up in the China Thursday trading session on news it resolved an issue with the bank that froze its accounts, this is PEANUTS in the grand scheme of things – while Evergrande has $107bn of B/S “debt” as of 12/31/20, with half due this year, when you add: (a) $80bn of commercial paper (some may overlap with the B/S debt), (b) $90bn of stretched A/P, (c) construction CAPEX for presold apts, and (d) a critical source of funding for prop developers is pre-sold units and have been used to fund ongoing operations and repay debts (i.e., selling apts before they are built) – which, “should” be escrowed, but are not (Evergrande has been offering steep discounts for those willing to pay in all cash for presales [why? because those units will likely never exist]), Evergrande likely has “debt” obligations in the hundreds of billions.

In fact, the news that the big HK banks halted Evergrande mortgages is much worse news vs. a bank unfreezing its accounts with respect to how the company is being viewed by other institutions in China at present.

WHAT’S THE PROBLEM? Tether’s commercial paper (“CP”) reserves – which we always assumed was some receivable from Binance or whoever – apparently could actually be CPs from China. Jim Cramer actually did a decent piece on this recently – i.e., his CNBC interview yesterday was pretty damning; they effectively refused to deny the CP associated with Tether was of Chinese origin, but said they are international A2+ rated (which makes sense given every bank and many of the EV’s subs are triple AA+ rated by Chinese agencies); see this article (link), which is pretty illuminating; also see here (link).

CONCLUSION? The “Tether printer” stopped just as Evergrande CP defaults started making news, which is also the time their bond sell offs accelerated. Admittedly, we don’t have the answers here, specifically, on if Evergrande has CP tied to Tether.

However, if Tether was a significant quantum of backdoor financing to someone in China for the first 5 months of the year (which certainly seems to be the case), the risk here could be much bigger than many realize. We firmly believe this is something everyone should be focused on monitoring at present as a macro risk.

By way of background, the Evergrande 3/23/22 bond we highlighted below a few days ago is trading at 66 cents on the dollar and now yielding a whopping 85.6% (vs. 69 cents on the dollar and a 73% yield two days ago).

The frightening part about this wild speculation is that it actually fits with the signals that we are seeing. Tether has previously claimed to have 100% USD-backed reserves. These have been exposed over time as nothing more than high-risk corporate paper.

If that CP is coming out of China, and why wouldn’t it be, then Evergrande is China’s largest issuer of USD debt, and there’s a good chance that Tether holds some.

None of this means that it is happening. But it throws up some extraordinary possibilities:

  • As Evergrande sinks towards insolvency so too might its creditors, including Tether.
  • Without putting too fine a point on it, Tether is the effective BTC central bank. Without it, BTC goes to zero.
  • This highlights, without being certain about anything, just how opaque are the counterparties and funding lines into the Chinese developer bubble.
  • It also highlights just how dodgy is BTC. It is much worse than a synthetic CDO if it is backed by a fume emanating from the Chinese developer bubble, which is now under sustained regulatory assault. Picture it: a synthetic currency backed by a synthetic central bank, backed by Chinese sub-prime developer debt, backed by Chinese bank mortgages, backed by a currency that prints squllions to hold a peg to a currency that prints quadrillions. Repackaged and sold as “sound money”. Faaaark.
  • Then you can add Australia’s current account to the very top of that marvelous edifice. If you want to get really hysterical about it, then you can add Australian real estate on top of that!
  • Finally, how ridiculous are those declaring BTC some new anarchistic form of currency when all it is doing is building the CCP police state with debt for anybody while paving the way for the mass centralisation of digital currency/tyranny.

Bugger me.

Houses and Holes
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  1. Tether probably owns the Greensill bonds as well.
    It is simply astounding what that Greensill managed to do. Sell asset back bonds, with the assets being potential future sales.
    If Tether owns the Greensil bonds, that would be one ponzi scheme owning another ponzi scheme.
    Simply beautiful and stunning that this crazy shiite can still happen today in broad daylight.

  2. The Traveling Wilbur

    Technical question: is a squllion smaller than a quadrillion?

    PS The movie rights to this story would be a good thing to snap up now. Turning the above into a script synopsis and publishing it should suffice, then it’s just 3-months in a garage with a typewriter (once some studio provides funding for that of course) and hey presto, it’s pretty lady in bath time again.

    Please do not cast anyone who has ever played Batman. For the love of god. Please.

  3. Mike Herman TroutMEMBER

    That is awesome and scary at the same time. I mean wow. I am sure we will be sitting here one day marvelling at the outrageous turn of events that pulled markets down and happened right under everyones noses…

  4. Stewie Griffin

    The only problem with this theory, i.e. that Tether is actually holding CP that sits OUTSIDE of the crypto space, is that it requires you to accept that real USD liquidity i.e. actual USD left the crypto space in order to buy real world assets, passing real world USD across to near bankrupt Chinese property developers who are nearly as hungry for real USD as the entire crypto space.

    Crypto is just as hungry or hungrier for real USD than the Chinese developers. There is imho zero likelihood that real USD have flowed out of Tether into Chinese CP.

    Binance is balls deep in Tether to the tune of at least $18bn:

    My bet is that the remainder of Tether’s CP reserves are paper owed by other crypto firms, Binance, Coinbase, Kraken, Bittrex, etc, that pair Tether, and that this entire crypto structure of one or two trillion in crypto market capitalisation, resembles an inverted pyramid balanced on top of no more than $5bn in real USD liquidity.

      • Stewie Griffin

        I’ll qualify what I said earlier – in regards to Tether there is imho zero likelihood that any real USD liquidity has flown out of the crypto space into Junk Chinese Bonds.

        However, the other stable coin – USDC which is owned by Circle, and supposedly the more trustworthy ‘stable coin’ recently released its own financial backing, which revealed around 25% unidentified paper noted as; Corporate Bonds, Corporate Paper and Yankee CDs:

        With total issuance of around $27bn that is possible that around $7b in USD that could have potentially found its way into dodgy Chinese CP…. however a recent report suggests that Circle was technically insolvent back in May this year, and like USDT, these CP amounts owing are much more likely to be inter-party crypto debts settled as Corporate Paper owing.

        Frankly I think the Crypto industry is probably encouraging these stories like ‘buying chinese CP’ somewhat to draw attention away from the more likely fact that all the CP backing Tether are basically other crypto assets, such as CP issued by exchanges used as collateral to purchase USDT or USDC in order to provide ‘liquidity’.

        Having the commentarti even speculate that the crypto ‘industry’ could support the withdrawal of $68bn OUTSIDE of the crypto space gives the entire edifice more substance, then the shell game it is. There is no chance in hell it could withstand even $10bn being withdrawn into real world Commercial Paper in real outward liquidity flows without the BTC price completely imploding.

  5. Fabian AlderseyMEMBER

    Are there any guarantees that Tether’s 13 employees (for a $64bn company) (who were all friends travelling in dodgy circles) aren’t also creating some Tethers out of thin air (alongside the Tethers real people bought)? When’s there going to be a full audit of how solid the real world backing of this supposed “1 Tether = 1 USD in cash” asset is?

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