The Breakdown - What We Learned (If Anything) From Powell's Jackson Hole Speech

Episode Date: August 28, 2024

NLW breaks down the Fed Chair's big moment at the end of last week. It's clear that the way is paved for the first cut of the cycle in September -- but could a jumbo 50bps cut be in the cards? Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Tuesday, August 27th, and today we are catching up on Pavel Durov as well as turning back to Jackson Hole. 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. Hello friends, we kick off today with a follow-up from yesterday's episode because we have now gotten an update from French prosecutors on the arrest of Telegram CEO Pavel Duroff.

A statement explained that Durav's arrest was part of a cybercrime investigation into an unnamed person which commenced in early July. An extensive list of charges are being considered. These include complicity in the sale of narcotics, organized fraud, the sale of hacking tools, and multiple other crimes conducted using Telegram. These potential charges are presumably similar to being an accomplice to a crime under U.S. law and seemed to refer to liability for user behavior. There was also a string of potential charges related to Telegram's lack of engagement with law enforcement.

One charge was referred to as a, quote, refusal to communicate at the request of competent authorities, information or documents necessary for carrying out and operating interceptions allowed by law. The unnamed person is also facing charges related to offering encrypted messaging, including providing cryptology services aiming to ensure confidentiality without certified declaration. My feelings on this were best summed up by Arthur Bratman, who wrote, I think it was wise to wait until the charges were released before making hasty statements about the arrest of Durov. With that said, the hasty statements were entirely correct, and yep,

he's being charged for every crime happening on telegram. This is insanity. There was a ton of consternation that exploded on Twitter around basically all of this. Many in the cryptospace were focused on the implications for cryptography, but others were focused on the fact that it seemed pretty clear that he was being held liable, for the behavior of his users. Embattled French President Emmanuel Macron took to Twitter to to quell the backlash stating, I've seen false information regarding France following the arrest of Pavel Dirov. France is deeply committed to freedom of expression and communication, to innovation and to the spirit of entrepreneurship. It will remain so. In a state governed by the rule of law,

freedoms are upheld within a legal framework, both on social media and in real life, to protect citizens and respect their fundamental rights. It's up to the judiciary and full independence to enforce the law. The arrest of the president of Telegram on French soil took place as part of an ongoing judicial investigation. It is in no way a political decision. It is up to the judges to rule on the matter. Now, this spoke exactly not at all to any of the critiques actually being leveled at Macron and his government. It wasn't about some big accusation that this was a politically charged arrest. It was about the chilling fact of arresting a tech entrepreneur for the behavior of the users of their platform. All in all, the mood on crypto Twitter is tense, with many wondering about the

future of encryption and privacy in the EU. Vitalik Buterin tweeted, I've criticized Telegram before for not being serious with encryption. But given the available info so far, the charge seems to be just being unmoderated and not giving up people's data, this looks very bad and worrying for the future of software and comms freedom in Europe. Podcaster Lex Friedman wrote, The arrest of Pavel Duraf is a disturbing attack on free speech and a threat not just to telegram but to any online platform. Government should not engage in censorship.

This is a blatant and deeply troubling overreach of power. Coincidentally, Monday also saw Mark Zuckerberg write to the House Judiciary Committee about Social Media censorship under the current White House. He admitted that this administration pressured META to remove pandemic-related content including humor and satire. Further, he confirmed that the Hunter Biden laptop story was suppressed on Meta's platform. Zuckerberg wrote,

I believe the government pressure was wrong and I regret that we were not more outspoken about it. I feel strongly that we should not compromise our content standards due to pressure from any administration in either direction, and we're ready to push back if something like this happens again. This is the type of story that we're going to have to keep coming back to as we get more information,

but it seems to me, at least from where I'm sitting right now, to be every bit as worrying as it seemed like it might be. Hello friends, before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for crypto-natives by crypto-natives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now, we are in a major political parties platform, which will lead ultimately to the

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get 10% off. In the second part of today's episode, though, I want to go back to Jerome Powell's Friday speech at Jackson Hole, which, while the news cycle has moved on from, the speech itself contained important information on the path of monetary policy that we haven't had a chance to dig into yet. First, Powell confirmed that cuts are imminent, stating, the time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. Most viewed this is clearly signaling the cutting

cycle will start in September. Joseph Levorna, chief economist at SMBC NECO security said, he's pretty doveish. He brought the option to do whatever he needs to do next month, which is clearly an ease. I don't think the bar for 50 basis points of cuts is particularly high. Giving a status update on the state of the economy, Powell said, inflation has declined significantly. The labor market is no longer overheated and conditions are now less tight than those that prevailed before the pandemic. Supply constraints have normalized and the balance of risks to our two-man. mandates has changed. In other words, this change that he mentions is the balance of risks is now clearly tilted towards the full employment mandate. Powell added,

it seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon. We do not seek or welcome further cooling in labor market conditions. This statement was noteworthy as it signals that the labor market weakness is already concerning for the Fed and may even suggest they are behind the curve already. Former Pimco Managing Director Paul McCulley said, this was a valedictory of essentially Chair Powell turning the page, saying the mission which has been focused on inflation for the last two years, has been successful. While the inflation mission is accomplished, minimizing unemployment is now squarely the focus

moving forward. Bloomberg economist Anna Wong suspects that Powell is already concerned about fighting unemployment from behind. Over the past weeks, multiple Fed officials have mentioned the need for the cutting cycle to be gradual and methodical. Wong noted, however, that this language was completely absent from Powell. Listening closely to Powell, she wrote, my take is that he has already on board the 50 basis point boat given the current data. It is now a matter of can he convince the other FOMC members. To elaborate on why this is my takeaway, he didn't say anything about the need to be gradual or methodical. He didn't characterize the risks as even, but rather it simply changed.

There is a notch more urgency in this framing than his July appearance. Nick Timmeros of the Wall Street Journal had similar thoughts, adding, The Powell pivot is complete. Powell is doveish across the board from the same stage where he two years ago signaled the Fed would accept a recession as the price of restoring inflation. While Powell was forceful in laying out the Fed's goals, he offered no specifics about the precise way officials will deliver them to retain maximum discretion. He entirely avoided certain coded words like gradual and methodical that some colleagues in recent days

had used to describe their expectation for a series of traditional quarter-point rate cuts. In doing so, Powell's silence kept the door open to larger rate cuts if the labor market shows signs of greater weakness in the weeks ahead. Oddlott's host Joe Wisenthal believes that Powell is about to attempt to stop rising unemployment before it enters a feedback loop. Quote, people always talk about the importance of anchoring inflation expectations. One way of reading Powell's speech is as an attempt to apply the same concept to low employment. The idea with inflation expectations is that if people expect high inflation, then they'll engage in more inflationary economic activity. The same notion carries over to labor. If people expect high unemployment, companies will fire faster. Workers will spend less. So what we are looking for after

that is basically more potential of a 50 basis point rate cut to come. More signals that the Fed might think that they're a little bit behind. That could have a really interesting shape on the texture of the next policy to come. Lastly today, a couple of updates from SEC land. Cracken had a mixed result on Friday in its attempt to get their SEC lawsuit thrown out. The SEC are claiming that Cracken is an unregistered securities exchange. They highlight a set of 10 tokens as the unregistered securities, including Solana, Cardano, and Filecoin. The bad news was that the court refused to dismiss the case. In written orders, Judge William Oreck stated, the SEC has plausibly alleged that at least some of the cryptocurrency transactions that Cracken facilitates on its network constitute

investment contracts, and therefore securities and are accordingly subject to securities laws. The more optimistic news is that Judge Oreck wrote extensively to explain how to in his view, the Howey test should apply to tokens. As a quick refresher, the Howey test requires four separate elements to be satisfied. That there is an A, investment of money, B, in a common enterprise, C, with an expectation of profits, D, and that those profits are derived from the efforts of others. This definition describes an investment contract that falls under the SEC's jurisdiction. In the Cracken case, the SEC argued that crypto tokens carry their status as investment contracts into the secondary market. Judge Oreck expressly rejected this view in line with the decision in the

Ripple case. He explained that the SEC would need to hone in their argument to focus solely on the transactions that actually take place on Cracken's platform. That is, proving the elements of the Howie test were satisfied when tokens trade on open order books. The SEC already failed at that task in the Ripple case. Judge Oreck also reprimanded the SEC for introducing new terms with dubious foundations in the law. He wrote, numerous courts have distinguished between the digital assets and the offers to sell them before engaging in an analysis of whether cryptocurrency transactions constitute investment contracts. The distinction is valuable. The way the SEC labels the crypto assets at issue as crypto asset securities is unclear at best and confusing at worst.

Cracken's chief legal officer Marco Santori heralded this as a, quote, significant win, tweeting, the SEC unqualifiedly lost on this tokens are securities theory and will not be permitted to rely on it going forward. Instead, it will need to prove for every alleged transaction on Cracken that the Howey test factors are satisfied. They aren't, and we look forward to proving this in discovery. Cracken will fight and Cracken will win. Now, one of the reasons this case is important is that it's being heard in federal court in California. The SEC has active exchange cases in three separate Federal Circuit courts, with Coinbase being heard in New York and Binance being heard in D.C. This was viewed as the SEC taking multiple

swings at developing a precedent, hoping to find one agreeable judge. With this order, it seems as though the California Circuit agrees with rulings made in New York. Stuart Alderati, the chief legal officer of Ripple tweeted, another court, this time in the Cracken case, confirms there's no such thing as a crypto asset security. Bad news for the SEC, whose entire regular regulation by enforcement strategy hinges on that failed premise. Lastly today, crypto lender Abra have settled SEC charges dating back to 2020. The regulator alleges that Abra's earned product was an unregistered securities offering. They claim the platform gathered around 600 million in assets, with 500 million coming from U.S. investors. The SEC complaint highlights marketing for Abra Earn, which allege that

investors could earn interest on their crypto automagically. The SEC further alleges that Abra operated as an unregistered investment company prior to winding down their earned product. They claim that due to the lack of regulation, investors were not provided with, quote, sufficient, accurate information to make informed decisions before they invest. Abra accepted the settlement without admitting or denying the allegations. They have already settled with 25 states for operating without proper licensing and agreed to return crypto assets to customers. This is Abra's second settlement with the SEC. The first was related to their swaps product and resulted in a pair of $150,000 fines to the SEC and the CFTC. The settlement doesn't have an agreed fine attach with that matter being left to the courts.

all in all, another sign of moving forward from a dismal period in crypto history. That's going to do it for today's breakdown. Appreciate you guys listening as always. And until next time, be safe and take care of each other. Peace.