The Breakdown - After Fed Meeting Minutes, Is the ‘Peak Hawkishness’ Narrative Still On?

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, chain aliasis, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, August 18th, and today we are talking about, well, everything from peak hockishness narrative at the Fed to new proposed rules for crypto disclosures in the SEC, to a number of other things. But before we get into that, one little note, there are two ways to listen to the Breakdown podcast. You can listen on the Coin Desk Podcast Network feed, which comes out every afternoon, and features other great shows alongside the breakdown, or you can listen

Starting point is 00:00:50 on the breakdown only feed, which comes out a few hours later in the evening. Wherever you're listening, if you would take the time to leave a rating or review, it makes such a big difference, and I appreciate each and every one of you. Lastly, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. So today we are hop-skipping and jumping across the crypto space, but we're actually going to start with the Fed. Yesterday, the Federal Reserve published the minutes of its July meeting. These minutes historically aren't nearly as impactful on markets as are its actual FOMC decisions, right? It's decisions about how it's going to change interest rates or its decisions about whether it's going to buy or sell assets. Because really the purpose of

Starting point is 00:01:33 these meeting minutes is really just to give a sense of what the conversation that led to the decisions was about. This here, however, markets have been paying extra close attention. And the reason for that is in January, markets were surprised to discover that in December, the Fed was not just talking about finally raising interest rates, as everyone assumed. But in fact, that they were talking about moving to a regime of quantitative tightening within the year in the wake of the global financial crisis, there had been a long period between when they started raising rates and when they actually started balance sheet runoff. And in many ways, it was the release of those meeting minutes all the way back in January that started the decline that we've been on ever since.

Starting point is 00:02:19 Now, since last week's surprise positive inflation report, markets have been fairly encouraged. The thinking has been that if peak inflation is behind us, perhaps so too is peak fed hawkishness. Did the July minutes do anything to confirm or deny this? Frankly, it didn't give us all that much that was new. There was agreement broadly among Fed officials that at some point there was going to need to be a slowdown in the pace of tightening. In Fed speak, quote, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation. end quote. Indeed, there was even the risk of over-tightening, or again, as the Fed puts it, quote, many participants remarked that in the view of the constantly changing nature of the

Starting point is 00:03:08 economic environment and the existence of long and variable lags in monetary policies' effect on the economy, there was also a risk that the committee could tighten the stance of policy by more than necessary to restore price stability. Now, markets had been down before the minutes came out, and on the news, they rebounded slightly, so the view is positive-ish. really everything here felt in line with the vibe that the Fed has been projecting, aka we're going to let the data lead. The Fed remains chiefly concerned with not letting inflation expectations become entrenched. Quote,

Starting point is 00:03:41 participants judged that a significant risk facing the committee was that elevated inflation could become entrenched if the public began to question the committee's resolve to adjust the stance of policies sufficiently. Now, when it comes to other economic factors, the Fed's base case remains optimistic while leaving room for surprises. quote, most market participants appeared to view a moderation of inflation and slower but still positive economic growth ahead as the most likely scenario. However, investors appear to be increasingly attentive to downside risks to the economy in light of the potential for shocks from abroad and the continued upside surprises to inflation. So really here the only new thing, quote

Starting point is 00:04:19 unquote, is the acknowledgement that the Fed will have to start reducing the speed of tightening at some point. Christopher Lowe, the chief economist that FHN Financial said, While the FOMC minutes continue to emphasize the need to contain inflation, there is also an emerging concern the Fed could tighten more than necessary. There is an inkling of improvement on the supply side of the economy. There is a bit of hope in some product prices moderating. But there is still a great deal of concern about inflation and inflation expectations. So, in other words, nothing new. Perhaps appropriately then, future markets are now pricing in the chance of a 50 basis point hike at 53% and a 75 basis point hike at 48%. Our next next

Starting point is 00:04:57 chance to hear from the Fed will be their annual retreat in Jackson Hole from August 25th to August 27th. Jackson Hole isn't specifically a policymaking conference. Instead, it's a chance for them to promote some big ideas that signal longer term shifts in their thinking. So, for example, if the Fed wanted to suggest that we're heading into some fundamentally new stagflationary regime, this is where we might hear about it. But for now, let's head back to crypto. We're going to talk some professional moves, some institutional news, and some really weird stuff. out of Canada. First, a couple of the professional moves industry insiders are making. This is a part of every bare cycle. People leave, join elsewhere. What's interesting for us to look at is where the flow is.

Starting point is 00:05:39 Are crypto people actually abandoning the industry or are Tradfai folks still coming in? I remember in late 2018, the number of people from L.A. in particular, who left crypto to go, quote unquote, pursue their true passion in cannabis or whatever, was like all of the LinkedIn posts I have. Anyways, who is moving and shaking this cycle? Well, Genesis saw a big shake-up this week. They were one of the harder-hit institutions from the Three Arrow's capital debacle, and last month they filed a $1.2 billion claim. Yesterday, Genesis announced that its CEO, Michael Morrow, would be stepping down. Additionally, the 260-person company is cutting approximately 20% of its workforce. A current executive, Darar Islam, will be stepping into the CEO role

Starting point is 00:06:22 temporarily while a full replacement search is conducted. Now, at the same time as this announcement, they also announced that they had added former 0.72 asset management president Tom Kenehi as a board member and senior advisor, and they also added a new chief risk officer, chief compliance officer, and chief technology officer. So this seems pretty clearly to be the fallout of the summer. You have a CEO who oversaw a fairly huge blunder leaving, while new risk and compliance officers come in. This is a shoring up of executive roles with the goal of presumably preserving confidence with customers and clients. This is a completely natural part of this process of the cycle. So, is there anything more bullish out there? Yes, there is. One of the big themes of the last

Starting point is 00:07:05 bull run was people moving over from Web 2 and Wall Street into crypto, and we got a great high-profile example of that earlier this week. Arbitrum is a scaling technology for Ethereum developed by a company called OffChane Labs. On Tuesday, they announced that they had hired their first chief marketing officer, and they nabbed him from Amazon. Andrew Saunders was previously the head of Amazon's global brand marketing team, where he focused on entertainment and cultural marketing. Prior to Amazon, he led brand strategy for TastMade, was the VP of Content Innovation at NBC Universal, and co-founded the Creative Artist Agency or CAA's brand partnership division. So this is someone with some serious brand marketing, entertainment, and talent chops.

Starting point is 00:07:44 Obviously, that's the type of acquisition into the crypto space that we like to see. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's N-E-X-X-O. Go.io. Eager to make more informed decisions around crypto,

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Starting point is 00:08:48 with the leading blockchain data platform by visiting us now at Chainalysis, com slash coin desk. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S.

Starting point is 00:09:16 FTXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. fees. Download the FTX app today and use referral code breakdown to support the show. Let's keep moving and talk institutional news. On Wednesday, the SEC proposed an amendment to form PF, which is a form by which registered investment advisors disclose information about securities holdings. The CFTC is currently looking at similar amendments. The idea would be to require funds with at least $500 million in AUM to disclose, among other things, crypto exposure. The update to this form would also require large funds to report specific asset concentration, leverage, and more.

Starting point is 00:10:00 The information would not be public, and the goal would be to avoid a systemic risk issue. One of the fears that permeates regulators is that a firm like Bill Huang's archa-gose would get way too levered in crypto, see some volatility they couldn't handle, get margin called like crazy, and through the liquidation process, transfer that crypto volatility into traditional markets. Now, one thing I feel pretty strongly about is that if the financial stability, concern with crypto is about hedge fund opacity, then it's not really about crypto. If we want to do something about it, we should focus on the opacity of hedge funds and not on crypto itself, which is just the asset. So on principle then, this is a discussion that I think is comparatively positive

Starting point is 00:10:41 relative to a lot of crypto regulatory discourse. However, the SEC Commissioner I am most inclined to agree with Hester Purse, thinks that the new proposals are overreach. She calls the new expanded questions nice to know but not need to know and effectively accuses them of mission creep. In her statement about why she doesn't support the new measure, she writes, the release avoids grappling with the line between the risks and individual fund may pose to its own investors and systemic risk. As one example, the release asks for more granular information on listed equities. The release explains that, quote, single equity positions may be more vulnerable to short squeezes. True enough. The release further explains that, quote, the level of granularity the proposal would obtain with respect to this

Starting point is 00:11:26 information would help identify entities that may be affected during a short-squeeze event. While high-profile short-squeezes in recent years have affected certain hedge funds, nothing in the release suggests these short squeezes created systemic risk. Nor does the release explain what proactive measures we or F-Soc intend to take should we have such data. Would regulators step in to prevent funds from taking short positions? Or to prevent other market participants from buying the securities those funds have sold short? Neither intervention would aid financial stability. In fact, they could do the opposite. Better data around aggregate short positions might be helpful, but we are working on other ways to

Starting point is 00:12:03 get those data. The regulatory implications are equally troubling if the purpose of the more granular information is to protect investors. Private fund investors, typically institutional investors, such as insurance companies, university endowments, pension funds, and high income and net worth individuals, are capable of making their own risk assessments. The SEC should not step in to protect them when their investments do not work out as hoped. Now, there's a lot of great stuff in this piece, but Hester concludes, By making form PF more granular, the proposal contributes to a tired narrative, yet one that is popular among our FSOC colleagues, namely that a systemic risk shadow lurks behind every

Starting point is 00:12:41 hedge fund activity. The commission should reject this narrative not to protect its regulatory prerogatives, but because the narrative is false, and because any new authority exercised at the behest of the F-SOC would likely look a lot like bank regulation. Increasing bank-like regulation on private funds would impair their ability to serve the broader economy and eat away at one of their most important features. Their ability to fail when the investment decisions they make do not pan out. This document is specifically about Form P.F. and hedge fund disclosures. But it gets at a much broader and more fundamental set of questions that need to be debated.

Starting point is 00:13:21 Is the purpose of regulatory investor protection about making sure that investors have all the information they need to make their own decisions? Or is it about preventing them from making their own decisions about risk? These are two very, very different things. All right, a couple more things before we get out of here. An academic study from the University of Technology, Sydney is arguing that between September 2018 and May 2020, front-running, a.k.a. Insider trading occurred at 10 to 25% of new listings on Coinbase. They argue that this front running generated at least $1.5 million in profits for the people behind the trading. Right now, there is, of course, a formal case around insider trading going on, where the Department of Justice charged a former

Starting point is 00:14:04 Coinbase product manager, along with some accomplices, with wire fraud around new listings. Interestingly, those charges have been discussed more in the context of the SEC piling in with accusations that nine of the tokens were securities. This new study has not done. yet been peer-reviewed, and who knows whether it's true or not. Still, I think it's an important note that if we are trying to be better than traditional finance, front-running insider trading, whatever you want to call it, has no place in this industry. More positively, two more nine-figure crypto funds were announced yesterday. Shima Capital raised $200 million for its first early-stage VC fund. Founder and managing partner Yida Gao is looking to fill in the gaps that have

Starting point is 00:14:44 been left behind by the swelling in size of other firms like Paradigm. Quote, There's been crypto funds that have grown and ballooned in size to billions of dollars of assets under management. It's hard for them to invest in the earliest stages of Web3 founders. We think that's an area that we can add the most value. Shima will be focused on pre-seed and seed rounds with checks ranging from $500,000 to $2 million. And as we were discussing the other day, they're following the trend of building a different type of VC firm with more than half of the team focused on post-investment operational support. Shima has an impressive list of investors that outside of crypto includes hedge funder Bill

Starting point is 00:15:18 Ackman and former U.S. presidential candidate and forward party founder Andrew Yang. Announced the same day was a new $300 million fund for coin fund. Coin fund have been at this game for a minute. They started in 2015 and were early in a ton of defy and NFT things like Dapper Labs. I remember CEO Jake Brookman showing me digital art he was personally making like four years ago at a conference. They raised their first venture fund in $83 million, dollar fund last year, and the goal with that raise, and especially with this raise, is to be able

Starting point is 00:15:47 to support companies at the Series A level to the tune of $6 to $10 million rounds. Interestingly, one of their LPs was the teacher retirement system of Texas. This is one of a small but growing number of pensions to make crypto or crypto-adjacent investments. Speaking of pensions, a giant Canadian pension fund case has written off their $150 million investment in Celsius, an investment that just happened last fall. At the time, the fund's EVP and CTO wrote, blockchain technology has the potential to disrupt several sectors of the traditional economy.

Starting point is 00:16:18 As digital assets grow in adoption, we intend to capture the right opportunities while working with our partners towards a regulated industry. Now, obviously, we know how this story went. And on Wednesday, during a webcast about the firm's first half of 2022, CEO Charles Edmund said that the fund had, quote, arrived too soon in a sector which was in transition. They said they will not be getting back into crypto anytime soon. Still, that's not the really weird story out of Canada.

Starting point is 00:16:44 I will caveat this one that it seems to me like it can't possibly be true, but if it is, it's absolutely insane and worth the flag. Mo Chains on Twitter grabbed a screenshot of a help page from Canadian trading platform Newton about regulatory changes in Canada that was updated just a couple days ago. The gist of it is that there are a certain set of crypto assets, namely Bitcoin, Ethereum, light coin, and Bitcoin Cash, that Canadians in most provinces can invest, however, much they want in. Every other type of digital asset, there is a $30,000 total cap on. In other words, if you buy $20,000 of Solana and $5,000 of Dogecoin, you only have another $5,000 left to buy

Starting point is 00:17:24 your Shebe. So far, I've not seen reporting confirming or denying this, although some folks seem to have spoken to others in Canada that are confirming it. I really have no idea. It strikes as huge overreach if the country is actually limiting crypto buys for their citizens. That's a straight-up capital controls regime. The Poctopus writes, there is common-sense regulatory oversight which helps reduce bad actors in the system. And then there's this. Uniswop inventor Hayden Adams writes Canada enshrining certain cryptocurrencies as unrestricted, and the rest restricted with a shared buying limit, is completely fucking nuts.

Starting point is 00:17:58 Also, lull at enshrining BTC and BCH. This law basically says the only jelly beans you can buy more than five of are vomit-flavored. Still, my favorite comment comes from Amanda Jean, who writes, calm down Canada. You can still buy unlimited Bitcoin cash. Anyways, guys, that is the view from where I am. For now, I want to say thanks again to my sponsors, nexo.io, chainalysis and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. I want to tell you about CoinDesk's new event, the investing in digital assets and enterprises summit or ideas. The event facilitates capital flow and market growth by connecting the digital economy with traditional finance.

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The Breakdown - After Fed Meeting Minutes, Is the ‘Peak Hawkishness’ Narrative Still On?

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