Welcome back to the Breakdown with me, and I'll W you.
It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world.
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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.
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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
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.
They insist that labor must come down for there to be any hope of getting inflation under
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, market seem increasingly to believe that something in the financial
sector is likely to break before the labor 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 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
The leading vote geter at the time of this recording was emerging market bonds for an exchange
Then there was this discussion.
I am the eagle on Twitter asked Luke Groman, Luke, I understand you don't have a crystal
ball, 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 US 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 unbelievably challenging and uncomfortable, it's why the scariest
part of the horror movie isn't 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 each under 100 within the next 12
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.
Now many in crypto took this as exactly the most extreme poll perspective that it represented.
Which Apollo wrote, bro, and Moon Overlord simply responded, are you on crack?
Anyway, the point is we are incredibly in between right now.
And in a Bloomberg piece today, Kenny Polkari, the chief strategist that Slate Stone
wealth 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 think a recession is coming and accepts the fact that
it is here already, then the psyche will change.
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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 US Bank Court, PNC Financial, JP Morgan Chase, City Group Bank of America
Truths 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.
Ranking Member Patrick McHenry addressed this concern head on in his opening statement.
I disagree with this hearing because it's the 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 banks 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, or we are a month before the election.
There was a significant undertone of the financial struggles of the nation.
Although JP Morgan Chase CEO Jamie Diamond said that consumers continued to 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 feds resolved 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 six 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 you can spend six trillion in an unexpected inflation.
I don't like to cry over spilled milk.
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 Fraser, the CEO of City Group 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 US recession could be made worse by uncertainty
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 JP 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
The CEOs responded that they would act as the US government instructed.
There was some discussion of CBDC policy, with the CEOs mostly rejecting the idea of those
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 this pleasure at the idea of being pressured to flag its suspicious
or outright censor, transactions related to controversial 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, asked whether
the CEOs intended to finance crypto mining.
Lady Group CEO Jane Frazier said, I do not believe so, and Bank of America CEO Brian
Moynihan and Wells Fargo CEO Charles Sharf both said their banks had no plans for that
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.
They're decentralized Ponzi schemes.
To me, looking at this, Diamond seemed like a man uncomfortable with his hypocrisy.
He has long been a critic of Bitcoin yet at the same time his company, JP 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 in crypto
asset or mecha 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 20, urges enforcement agencies
to take a substance over form approach to the law, 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 credential management standards.
The latest draft updated wording around algorithmic stablecoins, which were originally
not covered by the legislation.
Diego Stables are now within the scope of the regulation, quote, irrespective of how the
issuers intends to design the crypto asset, including the mechanism to maintain a stable
A previous draft sought to limit the issuance of stablecoins, which were denominated
in non EU currency, which industry figures fear would block popular US dollar stablecoins
from the European market.
The latest draft has moved to unify regulatory treatment regardless of currency denomination
of a stablecoin 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 fungable tokens in a large series or collection should
be considered as an indicator of their fundability.
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 released, but
for now, it's part and parcel of this sort of beginning of the end game, 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
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 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 Timmeros of the Wall Street Journal Rights, the golden handcuffs of a 3% mortgage.
Homeowners with low mortgage rates are blocking 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 Balldiss Strauss puts a 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 interest rate in 2021,
you have the same monthly mortgage payment as someone who just bought a $392,000 home
at today's 6.2% interest rate.
Nick, again, quoting from a redfin report, writes, typically when mortgage rates shoot
up, we expect prices to come down and 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.
Crack and CEO Jesse Powell is stepping down as chief executive.
He hands the rain 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 Crack and Powell intends to remain involved.
He'll become the chair of Crack and Sport 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 had 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 the gathering online exchange, although
as Jesse pointed out in 2019, quote, M.T.G. 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 Crack and on September 2013, although the company had
been founded earlier.
He was of course correct in Gox collapsed a few months later.
Powell and Crack and have been innovators in 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 the 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 US to be granted
a special purpose to pause a Tory institution charter in Wyoming.
Now there have been various controversies about the way Crack and was Ron 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 Crack and have been stalwart builders in the Bitcoin
crypto space, and it's much, much better for him having been here.
In the threat announcing his departure, Taylor Monahan wrote,
Love you and everything you've done for this industry over the years.
Hopefully getting you away from the company sheet means you will have more time to shape
the entire industry to be better, fair, and more empowering to each and every individual.
Jesse responded, thank you.
I appreciate your service and commitment as well, if you have more perspective.
Indeed stepping up a level should give me more bandwidth to actively engage on some of the
important and existential policy issues we're facing.
To which Jake Trevinsky of the Block Chain 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 sponsors, next.io,
Sheen Alice's and FTX, and thanks to you guys for listening.
Until tomorrow, be safe and take care of each other.