Deflation And Voyager Bankruptcy
Deflation And Voyager Bankruptcy
The euro and Japanese yen continue to fall against the U.S. dollar as energy prices wreak havoc. Voyager files for Chapter 11 bankruptcy
Today’s issue will cover the latest macroeconomic trends and developments, highlight the latest moves in the fixed income, foreign exchange, and commodity markets, before providing a brief update on the latest in the state of the cryptocurrency markets.
Bonus Content: We sit down with ARK Invest guests David Puell and Frank Downing to discuss exchange bankruptcies and what to expect from Bitcoin until the end of this year.
10-2 Treasury Yield Inversion Is Back
You can read relevant macro previous issues here:
February 18, 2022 - Higher Volatility And Less Liquidity
February 22, 2022 - Volatility, Tech Stock Drawdowns And Credit Markets
February 23, 2022 - What The Hell is Going On With Financial Markets?
February 2022 - Monthly Report
March 15, 2022 - Inflation, Credit And Volatility
There’s no shortage of alarming macroeconomic charts and indicators at the moment. Starting with fixed income, the yield curve continues to flatten with the spread of 10 and 2-year treasury yields inverting yet again. This has been a reliable leading recession indicator for 2000, 2008 and 2020 as the spread on borrowing short-term credit and loaning out longer term collapses, while at the same time investors price in a deteriorating economic outlook.
As global currencies around the world continue to face pressures in the midst of the global energy crisis underway, the U.S. dollar, via the DXY, continues to reach multi-decade highs. The euro, making up 57.6% of the DXY currency basket in the denominator, has now reached a new 20-year low against the dollar. The yen, making up 13.6%, continues its devaluation trend to new 20-year lows as the Bank of Japan continues its yield curve control path holding their target rate at 0.25%.
Energy tells some of the story in the European Union (EU) and Japan as energy costs have risen magnitudes higher than the U.S. as the EU relies heavily on Russian gas. Both regions are massive energy importers. As a result, the currencies are in freefall against commodities and the U.S. dollar.
As we’ve highlighted before, the rising U.S. dollar is also reflective of the world’s dollar shortage demand at a time when a global dollar-denominated debt deleveraging is playing out as global liquidity dries up and economic growth slows down.
Since March 2021, commodity prices have soared in year-over-year performance returns as major dislocations in supply and demand and regional shortages have yet to be resolved.
Yet over the last month, prices have started to turn over from their peak at the same time that the market’s inflation expectations have fallen significantly to 2.5% over the next five years. The bond market isn’t always correct at pricing in long-term inflation expectation trends but the market is telling us that investors are now positioning for demand destruction and deflation. For example, copper, a vital economic commodity across several industries, has moved lockstep with 10-year inflation expectations.
Voyager Files for Chapter 11 Bankruptcy
In Case You Missed It: Bitcoin Magazine Pro Special Edition Contagion Report
Early this morning it was announced that Voyager has filed for Chapter 11 bankruptcy.
Voyager Digital Commences Financial Restructuring Process to Maximize Value for All Stakeholders
This was following the announcement from the firm on June 22 that they had large exposure to Three Arrows Capital (3AC) in the form of unsecured loans.
“Voyager concurrently announced that its operating subsidiary, Voyager Digital, LLC, may issue a notice of default to Three Arrows Capital ("3AC") for failure to repay its loan. Voyager's exposure to 3AC consists of 15,250 BTC and $350 million USDC. The Company made an initial request for a repayment of $25 million USDC by June 24, 2022, and subsequently requested repayment of the entire balance of USDC and BTC by June 27, 2022. Neither of these amounts has been repaid, and failure by 3AC to repay either requested amount by these specified dates will constitute an event of default.” - Voyager Press Release
In our June 16 release, following the announced insolvency of 3AC, we speculated on the likelihood of Voyager exposure to 3AC in our issue, Fears Of Further Contagion.
“With the recent developments, rumors have been flying, with speculation that multiple crypto lending/borrowing desks have been hit from insolvency.
“While it is uncertain which firms may have experienced any balance sheet impairment, there is a large possibility of losses across firms in the industry, and it's likely that we haven’t seen the dust settle.
“Shares of crypto custody/borrowing firm Invest Voyager ($VOYG) have fallen 33% over the past two days. The firm’s latest quarterly release showed that the company had lent $320 million to a Singapore-based entity (home of 3AC before relocation). Regardless of whether the loan was to 3AC, the collapse in share price is certainly not a vote of confidence by the market for a U.S.-based public crypto lending platform.” - Fears Of Further Contagion
Now, with the announcement of Voyager’s bankruptcy proceedings, some interesting findings can be seen in the bankruptcy filings.
In the company’s filing, it was reported that Alameda Research has borrowed $376 million from Voyager, for unknown reasons.
While it is somewhat curious that the firm supposedly is working to shore up the industry and stem the balance sheet contagion is currently borrowing money from an insolvent firm (that Alameda holds 9.49% ownership in), there are a few reasons that come to mind.
It is not unusual for a proprietary trading desk to borrow capital in the cryptocurrency industry (specifically denominated in assets other than the dollar).
Given that Voyager’s assets (that were largely customer deposits) were partially bitcoin denominated, Alameda could possibly be borrowing BTC to use for market making/shorting, in which they would aim to cover the loan at a later date.
Although the terms of the loan are unspecified, given Alameda’s ownership stake in Voyager, it would make sense that the firm wouldn't call in the loan, which would lower expected interest revenues.
It is our belief that it will take the market either lower prices and/or significant time to recover from the damage suffered in recent months, from both a balance sheet impairment perspective as well as a reputational/legitimacy perspective.
Thank you for reading Bitcoin Magazine Pro, we sincerely appreciate your support! If you found this article useful, please leave a like and let us know your thoughts in the comment section. This article is public, so feel free to share it!
We were wrong about how high the bull market would go last year, so I’m thinking we’ll be wrong about how low the bear market will go this year, especially because THE FED can start turning the whole ship around with the push of a button. BTFD.