Discussing bonds, Federal Reserve activity and the impact they have on the bitcoin market.
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On this episode, "Bitcoin Bottom Line" hosts Steven McClurg and C.J. Wilson met to discuss bonds and crypto.
Wilson opened by asking McClurg what changes he has seen in the bond market. McClurg stated that when it comes to bond yields, the Federal Reserve tightens and makes it more expensive to borrow. More prominent institutional investors must have a certain amount of their assets in fixed income for safety; therefore, large institutions will push the yield down for companies issuing debt that should go out of business. Sears and Toys "R" Us survived longer than they should have, while Nordstrom is struggling to keep its doors open and cannot get credit to buy inventory. As the Fed begins to tighten, it increases the size of its balance sheet by continuing to expand the upper growth of purchasing. McClurg believes that the market is finally starting to price in tapering but has failed to price in interest rate heights.
This year, the Fed has mentioned three types of interest rate heights, meaning it will increase short-term rates. McClurg predicted that with a 10-year going to 188, which was previously down around 1%, it will cause the refinance rates for borderline companies not to afford their debt service; meaning they cannot afford the interest payment on their new debt, causing them to refinance continually. McClurg explained that the U.S. government’s treasury department is selling and buying the bonds. It is issuing debt to pay for government spending, but nobody else is buying it, so the Fed is needing to step in and buy it to keep rates down. If the Fed stops buying, that means there is an open market for treasuries and for debt and market pressure pushes yields upward, causing debt on spending programs to be even higher.
Wilson asked McClurg to explain the triangle trade between spending, lending, and the debt service. When it comes to banks and borrowing there's a Fed fund window. This window is the rate at which the Fed will lend overnight to the bank. The bank is getting cheap money that it is supposed to lend out to its customers for items like cars and mortgages. This has led to a rise in housing prices.
The bank's price is spread based on its overnight lending window which is set up by the Fed. McClurg believes that the low mortgage prices will rise back up to three and three quarters, all the way up to 4%, which can be devastating to people. As interest rates go lower, insurance companies charge higher premiums to new customers to offset the lack of yield that they are getting. As interest rates lower, premiums rise.
Wilson questioned when bitcoin will be allowable in pension plans or charity funds. McClurg talked about the risks that individuals take while investing in bitcoin and other areas. McClurg has a long-term mindset when it comes to investing that not everyone has. Willson stated the value of looking five to ten years ahead while investing. Wilson discussed with McClurg if Barry Bonds is a hall of famer.
Wilson said that America leads many countries when it comes to bonds and discusses debasing money around the world. McClurg stated that many countries are co-mingling with America’s manufacturing. Every country is forced to stay up with the dollar whether they are debasing or not.
The biggest opportunity for China is to have a strong currency that remains strong. There are different mentalities about Bitcoin, depending on location. The independence that comes with Bitcoin challenges authoritarian governments, which is why we need it. McClurg believes that people are generally more optimistic when markets are going higher. Wilson said that the best move is to assess all the different things that are in your portfolio and ask if something were to move 10% to 20% underneath you, will it affect you in such away that you have to make a move before that happens? People have to decide whether they are going to trade into or out of something. McClurg and Wilson ended the episode saying the bond market has spoken, patience is key and if you are in the space you should build.