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"OK Boomer" on stablecoins, profits, tax cuts vs tariffs and Presidential break-ups
Good afternoon and welcome to the June 2025 Eye on the Market podcast. This one’s called “OK Boomer.” Which refers to the response that people like me get whenever we have questions on, or suspicions on things related to crypto or the metaverse or any of the, those kinds of things. So most of this week’s, month’s piece is on stablecoins, but also some important information to share on S&P profits, an analysis of tariffs versus tax cuts for the corporate sector, and then a history of presidential breakups, given what just happened in DC.
So to start out, let us begin with some good news on the Q1 earnings season. I, there’s a team that’s run by Dubravko and his group at J.P. Morgan Securities and Equity Research, and they do a great job. And they summarized some of what was going on in their piece last week. Earnings surprise of around 7.5%, compared to 4% over the prior four quarters. EPS growth for the first quarter was revised up to 12% year-on-year. Net income margins of around 13% was higher than expected. And the consensus thought there would be margin compression in seven of 11 sectors. And then on company guidance, only 25% raised, which is below the normal numbers for the last few years, but only 15% cut, which was the lowest share of companies cutting guidance in Q1 in five years. And only 1% of companies withdrew guidance. So I take that as a positive, given how bad it could have been given all the uncertainty around tariffs.
The Mag 7 stocks continue to blow the doors off—28% year-on-year earnings growth. And stock buybacks were up around 25%, with new programs announced by Apple and Google, and Goldman and Wells Fargo, and Verizon. So a pretty good Q1 earnings season.
A couple of charts in here. Look at the earnings surprises from the Mag 7 were almost 14%. The rest of the market was a bit lower for an average. Again, it’s another, another example of a very bifurcated market, for the Mag 7 are driving capital spending and earnings, and a lot of other things. And earnings growth, again, you know, in the neighborhood of 30% for the Mag 7. Rest of the S&P is puttering along at about 9%, which isn’t bad in a low-growth, low-inflation kind of environment.
Now, the only caveat, and it’s a big one, is you don’t want to get too excited about Q1 earnings and economic data if some of it was influenced by a massive ramp-up of imports, where companies were on a precautionary basis accumulating inventory.
And if you look at this, we have a chart here on real imports of consumer goods, excluding cars. And in the first quarter it shot up, you know, enormously, and has since come back down. And then if you also look at imports of pharmaceutical and other medical goods, those also went bananas in the first quarter. So there’s going to be some payback in the second and third quarter in terms of lower earnings growth, lower economic growth.
But I think this was it was a pretty good quarter for the S&P in a demonstration that the, the Mag 7 are right now a pretty, formidable freight train.
Now that gets to the question of what will tariffs do to the S&P 500 from a profits basis. The tariff stuff is all over the place. We, you know, they, they were up as high as 25%. They started the year at two, then they were at five and they were at seven. And we’re now waiting for a lot of the judicial cases to be resolved regarding the reciprocal on the fentanyl tariffs. If Trump loses there, he’s going to do Section 232 and Section 301 investigations. But Empirical Research did an interesting analysis. They looked at a point in time of a couple weeks ago, and they said, as things stand right now, how, how much of the tariffs hurt profits, and how much would the tax cuts in the reconciliation bill help profits? Now we haven’t talked a lot about incremental new corporate tax cuts in the reconciliation bill because there aren’t that many. Other than extending the existing corporate tax cuts, there’s not a lot of new stuff. But there’s a few additional depreciation benefits for companies related to section 199A and section 179. If you, if you happen to enjoy that kind of, of stuff.
And we have a chart in the piece that shows that the corporate tax benefits are probably only, let’s say, a 20% of what they were from when the TCJA was passed in 2017. That said, Empirical’s estimate was that for most of the manufacturing sectors, the tariff costs would be offset by the impact of some of these reconciliation bill depreciation benefits. And so I thought that was, that was interesting and a good sign. So if it turns out that we don’t get the left-tail high-end tariffs, some of the depreciation bill benefits in the reconciliation bill, if it passes, could offset some of those moderate tariff costs.
Okay. Also, what are U.S importers doing? Imports from China are way down, but imports from other Asian countries—India, Taiwan, Vietnam, Malaysia, Singapore—these are up a lot, unsurprisingly, and so there’s a shift taking place that one would expect to continue.
And then one last quick thing on trade, after the Russian invasion of Ukraine, there was this kind of flag-waving, we’re not going to export to the, to Russia anymore going on in the EU. In Europe, nothing is ever quite what it seems. The Germans cut their quarterly exports to Russia, but they know full well what’s going on. Their, their exports to Turkey and the other former Socialist republics went up by a little more than half of that amount. So the transshipment process is alive and well, not just with respect to the U.S. and China, but also with respect to Germany and Russia.
Okay. So, the, the, what’s called the hero image for the Eye on the Market this week is a stylized version of me at a stablecoin IPO launch, which is a bunch of young people enjoying their popcorn, watching the movie, and me rising in fear because I think, or not so much fear, but concern, because I think I’ve seen this movie before. As a matter of fact, I’m pretty sure I have. So I’m not going to go into all the details on exactly what stablecoins are. If you’re listening to this podcast and you’re listening to this part, you probably know what stablecoins are. I will tell you that they had a pretty rough start. More than 20 stablecoins collapsed between 2016 and 2022, and every single one of the world’s stablecoins lost its reference peg on multiple occasions between 2019 and 2023. And if you think that’s a thing of the past, just last, just two months ago in April, the third-largest stablecoin lost its peg to the dollar for a few days after an unrelated crypto executive claimed that the other thing was insolvent, and it dropped to $0.87 on the dollar until they had to buy back a billion bitcoins and push it up again.
Now that said, stablecoin volatility has quieted down a little bit since the collapse of Luna and Terra, and the, the pegging of Tether and USDC, which took place when FTX failed. As things stand right now, Tether’s USDT and Circle’s USDC account for almost 90% of global stablecoin market cap and a similar percentage of stablecoin transaction volume. So it’s essentially, you know, controlled by a market that’s controlled by those two entities.
Now, there’s a chart making the rounds in the VC community, as these things tend to do, showing that stablecoin transaction volumes have soared and are now several trillion and are only a little bit below Visa, okay, and Visa’s at around, you know, 10 or 11 trillion. This chart is, needs a lot of explanation because it’s, it’s kind of misleading.
The easiest way to think about that is these are transaction volumes that are fact that are, that are affected by anytime money moves from one thing to some other thing, even within the crypto universe. And so the real value proposition that people claim that stablecoins can provide is traditional payment rails, not just being used as poker chips inside a crypto exchange, but being used for business-to-business transactions, consumer transactions and things like that outside crypto exchanges. And when you look at those numbers, they’re not 6 or 7 trillion. They’re 1% of that number. They’re around 70 billion. And there was a really good piece that came out recently from Artemis Analytics that looks at this. And they added up all the stablecoin payments on, on business-to-consumer, peer-to-peer, business-to-business, and it’s around $60 or $70 billion. So it’s not nothing, but it’s 1% of that other amount.
And I have a lot of questions about this GENIUS Act that’s being debated in Congress, which is essentially a stablecoin protection act. And I’m not going to go through all the questions. I lay them out in the Eye on the Market with some charts and tables and things like that, but I’m just going to walk through a few of them here.
If the value proposition for creators of these offshore collateralized stablecoins like Tether is the ability to hold some stuff not in T-bills and cash equivalents, in other words, Tether holds some Bitcoin, some precious metals and unsecured loans and things like that. And if this kind of an entity doesn’t have a large backup bank facility or a central bank discount window to draw from, how is this any different from the SIVs, for those of you that remember, that existed before the financial crisis, or the banks, frankly, that existed before the creation of the FDIC, I don’t know how they’re different.
How much stablecoin demand is being driven by entities who are primarily interested in anonymity since their core purpose is offshore gambling, money laundering, extortion, drug trafficking? The, there’s, a there’s a crypto analytics firm that already shows that it, that stablecoins account for like 60 to 70% of all, of all kind of crypto-related crime. And if they’re saying it, you know, it’s probably worse than that.
The big question for me is what is stablecoin offer that existing regulated channels don’t? Existing channels for legitimate commerce, you’ve got the Automated Clearing House, you have wire transfers, your card networks, correspondent banking relationships. You have this new thing called Fed Now that enables instant payments, and where you can deliver funds to households and businesses in seconds. There are Clearing House real-time payments. And then there’s private firms that offer instant ACH transfers. And so it’s unclear to me, I know there’s a lot of excitement about these stablecoins, but it’s unclear to me if a blockchain-based system can do better than the existing networks. And I thought it, a couple months ago, the CEO of Airwallex came out and said stablecoins can be more expensive than Western Union and other options, but if, particularly for, for people outside the country. There’s a lot of talk about, well, if you’re a cab driver in Turkey or Indonesia, and you want a store of value that you’d want to buy the stablecoins. Yes, you can do that if you have the local bank account, and it’s pretty seamless to get in.
The other question is why does the Genius Act, why did the capital, liquidity, custody and risk management standards for the stablecoin industry, why are they so much less demanding than they are for FDIC-insured banks when they effectively do the same thing? And, and why does the Act provide a state exemption for certain state stablecoin issuers with, with respect to federal supervision and enforcement? There’s a lot of weird stuff in this bill. Then if large tech companies issue their own uninsured stablecoins, that looks like it would end run the Bank Holding Company Act of 1956 that separates banking and commerce. And there are some other weird things that we describe in the note this month that would effectively give uninsured national banks that issue stablecoins access to the Fed’s discount window and other Fed goodies. So that’s weird. Then is the Act going to allow these entities to pay a yield or not? And even if they don’t, it doesn’t, it seems like it would only apply to the issuers themselves and not prevent affiliates of the issuers, crypto exchanges, DeFi blockchains and other crypto trading venues from paying rewards and yields to holders of stablecoins.
So for everybody that wanted this clause, like no yields on stablecoins because we don’t want to see money flow out of the traditional banking system, which could reduce the availability of capital that gets lent to small and medium-sized businesses, you’re going to end up in the same place if yields can be paid on stablecoins just from affiliated entities rather than the direct issuer itself.
There’s all sorts of weird loopholes in here that would allow the Treasury Secretary to issue safe harbors and waive reserve requirements and, and other provisions for, for offshore entities like Tether to have their coins sold in the U.S. And then, you know, you got to ask the question, what explains the administration’s commitment to this GENIUS Act? And, and how is this affected by the fact that the crypto PACs were, accounted for nearly half of all the donations in the 2024 elections by the launch of a stablecoin affiliated with the administration’s people, called World Liberty Financial? Abu Dhabi made a decision to use World Liberty Financial’s stablecoins to invest $2 billion in Binance. It’s just a lot of questions you have to ask in terms of what’s driving the administration’s commitment to this GENIUS Act.
What I will give them is that essentially this could act like a magnet for all sorts of offshore dollars, whether they’re illicit or not, and provide more demand for T-bills and dollars at a time when you’ve got rising budget deficits and concerns about Section 899 taxes on entities with countries with unfair foreign taxes, and you know, at the, at the same time that everybody’s handwringing about reduced demand for dollar assets, this could start sucking them in another direction. So anyway, take a look. That’s the stablecoin section. A lot more questions and answers. And again, I think I’ve seen this movie before.
Then to close, just a brief Dogespierre update. Obviously there was a big, breakup, a Taylor Swift style breakup between the president and Dogespierre. Dogespierre was upset about the reconciliation bill. Shed no tears for Dogespierre. Many of the DOGE spending cuts have substantially hampered the agencies that regulate his various businesses, something that we covered in detail in the May 1st Eye on the Market. Another thing about DOGE. The federal government is now scrambling to rehire a bunch of federal employees that were dismissed by DOGE after its initiatives wiped out entire offices, in some cases affecting things that the military and the commercial sector need, like weather forecasting and drug approvals.
And you know, just to end, you know, there have been presidential breakups before. I’ve put in a few that I thought would be of interest. The one that’s amazing to me is, and obviously much worse than the one that just happened, was the breakup between George Washington and Thomas Jefferson. While he was Secretary of State, Jefferson secretly established and funded a partisan press effort to target Washington’s own administration, and he funneled confidential information from cabinet discussions to, to Madison, who then drafted anonymous resolutions for House Republicans to censure Alexander Hamilton. Jefferson tried to convince Washington that Hamilton and his supporters were plotting to transform America into some kind of pro-British monarchy, and Washington was really upset about that. Their relationship, which had existed for decades, was damaged, and Jefferson resigned as Secretary of State in December of 1793. When Washington delivers his famous farewell address, a lot of the clauses in there can be read as strong critiques of Jefferson when Washington warns against excessively favoring or disfavoring foreign nations. Then, after retiring, the first, what does Jefferson do? The first thing Jefferson does is organize a new party to run in opposition to Washington’s Federalist Party. So, I think that kind of ranks up there, similar to the rupture that we’ve just seen.
And then the, my favorite one, just because of all the drama involved, is when John Dean testifies against Nixon in Congress. And I watch this as a kid, and he said, “I began by telling the president that there was a cancer growing on the presidency. And if the cancer wasn’t removed, the president himself would be killed by it.” I think people had a lot more dignity and, and, and, and shame back then. Anyway, that’s, and that was the beginning of the end for Nixon.
Another part of Dean’s testimony he actually testified against, he had testified that Nixon asked him specifically how much more he would have to pay to silence the, the Watergate break-in burglar defendants, and when he told them that it was about $1 million more than he paid so far, the president said, no problem, we can pay it. And then a lesser known fact, even before the Watergate break in, Dean was forced to intervene to scuttle another plan. The Nixon people had to firebomb the Brookings Institution, where certain incriminating papers were held regarding the 1972 election.
So there’s been a lot of strange breakups between presidents and their cabinet members and other senior advisors, and, and the one that just took place with Dogespierre is just one example of that.
Thank you for listening. And I look forward to connecting with you at the end of June when our 20-year anniversary retrospective piece comes out. Thanks for listening.
(SPEECH)
Good afternoon and welcome to the June 2025 Eye on the Market podcast. This one is called "OK Boomer," which refers to the response that people like me get whenever we have questions or suspicions on things related to crypto, or the Metaverse, or any of those kinds of things. So, most of this month's piece is on stablecoins, but also some important information to share on S&P profits, an analysis of tariffs versus tax cuts for the corporate sector, and then a history of presidential breakups, given what just happened in DC.
(DESCRIPTION)
The speaker sits facing us. Behind him is a window overlooking a city-scape, and decorative shelves, with "JP Morgan" written on the back wall.
(SPEECH)
So, to start out, let us begin with some good news on the Q1 earnings season.
(DESCRIPTION)
Text: Some good news on S&P 500 Q1 earnings season. 7.6% vs 4% for the prior 4 quarters. Q1 2025 EPS revised up to 12% year over year. Net income margins of 13.2% were higher than expected. Estimates pointed to margin compression in 7 of 11 sectors.
(SPEECH)
There's a team that's run by Dubravko and his group at JP Morgan Securities and Equity Research, and they do a great job. And they summarized some of what was going on in their piece last week. Earnings surprise of around 7.5% compared to 4% over the prior four quarters.
EPS growth for the first quarter was revised up to 12% year on year. Net income margins of around 13% was higher than expected. I think the consensus thought there would be margin compression in 7 of 11 sectors.
(DESCRIPTION)
Text: The share of companies cutting guidance in Q1 was the lowest in five years.
(SPEECH)
And then on company guidance, only 25% raised, which is below the normal numbers for the last few years, but only 15% cut, which was the lowest share of companies cutting guidance in Q1 in five years. And only 1% of companies withdrew guidance.
So, I take that as a positive given how bad it could have been given all the uncertainty around tariffs.
(DESCRIPTION)
Text: A basket of AI, data center, and electrification stocks recovered by 50% from April lows.
(SPEECH)
The Mag 7 stocks continue to blow the doors off, 28% year on year earnings growth. And stock buybacks were up around 25% with new programs announced by Apple, and Google, and Goldman, and Wells Fargo, and Verizon. So, a pretty good Q1 earnings season.
A couple of charts in here. Look at the earnings surprises from the Mag 7.
(DESCRIPTION)
A line chart is shown, titled, "earnings surprise". It compares the earning percentages from March 2023 to March 2025 for three different stock classes, Mag 7, S&P 500, and S&P 493. The Mag 7 class both dipped, but then increased the most, from negative 1 percent in June 2024, to over 14% by March 2025. The S&P 500 and 493 followed a similar trend of less extreme dips and raises throughout this time period.
(SPEECH)
We're almost 14%. The rest of the market was a bit lower for an average. Again, it's another example of very bifurcated market for the Mag 7 or driving capital spending and earnings, a lot of other things.
(DESCRIPTION)
He switches to a different line chart, titled, "earnings growth" which compares the same three stock classes over the same time period as the prior chart. The Mag 7 category had a much higher percentage earnings growth throughout all time periods compared to the S&P classes, in the range of 20 to 40 percent when compared to negative percentages to around 10% for the S&Ps.
(SPEECH)
And earnings growth, again, in the neighborhood of 30% for the Mag 7. Rest of the S&P is puttering along at about 9%, which isn't bad in a low growth, low inflation kind of environment. Now, the only caveat, and it's a big one, is you don't want to get too excited about Q1 earnings and economic data if some of it was influenced by a massive ramp up of imports, where companies were on a precautionary basis, accumulating inventory.
(DESCRIPTION)
He switches to another graph which is titled, "Real imports of consumer goods ex autos", which uses Census data from 2016 to 2025 and shows the gradually upward trend in index values of consumer goods, excluding autos imports, until 2025, when the index rose from 120 to 145, before dropping back down.
(SPEECH)
And if you look at this, we have a chart here on real imports of consumer goods, excluding cars. And in the first quarter it shot up enormously and has since come back down. And then if you also look at imports of pharmaceutical and other medical goods, those also went bananas in the first quarter.
So there's going to be some payback in the second and third quarter in terms of lower earnings growth, lower economic growth. But I think this was a pretty good quarter for the S&P. And a demonstration that the Mag 7 are, right now, are pretty formidable trade tree.
(DESCRIPTION)
Another line graph is shown titled "US pharmaceutical and medicine trade", as part of a slide on how imports surged in advance of tariffs. A blue line represents imports, and a brown line represents exports. It shows that amount of money spent on imports in this field rose more drastically, from 250 billion dollars to 300 billion dollars in 2025, compared to exports, of which the curve remained relatively flat, around 110 billion dollars in 2024 and 25.
(SPEECH)
Now, that gets to the question of what will tariffs do to the S&P 500 from a profits basis. The tariff stuff is all over the place. They were up as high as 25%. They started the year at two. Then they were at five. Then they were at seven.
And we're now waiting for a lot of the judicial cases to be resolved regarding the reciprocal and the fentanyl tariffs. If Trump loses there, he's going to do Section 232 and Section 301 investigations. But empirical research did an interesting analysis. They looked at appointed time of a couple of weeks ago.
And they said, as things stand right now, how much would the tariffs hurt profits and how much would the tax cuts and the reconciliation bill help profits? And we haven't talked a lot about incremental new corporate tax cuts in the reconciliation bill, because there aren't that many. Other than extending the existing corporate tax cuts, there's not a lot of new stuff, but there's a few additional depreciation benefits for companies related to Section 199A and Section 179, if you happen to enjoy that kind of stuff.
(DESCRIPTION)
A bar chart titled, "Business tax cuts for US public companies, new tax benefits as a share of earnings, percent" is shown on a slide titled, "Reconciliation Bill business tax cuts". It compares the business tax cuts as a percentage of earnings in 2018 and 2019 during the Tax Cuts and Jobs Act, and from the proposed US Reconciliation Bill, forecasting for 2025 and 2026. Tax cuts are shown to be much higher from TCJA compared to the forecasted cuts from the reconciliation bill.
(SPEECH)
And we have a chart in the piece that shows that the corporate tax benefits are probably only, let's say, a 20% of what they were from when the TCJA was passed to 2017. That said, empirical's estimate was that for most of the manufacturing sectors, the tariff costs would be offset by the impact of some of these reconciliation bill depreciation benefits. And so I thought that was interesting and a good sign.
So, if it turns out that we don't get the left tail high-end tariffs, some of the depreciation bill benefits in the reconciliation bill, if it passes, could offset some of those moderate tariff costs. OK.
(DESCRIPTION)
Another bar chart titled, 2025 impact of US Reconciliation Bill and tariff costs on US manufacturers, by percent of revenues. This chart displays bars as different industries, Tech, electrical equipment, autos and parts, machinery, pharmaceuticals, chemicals, and manufacturers.
(SPEECH)
Also, what are US importers doing?
(DESCRIPTION)
Line graph titled, "US imports from China vs other Asian countries," in billions of US dollars. This is part of a slide titled, "US importers shift to the rest of Asia".
(SPEECH)
Imports from China are way down, but imports from other Asian countries, India, Taiwan, Vietnam, Malaysia, Singapore, Indonesia are up a lot, unsurprisingly. And so, there's a mixed shift taking place that one would expect to continue.
And then one last quick thing on trade.
(DESCRIPTION)
A line graph titled, "Transshipments to Russia, Germany quarterly exports to select countries, in billions, Euro." This is part of a slide titled, "Germany isn't fooling anyone". The graph spans data from 2008 to 2025. It has three lines each representing different countries, Russia, Turkey, and then one line which represents Kazakhstan, Georgia, Azerbaijan, Kyrgyzstan, and Armenia. The German exports to Russia after 2022 dipped from 7 billion euro to 3 billion euro, while export totals for Turkey rose slightly, from 5 billion to eight billion from 2022 to 2023.
(SPEECH)
After the Russian invasion of Ukraine, there was this kind of flag waving, we're not going to export to Russia anymore, going on in the EU. In Europe, nothing is ever quite what it seems. The Germans cut their quarterly exports to Russia, but they know full well what's going on. Their exports to Turkey, and the other former Socialist Republics, went up by a little more than half of that amount. So the trend shipment process is alive and well, not just with respect to the US and China, but also with respect to Germany and Russia.
OK.
(DESCRIPTION)
Slide titled, "A stylized version of me at a stablecoin IPO launch." There is a black and white image in a movie theater of a man looking towards the screen in shock, while the people around him are all laughing and smile.
(SPEECH)
So, what's called the hero image for the Eye on the Market this week, it's a stylized version of me at a stablecoin IPO launch, which is a bunch of young people enjoying their popcorn, watching the movie, and me rising in fear because I think-- or not so much fear, but concern because I think I've seen this movie before. As a matter of fact, I'm pretty sure I have.
So, I'm not going to go into all the details on exactly what stablecoins are. If you're listening to this podcast and you're listening to this part, you probably know what stablecoins are. I will tell you that they had a pretty rough start. More than 20 stablecoins collapsed between 2016 and 2022. And every single one of the world's stablecoins lost its reference peg on multiple occasions between 2019 and 2023.
And if you think that's a thing of the past, just two months ago in April, the third largest stablecoin lost its peg to the dollar for a few days after an unrelated crypto executive claimed that the other thing was insolvent, and it dropped to $0.87 on the dollar until they had to buy back a billion of the coins and push it up again. Now, that said, stablecoin volatility has quieted down a little bit since the collapse of Luna and Terra, and the depegging of Tether and USDC, which took place when FTX failed.
As things stand right now, Tether's USDT and Circle's USDC account for almost 90% of global stablecoin market cap and a similar percentage of stablecoin transaction volume. So it's essentially controlled by a market that's controlled by those two entities.
(DESCRIPTION)
A line graph titled, "annual transaction volume" in trillions of US dollars, is part of a slide titled, " stablecoin volumes". It shows the transaction volume trends from 2014 to 2024, with a different entity representing each line, including Fedwire, ACH, Visa, Stablecoin, Remittance, and PayPal.
(SPEECH)
Now, there's a chart making the rounds in the VC community, as these things tend to do, showing that stablecoin transaction volumes have soared and are now several trillion and are only a little bit below Visa. And Visa's at around 10 or 11 trillion. This chart needs a lot of explanation because it's kind of misleading.
The easiest way to think about that is these are transaction volumes that are affected by anytime money moves from one thing to some other thing, even within the crypto universe. And so, the real value proposition that people claim that stablecoins can provide is traditional payment rails, not just being used as poker chips inside a crypto exchange, but being used for business to business transactions, consumer transactions, and things like that, outside crypto exchanges. And when you look at those numbers, they're not six or seven trillion.
They're 1% of that number. They're around 70 billion. And there was a really good piece that came out recently from Artemis Analytics that looks at this. And they added up all the stablecoin payments on business-to-consumer, or peer-to-peer, business-to-business, and it's around $60 or $70 billion.
(DESCRIPTION)
A bar chart titled, "Stablecoin payments by type, annualized run rate," in billions of US dollars. Each bar covers different quarters, from Q1 of 2023, chronologically until Q1 of 2025. Each bar is divided into four sections, Business to consumer, card, as in debit or prepaid cards, peer to peer, and business to business.
(SPEECH)
It's not nothing, but it's 1% of that other amount.
And I have a lot of questions about this Genius Act that's being debated in Congress, which is essentially a Stablecoin Protection Act. And I'm not going to go through all the questions. I laid them out in the Eye on the Market and with some charts and tables and things like that, but I'm just going to walk through a few of them here.
If the value proposition for creators of these off-shore collateralized stablecoins, like Tether, is the ability to hold some stuff not in T-bills and cash equivalents, in other words, Tether holds some Bitcoin, some precious metals, and unsecured loans and things like that. And if this kind of an entity doesn't have a large backup bank facility or a central bank discount window to draw from, how is this any different from the sivs, for those of you that remember, that existed before the financial crisis, or the banks, frankly, that existed before the creation of the FDIC? I don't know how they're different.
(DESCRIPTION)
Text: How much stablecoin is driven by entities seeking anonymity since their core purpose is offshore gambling, money laundering, extortion, drug trafficking, o sanctions evasion? There are examples of criminal enterprises depositing proceeds in stablecoins to avoid prosecution, and as shown in the chart from Ahainalysis, stablecoins now dominate on-chain crime.
(SPEECH)
How much stablecoin demand is being driven by entities who are primarily interested in anonymity, since their core purpose is off-shore gambling, money laundering, extortion, drug trafficking. There's a crypto analytics firm that already shows that stablecoins account for 60% to 70% of all kind of crypto-related crime. And if they're saying it, it's probably worse than that.
The big question for me is, what does stablecoin offer that existing regulated channels don't?
(DESCRIPTION)
Text: For cross-border flows, note that there are still substantial off-ramp costs in many EM countries to first convert into local US dollar, and then from local US dollar into local fiat.
(SPEECH)
Existing channels for legitimate commerce, you've got the automated clearinghouse, you have wire transfers, you have card networks, correspondent banking relationships. You have this new thing called FedNow that enables instant payments and where you can deliver funds to households and businesses in ECC. There are clearinghouse real-time payments, and then there's private firms that offer instant ACH transfers.
And so, it's unclear to me, I know there's a lot of excitement about these stablecoins, but it's unclear to me if a blockchain based system can do better than the existing networks. And I thought a couple of months ago, the CEO of Airwallex came out and said stablecoins can be more expensive than Western Union and other options particularly for people outside the country. There's a lot talk about, well, if you're a cab driver in Turkey or Indonesia, and you want to store value, that you'd want to buy the stablecoins.
Yes, you can do that, if you have a local bank account. And it's pretty seamless to get in. The other question is, why does the Genius Act, why do the capital, liquidity, custody, and risk management standards for the stablecoin industry, why are they so much less demanding than they are for FDIC-insured banks when they effectively do the same thing? And why does the Act provide a state exemption for certain state stablecoin issuers, with respect to federal supervision and enforcement?
There's a lot of weird stuff in this bill. Then, if large tech companies issue their own uninsured stablecoins, that looks like it would end run the Bank Holding Company Act of 1956 that separates banking and commerce.
(DESCRIPTION)
Text: GENIUS Act loopholes would reportedly allow a single entity to own more than the $10 billion limit, see Wilmart, Section 4A. By authorizing the OCC to charter uninsured national banks that issue stablecoins, the Act could give those stablecoin issuers potential access to Fed discount window advances, Fed master accounts, and related Fed payment services and guarantees.
(SPEECH)
And there are some other weird things that we describe in the note this month that would effectively give uninsured national banks that issue stablecoins access to the Fed's discount window and other Fed goodies.
(DESCRIPTION)
Text: According to GENIUS Act, US stablecoin issuers would need to hole 100% of their collateral in cash, T-Bills, and other cash equivalents, which can include repos with uninsured counterparts. If so, these issuers would earn the spread of these assets, versus whatever yield is paid to stablecoin holders. Will the Act ultimately include a prohibition on issuers paying a yield? And would that matter, if the Act's yield prohibition only applied to stablecoin issuers and not prevent affiliates of issuers, crypto exchanges, DeFi blockchains, or other crypto trading venues from paying rewards and yields to holders of stablecoins who keep them at those venues? Yields observed this year, PayPal, 3.7%, Coinbase, 4.1%, Kraken, 5.5%, and Binance, up to 11%.
(SPEECH)
So, that's weird.
Then, is the Act going to allow these entities to pay a yield or not? And even if they don't, it seems like it would only apply to the issuers themselves and not prevent the prevent affiliates of the issuer's, crypto exchanges, DeFi, blockchains, and other crypto trading venues, from paying rewards and yields to holders of stablecoins. So for everybody that wanted this clause, like, no yields on stablecoins, because we don't want to see money flow out of the traditional banking system, which could reduce the availability of capital that gets lent to small and medium-sized businesses, you're going to end up in the same place if yields can be paid on stablecoins just from affiliated entities, rather than the direct issuer itself.
There is all sorts of weird loopholes in here that would allow the Treasury Secretary to issue safe harbors and waive reserve requirements and other provisions for offshore entities, like Tether, to have their coins sold in the US.
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Text: Why does the Act include loopholes allowing foreign stablecoin issuers like Tether to have their stablecoins sold in US markets? Powers granted to the Treasury Secretary include the ability to issue safe harbors, waive reserve requirements, allow secondary trading, et cetera. Are these loopholes related to Tether's business relationship with the Secretary of Commerce and his former firm? See Wilmarth, Section 6G.
(SPEECH)
And then you got to ask the question, what explains the administration's commitment to this Genius Act? And how is this affected by the fact that the crypto packs were accounting for nearly half of all the donations in the 2024 elections, by the launch of a stablecoin affiliated with the administration's people, called World Liberty Financial, Abu Dhabi made a decision to use World Liberty Financial stablecoin to invest $2 billion in Binance?
It's just a lot of questions you have to ask in terms of what's driving the administration's commitment to this Genius Act.
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Text: Or are stablecoins a means for the US to attract more demand for USD and T Bills at a time of rising budget deficits, policies reducing the appeal of US assets, proposed Section 899 taxes on entities from countries with unfair foreign taxes, and large US reliance on foreign capital?
(SPEECH)
What I will give them is that essentially, this could act like a magnet for all sorts of offshore dollars, whether they're illicit or not, and provide more demand for T-bills and dollars at a time when you've got rising budget deficits and concerns about Section 899 taxes on entities with countries with unfair foreign taxes. And at the same time that everybody's handwringing about reduced demand for dollar assets, this could start sucking them in another direction.
So, anyway, take a look. That's the stablecoin section. A lot more questions than answers. And again, I think I've seen this movie before.
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An AI-generated image on the slide of Elon Musk as Maximilien Robespierre, a statesman during the French Revolution. In the background is France on fire and French crowds arguing.
(SPEECH)
Then to close, just a brief DOGEspierre update.
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Text: Many DOGE spending cuts are hampering agencies that were in the process of regulating him, including the EPA, CFPB, DOL, USDA, DEC, DOI, DOD, and SEC. The federal government is now scrambling to rehire federal employees dismissed by DOGE after its initiatives wiped out entire offices, in some cases imperilling services such as weather forecasting and drug approvals.
(SPEECH)
Obviously, there was a big breakup, a Taylor Swift style breakup, between the president and DOGEspierre. DOGEspierre was upset about the reconciliation bill. Shed no tears for DOGEspierre.
Many of the DOGE spending cuts have substantially hampered the agency that regulates his various businesses, something that we covered in detail in the May 1st Eye on the Market. Another thing about DOGE, the federal government is now scrambling to rehire a bunch of federal employees that were dismissed by DOGE after its initiatives wiped out entire offices, in some cases, affecting things that the military and the commercial sector need, like weather forecasting and drug approvals. And just to end, there have been presidential breakups before. I put in a few that I thought would be of interest.
The one that's amazing to me is, and obviously much worse than the one that just happened, was the breakup between George Washington and Thomas Jefferson. While he was Secretary of State, Jefferson secretly established and funded a partisan press effort to target Washington's own administration. And he funneled confidential information from Cabinet discussions to Madison, who then drafted anonymous resolutions for House Republicans to censure Alexander Hamilton.
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Text: The French ambassador to the US encouraged Americans to support revolutionary France, commissioned privateers in American ports to seize British ships, and announced a plan to persuade Kentucky to seize Spanish-held Florida and New Orleans, in order to create an independent nation loyal to France. Jefferson made only perfunctory objections to this idea and Washington was furious. Washington accused Jefferson of having a low opinion of his intelligence and declared he was the last man in the world who would tolerate the emergence of an American king.
(SPEECH)
Jefferson tried to convince Washington that Hamilton and his supporters were plotting to transform America into some kind of pro-British monarchy, and Washington was really upset about that. Their relationship, which had existed for decades, was damaged. And Jefferson resigned as Secretary of State in December of 1793.
When Washington delivers his famous farewell address, a lot of the clauses in there can be read as strong critiques of Jefferson when Washington warns against excessively favoring or disfavoring foreign nations. Then after retiring, what does Jefferson do? The first thing Jefferson does is organize a new party to run in opposition to Washington's Federalist Party. So, I think that kind of ranks up there similar to the rupture that we've just seen.
And then my favorite one, just because of all the drama involved, is when John Dean testifies against Nixon in Congress. And I've watched this as a kid.
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Text: At the end of the long Watergate saga, White House Counsel John Dean testified against Nixon in Congress.
(SPEECH)
And he said, "I began by telling the president that there was a cancer growing on the presidency, and if the cancer wasn't removed, the president himself would be killed by it." I think people had a lot more dignity and shame back then. Anyway, and that was the beginning of the end for Nixon.
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Text: Shortly before the sentencing of the seven Watergate defendants, Nixon asked Dean how much the defendants would have to be paid to ensure their continued silence, in addition to $460,000 that had already been paid.
(SPEECH)
Another part of Dean's testimony, he actually testified that Nixon asked him specifically how much more he would have to pay to silence the Watergate break-in burglar defendants. And when he told them that it was about $1 million more than he had paid so far, the president said, no problem, we can pay it. And then a lesser known fact, even before the Watergate break in, Dean was forced to intervene to scuttle another plan. The Nixon people had to firebomb the Brookings Institution for certain incriminating papers were held regarding the 1972 election.
So, there's been a lot of strange breakups between presidents and their Cabinet members and other senior advisors. And the one that just took place with DOGEspierre is just one example of that. Thank you for listening. And I look forward to connecting with you at the end of June, when our 20-year anniversary retrospective piece comes out. Thanks for listening.
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