The Breakdown - After Rektember, Is Uptober Back?

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 nexo.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, October 4th, and today we are asking the question on everyone's mind is October back. Before we get into that, however, if you are enjoying the breakdown, please go subscribe. to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure as always. In addition to them being a sponsor of the show,

Starting point is 00:00:49 I also work with FTX. All right, folks, well, there is a hint, a hint of something in the air. Is it possible, just possible, that rectember is over and October is back? Monday saw strong returns across the entire stock market. 97% of the S&P 500 ended the day in positive territory. Overall, the index rose 2.6%. The NASDAQ 100 gained 2.4% and all told, this was the strongest day for U.S. stock since July. September obviously had done its crappy September thing. And for those of you who haven't heard any of my past Why September Suck shows,

Starting point is 00:01:31 go back and listen to them from years past. I didn't do one this year because, well, it was transparent why September was so bad in our particular case, but more, a lot of the historical info is just the same. The TLDR is that September is historically the worst month for stocks dating back to 1950. This time around, September was the single worst month of return since March 2020, and all major indices bar the NASDAQ recorded their worst September for 20 years. In our particular case, the end of September closed out the worst nine-month start to a year for two decades. But then, Monday, was the third best start to an October since 1930.

Starting point is 00:02:09 And it wasn't just stocks. Bitcoin was up 1.7% on the day and Ethereum was up 1.2%. So, of course, the question becomes what's going on, and there are a few possible interpretations. One is that the dollar continues to cool. The dollar index fell 0.5%, with the euro up 0.3%, and the British pound up 1.4% against the dollar. Now, these are, of course, small moves, but represent a continuation of the cooling off the of an incredibly strong dollar trend over most of September. The perception is that the market may be too bearish. Matt Mali, the chief market strategist at Miller-Tayback and co, said, quote,

Starting point is 00:02:43 the market is oversold and sentiment is extremely negative, so a bounce, even a sharp one could happen any time. However, we see lower lows before the ultimate bottom is reached for this bare market, as the stock market is not fully priced in a recession. Another possible interpretation was a rate surprise out of Australia. Some news outlets speculated that a smaller than anticipated hike from the Reserve Bank of Australia, a 25-bases-point hike instead of the anticipated 50-bases-point hike that people were expecting, fueled discussion of whether central banks were nearing peak rate territory. In other words, the narrative is that banks might not have that much more room to hike, and if we're starting to see central banks go lower than anticipated rather than higher than anticipated,

Starting point is 00:03:23 maybe we're reaching that peak rate. In the Bad News's Good News theme, data from the Institute for Supply Management's gauge of factory activity released on Monday showed the lowest reading since May 2020. That indicates that a slowdown has reached America's manufacturing sector, which could be another indicator to potentially reduce the urgency for more Fed rate hikes. And in general, there has just been a growing chorus pressuring central banks to chill out. Yesterday, the big headline from the Wall Street Journal was UN calls on Fed, other central banks, to halt interest rate increases. A UN agency warns that further policy tightening risks a global economic downturn. This got big eye rolls from the Twitterati,

Starting point is 00:04:01 but shows that there is a growing counterpoint to the get-tuff-fight inflation stance. The UN's assessment is frankly in line with what we were discussing last week in the episode the dollar is our currency and your problem. The UN agency in question estimated that the Fed's rate increases so far this year would reduce poor country's economic output by $360 billion over three years, and also said that further policy tightening would do additional harm. The agency said, quote, There's still time to step back from the edge of recession.

Starting point is 00:04:28 We have the tools to calm inflation and support all vulnerable groups. but the current course of action is hurting the most vulnerable, especially in developing countries, and risks tipping the world into a global recession. The UN is basically arguing that inflation is a supply-side issue right now, and that increasing rates isn't likely to help with energy or food issues. Now, I don't think the markets think that the Fed is likely to listen to the UN, but it contributes to an overall sentiment that the pressure on the Fed is rising. There is indeed growing speculation that the November Fed meeting could mark the end of the Fed hiking cycle. Ed Moya, a senior market analyst at Awanda said, quote,

Starting point is 00:05:03 investors are starting to doubt central banks globally will remain aggressive with fighting inflation, as financial stability risks are growing. It is too early to call for a Fed pivot, but it seems the action in treasury markets suggest traders are growing confident that the global growth slowdown is starting to drag down pricing pressures. Ryan Detrick, the chief marketing strategist at Carson Group, wrote, 2022 was the worst start to a year for the S&P 500 since 1974 in 2002. worth noting that the 1974 bear bottomed on October 3rd, while the 2002 bear bottomed on October 9th.

Starting point is 00:05:34 The precedent Ryan is suggesting is that maybe we are also around the bottom. Charlie Ballayo, the CEO at Compound Capital Advisors, made a similar point, writing, The S&P 500 finished the first nine months of 2022 down 24%. Worst years in market history. Number 1, 1931, down 43.8%. Number 2, 2008, down 37.0%. Number 3, 1937, down 35.3%. Number 4, 1974, down 25.9%.

Starting point is 00:06:02 Number 5, 1930 down 25.1%. Number 6, 2002 down 22.1%. And so on and so forth. What Charlie is trying to get at, of course, is that if the market year ended now, it would be the sixth worst year in market history. Michael Gaiad from Leelag report wrote, The number of down weeks for the S&P 500 as a percentage of the year is nearing 64% second only to 1931.

Starting point is 00:06:24 This year has literally conditioned people to be bearish on stocks. The end of the world is the bull case. Now, if one is looking for comfort, the problem with these sort of historical analyses is that we are indeed living through a set of historical circumstances. We've seen inflation return in a major way for the first time in a very long time. We've seen a global exogenous shock in the form of war returning to Europe. We've also got the revision to the mean after years of post-COVID monetary and fiscal injections.

Starting point is 00:06:54 The point being is that these are the types of things that really could drive one of the worst years of all time. But as I said up front, this is an optimism show. So let's stay in the realm of historical averages. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on NexO Pro. The new Spot and Futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources. Utilizing the complete Nexos suite allows you to earn interest and borrow funds. as you wait for the next trade setup. Visit pro.nexo.io. That's p.ro.n.xo.com.

Starting point is 00:07:35 Dot and sign up today. 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. FtXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTX, you pay no gas fees. Download the FTCX app today and use Referral Code Breakdown to support the show. Moving back to crypto, October is seasonally the strongest month for crypto markets. Bitcoin has averaged a 25% gain in October since 2015 and recorded positive months in each October other than 2017 and 2014.

Starting point is 00:08:28 Starting the month off with a 1.7% rally on Monday, Bitcoin is showing early positivity. Now, this stands in stark contrast to Bitcoin losing 14% in August and an additional 3% in September before finally settling into a range between 19 and 20,000. According to coin shares, last week saw $10.3 million worth of inflows into digital asset investment products, which, while very minor, is still the third straight week of inflows. The report said, quote, The flows remain low implying a continued hesitancy among investors. This is highlighted in investment product trading volumes, which were $886 million for the week,

Starting point is 00:09:02 the lowest level since October 2020. Some are also keeping an eye on exchange withdrawals, noting that at 60,000 Bitcoin worth $1.1 billion had left exchanges between Thursday and Saturday, which is the highest amount of outflows in months and suggests that this could be a sign of demand coming back to the market. James Bull tweeted interesting stats. One, October is the most bullish month for Bitcoin with 80% of October's being green, and an average pump of 20%. This would bring us to 24,000.

Starting point is 00:09:29 Two, Q4 is the most bullish quarter with an average pump of 90%. This would bring us to 37,000. Let's go October. Will Clemente also wrote, historically, Q4 has been Bitcoin's best performance by far, with an average quarterly return of 103.9%. October and November have been its best performing individual months, with average returns of 24% and 58%. The seasonality matter? Let's see.

Starting point is 00:09:52 Peter Katavadis writes, more market bottoms happen in October than any month, will 2022 be the same? The reality is, of course, we don't know, and historical averages are not indicators of future performance. What we can look at is positive or negative market stories out there that might help shape investor sentiment. And I'm sure you already know this, but this week kicked off with news that the SEC was going after Kim Kardashian. Kim Kardashian has agreed to pay $1.26 million fine to the SEC for promoting Ethereum Max without disclosing her payment. The SEC filed charges of the United States. The SEC filed charges against the reality star for failing to disclose that she made $250,000 for posting content about

Starting point is 00:10:28 the cryptocurrency in 2021. As part of the settlement, she has agreed not to promote any cryptocurrencies for three years. Now, you might remember that in June last year, Kim posted to her 331 million followers on Instagram, and that was happening at the same time as Ethereum Max was tapping people like Floyd Mayweather to promote the coin. In the press release, the director of SEC's Division of Enforcement said, quote, the federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion. Investors are entitled to know whether the publicity of a security is unbiased, and Ms. Kardashian failed to disclose this information.

Starting point is 00:11:05 SEC Chair Gary Gensler announced the settlement on Twitter. This case is a reminder that when celebrities and influencers endorse investment opportunities, including crypto asset securities, it doesn't mean those investment products are right for all investors. Gensler's post came with an accompanying video prominently featuring himself, of course, warning against celebrity endorsements of investments. Ron Hammond, the Director of Government Relations at the Blockchain Association, wrote, Very interesting for a lot of reasons, but timing of this news is one to consider. It is the first day of the new fiscal year, enforcement actions before markets open are rare,

Starting point is 00:11:36 and going after a popular celebrity. These comms rollouts are intentional for Max Media Coverage. Gensler on CNBC now to discuss the enforcement action. Easily the heaviest comms push between the morning interviews, pre-made video, and timing of action we've seen to date. Very telling. Now, from where I sit, there has been a lot of eye-rolling. In a private telegram group, I saw someone say, this is undoubtedly correct, but so weird, this is what they choose to prioritize. And that sentiment was pretty broad.

Starting point is 00:12:03 Tim Hight, Financial Services Council for Congressman Warren Davidson, wrote, So where's the lawsuit against Ethereum Max? There is none? Shocker. How does Kardashian get charged, but the entity doesn't? Regardless of whether Ethereum Max is a security or not, this process is absurd. Bill Hughes, the General Counsel at Consensus and former DOJ, quote tweeted that and said, When you were a tiny agency tasked with regulating a $100 trillion market market, your actions need to affect a lot of market conduct.

Starting point is 00:12:28 SEC enforcement is designed to change market behavior more than anything else. Splashy helps. Somewhat different than criminal justice in that regard. Maya Zahavi, though, went straight for the throat, saying, imagine an alternative world where Gary Gensler had gone after Celsius CEO Alex Machinsky before the crash, or the real shilling as a business entity instead of shilling some Kardashian news that doesn't matter in the grand scheme. Drew Hinkies, an adjunct professor at NYU law, wrote, while it's notable that Kim Kardashian settled with the SEC, it's more interesting

Starting point is 00:12:56 to see that the consent order, once again, includes conclusory allegations that the token at issue was a security without the SEC bringing a claim versus the issuer or giving the issuer an opportunity to dispute the conclusions found in the consent order. While the consent order doesn't determine that the issue and has no precedential effect against the issuer, it maintains a pattern of indirect enforcement. Now, from where I'm sitting, it's hard to watch the video and not feel like it's regulatory theater. Not in the sense that Ethereum Mac shouldn't get dinged, although I think there are big process

Starting point is 00:13:23 issues, as Drew points out. And I can recognize what Bill Hughes argued, that the SEC actually has to do some of this marketing to try to have the intended effect. But it's hard not to view how they specifically did this as an act of marketing for the SEC, and more specifically, it's chief. Anyway, speaking of regulators, the top financial regulators have lobbied Congress to give them additional powers to oversee trading in Bitcoin markets. A report released on Monday, co-signed by the heads of Treasury, the Federal Reserve,

Starting point is 00:13:50 the CFTC, and the SEC in their role on the Financial Stability Oversight Council, or FSOC, highlighted that the government's current ability to regulate markets for cryptocurrencies that are not securities is extremely limited. While some crypto assets are within the reach of the SEC, others, most notably Bitcoin, are viewed as commodities and therefore lack of clearly. designated regulator. The report from FSOC, the latest in a string of reports meeting the request of the President's crypto executive order said, as a result, those markets may not feature robust rules and regulations designed to ensure orderly and transparent trading, to prevent conflicts of interest

Starting point is 00:14:20 in market manipulation, and to protect investors in the economy more broadly. Now, while the CFTC has oversight of Bitcoin derivatives markets and banking regulators can exercise some power over the practices of crypto firms, it's true that there is no regulator which has the power to set and enforce rules in Bitcoin spot markets. The report, therefore, calls on Congress to assign a regulator powers in a whole range of subjects including conflicts of interest, abusive trading practices, recordkeeping requirements, segregation of customer assets, cybersecurity, and more. During the FSOC meeting for presenting and approving the 125-page report, Treasury Secretary Janet Yellen said, quote, innovation without adequate

Starting point is 00:14:53 regulation can result in significant disruption and harm to the financial system. Indeed, the tone of the report and the meeting was to point out that while crypto may not pose a financial stability risk so far, the lack of clear regulatory frameworks could allow those risks to grow without oversight. OCC head Michael Sue said in a statement to the meeting, we know from the 2008 financial crisis what happens when regulatory agencies fail to coordinate effectively on risks that cut across jurisdictional lines. An unlevel playing field emerges and financial stability risks grow in the shadows. As regular listeners know, there are multiple bills in Congress which would give the CFTC power over Bitcoin and other commodity cryptocurrency spot markets, but the report

Starting point is 00:15:29 did not express support for any specific legislation. Matt McGuire, the General Counsel at Violet Protocol, wrote, hard to know how to react to the FSOC report, except more of the same unhelpful rhetoric. Small positive, it largely looks to Congress to act where we can still make an impact, starting to think we should pursue a global treaty approach since U.S. refuses to competently lead. Yellen says, innovation without adequate regulation can result in significant disruptions and harm to the financial system and to individuals. Use of can makes that statement literally true, but it's generally wrong here.

Starting point is 00:15:58 Crypto collapses didn't require bailouts. Consumer harm angle is all I've ever found persuasive here, but I haven't seen evidence from anyone indicating exactly how much consumer harm flowed from Celsius, 3AC, etc. Anyway, it's hard to see how anything has happened to even suggest crypto equals a real systemic risk. Bill Hughes again writes, good time for the reminder that FSOC cannot legislate and is entirely beholden to the will of the president, the rule set out by Congress and the decisions of the federal court system. Anne Kelly, formerly of the SEC, says I agree with FSOC recommendations that Congress needs to act first. In fact, I would say that digital assets are novel products that

Starting point is 00:16:31 require congressional action before the SEC and CFTC has authority to write out or enforce rules on them. If you're starting to feel like this is just a broken record of Congress has got to do something, and it specifically needs to be Congress who's taking the lead, well, you're not wrong. Either way, I continue to think we're in the same place of moving towards the regulatory endgame but not being quite there yet. And in the meantime, crypto is mostly beholden to what's happening in broader markets. For my part, I am not exactly so sure that we are at those peak rates yet. I'm certainly not convinced by the idea that the Fed is going to stop hiking after November, but I'll tell you what, if this October the only thing turning red was the leaves,

Starting point is 00:17:11 that would be just fine with me. For now, I want to say thanks again to my sponsors, nexus.io, circle 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 enterprises and asset 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 Rektember, Is Uptober Back?

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