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FTX, "I didn't ever try to commit fraud."   

I mean there is a lot going on in such a short sentence. “I didn’t try to commit fraud” is not the same as “I didn’t commit fraud.” It’s the old ‘yes I did it but I didn’t mean to and I didn’t know it was illegal’ defence...which is to put it mildly, weak. Apparently, shock horror, Sam’s lawyers don’t think it’s a good idea to be speaking publicly about the failures.   

Anyways...I guess “I didn’t try to commit fraud” would make a pretty cool epitaph for Sam Bankman-Fried. But it won’t do much for everyone who’s lost their shirts in FTX. Whilst he admitted he’d completely failed on risk, he had never knowingly comingled client funds with Alameda. Given what he’s accused of, the sheer scale of this monumental mess, to just brush it off as a “bad month” looks kind of arrogant and kind of like he still doesn’t really get it. Interviewer Andrew Ross Sorkin made a great analogy of a bank teller taking the cash home at night...even if they intended to bring it back, they were still stealing. And if one day you lose it all and can’t bring it back…well then you are stuffed. 

 

ECB Bitcoin Blog Bearish 

Sticking with crypto – yes. we are – and there is a great blog from the European Central Bank (ECB) on Bitcoin and cryptocurrency, in which the authors reel off all the sound reasons for why they are bad. But there is some interesting stuff here. “The belief that space must be given to innovation at all costs stubbornly persists,” the authors write. I like this – there is a belief that because the blockchain is new it must, ipso facto, have some use cases that are better than older things.  

They write: “Since Bitcoin is based on a new technology - DLT / Blockchain - it would have a high transformation potential. Firstly, these technologies have so far created limited value for society - no matter how great the expectations for the future. Secondly, the use of a promising technology is not a sufficient condition for an added value of a product based on it.”  

But... of course the ECB is throwing some shade here. One of the authors of the blog is Ulrich Bindseil, the director general for the ECB’s Markets Infrastructure and Payments division, who is at the heart of the ECB’s drive to create a central bank digital currency, or CBDC. CBs don’t like Bitcoin and other cryptocurrencies, never have, particularly the ECB. It muscles in on their space. Bindseil and co-author Jurgen Schaaf pointedly attacked the swathes of regulatory greyness that has “facilitated the influx of funds by supporting the supposed merits of Bitcoin and offering regulation that gave the impression that crypto assets are just another asset class”.    

So, the idea is that rather than regulate and legitimise crypto, they prefer to let them wither and die. The death of what we could call ‘private crypto’ then leaves the field open for ‘public crypto’, ie, CBDCs. “Since Bitcoin appears to be neither suitable as a payment system nor as a form of investment, it should be treated as neither in regulatory terms and thus should not be legitimised,” the authors conclude.  

  

Powell to Slow Rate Hikes; Stocks Rally 

Elsewhere, stocks made firm gains to end November well in the green after Jay Powell indicated the Federal Reserve was likely to slow the pace of rate hikes at its next meeting. But the speech was otherwise quite hawkish; don’t underestimate the effect of bulls chasing this higher at the month-end. This was an excited flush higher really on no new news. The market heard what it wanted to hear.  Powell reiterated that the Fed was not going to keep up with 75bps hikes forever. But he gave a strong signal about the timing of when the Fed would slow the pace of hikes. “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he said. “The time for moderating the pace of rate increases may come as soon as the December meeting.”  

The relief rally for stocks reflected the fact that Powell didn’t do a Jackson Hole, when he really pressed the hawkish message beyond what the market had thought. The speech was hawkish by all normal standards, but when you’ve been raising rates at such a clip there is a high bar to match it. So, when he emphasised that there is “more ground to cover” and “history cautions strongly against prematurely loosening policy”, all the market could hear was the words about slowing the pace of rate hikes. However, as we’ve been noting here, and in the words of Fed governor Waller, quit paying attention to the pace and start paying attention to where the endpoint is going to be. BlackRock says the result of central banks engineering recession in a bid to tame inflation will result in, er, recession and persistently above-target inflation...  

 

Positive Outcomes All Round 

The S&P 500 rallied 3% for the day after the comments. There was also a clutch of US data with GDP a bit better than expected and the labour market a little worse. That gave a last-gap boost to the major indices with both the Dow Jones and S&P 500 closing up more than 5% for the month. The Nasdaq rallied 4.4% for November. European equity markets have made further gains in early trading on Thursday. London, Frankfurt and Paris rose also had a good November, rising variously by around 6-8%.  The dollar eased back after staging a bit of a fightback and DXY is now back to its 200-day line. Meanwhile, China seems to be taking some very small steps to easing restrictions, which is good for risk again this morning. I’d be wary of these rallies. 

  

Premature Positivity? 

But the low isn’t in yet. JPMorgan’s Marko Kolanovic: “Previous lows in equity markets are likely to be re-tested as there may be a significant decline in corporate earnings… we are inclined to think that this market decline could happen between now and the end of the first quarter of 2023.” Today – the small matter of the PCE index, which if it comes back in a bit more will add to the Fed pause narrative. Core PCE inflation is seen +0.3% month-on-month; +5.0% year-on-year, easing from 5.1% in October. ISM Manufacturing PMI also on tap seen falling from 50.2 in October to 49.8 last month. 

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