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Spot Markets Live Transcript; 14/11/22

Screenshot 2022-11-14 at 09.43.08

Today’s Spot Markets live session is with Anjuli Davies, formerly of the Telegraph and Reuters, Davies’ last posting was as Senior City Editor for the Telegraph, moving there from her role as Acting Chief UK Financial Correspondent for Reuters.

Comments addressing audience statements are in bold.


Izabella Kaminska 10:58

Hello and welcome to Spot Markets Live the whistlestop tour of markets every Monday at 11am UK time.

Today I’m joined by Anjuli Davies, formerly of The Telegraph and Reuters.

Anjuli Davies10:59

Hello there

Izabella Kaminska 11:00

Are you an effective altruist Anjuli?

Anjuli Davies 11:00

Err what?

Izabella Kaminska 11:00

Effective altruism. You know. Making billions and then giving it away “effectively” as opposed to “ineffectively”. Makes all the difference, don’t ya know?

I think it’s best summarised by this Curb Your Enthusiasm clip:

Anjuli Davies 11:00

Okay, but what’s this got to do with markets?

Izabella Kaminska 11:01

Well, it’s a major plot angle in the rise and fall of Sam Bankman-Fried, who was part of the Effective Altruism movement.

I am of course talking about the ongoing fallout from the crypto drama that is the downfall of crypto exchange FTX and the surrounding Sam Bankman-Fried empire.

Anjuli Davies 11:01

Oh gawd. It reminds of Phoebe from friends – “there is no selfless good deed”.

Izabella Kaminska 11:01

She’s right I think.

We don’t usually like to jump on bandwagons. But this is just too insane a story not to summarise for those who haven’t spent all weekend following every twist and turn.

First, let’s go through the epic schadenfreude on display on Twitter.

SBF, for those who have been under a rock, was the crypto billionaire genius who rose out of nowhere to become a self-made multi-billionaire by the age of 30 by creating the FTX platform.

Anjuli Davies 11:02

What do they have in common I wonder?

Izabella Kaminska 11:02

Funny voices.

The official narrative about SBF’s rise to power is that after studying at MIT, he interned at what was at the time a very secretive prop trading house called Jane Street Capital. After graduating he got a job there as an ETF market maker.

This is where he learned the tricks of the index arbitrage world.

It was also when he got really into Effective Altruism (which some people describe as a cult). This saw him donating a big chunk of his paycheck to EA causes.

Eventually, he left JS to work briefly at the Centre for Effective Altruism (which really does sound a lot like the centre for Scientology the more you look into it) before discovering crypto proper and taking it upon himself to close what was then known as the Kimchi premium arbitrage.

Anjuli Davies 11:03

Izzy did you not once go and talk to Jane Street?

Izabella Kaminska 11:03

Yeah, actually I did! It was when I was in the depths of my ETF research and analysis.

I got invited to address the employees. A really fascinatingly weird place.

Covered in war propaganda images, and the founders were big into crypto I think because I was shown a vintage ██████████ that was prominently displayed in one of the founders’ offices (allegedly)

I may have ██████████

I had just gotten one of those ██████████

So I was ██████████ around in stealth mode.

But I probably shouldn’t have been, so ██████████ ██████████ are just for our little community.

Anyway, this was the audience as it was in July 2014, perhaps SBF was somewhere in the crowd?

Anjuli Davies 11:06

He was only probably about 4 years old

Izabella Kaminska11:07

See the propaganda posters in the background?

I’m wondering if this might be SBF?

Anjuli Davies 11:07

It’s like where’s Wally?

No pun intended

But it gives you an idea of the vibe. These guys were all former physicists and mathematicians.

All focused on the maths I remember and not any core fundamentals. There was also a Texas Hold’em or maybe poker table area. And if I recall many bean bags.

Anjuli Davies 11:09

Of course bean bags. How are they doing now?

Does anyone know

Izabella Kaminska 11:10

Bean-ie bags?

So anyway, this is where SBF became proficient at things like closing index arbs.

Eventually he made his fortune closing the so-called Kimchi arb, a strange situation where bitcoin prices were higher in south Korea than almost anywhere.

Anjuli Davies 11:11

@Peter it does hurt my brain

Izabella Kaminska1 1:11

This trade eventually catapulted him to riches and the creation of his own hedge fund Alameda Research in 2017. Many crypto arb moves later, he founded FTX – a crypto derivatives exchange in April 2019.

Anjuli Davies 11:12

But weren’t there already loads of exchanges by that point?

Izabella Kaminska 11:12

Exactly, there were. So it was weird how quickly and suddenly his platform was propelled to the limelight. Among other things, he somehow managed to convince many powerful names and funds from core finance to back him.

The fact he had worked previously at Jane Street probably helped.

But this contrasts heavily with the rise of BitMex which also included former core finance traders (Ben Delo and Arthur Hayes), who very much struggled to get any VC backing for their derivatives exchange.

Among those backing SBF (as he is known) according to the latest Alameda liquidation docs:

Anjuli Davies 11:13

That’s a serious who’s who in the investing world

Seriously bad judgment. So then what?

Izabella Kaminska 11:13

@noelle yes regarding derivatives, but weird to me that Bitmex couldn’t get any backing at all and he suddenly did.

Anyway, this reminds me of how the ICE exchange became a thing actually.

I see Chris Cook is in the crowd, and can probably remember better than me.

But there used to be a lot of similar exchange wars in conventional commodities. And whoever got the liquidity backing of the major funds and banks was no doubt going to be the winner.

NYMEX and IPE were the dominant exchanges. But then Enron tried to get a piece of the action.

It started developing its own exchange.

The banks weren’t too pleased about this and decided to basically organise to ensure Enron failed. They did this by backing the dude at intercontinental exchange (which became ICE).

This was at the time a relatively small exchange. But when they committed their flows in exchange for equity (i think) it was clear he was going to be a big success.

I’m of course referring to Jeff Sprecher.

But Chris might remember better than me.

@noelle – I don’t know, I’m not a trader, but I think this idea that FTX was far more sophisticated is a bit of a stretch. I think BitMex was actually fairly sophisticated given the innovations they made. And SBF basically lifted a lot of their innovation and copied it. When I spoke to ████████████████████████████████████████

I can’t find the quote now. But will try later

Anjuli Davies 11:20

Anyway I’m sure we will get to the bottom of it in Michael Lewis’ book. What timing!

You should team up with him Izzy

Izabella Kaminska 11:20

Ha. Well, I think I would never be able to match his capabilities. He definitely has a nose for this stuff doesn’t he?

I think the fact SBF did get a lot of positive PR was also fairly strange.

This culminated in the infamous Lunch with the FT in May 2022.

I don’t think the contents of that were too sycophantic, but being offered a lunch with the FT is an anointment of sorts in its own right …

I personally had not really registered him as a thing until then. Which just goes to show how accelerated his rise was.

Before that he did an absolutely dumbfounding interview with Matt Levine on Odd Lots where the former basically sussed SBF was describing a ponzi scheme.

Anjuli Davies 11:22

Long story short I guess higher interest rates and crypto turbulence exposed the fundamental issues and conflicts within the platform?

Izabella Kaminska 11:23

Basically, yes. It looks very much like the platform may have first encountered issues during the Terra Luna collapse in April and was just holding out for a turn in the market which never came.

A useful and complete timeline of events is available here.

Anjuli Davies 11:23

Some of the ads they were running were priceless. Tom Brady and Gisele! (but then Brady was an investor on your list above)

Izabella Kaminska 11:24

And Larry David, amazingly, manages to come out okay in his FTX ad, because he’s positioned as the eternal sceptic. YOU SHOULD HAVE LISTENED TO LARRY DAVID!

@chris exactly right. This sounds very collusive to me, but hey what do I know

The key point is that rival exchange Binance, run by “CZ” suddenly last week came into play as a potential rescuer of FTX. CZ had previously dropped a Tweet implying there were issues at the exchange, which only became known because of his Tweet.  He then pulled out at the last minute. The implication be that the funds SBF said were there were not really there. A capital shortfall of about $1bn was suspected.

This prompted mass customer liquidations from FTX, and then on Friday FTX finally applied for Chapter 11 protection.

So now the big question is just how circular this whole thing was — and did CZ himself catalyse the destruction of FTX?

Also how far will the contagion travel? And where exactly is SBF?

There’s been a veritable OJ Simpson-style manhunt for him. His suspected plane is being tracked all over Twitter, and people speculating whether he’s in the Bahamas or on his way to Dubai.

As Noelle says, the suspected shortfall has now grown to $10bn.

Anjuli Davies 11:26

I see details of his alleged property in Bahamas being supposedly up for sale? Impressive photos. But maybe list the top rumours and crazy twists?

Izabella Kaminska 11:27

Why not. There’s loads of them. Though funnily enough, I was sitting next to some hedge fund guy not long ago who has a place on what used to be a relatively discrete Bahamanian island. And he was moaning no end about the rise of the crypto Bahamian residents.

And how they had messed up all of the Bahamas

Anjuli Davies 11:28

Wasn’t Fyre festival set in the Bahamas?

Izabella Kaminska 11:28

Yes! I believe it was.

This proves my point that the Entire Economy is Fyre Festival.

And let’s not forget the Bahamas is generally very crypto-friendly and launched one of the first CBDCs, which is called the Sand Dollar. It’s not been too much of a success.

Tho perhaps we shouldn’t be surprised that the Bahamas has attracted all this skullduggery given it was also the film location for Casino Royale

THE CLUES TO THIS MYSTERIOUS DEEP STATE/BOND VILLAIN UNDERCOVER INFLUENCE OP WERE EVERYWHERE

Who else sets up a crypto bond lair base at the home of LE Chiffre’s greatest and most iconic exchange with James Bond?

Here in any case are the top rumours/conspirarcy theories to keep track of:

  1. Turns out SBF was a major donor to the Democrat party after his rise, becoming the second biggest donor after George Soros. Some are wondering if the favourable press he received was for political reasons, related to laundering of political donation funds. https://www.ft.com/content/428c7800-c72d-4c59-9940-4376fea6e263
  2. There are some nefarious and conflicting relationships related to his sometime girlfriend and CEO of Alameda research, Caroline Ellison. She’s being cast as the manipulative female horse whisperer in this whole thing.
  3. All sorts of Stanford Univeristy clique stuff. SBF’s parents, who were both Stanford professors, supposedly had a scandalous affair there, and SBF was the product of that affair. Here’s the main conspiracy that’s going around about that: https://twitter.com/JagoeCapital/status/1590830620573409283?s=20&t=lpWbmOSpSUEgxLJH1kcANQ
  4. Some are wondering if Gary Gensler, the current head of the SEC, was also captured by the whole operation. SBF was getting closer to US politicians , CZ had Iran / N Korea / Chinese backers …. Speculation CZ realised his exchange could fall to zero if SBF got the US regulators to regulate CZ out of business… So perhaps he pushed SBF under the bus on purpose?
  5. Was SBF set up to first generate political campaign funds and then fail spectacularly to give regulators an excuse to clamp down on crypto and bring in CBDCs?
  6. Some speculation about the degree to which Ukraine was depending on FTX for its military aid donations.
Anjuli Davies 11:34

Everyone is talking about regulatory oversight, but regulators have allowed/enabled/missed this – as @Roger tells it – Success – Hubris – Collapse cycle – to happen over and over again

Izabella Kaminska 11:34

Indeed. A lot of people also blame regulatory uncertainty.

Anjuli Davies 11:34

So, what about the fallout?

Izabella Kaminska 11:35

Huge price collapse across the crypto board and now fears of contagion elsewhere, among them at crypto.com.

Lots of wallet and exchange businesses are now voluntarily coming out with “proof of reserves” to try and calm jittery investors.

But there are also a lot of suspicions that this is being gamed in the old repo 105 way…

Remember Repo 105?

Anjuli Davies 11:36

And don’t forget this one: The collapse of crypto exchange FTX has left Formula One partners Mercedes in “utter disbelief”, team principal Toto Wolff said.

Mercedes suspended the partnership last week, removing FTX branding from their cars and other assets ahead of the Brazilian Grand Prix.

Izabella Kaminska 11:36

It might not even be as bad as 105, though. More akin to conventional end-of-quarter window dressing repo by banks — a strategy used by banks to make bank balance sheets look healthier than they really are at the key auditing snapshot moment.

In the crypto equivalent,  friendly exchanges/whales are transferring funds to hard-up exchanges for the sake of the snapshot proof, but then supposedly transferring them back out as soon as the proof is done.

Repo Window dressing on steroids. Except doesn’t work quite as well on a blockchain as everyone can see the flows.

Anjuli Davies 11:37

Sounds like a total clusterfuck.

Let’s not forget that SBF also offered to fund Elon’s purchase of Twitter, but Elon declined on the basis that he could smell SBF was a bullshitter.

Izabella Kaminska 11:37

Takes one to know one?

I like this bit

@Peter which one?

Should we check in on the valuations of the currencies of the future?

This is my preferred source

On a weekly basis, Solana is the lead loser – down 55%

Tether did have a little wobble and people are worried it might be at risk

Anjuli Davies 11:41

Worryingly my Mum’s friend persuaded her to dabble in some crypto

Izabella Kaminska 11:41

@helmholtz – yes, but I think in the crypto version it’s all about proof of reserves, but conceptually very similar.

That’s bitcoin above.

And that’s the infamous FTX token.

Anjuli Davies 11:44

Any other aspects of FTX rabble? before we move on to the actual news…

Izabella Kaminska 11:45

Yeah, I’m personally interested in the continuing fallout and contagion to real markets. Thinking of who has the biggest exposure, and how listed crypto companies might be impacted. Overall, I suspect core finance is relatively protected.

@noelle – don’t know about this. Tell us more! Is that official crypto regulatory parlance ? “projects that are hurting”?

Anjuli Davies 11:47

The new level 3 asset liquidity issues are projects that are hurting

Izabella Kaminska 11:48

@noelle – it is interesting. Isn’t it? It’s almost a Soros-type move.

Anjuli Davies 11:48

Tweet:

CZ : Binance @cz_binance 5h

“To reduce further cascading negative effects of FTX, Binance is forming an industry recovery fund, to help projects who are otherwise strong, but in a liquidity crisis. More details to come soon. In the meantime, please contact Binance Labs if you think you qualify. 1/2”

Izabella Kaminska 11:48

That’s the tweet

Anjuli Davies 11:48

CZ  Binance @cz_binance 5h

Also, welcome other industry players with cash who wants to co-invest. Crypto is not going away. We are still here. Let’s rebuild. 2/2

Izabella Kaminska 11:48

BUILD BACK BETTER CRYPTO

lol

this is too funny

In terms of good reads on all this, I have to give David Gerard a shout-out.

I like this bit from his assessment

The history of cryptocurrency teaches us, over and over, that crypto companies have two states:

  1. Quadriga. They steal everyone’s money and explode.
  2. Quadriga — but they haven’t exploded yet.

You should expect all exchanges to abuse their customers as much as they think they can get away with.

?

Some other notable stories to keep an eye on from his morning relatedly:

Everyone wondering about the impact on none other than Softbank

Japanese conglomerate SoftBank Group Corp. invested just under $100 million in the troubled crypto exchange FTX.com and anticipates writing down the entire value of the stake, according to a person familiar with the matter.

Also Softbank supposedly sank 12% after the loss and after reporting no new buyback programme.

This is a good piece about broader contagion to crypto.com etc

Also, this is the official thinking of the EA forum on the whole thing:

And last and not least, SBF himself has been putting out some ironically cryptic tweets.

WHAT DOES IT MEAN?

I like this related meme

Anjuli Davies 11:58

Ok, we are running out of time…should we turn to Ukraine quickly?


Izabella Kaminska 11:58

I think we should because it’s nuts that FTX and SBF have crowded the most significant news story about Ukraine since the war began.

Kherson has been liberated

but there is more afoot than just that

The press is framing the Kherson liberation very much as a victorious success for the Ukrainian army. But it sounds like there may be an important backstory.

For one thing, it looks like negotiations between the US and Russia over nukes have been agreed to by both parties.

Then there have been some mysterious nondenials from the Kremlin about talks with the US in Turkey.

This follows this CNN story on Tuesday, Nov 8:

Washington(CNN) The US and Russia have agreed to hold talks on the single existing nuclear treaty between the two countries in the near future, State Department spokesperson Ned Price said on Tuesday.

The New START treaty limits all deployed intercontinental-range nuclear weapons by Russia and the US.

The treaty — the only one left regulating the two largest nuclear arsenals in the world — was extended by five years in February 2021 during the first weeks of Joe Biden’s presidency.

Also, very importantly, I’m told to pay attention to this Daily Mail report that Putin “tried and failed” to test the Doomsday Poseidon nuclear-powered torpedo.

This is apparently what catalysed the desire to engage in talks.

One well-connected source tells me:

“The various recent attempts and close calls with nuclear weapons made the US willing to return to the negotiating table with Russia on nuclear issues. Luckily a lot of Russia equipment simply failed. Its not that Putin did not try.”

The implication is: Russia has agreed to stop in Ukraine in exchange for these direct nuclear negotiations w the US.

If that’s true, the liberation of Kherson may not quite be the tactical Ukrainian military success the press is making it out to be.

The Russians may have retreated on purpose as a condition of negotiation. Also, their retreat is only to the other side of the river, and there is a chance that they took on this overstretched position tactically for the purpose of generating bargaining optionality. Also, very likely they have retreated to a superior fortified defence position (a.k.a the river Dnieper). For those who don’t know the geography:

Mary Dejevsky at the Independent has also made the point that this is likely to not be seen as too much of a concession domestically.

in any case, it seems to be good news… (I hope). Mutual inspections are probably in everyone’s interests, I would hope.

Anjuli Davies 12:04

PRAY FOR PEACE

Izabella Kaminska 12:04

Indeed.

Last and not least, TWITTER.

ABSOLUTE MAYHEM

Hard not to finish off on the carnage that was caused by Elon’s brief release of Twitter blue.

Most amazingly of all the mayhem, Natural Gas futures dropped around 9% just after some impersonators claimed a Texas gas-export terminal’s re-opening would be further delayed.

Though not sure how that makes sense – surely it would rise on that news?

All of the relevant tweets have since been deleted – but many came from an account called LithiumPlays;

Also a fake Eliy Lilly tweet about insulin:

That knocked the share price a lot too.

Anjuli Davies 12:07

We leave with news that effective altruism is still alive – Amazon founder Jeff Bezos is going to give away his $124 billion fortune in his lifetime according to CNN.

Izabella Kaminska 12:07

Oh, just before Amazon collapses entirely?

Funny that.

I think we are out of time now, it’s been a total blast today.

So that’s all from us.

Anjuli Davies 12:08

Ciao all

Izabella Kaminska 12:08

Have a good week, and if we have the bandwidth we might do another session later this week.

So keep an eye on my Twitter account and/or your email: I will send a note if we’re on again.

Take care, everyone!

Remember if you want to take part in the live sessions you need to be a Blind Spot or Betaville subscriber. If you already are, please fill out the application form here and we will get you a login. The sessions are run on the Coodash platform. 

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