The Breakdown - Bleak Week as Bitcoin Hits 3-Month Low

Starting point is 00:00:00 why wouldn't the Fed be even more aggressive and just go all the way to 1%. I think there are a few reasons. The first is that reading between the lines, in some ways the biggest priority for the Fed remains psychological. They don't want inflation expectations to become entrenched. They keep referencing the 1970s as a time where the Fed waffled, and they don't want to be seen as doing that. I don't believe that doing another 75 basis point hike for a third meeting in a row will appear to anyone to be a waffle.

Starting point is 00:00:27 so they don't have a, let's call it, marketing need to go all the way to 100. 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.i.o, chain aliasis, and FtX, and produced and distributed by CoinDesk. What's going on, guys?

Starting point is 00:00:52 It is Monday, September 19th, and today we are talking about what is shaping up. to be a bleak week. 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.

Starting point is 00:01:13 Also, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. Well, folks, I have just one word to say about this past weekend, and that is blech. I hope with all of my heart that you are off doing something fun rather than sitting around watching prices go down and down and down some more. So it is with a heavy heart that I say welcome to Bleak Week Baby.

Starting point is 00:01:36 Now, obviously, the big event coming up this week is the FOMC meeting, which will happen on Tuesday and Wednesday. One way or another, this meeting will produce another big interest rate hike. For a while, the debated markets had been about whether the Fed would hike 50 basis points or 75 basis points. If 75, it would be the third 75 basis point hike in a row. And for at least some part of the summer in late July and early August, there was a bit of perhaps misplaced optimism that the Fed would start to taper off its hiking at least a little bit. However, in advance of last week's August inflation numbers, the market had largely settled on the idea that the Fed was gearing up for another 75 basis point hike no matter what the

Starting point is 00:02:18 outcome of those inflation numbers. The conventional wisdom heading into that Tuesday report last week was that inflation was going to show continued progress down. There were some number of indicators that had people hopeful that overall inflation was going to continue to come down in a way that continued the trends from July's numbers, and that core CPI was going to be flattish. Remember, in July, we saw 0% month-over-month inflation. And so markets seemed to think that if that happened again, it would be a good indication

Starting point is 00:02:47 that the inflation fight was working, and that perhaps we'd get some light at the end of the tunnel of this monetary tightening. Unfortunately, that's not what happened. while prices came down in the energy sector as anticipated, they proved devilishly and tractable elsewhere. Food, for example, remained extremely elevated and most worrying in some ways, services were elevated as well. The market reacted incredibly strongly. Last Tuesday was the worst day in markets since June 2020. On top of just a generalized stock market dip, markets also started pricing in the possibility of a 100 basis point or 1% interest rate hike this week

Starting point is 00:03:24 instead of the 75 basis points that had been consensus going into the inflation numbers. However, now a week on, markets have settled back into their strong expectation of another 75 basis point hike. As I'm prepping this show, the CME's Fed Watch tool has the market betting on an 86% probability of a 75 basis point hike, with just 14% probability of a full percentage point rise. Now, you might ask, why wouldn't the Fed be even more aggressive and just go all the way to 1%. I think there are a few reasons. The first is that reading between the lines, in some ways the biggest priority for the Fed remains psychological. They don't want inflation expectations to become entrenched. They keep referencing

Starting point is 00:04:05 the 1970s as a time where the Fed waffled, and they don't want to be seen as doing that. I don't believe that doing another 75 basis point hike for a third meeting in a row will appear to anyone to be a waffle, so they don't have a, let's call it, marketing need to go all the way to 100. Second, they do understand that monetary tightening takes. a while to work its way through the economy. It's not just an on or off switch. Higher interest rates have to show up by raising the price of things that people are buying, such as mortgages for houses. This is the way they actually work their way into the economy. There is a lag on that process, and there is a concern, of course, that the Fed could overcorrect. Now, from everything we've seen, they're willing to

Starting point is 00:04:43 overcorrect a bit, but I still believe they don't want to be seen as having created another unnecessary situation in another direction. A third reason why they might not be keen to go more than 75 points is that there are just a lot of questions around this particular bout of inflation. As easy as it is to meme, and frankly, as sort of reasonable as it is to meme, I actually take Jerome Powell at face value when he says that they understand now how little they understood about inflation before. There are so, so many debates and no clear consensus about why this inflation happened when previous times it didn't. Some are convinced that the big difference was the addition of fiscal stimulus in the form of direct payments from government

Starting point is 00:05:21 and relief or deferral for other forms of debt. This is a big part of Lynn Alden's take, for example. Others are still focused on the radical disruptions based on the unwind of globalized supply chains due to COVID, the unprecedented nature of shutting down the global economy, the persistent problems relating from China's COVID-Zero policy, and of course the geopolitical disruptions arising from war and the economic sanction response to it.

Starting point is 00:05:44 The point being, it's complicated out there. And so the line being threaded is, again, not waffling on the underlying need to fight inflation, but some amount of humility on the path to get there. There also remained first principles arguments that inflation isn't the concern exactly long-term. Elon Musk and Kathy Wood have been kind of tag-teaming Twitter with this message. On September 9th, Elon tweeted, a major Fed rate hike risks deflation. Kathy Wood quote tweeted that and said deflation in the pipeline, heading for the PPI, the CPI, PCE deflator. From post-COVID price peaks, lumber is down 60%, copper down.

Starting point is 00:06:18 down 35%, oil down 35%, iron ore down 60%, dram down 46%, corn down 17%, Baltic freight rates down 79%, gold down 17%, and silver down 39%. She goes on to use autos as a specific example. As measured by the Mannheim, used car prices dropped 4% in August, roughly 50% at an annual rate, having dropped 10% since peaking in January. And if electric vehicles are as disruptive as we believe, could be cut in half, hitting lows last seen during the GFC in late 2008. If residual auto values deteriorate accordingly, the $1 trillion plus in U.S. auto debt will be in harm's way. Autos were the best credit in 2008-2009 as individuals prioritized their auto loan payments at the expenses of mortgage so they could get to work and stay employed. This time around, thanks to ride-hailing and soon, less expensive autonomous

Starting point is 00:07:06 taxis, individuals are unlikely to prioritize auto debt payments over mortgage payments, which could turn backward-looking quant models upside down. Now, of course, there are many who will say this is just Kathy talking her own innovation book. And while, of course, Arc and Kathy have invested against these themes, this is a consistent view of technology rot deflation that she and they have been talking about for some time. What's more, I actually think it's this last tweet that's the most important. Let's take away the specific example and just abstract it to the essential. This time around could turn backward-looking quant models upside down. The idea here is a sort of Lincoln-esque dogmas of the quiet past are inadequate to the stormy present. Or more specifically,

Starting point is 00:07:49 the circumstances have changed, and so our thinking about it, has to change as well. Kathy and Elon actually resurfaced this today. She tweeted, Larry Summers seems to be leading the Biden administration astray with his conviction that inflation is intractable with the 70s as his guide. The 70s inflation started in 1964 with the Vietnam War and the Great Society and burgeoned for 15 years. This inflation started fewer than two years ago with COVID and supply chain bottlenecks, exacerbated by Russia's invasion of Ukraine this year. The Fed is solving supply chain issues by crushing demand and, in my view, unleashing deflation, setting it up for a major pivot. Elon responded, yes, the fundamental error is reasoning

Starting point is 00:08:27 by analogy rather than first principles. Now, as you might expect, much of FinTwit called BS on this, again saying they're desperately talking their book and trying to get their net worths back to where they once were. Joe Wisenthal, however, didn't think it was that simple. He wrote, If I'm understanding Elon Wright, the gist is that rather than examining what's happening right now, in the aftermath of an unprecedented global pandemic, economists are just assuming that past periods of high inflation provide the roadmap. And there might be something to that. So, whatever the right combination of reasons for it is,

Starting point is 00:09:00 the Fed affiers to me to be pretty clear on the fact that the way to respond to persistence in these inflation numbers is not just some rapid increase to get to the terminal federal funds rate faster, but to extend the duration for how long they have to keep on the brakes and be willing to increase their expectations about how high the terminal rate has to be along the way. Whether they're right or wrong, there is an inherent lack of clarity in this position, or at least an element of we're just going to have to wait and see. That lack of clarity in policy, even if correct, causes lack of clarity in markets as well. John Turich wrote this morning,

Starting point is 00:09:35 feels like we are at the point where the economy and risk assets are at odds. For a meaningful rally, markets ironically are going to need to see some consumer or labor market weakness. Joe Wisenthal again responded, I've never thought the bad news as good news was compelling, but these days I've had the same thought. If the Fed is pivoting from labor market pain is a likely but unfortunate byproduct of the fight against inflation to, without labor market pain, we won't be convinced that inflation is defeated, then the bad news is good news for stocks. Synics might be right for once. So, TLDR, it's confused.

Starting point is 00:10:06 And in confusion, in the world we have today, that leads to one thing. To paraphrase in Arthur Hay's tweet today, EU equals f***, China equals f***, US equals okay, USD equals strong. Bitcoin and eth, hold on to your butts. Nexo is a security first platform built for the long run with everything you need for your crypto. Five key fundamentals, including real-time auditing and insurance on customs. asset, safeguard your funds, making Nexo the right place for you to buy, exchange, and borrow against your assets safely. Learn more about Nexo's reliable business model and start

Starting point is 00:10:50 your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, Chainalysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash CoinDesk. The breakdown is sponsored by FTXUS. FTXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to

Starting point is 00:11:41 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. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today and use Referral Code Breakdown to support the show. Bloomberg today published a piece that's sort of the closest to the Bitcoin is dead that we've seen this cycle. It starts, what is Bitcoin for exactly? While that's been a tricky question to answer in years past,

Starting point is 00:12:20 it's safe to say that right now, it's definitely not for preservation of wealth. The shiny new thing is down 60% year-to-date against the grimy old thing, aka the USDA. More losses may follow as the Fed hikes with the bank's next installment due midweek. Bitcoin's collapse makes for a decent new entry in the Tulip Mania archives. Since peaking last November, it's down 73%. That's quite a train wreck. With delicious irony, the same week it registered a record, the Fed warned, of perilous plunges for risky assets should the economy take a turn for the worse. As the U.S. Central Bank responded belatedly to inflation, Bitcoin tanked. You can almost taste the shot in Freud, but still, they're not wrong about Bitcoin tanking. We slid to a three-month low last night of under

Starting point is 00:13:00 19,000, with Eath falling even further, hitting just around 1,300. Now, I think many believe that the merge was going to be a buy-the-new, sell-the-event type of thing. But the fact that it slammed into this horrific macro environment really drove that home. Still in the crypto world, though, much of the discussion continues to be about enforcement actions and the fallout of things that happened earlier in the year. For example, the Financial Times is reporting that South Korean authorities are asking Interpol to issue a red notice on Doe Kwan. Red notices are used for fugitives wanted either for prosecution or to serve a sentence and function as, quote, a request to law enforcement worldwide to locate and personally arrest a person pending extradition,

Starting point is 00:13:38 surrender, or similar legal action. Prosecutors said on Monday, quote, we have begun the procedure to place him on the Interpol Red Notice list and revoke his passport. Prosecutors have claimed that Kwan is not cooperating with investigators and had communicated through attorneys that he had no intention of appearing before them for questioning.

Starting point is 00:13:53 Now, over the weekend, Kwan tweeted kind of defiantly about this. On Saturday, he wrote, Dear CT, I will tell you what I am doing and where I am if, one, we are friends, two, we have plans to meet, three, we were involved in a GPS-based web three game. Otherwise, you have no business knowing my GPS coordinates. Really don't understand why otherwise would be true. Think about whether you would be comfortable with the same level of invasion of privacy for yourself.

Starting point is 00:14:17 I am not on the run or anything similar. For any government agency that has shown interest to communicate, we are in full cooperation and we don't have anything to hide. We are in the process of defending ourselves in multiple jurisdictions. We have held ourselves to an extremely high bar of integrity and look forward to clarifying the truth over the next months. Kwan even went back and quote tweeted himself, saying, to be honest, haven't gone running in a while, need to cut some calories.

Starting point is 00:14:38 So, who knows on that situation? Over an enforcement land in the U.S., the SEC and Ripple are both seeking an early summary judgment in their case, according to documents filed on Saturday. Ripple is maintaining that the SEC has not established that XRP meets the definition of a security laid out in the Howie test. They argue that there was no contract between Ripple Labs and XRP investors, and that there was no common enterprise which investors were placing their faith in. The SEC are arguing that Ripple sold XRP to investors who had a belief

Starting point is 00:15:04 that their investment would increase in value over time, and that the executive team at Ripple Labs made representations about the work that was going to increase the value of the token. From the SEC filing, quote, Ripple publicly touted the various steps it was taking and would take to find a use for XRP and to protect the integrity and liquidity of the XRP markets. In its filing, Ripple said, even if the SEC were to engage in a belated post-discovery transaction-by-transaction analysis to identify XRP offers and sales with contracts, its claim would still fail as a matter of law. Not one of those contracts granted post-sale rights to recipients as against Ripple or imposed post-sale obligations on Ripple to act for the benefit of those recipients. So if a summary judgment is awarded to either

Starting point is 00:15:44 party, this two-year lawsuit will conclude without additional testimony or deliberation. Attorney Jeremy Hogan wrote, I just read the briefs and the SEC has got a couple big problems. One, its expert agrees that most of the changes in XRP price are due to market forces and not Ripple. These types of concessions are perfect for summary judgment. Two, the SEC failed to get on record that any XRP purchaser heard Ripple's alleged marketing pitch. A big problem because it has the burden to prove everything here. Now, there is a lot of wonkiness in this case, but all of this has implications for precedent in the future. Speaking of precedent and the SEC, the SEC continues their prosecutions from the ICO era as well. A big one today is they have gone after Ian Bolina, who is one of the

Starting point is 00:16:25 most prominent promoters of that era. The specific suit claims that Ian Bolina promoted the SPRK token on YouTube and Telegram without disclosing that he had been paid to do so. They also accused him of organizing an investing pool that had about 50 people and which offered them the chance to buy tokens from him without any sort of registration. Belina apparently made $5 million from SPRK, and they offered an additional 30% discount on additional tokens. Now, I would not characterize there as being a lot of support for Belina. There's even a bit of fist pumping going on from people who were around in that era.

Starting point is 00:16:56 The reason being that that sort of lack of disclosure is clearly not good behavior and isn't something that anyone with a long-term interest in the space thinks should persist. There is another interesting wrinkle in it, however. Section 69 of the complaint says, The U.S.-based investors in Belina's Pool irrevocably committed to the transaction when, from within the United States, they sent their ETH contributions to Belina's pool. At that point, their ETH contributions were validated by a network of nodes on the Ethereum blockchain, which are clustered more densely in the United States than in any other country.

Starting point is 00:17:25 As a result, those transactions took place in the United States. Mike Dutus of Sixth Man Ventures says, Oh, shit, they're trying to sneak this into an open and shut case on Ian Bolina, publicly shilling unregistered securities for which he was paid without public disclosure. Investor Adam Cochran gives some further context, saying, wow, the SEC had an easy potential win here that none of crypto would have complained about, going after a token pumper for promoting to U.S. customers. Instead, they shoehorned in an argument that all eth transactions are, quote, in the U.S. because of higher node density there.

Starting point is 00:17:55 Rather than take on a simple case, the SEC is trying to use this to set precedent claiming that all of crypto is under SEC's jurisdiction. This is an absolutely unacceptable overstep that will have to be pushed back against aggressively. Now, speaking of defiant tweets will close on Ian's tweet himself. He writes today, excited to take this fight public. This frivolous SEC charge sets a bad precedent for the entire crypto industry. If investing in a private sale with a discount is a crime, the entire crypto VC space is in trouble. Turn down settlement so they have to prove themselves. So there you have it. Numbers may be down, enforcement actions may be up, but at least there's never a dull moment. For now, I want to say thanks again to my sponsors, Nexto, chain analysis and FTX, and thanks to you guys for listening.

Starting point is 00:18:37 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. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience, where you can sort, invest and secure the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass. You can register today at coin desk.com slash ideas.

The Breakdown - Bleak Week as Bitcoin Hits 3-Month Low

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