The Breakdown - The 'New Weird' and the Terror of the In-Between

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.io, chain aliasis, and FtX. And produced and distributed by CoinDesk. What's going on, guys? It is Saturday, September 24th, and today we are talking about the new weird and the terror of the in-between. Before we dive in a quick note, there are two ways to listen to the breakdown. You can hear us on the Coin Desk Podcast Network, which comes out every afternoon, and features other great CoinDesk shows, or you can hear us on the breakdown-only feed, which comes out a few hours later.

Starting point is 00:00:45 Wherever you listen, I would so appreciate it if you would take the time to leave a five-star rating or a review wherever you happen to listen. It makes a huge difference, and I really appreciate it. Also, a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. Finally, I want to tell you about CoinDesk's new event, the investing in digital enterprises and assets summit, or Ideas. Ideas is designed to facilitate 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 source and invest in the next big deal in digital assets.

Starting point is 00:01:21 Use code breakdown 20 for 20% off a general pass and register today at coindesk.com slash ideas. So let's start with the biggest theme this week, which is about what the week told us about where we are psychologically. Obviously, there was an FOMC meeting where somehow investors were taken by surprise that the Fed believed that at the end of next year, the federal funds rate was going to be somewhere between 4.25 and 5%. So when all was said and done, the 75 basis point rate hike didn't really matter to investors, but the Fed's acknowledgement for how long these market conditions were likely to remain did. We also learned, as I went over Thursday, that there was a clear enemy in the Fed's view at this point. That is the tightness in the labor market. That is the tightness

Starting point is 00:02:02 in the labor market. They insist that labor must come down for there to be any hope of getting inflation under control. My frustration is that it feels like they're making the same mistake they made last year, just in a different form. 2021's mistake was the Fed's view that the labor market was just global financial crisis 2.0, in which jobs were slower to return than financial markets. Because of this, they let inflation run hot. In 2022, they seem to be viewing this as some normal labor market that will come down based on normal factors, rather than something that has fundamentally changed post-COVID. The question is, what if it's not? Whatever the case, markets seem increasingly to believe that something in the financial sector is likely to break before the labor

Starting point is 00:02:45 market does. Last night, Raul Paul tweeted, for example, the bond market is now as broken as it was at the peak of the pandemic. Back then, 10-year futures moved 10 handles in 12 days. Right now, it's 10 handles in 36 days. Liquidity is equally as bad. Calum-Tom. Tom. Thomas of top-down charts ran a poll where he asked, what is most likely to break under strain of strong dollar and Fed tightening? Break is in getting stuck in some sort of downward spiral, extreme market disruption, or stress and crisis. The leading vote getter at the time of this recording was emerging market bonds, foreign exchange, and equities. Then there was this discussion. Sam the Eagle on Twitter asked Luke Gromond. Luke, I understand you don't have a crystal ball,

Starting point is 00:03:23 but just for the fun of it, if you had to guess at what point do you think the Fed would intervene? Luke responded, I think we'll hit 8 to 10% 10-year U.S. Treasury yield before that. And unless the Fed steps in, then we would likely blow by 8 to 10% unemployment on the way to 15% to 20%. Lynn Alden says, yeah, I continue to view the potential for an illiquid treasury market as the more likely limiting factor for Fed policy than the unemployment rate. Now, certainly not to diminish any of these takes, but I also think there is another thing going on here, which is the in-betweenness of where we are. Humans find liminal states unbelievable. unbelievably challenging and uncomfortable. It's why the scariest part of the horror movie isn't

Starting point is 00:04:01 when the victim finally sees and confronts the monster. It's the stalking part where they're hiding, waiting to be found, with the faintest hope of still getting away. The terror is the in-between because at least once something happens, there can be action. That terror is producing terrified takes. Investor Andrew Steinwald wrote, I think we could see ETH under 100 within the next 12 months, One, heading into a recession worse than 2008. Two, SEC is declared war on crypto. Three, Russia-Ukraine war escalation. While scary, I view it as a generational buying opportunity.

Starting point is 00:04:34 Now, many in crypto took this as exactly the most extreme pole perspective that it represented. Frank Chaparro wrote, bruh. And Moon Overlord simply responded, Are you on crack? Anyway, the point is we're incredibly in between right now. And in a Bloomberg piece today, Kenny Polkari, the chief strategist at Slate Stone Well put this in traditional market terms. It appears that traders and investors are going to throw in the towel this week in what feels like the sky is falling type of event. Once everyone stops saying that they

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Starting point is 00:06:46 Download the FTCS app today and use referral code breakdown to support the show. Let's talk about a few stories we didn't have a chance to discuss earlier this week. On Wednesday, the House Financial Services Committee held a hearing entitled Holding Megabanks Accountable, oversight of America's largest consumer-facing banks. The CEOs of U.S. Bank Corp., PNC. Financial, J.P. Morgan Chase, Citigroup, Bank of America, Truest Financial, and Wells Fargo were all in attendance. These executives were called to account on hot-button topics, including ties to Russia and China, stances on firearms purchases, and employee unionization. Now, as is always the case with these hearings, they tended to be less about tackling deep structural issues and more about scoring political points ahead of the midterms.

Starting point is 00:07:31 Ranking member Patrick McHenry addressed this concern head on in his opening statement. I disagree with this hearing because it's theater, not oversight. The majority has had two years to do its job of oversight, and it's failed miserably. My colleagues have instead called on large bank CEOs to publicly pressure them to promote divisive partisan priorities. We'll hear a lot of that. In fact, you might hear it from both sides, where we are a month before the election. There was a significant undertone of the financial struggles of the nation. Although J.P. Morgan Chase CEO Jamie Diamond said that consumers continued to be

Starting point is 00:08:01 be in good shape, with robust spending patterns, he acknowledged that continued rate hikes could be difficult for consumers and potentially push the country into recession. When asked whether or not they have confidence in the Fed's resolve in fighting inflation, each CEO confirmed their support for the central bank. Diamond rather pointedly said, I think the government did the right thing early on in the crisis to take dramatic action to reduce the pain of the pandemic. Since then, we've spent $6 trillion, 30% of GDP, which is bigger than any time in history other than World War II. We're paying the price of too much monetary and fiscal stimulus. I don't think we're going to think we're you can spend $6 trillion and not expect inflation. I don't like to cry over spilled milk.

Starting point is 00:08:35 Let's do the things we've got to to fix all that, then move forward and grow the economy, which is the best way to reduce inflation and help all of our citizens. Jane Frazier, the CEO of Citigroup, noted that people with lower credit scores will likely experience greater financial stress in the coming years, saying we're going to be in for tougher times ahead. Brian Moynihan, the CEO of Bank of America, recognized that rate hikes meant that borrowing costs on key consumer products, including mortgages, would be higher, but added, quote, the reality is it needs to be done. Diamond, looking abroad, pointed out that a mild U.S. recession could be made worse by uncertainty

Starting point is 00:09:06 over global food and energy supplies, as well as escalating tensions with Russia and China, causing further vulnerability to global financial stability. This question of foreign ties was a significant moment in the hearings. Diamond pushed back on Brad Sherman's questioning about J.P. Morgan's Russia clients, saying we are following the instructions of the American government as they asked us to do it. There were also questions to multiple CEOs about how they would act should China invade Taiwan. The CEOs responded that they would act as the U.S. government instructed. There was some discussion of CBDC policy, with the CEOs mostly rejecting the idea of those systems.

Starting point is 00:09:38 They questioned the ability of the Fed to operate a retail banking product like a CBDC, with all of the customer service requirements that that would entail. They also expressed displeasure at the idea of being pressured to flag a suspicious or outright censor transactions related to controversial but legal purchases, including firearms. Diamond said, We don't want to be in the business of telling American citizens what they can do with their money. In terms of crypto, there wasn't much, but what there was got a fair bit of press. Brad Sherman, who's one of the most frequent crypto critics on the Hill,

Starting point is 00:10:06 asked whether these CEOs intended to finance crypto mining. Citigroup's CEO Jane Frazier said, I do not believe so. And Bank of America's CEO, Brian Moynihan and Wells Fargo CEO, Charles Scharf, both said their banks had no plans for that either. Still, for sure, the most pointed and reported comments came from Jamie Diamond again, who said, I'm a major skeptic on crypto tokens, which you call currency like Bitcoin. their decentralized Ponzi schemes. To me, looking at this, Diamond seemed like a man uncomfortable with his hypocrisy.

Starting point is 00:10:35 He has long been a critic of Bitcoin, yet at the same time, his company, J.P. Morgan Chase, is forced to get ever deeper into the space based on customer demand. But now let's move off banking and hit a few other stories. In Europe, the European Union has finalized the text for its landmarks markets and crypto asset or Mika legislation, which will provide a comprehensive regulatory framework for the crypto industry in Europe. While the text is still officially open to comments, sources briefed on the internal process have said that in practice it is finalized. A leaked draft of the legislation that was dated September 20th urges enforcement agencies to take a substance-over-form approach to the law,

Starting point is 00:11:11 meaning its provisions could apply to some assets classified as NFTs, which aren't formally considered by the law. The law will require things like issuers of crypto assets to publish white papers containing technical roadmaps, platforms to register with authorities, stablecoin issuers to hold capital and uphold prudential management standards. The latest draft updated wording around algorithmic stable coins, which were originally not covered by the legislation. Algo stables are now within the scope of the regulation, quote, irrespective of how the issuer intends to design the crypto asset, including the mechanism to maintain a stable value. A previous draft sought to limit the issuance of stable coins which were denominated in non-EU currency, which industry figures feared

Starting point is 00:11:48 would block popular U.S. dollar stable coins from the European market. The latest draft has moved to unify regulatory treatment regardless of currency denomination of a stable coin, instead. Another concern of lawmakers this year was that the regulations would be outdated before they were made regarding their failure to cover NFTs. The leaked draft considers that genuinely unique NFTs should not be covered, but that, quote, the issuance of crypto assets as non-fungible tokens in a large series or collection should be considered as an indicator of their fungibility. Essentially, this would bring the vast majority of the NFT marketplace within the scope of the regulation as well. Obviously, we'll get a lot more information here when the official text is

Starting point is 00:12:23 released, but for now, it's part and parcel of this sort of beginning of the endgame idea and regulatory discourse that we've been talking about for months. Now, moving back to the macro for a minute to update a story from earlier this week. We talked a lot about the decrease in home builder sentiment, the increase in mortgage prices, the idea that some in the housing sector are calling it a housing recession already. But there is a growing narrative that we didn't discuss, which will call the Golden Handcuffs narrative. While we talked a lot about how high interest rates could sap demand by forcing buyers out of the market, because the average monthly payments have gone up so much, there's also the potential that those higher mortgage

Starting point is 00:13:01 payments also sap supply. The reason being that people who locked in rates at 3% have such a disincentive to sell their house and get locked into a new much more expensive mortgage. That disincentive creates another force for reducing inventory. Nick Timuros of the Wall Street Journal writes, the golden handcuffs of a 3% mortgage. Homeowners with low mortgage rates, are balking at the perspective of selling their homes to borrow at much higher rates for their next homes, a development that could limit the supply of houses for sale. Danny Baldess Strauss put some numbers around this. This is crazy, he writes, if you secured a 30-year fixed mortgage on a $600,000 home at a $2.6,000 interest rate in 2021, you have the same monthly mortgage payment as someone who just

Starting point is 00:13:42 bought a $392,000 home at today's 6.2% interest rate. Nick again, quoting from a Redfin report, It writes, typically when mortgage rates shoot up, we expect prices to come down in turn. But with so few desirable homes coming on the market, buyers are not getting much relief. They write, what's happening in the housing market feels more like a new weird. As you can tell from the title of the show, I think a new weird is a perfectly apt summary of just about everything right now. And one final story before we close out today. Cracken's CEO, Jesse Powell, is stepping down as chief executive.

Starting point is 00:14:15 He hands the reign over to current chief operating officer Dave Ripley, who has been in this role with a company since 2016. According to a press release from Cracken, Powell intends to remain involved. He'll become the chair of Cracken's board and continue to work on product development and crypto industry advocacy. For those of you who don't know, Jesse is one of the absolute true OGs of this space. He was an early pro-Magic the Gathering player who also got into selling virtual goods around the turn of the millennium, as in he was early on a lot of the things that have become part and parcel of this industry. He was a consultant early, trying to help Mount Gox on security. As an aside, Mount Gox originally stood for Magic

Starting point is 00:14:51 the Gathering online exchange, although, as Jesse pointed out in 2019, quote, MTG cards were never actually tradable on Mount Gox, before the domain was repurposed for the Bitcoin exchange. I got into Bitcoin through a random news article about it. Turns out many crypto fans are also Magic fans. Anyway, after his experience with Gox, he was pretty sure that a replacement was going to be needed and formally launched Cracken on September 2013, although the company had been founded earlier. He was, of course, correct and Gox collapsed a few months later. Powell and Cracken have been innovators and first movers in the space for years. They've tended to take a strong stance on regulatory questions. For example, in April 2018, they refused to comply with a New York Attorney General investigation around whether they had done enough to protect customers from market manipulation and money laundering. In September 2020, the company became the first crypto exchange in the U.S. to be granted a special-purpose depository institution charter in Wyoming.

Starting point is 00:15:39 Now, there have been various controversies about the way Cracken was run and Powell's libertarian values, but when the dust settles, there is only one clear thing. And that is that for a decade, Jesse and Cracken have been stalwart builders in the Bitcoin and Cryptos space, and it's much, much better for him having been here. In the thread announcing his departure, Taylor Monaghan wrote, Love you and everything you've done for this industry over the years. Hopefully getting you away from the company's shit means you will have more time to shape the entire industry to be better, fairer and more empowering to each and every individual. Jesse responded, thank you. I appreciate your service and commitment as well. Few have more perspective. Indeed, stepping up a level should give me more

Starting point is 00:16:15 bandwidth to actively engage on some of the important and existential policy issues we're facing, to which Jake Trevinsky of the Blockchain Association wrote, well, that's the best news I've heard today. So thank you, Jesse, and excited to see what you do next. But for now, let's wrap the show and let you get off to the rest of your weekend. I want to say thanks again to my sponsor. sponsors, nexus.io, chain aliasis and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - The 'New Weird' and the Terror of the In-Between

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