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China Dumps Treasuries, But Stablecoins Could Save The Day?
Today’s letter is brought to you by Consensus 2024!Consensus 2024 is happening May 29-31 in Austin, Texas. This year marks the tenth annual Consensus, making it the largest and longest-running event dedicated to all sides of crypto, blockchain and Web3. Don’t miss Bitcoin: We Are So Back, where Anthony Pompliano will discuss what the next bull market will look like, how it will differ from previous run-ups and the broad macro investment thesis for bitcoin and crypto more broadly. Consensus has tailored programming for Bitcoin maxis and multi-chain mavericks alike, covering everything from post-halving strategies to mining and more. Plus, you absolutely won’t want to miss the epic BTC (Nic Carter) vs ETH (David Hoffman) battle at Karate Combat. That’s just a taste of what's to come at crypto’s only big-tent event. Join Consensus in Austin alongside 15,000+ investors, founders, brands and more to take in all that blockchain has to offer. Get your pass today and use code POMP to save 20%. To investors, We are headed towards a multi-polar world. This is the perspective from an 18-month old podcast called Multipolarity. The hosts Andrew Collingwood and Philip Pilkington write for various publications on topics across finance and macroeconomics, while hosting the podcast which presents itself using the following description: “After the US retreat in Afghanistan, after the war in Ukraine, the old unipolar world is dead. America's imperial power is finally waning. Its rivals are rising. In trade and diplomacy, the US can no longer make all the rules all the time. Now, new alliances will emerge. New trade routes will open. Countries will compete as never before. Multipolarity is the podcast that explores this changing reality, every week. New era; new rules.” This context is important because Philip Pilkington recently put out an excellent Twitter thread on China’s continued selling of US debt. Normally when you see these opinion-laden posts, you can ignore majority of them because they were created by armchair critics. Pilkington may or may not be right in his conclusions, but at least he has credibility in evaluating geopolitical developments. So what is Pilkington worried about? China has been dumping US treasuries and debt at an accelerated clip, which has driven the measurement to an all-time high. This is not necessarily concerning by itself. But China is selling this debt at the same time that they are accumulating gold for their central bank reserves. This accumulation is still slightly below 5% of their total reserves, but that number is up more than 50% since the start of 2020. You can see an acceleration starting in the second half of 2022 in the chart above. Again, China being a net seller of debt has happened a few times before. China buying gold and increasing the percentage of their reserves has been happening for years as well. So what is the big deal? This is all happening at the exact same time that interest rates in the US have been increasing, which suggests that China is selling their debt to investors looking for higher yield. Pilkington points out this is important because it signifies a shift from a yield-insensitive buyer (China) to a yield-sensitive buyer (investment organizations). Everything is fine at the moment with this transition. Trouble will appear if the Fed starts to lower interest rates at a meaningful pace, which could happen if a recession was to hit the US economy, because these investors will start selling the debt as well. If foreign countries won’t buy our debt, and neither will investors like pensions or endowments, then who will buy the US debt? In a surprise development, stablecoin issuers may be the saviors that the Fed needs. I wrote to this group on December 1, 2023 in a letter titled “Are stablecoins saving the Treasury market?” the following: “China and Japan have decreased their share of US Treasuries by approximately 68% over the last 10 years. Not a great situation. Thankfully, at the same time that nation states have been decreasing purchases in US Treasuries, another buyer has shown up in the market. It isn’t the buyer you would expect though. Stablecoin issuers are buying US treasuries by the handful. They have collectively become the 16th largest holder of treasuries, and as CoinFund’s Chris Perkins pointed out, hold more than Norway, South Korea, Saudi Arabia, Germany, The Netherlands, Mexico and the UAE.” This is not just the crypto industry talking about this development either. Former Speaker Paul Ryan recently sat down with Bloomberg to promote stablecoin legislation as a way to increase demand for US Treasuries. You can watch the clip here: Castle Island’s Nic Carter nailed the implications of Ryan’s comments with the following comments: “First of all, he mentions stablecoins unprompted in response to a question about how Congress can deal with the debt. this is pretty interesting; the first thing he thinks of is stablecoins. Second, he's repeating industry points verbatim, which is pretty cool. I'm pretty sure that "stables [if considered a sovereign] are the 16th largest buyer of treasuries" traces back to my Messari Mainnet talk! Third, this is Paul Ryan, former House speaker, not some junior pro-crypto representative. The fact that someone of his stature is willing to openly say that stablecoins are a potential solution to the debt is quite remarkable and represents a considerable tonal shift. I've noticed elite policymakers have begun to make this transition towards recognizing the validity of stablecoins and accepting that they will be part of the financial fabric of the nation.” This brings me to my current thinking on this topic — China dropping US debt for gold is not exactly what the US wants to see. The offloading of our debt to weak-handed investors who will bail as soon as interest rates fall creates danger on the horizon. But the crypto industry may be able to save the day with growing popularity related to stablecoins. It is still too early to know for sure, but stablecoins have the best shot out of any other option we have seen to date. Crypto critics will have their brains in a blender reading this. I come in peace. I just want to share the facts and data that I am seeing in the market :) Hope you all have a great start to your week. I’ll talk to everyone tomorrow. -Anthony Pompliano Reader Note: Today is a free email available to everyone. 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