FTX Crypto Implosion

Samuel Bankman-Fried, commonly known by his initials SBF, is an American entrepreneur and investor. He is the founder and former CEO of FTX, a Bahamas-based cryptocurrency exchange, and FTX.US, its U.S. affiliate. He also had managed assets through Alameda Research, a quantitative cryptocurrency trading firm he founded in October 2017.

He filed for Chapter 11 bankruptcy protection last Friday.

Bankman-Fried’s personal assets, as recorded by Bloomberg, peaked at around $26 billion in March of this year before plunging in value from a reported $16 billion to $0 over just a few days. Yesterday, The Wall Street Journal and Reuters reported that SBF had used $10 billion in customer funds from FTX to prop up his other crypto business, Alameda Research. (Source: The Verge)

Timeline:

FTX blows up in Q2, creating an $8b hole caused by the Terra / Luna collapse
SBF pretends everything is fine, and uses FTT as collateral to get money to appear solvent; he knows that CZ (Binance CEO) can end him if he ever dumped his FTT but assumes he won’t
SBF keeps a golden boy image, doing interviews, working with regulators, and meeting politicians
SBF tweets a bunch that people should buy FTT and plans to launch a stablecoin to get himself out of the hole
Brett Harrison and Sam Trabucco both decide to get out before it blows up; all employees and investors are in the dark; Caroline is brought in to manage Alameda because she is the only person he trusts
SBF accidentally angers CZ with his proposed regulations that would harm Binance and a Tweet about CZ not being allowed in DC
CZ dumps FTT in retaliation and exposes his fraud
SBF comes clean to CZ and begs for a buyout
CZ decides the hole is too big and declines
SBF is now on the run

US Economy

The October payrolls report topped expectations, once again pointing to resilience in the labor market.

The surge in mortgage rates suggests that home prices will see year-over-year declines at the national level.

Price cuts are more common.

Mortgage applications are running at 2014 levels, down over 41% from a year ago.

The decline in existing home sales has been rapid, …

Source: Morgan Stanley Research; @WallStJesus

… as housing affordability deteriorated.

Source: Morgan Stanley Research; @WallStJesus

A recession during the third year of a presidential cycle? There is a first time for everything.

The Fed

The FOMC greatly damaged their credibility when they allowed inflation to race far above their target. Sadly, the deteriorating economic prospects are a direct consequence of the Fed’s failure to execute their fiduciary responsibility to the American public. Almost universally, the other members of the FOMC have supported the Fed chair’s position that low inflation is of paramount importance to deliver a rising standard of living for all. If the Fed were to abandon its commitment to the inflation target, the FOMC would suffer a major double blow to its integrity, which would be increasingly more difficult to restore as Volcker so cogently argued. Failure of the Fed to achieve its target would also have the consequence of allowing an emergent money/price/wage spiral to become entrenched, causing a dismal replay of the two-decade span from the early 1960s to the early 1980s. The Fed’s mettle will be tested because highly over-leveraged institutions will fail as they historically have done in such situations. Bad actors or their enablers should be directed to bring their collateral to the discount window or, if necessary, to the bankruptcy process rather than be given bailouts that have severely widened the income and wealth divides in the U.S. while causing the Fed to sacrifice price stability that’s so essential for broad-based economic gains. These considerations suggest that the Fed’s current stance should continue. The long-term Treasury market is in the zone of digesting the rapid inflation of the past several quarters, and future Fed rate hikes. Barring any capitulation in the determination to quell inflation by the Fed, long Treasuries will increasingly reflect the looming recession and its deflationary circumstances.