E121: Macro update, Fed hike, CRE debt bubble, Balaji's Bitcoin bet, TikTok's endgame & more

The March 2023 25‑basis‑point rate hike by the Federal Reserve may later be recognized as the marginal policy decision that tipped the stressed financial system into a more serious crisis (e.g., further bank failures or systemic instability).

“I think that this move here could, in hindsight, be seen as the straw that breaks the camel's back.” View on YouTube

The U.S. federal funds rate will remain at an elevated level (relative to market expectations and recent history) for an extended period, staying higher for longer than most market participants desire or anticipate, rather than quickly reverting to near‑zero rates.

“Look, I've maintained now for nine months that rates are going to be long higher than we like and longer than we want.” View on YouTube

To break U.S. inflation, the Federal Reserve will ultimately have to raise the federal funds rate to at least 5.5–5.75%, implying further rate hikes above the then-current 4.75–5.0% range.

“we've known since Volcker era what we need to do to do that, which is you need to get interest rates to be greater than terminal inflation, which means that if 5% fed funds rate is insufficient. So we're going to need to see a print of five and a half, 5.75%.” View on YouTube

Following the early‑2023 banking stress related to long‑dated bonds, the U.S. financial system will experience a second, more serious phase of crisis centered on large unrealized losses and defaults in commercial real estate loan portfolios.

“there's tremendous stress building up in the banking system from unrealized losses on long dated bonds. Also unrealized losses on commercial real estate loans. And we've barely scratched the surface of seeing that problem. That's, I think, the next shoe to drop in this whole thing.” View on YouTube

If current trends continue, a large portion of downtown San Francisco office towers will be repossessed by banks through loan defaults and then sold off in distressed, low‑price auctions, with limited buyer demand due to high vacancy and weak tenant demand.

“So then what happens is you end up with all of downtown San Francisco owned by a bunch of banks. What are they going to do with it? They don't want to be in the real estate business, so they have to fire sale those buildings in a bunch of auctions at rock bottom prices...There were no buyers.” View on YouTube

The U.S. federal government will eventually deploy on the order of $2–3 trillion in new support (backstops, facilities, or similar programs) specifically to stabilize and support real-estate- and bank-related assets, including commercial real estate and banking system liquidity.

“I think it's inevitable. We'll have probably 2 to $3 trillion of federal money. You know, spent to backstop and support the asset.” View on YouTube

To address accumulated debt and asset fragility, the U.S. will resort to substantial further monetary expansion and inflation, but the U.S. dollar will not experience Weimar‑style hyperinflation or go to (or near) zero in value; instead, it will undergo a more gradual devaluation similar to the British pound at the end of the British Empire.

“there has to be money printing to get out of this hole. I don't know if it's necessarily in this moment...The truth is, it looks a little bit more like the pound sterling at the end of the British Empire...it's really hard to kind of just say, hey, it's going to be hyper inflationary and the value is going to go to zero. It's just not going to happen.” View on YouTube

By June 17, 2023, the price of Bitcoin will almost certainly remain far below $1,000,000 per coin; the probability that Bitcoin reaches $1,000,000 by that date is characterized as extremely low (near zero).

“he's betting 2 million in total on Bitcoin hitting 1 million by June 17th which there's probably no chance of that happening or a very tiny chance” View on YouTube

Bitcoin will not reach $1,000,000 per coin within 90 days of March 17, 2023 (i.e., by roughly mid‑June 2023).

“Do I think that we're going to have $1 million Bitcoin in 90 days? I personally find that very unlikely” View on YouTube

The 2023 banking turmoil is only the first of three phases of a broader financial crisis: (1) current banking/bond losses, followed within the next few years by (2) a major, deflationary commercial real estate crisis, and then (3) a government debt/sovereign debt crisis that prompts inflationary policies (monetization of debt), with these phases unfolding over a multi‑year period rather than within 90 days.

“So I think there's three phases to this financial crisis. We're in phase one, and I think CRA and government debt are the next two phases...I think that the government debt crisis...will be highly inflationary...I think this could play out over the next couple of years.” View on YouTube

If the U.S. Congress fails to agree on and pass a timely increase in the federal debt ceiling by June 2023 due to a hardline Republican stance on spending cuts, the U.S. will technically default on some of its federal obligations, triggering severe financial market turmoil and broader economic stress.

“In June, Congress needs to pass. An increase in the debt ceiling...if it does look like the Republican Party takes a very hard line and says...we are not going to approve increasing the debt limit...in the absence of that, the US will have to default on debt...you can have things really melt down.” View on YouTube

Despite mounting debt and fiscal issues, the United States will not experience Weimar‑style hyperinflation of the dollar in the foreseeable future, because the dollar’s status as global reserve currency and its widespread holdings make such a rapid, total loss of confidence unlikely.

“I'm not sure there's going to be this kind of like Weimar Republic Deutschmark hyperinflation thing, because it is the reserve currency and it is so widely held by everyone, it would require collective giving up.” View on YouTube

By early May 2023, the U.S. Federal Reserve will publicly release its investigation report covering both Signature Bank and Silicon Valley Bank (SVB).

“In early May, the fed will release their investigation into signature Bank and SVB.” View on YouTube

The most likely U.S. policy outcome for TikTok is that it will be required to spin out its U.S. operations to U.S. investors, with the Chinese parent ByteDance retaining at most a non‑voting equity stake and U.S. authorities mandating that a majority of shares and governance control are in American hands.

“Yeah, I think I've shared this in the past. I think they're probably going to have to spin this thing out. And if they hold any equity, if the Chinese parent company holds any equity interest, it'll probably be non-voting shares, and there'll be a mandate that the majority of the shares and some degree of oversight.” View on YouTube

The U.S. government will ultimately choose to shut down TikTok’s operations in the United States rather than allow a divestiture, because legislators will not be satisfied that the codebase and infrastructure can be cleanly separated from Chinese control in a provable way.

“So it's a pretty bad tell. I don't think divestitures are a real option, because when you think about the details of that, how will the government be satisfied that the code base was separated elegantly, that there was no malware surreptitiously planted? How will you actually prove all of this to a degree that satisfies a legislator? So I think the pound of flesh that they want is more easily and more salaciously satisfied by shutting this thing down. So if I had to bet on what happens. I bet more on that.” View on YouTube

Following the March 2023 congressional hearing with TikTok CEO Shou Zi Chew, TikTok will be forced to cease operating in the United States (be shut down) rather than remain under ByteDance ownership with conditions.

“As soon as that was in my mind, I was like, this thing is getting shut down because I don't think it's gonna.” View on YouTube