Bring 'em in and close the gates: Slow Mark Downs & the Crypto Tzar

The art of the regulatory tradecraft is to make the participants swallow the bitter pill and ask for seconds. As the land of the free & the home of the brave braces for the new generation of tzars to take over gnarly problems, all the other provinces of the world are trying their best to see through the fog of strategic ambiguity. This week, the People's Bank of China received the subtle mandate to devalue the currency and the US has announced its very own crypto tzar entrusted with the solemn authority to catch the wild goose.

Before we get into the crypto plan let's set the context using 3 themes:

Act 1: The Drunk Sailor

Before we get into the thick of things, let's start with how US sovereign interest payments as a percentage of GDP. This variable would be forcing a lot of actions in 2025-2026.

Now before one thinks that this is the only variable forcing the play, there are two more that would significantly affect the interest payments as a proportion of GDP.

• DOGE: Over the next 12-19 months the US wants to reduce its sovereign spending in the domestic economy which currently accounts for around 1/4th of the GDP. Reducing sovereign spending would induce a sharp revenue fall until alternatives are figured out. The current quantum of sovereign debt is too large to be refinanced in noticeable quantity. This would induce a sharp increase in the proportion of interest payments in the context of GDP. This medicine is quite necessary for the health of the US sovereign but will be a very bitter pill to swallow.
• Maturity wall of 2025-2028: Anyone who is crying about the higher cost of capital has not seen yet what going over a maturity wall looks like. In the next 12, 24 and 36 months, 2.14 trillion USD, 4.73 trillion USD and 7.31 trillion USD of corporate credit is about to mature globally. Just to put this into context most reputed bond market participants believe that over the coming 12 months around 1.5-2 trillion USD worth of corporate bonds may be issued in 2025. These maturities are post the COVID tightening cycle as such even if prime rates are applied, these would have to be refinanced at a higher rate than they were issued at. This has a knock on sovereign revenue for the US as a good portion of this debt might have to go out of the system.

Both of the above factors would increase the proportion of sovereign interest payments as a part of US GDP in 2025-2026. I am a Bayesian as such not very keen on trying to nail a moving target with certainty. There is already a good amount of refinancing effort on the way to reduce this burden and kick the can further down the road until it hits a rock as such it is not all doom and gloom.

Act 2: The sack of coins

While this drama goes on, the amount of private risk-taking in the US is coming to a grinding slowdown as the money supply available for deployment is going through the roof.

The easing cycle in the US started in October 2024 and was meant to encourage risk-taking and increase credit consumption which would further translate into demand for goods and services consumption. The effect of the policy rates on an increase in credit uptake has not worked in the US in the last 3 months.

Act 3: The slow markdown

Post the COVID era the world has adopted a style of working dominated by online interactions and even the strongest pulls have not been able to get the demand of commercial real estate back to the pre-covid era.

If we consider the volume as well as the absolute dollar value of commercial real estate transactions in 2024, this has been lacklustre, to say the least. Everyone has been worrying about commercial real estate leases post-COVID which have been predominately owned by community banks as well as the big players of the mortgage world. Now we must remember that commercial real estate leases can be as long as 4-5 years. So the leases that might have been signed in 2022-2023 would end in 2026-2027 while "DOGE" reaches maturity of implementation.

The slowdown in the total number of commercial real estate transactions in 2024 has led to the problem in which the value of a good proportion of the market can not be ascertained as they have not hit the market in a while.

Humble speculation: A good portion of the M2 is waiting to participate in the commercial real estate transactions of 2026-2027 which is to be a sizeable opportunity in distress when the leases signed in 2022-2023 come to an end. This money supply waiting for a home has comfortably started moving into short duration t bills as per the auction results on Nov-Dec 2024.

Final act: The liquidity sink

As Russia and the Middle East go through military conflict and as China is going through deflation, wealth from these areas is looking for a silk route out of the kinetic and economic conflicts. As a cherry on the cake, the People's Bank of China has received the subtle mandate to devalue the RMB. Crypto has been acting as a convenient pit stop for the fleeing wealth which is in the process of shifting its ownership to US domiciled funds.

Humble speculation: As David Sachs takes on the responsibility of the crypto tzar, he would be trusted to redirect the flows from outside into cryptos to finance the reduction of sovereign revenue as "DOGE" comes into effect. Brace for crypto in the US to be treated as a security with an increase in capital gains from sales of crypto to have a higher tax than the usual securities. The details are to be pencilled out but the primary driving force behind the crypto policies of 2025 would be focused on directing the wealth from crypto towards sovereign debt and to be kept there for longer duration. The iron corridor of the redirection would be a feat to watch.