To Make Money In The Markets From Here, You’ll Need To Play By New Rules | Jim Bianco

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Macro researcher Jim Bianco returns for Part 2 of our interview with him to discuss his macro & market outlook. He sees inflation proving stubborn to tame & the economy falling into recession — so he thinks investors are going to need to play by rules very different from the ones that worked well over the past decade.

Jim Bianco: FTX Scandal Inflicting Lasting Damage To Cryptoverse & Financial Markets

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A seismic event just rocked the cryptocurrency universe with last week’s implosion of FTX, the world’s second largest crypto exchange.

Tens of $billions in client assets and market value have vaporized. And it seems mismanagement, for certain, and possibly fraud and outright theft lie at the heart of this disaster.

To help make sense of what exactly has just happened, and what repercussions the collapse of Sam Bankman-Fried’s FTX will have on the crypto ecosystem and perhaps on the

financial markets in general, we’re fortunate to be able to turn to Jim Bianco of macro research firm Bianco Research.

Adam’s Notes:

Inflation has peaked, but it’s not going to come down as fast as the market is currently expecting. Jim sees it slowly coming down to ~4% and being stubborn after that. He expects a recession in 2023.

To understand the FTX fiasco, it’s helpful to understand the assets involved:

  • Sam Bankman-Fried is the 30-year old CEO and founder of FTX
  • There are two FTX companies:
    • The smaller one is US-based. The assets here are likely in better shape
    • The bigger one, called FTX.xom is based in the Bahamas. This is where the vast majority of assets where & where the lion’s share of the losses & fraud occurred
  • FTX has its own crypto token, FTT, which it used like a printing press
  • Alameda Research is a hedge fund that traded in cryptocurrencies
  • FTX Ventures is a backer of a lot of crypto protocol developers

When the Terra Luna stablecoin imploded, it blew up Alameda, though that was not revealed – which was pretty easy for SBF to conceal, as his company had no real Board or oversight. To do so, he took customer funds on deposit at FTX and gave them to Alameda as loans to keep it solvent. Alameda used these loans to buy up all the faltering crypto ventures is was invested in (e.g., Celsius) to avoid having to mark its investments in them to market.

This kind of malfeasance is nothing new. We’ve seen this many times in history, most recently in MF Global. It’s not unique to crypto.

In fact, because crypt is unregulated and FTX operates outside of the US, it’s not clear if he truly broke any laws. At this moment, the best avenue to prosecute SBF may be to go after him for violating FTX’s Terms of Service.

The SEC doesn’t have regulation in place yet for cryptos, even though many players in the ecosystem have been begging for it.. Instead, the SEC has been ‘slow walking’ the process. Ironically, it had been collaborating most closely with FTX in its exploration of which regulations to put in place.

Another specious practice of FTX has been to create (out of thin air) more FTT tokens, which it then lent to Alameda to go out and buy ‘legit’ tokens like Ether, Bitcoin & stablecoins to hold on its balance sheet. This gave it a tremendous advantage, to exchange funny-money FTT for other assets.

The staff at FTX/Alameda were all extremely young and in many cases, quite inexperienced. SBF is only 30. The CEO of Alameda (who is romantically linked to SBF) is 28 and had little prior trading experience. All the staff at Alameda were in their 20s and dating one another. It’s amazing so few, so young and so inexperienced a group was in charge of tens of $billions with no supervision.

So how did the world find out that FTX as a giant ponzi scheme?

Two weeks ago, Coindesk got hold of FTX’s balance sheet and revealed how the FTT token loans to Alameda were being used to buy other assets. Binance, the biggest crypto exchange in the world, owned a lot of FTT tokens and became worried about how many of these tokens were being printed. Binance’s CEO, CZ, decided to sell his FTT tokens and publicly announced this intent on Twitter and criticized SBF for his efforts to influence SEC regulations to favor FTX over other competitors. The selling of FTT tokens exposed how vulnerable FTX was and started a ‘bank run’, FTX imploded over the following 48 hours.

FTX is now in bankruptcy, and for the most part, clients will lose most of their money. That’s about $10-14 billion. FTX investors have pretty much lost everything.

The contagion from this is going to be epic across the cryptoverse. A number of them may die off, too. Blockfi is a firm many are very worried about at the moment. The entanglement is extreme, and the fallout may be so big that it also spills over into the general financial markets.

The crypto universe does not have a central bank like the financial system does, to backstop losses during a big crisis. That makes it a lot more vulnerable here.

Apart from the largest exchange, Binance, capital is flowing out of all the other crypto exchanges right now. Crypto.com is looking very shaky right now.

There’s a ton of reputational damage resulting from the FTX fraud and the lack of oversight leading up to it. Sequoia Ventures is one – a leading VC firm that invested $200mil in FTX. It clearly was not doing its job well in understanding its investment. This will result in institutional capital shunning cryptos for a long time – setting the clock back years in terms of adoption.

To re-attract capital, the crypto ecosystem is going to have to totally re-set itself. Clear out the scammers & the crapcoins & the ‘get rich quick’ mentality. Get back to basics. Emphasize decentralized protocols. Focus on disrupting the financial system.

To clear out all the malinvestment & bad actors, Jim thinks a bigger reckoning is needed and that crypto prices need to go lower – and will. A crypto “ice age” is likely ahead.

A lot of people are getting tarred with this scandal, including SEC head Gary Gensler, IEX’s Brad Katsuyama, Kevin O’Leary, SBF’s parents (who are compliance attorneys), the Democratic party (SBF was its #2 top donor), Bill Clinton, Tom & Gisele Brady…and the list is growing by the minute. 

There’s also a lot of suspicion that SBF donated a lot of $ to the Democrats, the Dems then sent a lot of money to Ukraine, and then a lot of that money was then invested by Ukraine back into FTX.

Amazingly, Michael Lewis has been embedded in FTX for the past 6 months working on a book about the company. We’re going to have one hell of a story from him once he’s done writing.

As best we know right now, SBF is being detained in the Bahamas with several FTX execs. The Alameda CEO is in Hong Kong, rumored to be trying to get to Dubai to avoid extradition. SBF has gone radio silent, though his account has been sending strange unintelligible fragmented tweets over the past 24 hours.

Remaining client assets have been getting mysteriously hacked/stolen from FTX – up to $1billion. If this is SBF or a lieutenant transferring exchange assets onto a cold storage device, he’s the only person with the access code. It may be his insurance against authorities – i.e., “without my help, no one will get anything”

Jim thinks that gold should benefit from all this, as ‘sound money’ investors leave crypto and look for an acceptable solution.

PART2: [to come out tomorrow when video is released]

Jim Bianco: Best Investments For Surviving Inflation

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https://youtu.be/VZW97k28R-s

Yesterday, we shared with you Part 1 of our interview with macro researcher Jim Bianco.

In it, Jim emphasized how today’s hot and persisting inflation is a true game-changer.

And due to that, he believes the Federal Reserve is more committed to hiking interest rates than the market is currently pricing in.

If that indeed proves true, a further market correction and quite possibly recession should result.

So where does he advise investors place their capital in such an environment?

To find out, watch Part 2 of our interview with the always on-point Jim Bianco.