Thursday Speculatory Mailbag
Q: Is the Fed totally out of touch?
It did feel that way reading the minutes yesterday.
To be fair, those minutes are three weeks old, and the situation is fluid: Commodities have been collapsing in the interim; retailers are telling customers to keep their returns; people have stopped buying houses, etc.
I'm sure the Fed will still raise by 75 bips at the next meeting. And that will look even more out of touch — I can't imagine the economic news will get any better between now and July 27.
But the Fed values predictability over fluidity, so expect them to stay the course until it's blindingly obvious it's taking them in the wrong direction.
I've always thought the biggest danger in this market cycle is that the Fed would keep hiking well past the point they should actually be cutting, and we are rapidly getting to that point.
But, at the risk of contradicting myself, I also think we spend far too much time worrying about what the Fed is doing. Does it really matter that much if Fed funds is 3% when it should probably be 2%?
I don't know, maybe it does. But economies are infinitely complex — the sum total of uncountable transactions that even a quantum computer with perfect knowledge would not be able to decipher.
It's human nature to avoid complexity, because complexity is stressful. We can't hope to understand the economy, so we've collectively agreed to all obsess over this one thing we can understand — the Fed Funds rate.
I think that's mostly because it makes us feel like we're in control.
We're almost certainly not.
Q: Is inflation good or bad for stocks?
Yes.
In terms of P/E ratios, it's bad for the numerator (price), but good for the denominator (earnings).
That's worth keeping in mind now that we are presumably shifting from inflation to disinflation: Stocks have gone down on inflation, so it's logical to think they will go up on disinflation.
But it's a little more nuanced than that.
Inflation has been a tailwind for corporate earnings, starting with the energy sector, of course. But lots of companies have been able to raise prices while a significant portion of their costs remained fixed.
That tailwind may turn into a headwind as prices stop rising and wages — always lagging — keep rising.
This only applies to stock with earnings, though. Stocks without earnings care only about the numerator half of the P/E ratio and falling bond yields are generally helpful, there — hence the rotation into the earnings-free, speculative tech end of the market (ARKK, basically) over the past week or so.
Where the stock market goes from here will be a function of this balance between prices going up on falling rates and earnings going down on slowing economies.
Place your bets accordingly.
Q: Is SBF more like JP Morgan or Warren Buffett?
Very much JP Morgan.
Morgan acted as the lender-of-last-resort in 1907 in order to stem a financial panic that posed an imminent threat to his banking franchise. He did so on favorable terms, so he still made out like a bandit, but he wasn't initially looking to make a profit.
SBF is now rescuing failing CeFi lenders for the good of the crypto ecosystem, because the crypto panic poses a similar threat to his FTX/Alameda franchise.
I don't expect the rescues will turn out to be similarly profitable for SBF, though: In one deal, JP Morgan bought a steel business from a failing bank for $45 million that was later valued at $1 billion…that's $1 billion in 1907 dollars — unadjusted for inflation.
I can't imagine anything SBF picks out of the CeFi rubble will turn out to be worth $1 billion, even in 2022 dollars.
But here's where it'll pay off: In the next crypto cycle, he'll be Buffett.
Buffett has never been in the rescuing business — he's only ever done deals to make money.
Sometimes they look like rescues, because companies go to him in times of distress, but he only ever invests in the ones that are not truly distressed: Goldman didn't really need his money in 2008, but they offered him $5 billion of preferred shares on incredibly favorable terms, because they wanted the halo effect of having Buffett as a backer.
Those are the types of free-money deals that SBF will be getting once he's established himself as crypto's lender-of-last-resort.
That gives a positive "expected value" (his favorite metric) to something like extending credit to Voyager, which, in the short term, looks a lot like lighting money on fire.
So, to re-answer the question, SBF is JP Morgan this time around, and he'll be Buffett the next time around. And there will be a next time around.
Q: I thought bailouts were bad. And I thought CeFi was bad. Is SBF bailing out CeFi bad?
He's only rescuing the depositors, and I can't see why anyone would object. Equity investors in CeFi businesses are being wiped out, so there's no moral hazard.
Crypto natives might prefer that CeFi be left to die, but I think that is short-sighted. If we want DeFi to be a real alternative to TradFi, it will have to interact with the real world, and CeFi is going to be a part of that — irrespective of whether we like it.
Q: Is crypto just gambling?
That depends on whether you think anything useful is being built.
Gambling is when you take risks that have been created expressly for the sake of entertainment.
Speculation is the assumption of risks inherent to capitalism.
Is crypto creating risks just for the lolz? There is certainly an element of that, so, sure, some portion of crypto is just gambling.
But useful things are being built, too. Which means some portion of crypto is speculation — in a good way. (If you're skeptical, have a listen to this Twitter Spaces where Blockworks' research team highlights some protocols demonstrating utility in the downturn.)
Gamblers create risk. Speculators assume risk.
There's a lot of both in crypto.
Q: Is Smol Joes just gambling?
Yes.
But I love seeing that wacky, ridiculous stuff can still happen in crypto.
The price Smol Joes NFTs — the first on the Avalanche blockchain — have zoomed from a floor price of about $200, after the mint just 10 days ago, to about $8,000 now.
There's only 100, so there's not a huge amount of money in play, but I see it as a timely reminder that the animal spirits will always return to crypto, no matter how deep and long this winter proves to be.
I recommend sticking to smart speculation in the meantime, but know gamblers will come back for fun, as has been proven time and again in the stock market.
And, of course, casinos.
See you tomorrow for Friday Charts.
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