FTX and the banana turn in the markets

FTX and the banana turn in the markets

Here we go again with two of the market themes that keep popping up this year: the chaotic alliance with the crypto disaster and the search for a more lenient stance from the US Federal Reserve.

Both are dramatic in their own way, but the latter of the two is far more important to the health of traditional investors’ portfolios.

The so-called schadenfreude that arises when crypto slips is always tempered by the grim knowledge that some naive amateur investors are losing their life savings. Bitcoin, the biggest token of the bunch, has fallen around 18% in this week.

But any new buyers who arrived after plummeting 70% from November to June and holding steady at around $20,000 a pop after that probably knew what they were getting into. If you hung on after the accident, chances are you knew it was a punt.

Retail investors are primarily affected by the rolling value of coins. Professionals take the trouble through their stock investments. And they suffered a brutal collision with reality this week, after Sam Bankman-Fried’s FTX – supposedly the most trusted exchange in this freewheeling market – suffered a good old-fashioned bank run before to file for bankruptcy.

First, trust has evaporated from FTX’s native token, FTT – quite a common occurrence with tokens based on trust and manual ambitions rather than traditional boring things like income, dividends, interest payments and institutional resilience.

It was bad enough, but FTX rival Binance stepped in and made it worse. First by publicly declaring its intention to sell off its FTX token holdings, then offering to save the exchange itself before pulling out of such a deal, leaving its CEO Changpeng Zhao as the last remaining king of the cryptography. SBF, as it is known, was forced to resign as CEO.

This is all top notch, humiliating drama for FTX backers, who have certainly been drinking the Kool-Aid. One, venture capital firm Sequoia, said this week it would cut its $210 million investment in FTX to zero, noting that “a liquidity crunch has created solvency risk. for the scholarship.

Contrast that with Sequoia’s gushing assessment of FTX’s prospects in an extremely lengthy article he posted online less than two months ago. In a now-deleted 13,800-word profile (that’s about 16 times the length of this column), Sequoia described Bankman-Fried’s “legendary status.” His explanation of how FTX could one day be used to “buy a banana” (I’m not kidding) thrilled the Sequoia team. “Love this founder,” one said. “It was a vision of the future of money itself,” the profile explained. Now you will have a hard time getting your funds back from FTX, let alone using them to buy fruit.

The best comedy or drama writers on the planet couldn’t come up with a more ridiculous denouement for an industry already long on absurdity. Keep in mind that Bankman-Fried himself told the FT last year that he would like to buy Goldman Sachs. And yet, the pieces still cling. Even with all those slings and arrows, bitcoin is trading at around $16,500. Morgan Stanley believes, based on when retail investors entered and trading psychology, that many will not sell until we hit $10,000.

Indeed, the price of tokens briefly rallied from its lows this week after finally, finally, a pause formed in the clouds of inflation.

Data released on Thursday showed that annual inflation in the United States was 7.7% in October. By any reasonable measure, this is extremely high and well above target. But this is the lowest 12-month increase since January.

All year, investors have been desperately looking for a sign that the Fed might at least slow its pace of raising interest rates, and they finally got one, in cold, hard data.

The market reaction was absolutely explosive. The S&P 500 index gained 5.5%. Stripping down the extremely volatile scenes in the spring of 2020, it’s the biggest daily rally in over a decade, and one of the biggest ever. The tech-heavy Nasdaq Composite closed up 7.4%.

Government bond prices soared, causing yields to fall. The yield on the two-year note fell some 0.25 percentage points to 4.33%, its biggest drop since October 2008.

It’s the market’s way of saying: Mission accomplished. Crisis over. Are investors getting ahead? Yes. It’s just a data point, and it’s not guaranteed to lower the Fed’s rate hike end point. But that’s how the game works. And fund managers are holding more cash than at any time since 2001, according to Bank of America data, giving enormous firepower to deploy on the rebound.

“The markets finally got what they wanted,” says Emmanuel Cau, strategist at Barclays. The reaction was “euphoric” and reinforces FOMO – the fear of missing out, he says.

The fact that this seems to have given a boost even to bitcoin, after a week where the market’s foundations turned out to be built on sand, tells you two things: firstly, after a few false starts, this could be the big one this times, the start of a significant market recovery after 12 terrible months. Second, you cannot buy bananas on the blockchain, and you probably never will.

katie.martin@ft.com

#FTX #banana #turn #markets

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