Centerfin Collective Weekly

Weekly Update Nov 25, 2022

Supply chain risks, yield curve inversion, update on crypto

New supply chain risks building

Reported this week were new lockdowns across the country, and protests at Apple’s largest iPhone manufacturing plant in China. In the US, the railroad workers union continues to be at an impasse in negotiating a new labor contract, threatening a strike in early December. China is the United States’ largest supplier of goods, and new lockdowns could disrupt their delivery ability. The US has no alternative to the railroad system to distribute goods from the ports. Both of these developments increase the risk of supply chain disruptions. It is important because supply chain issues served as one of the initial sparks for the current inflationary environment. As a result, the Federal Reserve has been aggressively raising interest rates, and markets have been acutely focused on their eventual slowdown or finish. While inflation in the US has been declining recently, this could make the Federal Reserve more cautious about changing direction.

Yield curve inversion

Yield curve inversion is when interest rates on the shorter end of the curve are higher than the longer end of the curve. As an example, as of Nov 25th, interest rates on 3-month treasury bills are around ~4.3%, while interest rates on 10-year treasury notes are ~3.7%. It doesn’t make sense that investors would charge less interest to lend to the US government for longer. This is not typical and is often looked at as a signal of a coming recession. While the yield curve has been inverted for some time, the longer it stays inverted, the better a predictor of recession it is. The 3 month-10 yr spread is the most widely looked-at indicator, and it has now been inverted since October 25th. In the last 50 years, when this spread has been inverted for more than ten days, recession has followed every single time.

Update on the world of crypto

Focus has shifted to Genesis and Grayscale Bitcoin Trust (GBTC), both subsidiaries of Digital Currency Group (DCG). Genesis, its custody, trading, and lending subsidiary, suspended redemptions and hired financial advisors. The parent company confirmed the existence of intercompany loans between Genesis and DCG. GBTC traded at as much as a 50% discount to its Net Asset Value (the value of the actual bitcoin) before rebounding. Worries about the security of their bitcoin forced Coinbase, its custodian, to reaffirm its holdings. It is not clear how the situation unfolds from here. As we have written before, crypto markets were at the highest end of speculative assets, inflated by more than a decade of easy money. Rising markets and abundant liquidity covered many bad actions and actors. As liquidity gets drained, all of this becomes exposed. While painful in the short term for those with exposure, it is healthy in the long term. We have always distinguished between Bitcoin, Ethereum, and “crypto” broadly. We have also always suggested that those who own coins store them in a private wallet.

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