5MF (WEEK 39): GBP’S RECORD LOW, AMERICAN SHAREHOLDERS DOWN $9T, SBF TO BUY CELSIUS?

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The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.

Let’s see what’s going on this week:

  • Why is the GBP Sinking Like Never Before?
  • American Shareholders Lost $9 Trillion Since Q4 2021
  • Sam Bankman-Fried’s Buying Spree Continues; Eyeing Celsius
  • Crypto CEOs Leaving the Embattled CeFi Scene
  • Interpol Issues Arrest Notice for Do Kwon; Attempt to Freeze BTC

GBP Just Touched a Record Low Against USD

  • Short Selling on GBP Ramped Up 17% as Truss Became UK’s Prime Minister (link)
  • BoE to Start Buying Bonds as IMF Warns of Britain’s Fiscal Irresponsibility (link)

Bank of England’s Bond Purchasing Program Aims at GBP Recovery

Powered by the dollar, the world’s fiat system is grinding in the liquidity mud. The Federal Reserve’s quantitative tightening (QT) comes at a time when Europe is on its inflationary knees. Driven by an exacerbated energy crisis, Germany’s inflation recently reached 10%, a 70-year high, with the UK tagging along at 9.9%.

To combat this cost of living crisis, both the European Central Bank (ECB) and the Bank of England (BoE) are back to quantitative easing. Germany prepares a $196.5 billion relief plan, while the UK’s bank intervened by buying $69 billion worth of bonds to prevent a pension funds rout.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,”

-Bank of England

In the UK, here’s how it works: The UK government issues bonds — which are essentially IOUs. The Bank of England and other investors in international markets purchase these bonds, which cut down the cost of borrowing for the UK government.

The Bank of England had stepped in primarily to ease the selling pressure of UK government bonds by pension funds (pension funds are a big holder of these bonds). Initially, bond interest rates increased, which is good for the GBP. But this had an interesting effect: derivatives contracts held by pension funds also increased, requiring pension funds to post additional collateral. Many funds had to sell their bonds in order to fulfill obligations related to collateral, which — at the end of the day — actually contributed to selling pressure with UK government bonds. As we’ve all seen, this is bad for the GBP.

As a result, 30-year bond yields took a 100 bps dive. And at the same time, the British Pound (GBP) and Euro (EUR) are tanking against the dollar. Yet, the Bank of England stepped in to purchase additional bonds, and the GBP has somewhat recovered.

Still, this past week the world witnessed the GBP touch a record low against the USD. We’re even seeing traders and investors ditch the Euro and GBP for BTC:

Image credit: Messari

For now, the UK’s bond purchasing program is expected to run until October 14. Analysts expect the UK’s new Prime Minister and chancellor to revisit recent tax-cutting initiatives in order to reduce the chance of additional panic to hit the GBP once October 14 arrives.

Real Estate to Cool Down in the US, as American Shareholders Lose Trillions

  • American Shareholders Lost $9T Since Q4 2021, Top 10% Lost $8T (link)
  • Federal Reserve on Fastest Rate Hiking Cycle Since the Early 1980s: Report (link)

Interest Rates and Debt on the Rise

While allied currencies are crashing against the dollar wall, the Fed Chair Powell is still adamant to bring inflation down to 2%, from its previously report 8.3%. It’s clear that Powell is in a hurry, having ramped up interest rate hikes the fastest since the 1980s.

Accelerated Fed cycles as debt liabilities increase. Image credit: @Mayhem4Market

For an economy that enjoyed extensive periods of cheap borrowing, market shocks go hand-in-hand. In prior months, Powell entertained the idea of a “soft landing”, in which inflation reduction could be done without a recession.

This is no longer entertained. At this week’s Inflation: Drivers and Dynamics panel, one of the Fed Governors, Loretta Mester, made it clear that a recession will have to be endured in order to achieve price stability.

“…we’re going to be slowing down to well-below 2% growth. Unemployment is going to move up, but it is necessary in order to avoid having even higher costs later on if we don’t what it takes now to get to price stability.”

This entails a suppression of all assets, which historically leads to lowered spending and job loss. BlackRock estimates up to 3 million job terminations. While the crypto market is a collateral victim, having lost $1.2 trillion since January, the focus is on the big game — stocks and real estate. As a percentage of GDP, the US stock market declined by -51% this year.

In other words, American shareholders lost about $9 trillion in stocks since Q4 2021. Powell would also like to splash cold water over the “red hot housing market”. It grew to $41 trillion in H1 2022, but interest rates in 30-year mortgages have already doubled to 6.35% from last year’s 3%.

However, the pricing pressures act differently against different wealth percentile groups. The bottom 90% has the majority of their wealth in real estate, while the top 10% have diversified beyond real estate to include equities, pensions, private equity, and other assets.

For Q2 2022, the under-90% wealth percentile groups have a combined stock stake at $3.8 trillion, 7x smaller than the combined upper-10% at $29.13 trillion. Image credit: FederalReserve.gov

This means that the wealthier have a bigger cushion to fall onto, so they are less likely to deplete savings and reduce spending. In contrast, the bottom 90% will have to reduce spending to service credit card debt (which increased by $42 billion in Q2 2022 in the US) and rising mortgage rates.

Since the Great Recession of 2008, US household debt rose by +33%, from $12.13T to $16.16T, with non-housing debt increasing by +64%.

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SBF Continues Buying Spree

  • FTX Eying Celsius Immediately After Winning the Voyager Bid (link)

SBF Locks In Voyager Digital, is Looking at Celsius

Sam Bankman-Fried (SBF) is on his path for the crown as crypto bailout king. Before the Terra fallout dust settled, he issued credit lines in attempts to save BlockFi and Voyager Digital. In August, SBF even lent Japanese exchange Liquid Global $120 million after a nasty $97 million hack.

The 30-year old billionaire and FTX CEO, has now won the bid (some $1.4 billion) for bankrupt Voyager Digital’s assets. Next on the menu appears to be Celsius Network, another player in the recent crypto contagion and a seeming victim of reckless trades made by the firm’s own CEO, Alex Mashinsky.

Coinciding with the insider report that SBF is raising $1 billion to acquire bankrupt Celsius, Mashinsky has stepped down as Celsius CEO. Before the bankruptcy, SBF couldn’t justify bailing out Celsius due to a glaring $2 billion hole in its balance sheet.

SBF’s Alameda Research is also a prolific backer of major crypto projects, such as layer 1 blockchains Solana, Aptos, and Sui. The SBF buck doesn’t stop there. Recently revealed text messages further show that SBF has been interested in buying Twitter for as long as Musk has.

In the end, Musk was less keen on SBF’s Twitter contribution, turned off by the potential “laborious blockchain debate”.

Is there anything that SBF hasn’t touched, directly or indirectly? Crypto veterans may remember him by his takeover of SushiSwap, a Uniswap clone that engaged in vampiric mining of Uniswap’s liquidity.

It appears that every age has its barons. In the early 1900s, it was J.P. Morgan’s John Pierpont Morgan who engaged in bailout sprees after the 1907 financial crisis, otherwise known as the Knickerbocker Crisis. The parallel is stunning, as it was the first global crisis spurred by both excess speculation and loose monetary policy.

Now, JPMorgan is the world’s largest commercial bank. Will SBF achieve similar dominance in the future?

Crypto Executives Flee Against Bear Winds

  • Crypto exchange FTX is replacing its U.S. president (link)

The “Great Resignation” Continues, Now in Crypto Too

Between Covid and the shift toward working from home, we’ve seen a number of ripple effects in the business world. One of them is CEOs’ “Great Resignation”. According to a Deloitte study published in June, 70% of upper echelon managers are on the verge of quitting.

The majority of those considering walking out of the door, at 80%, said they would have to prioritize mental health over profit-making opportunities. The work-from-home period has certainly made that task more difficult. Executives and managers alike have had to balance talent recruiting and retention, supply chain disruption, shareholder responsibility and being the target when something goes wrong.

In the crypto space, there is no shortage of things going wrong. Just this week alone, there has been a flurry of resignations:

  • Four senior staffers from Genesis, a centralized crypto lender that had to cut 20% of its workforce in August.
  • Brett Harrison, President of FTX US.
  • Alex Mashinsky, CEO of the toppled Celsius Network that SBF is now eyeing.
  • Kraken’s CEO and co-founder Jesse Powell.

This isn’t the start of a new trend. Last month, Sam Trabucco resigned as co-CEO of Alameda Research, while Huobi’s Li Shufei (known as Chris Lee) resigned as CFO. And while not a crypto firm, Microstrategy’s former CEO Michael Saylor resigned from his position in early August.

The ongoing bear market isn’t just impacting investors and traders. Businesses — and their executives — are certainly feeling the crunch.

Interpol Issued an Arrest Notice for Do Kwon — What’s Next?

  • Crypto Founder behind $60 Billion Collapse Says He Is Not Hiding after Interpol Issues Arrest Notice (link)
  • South Korea Seeks to Freeze Bitcoin Tied to Do Kwon (link)

What Happens to Do Kwon from Here?

This past Tuesday, Interpol issued a Red Notice to apprehend Do Kwon, the founder of Terraform Labs. Kwon launched (LUNA) and TerraUSD (UST) which many believe are largely responsible for kicking off the crypto contagion in 2022.

The global arrest warrant was issued in tandem with South Korean prosecutors demanding for KuCoin and OKX exchanges to freeze Kwon’s 3,313 bitcoins, worth ~$67 billion. The funds were moved from the Luna Foundation Guard (LFG), which was in charge of guarding UST’s peg to the dollar.

Just before the collapse, LFG was stockpiling $3.5 billion worth of BTC. However, CryptoQuant researcher pointed to the new wallet address having been created on September 15th. In the meantime, the former “Master of Stablecoin” has been acting as usual.

Image credit: Twitter

In his most recent tweet, with disabled replies, Kwon claims that he hasn’t used either OKX or KuCoin “in at least the last year”.

From here, whatever happens to Do Kwon is likely to have notable implications for builders and yield-bearing crypto products for quite some time.

Tweets of the Week

The CFTC is going after DAOs — How does this affect you?

Big questions:

- What is happening?

- How will it affect DAOs?

- How does it affect token holders?

+ Ooki’s legal defense will be really important for the entire DAO space.

Let’s take a look 1/26

@Timccopeland

Signs of lower inflation rates to come…

-Crude Oil down 40% from March high

-Used car prices down 13% YTD.

-Global freight rates down 57% YTD.

-Rents down in Sep, 1st decline this year (YoY% increase at lowest level since May 2021).

-Home prices down 6% from peak in June.

@charliebilello

In the context of other big crashes, the S&P 500 has a way to go.

#Bitcoin and $ETH have been hit more heavily, but are still above their previous bear market lows.

Very interesting graphic: @ecoinometrics

@milesdeutscher

When the Euro goes down the EU trade surplus should go up. But now the Euro is at a record low and the EU trade surplus is crashing.

@KimDotcom

The S&P 500 is down 23.6% in the first 187 trading days of 2022, the 4th worst start to a year in history. $SPX

@charliebilello

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