💬 "FTX Collapse, [...] Election Results, Macro Update & More"

Prefer to receive PodSnacks weekly? Manage your subscription preferences here.

Podcast’s Essential Bites:

On the Midterms:

[8:38] DS: "Two days before the election, Trump basically comes out and pre-announces that he's running. This basically plays into the narrative that Biden has already created that this is not a referendum on Biden, it's a referendum on democracy. And basically Trump made it into a choice election, who do you like better: Biden or Trump? And the fact of the matter is, if you look at the exit polling, as unpopular as Biden is, Trump is even more unpopular. So that did absolutely nothing to help the Republicans and I think it really hurt them at the margins."

[12:28] CP: "The Democrats' strategy of helping to promote these extremist MAGA candidates in the primaries turned out to be a huge winning strategy, because every single one that they helped put up against the Democrat, the Democrats won. [...] On the other side, all of these extreme left leaning Democrats also did not do very well, either. [...]The winning strategy is that messy middle. [...] Every time you had an extremist ballot initiative, whether it was a complete ban on abortion in a red state, or whether it's tax the rich policy in a blue state, they failed. [...] You gotta clean up all this extremist rhetoric"

[17:33] DS: "The bottom line is that who your messenger is in politics is incredibly important. And Trump just gives his enemies way too much to work with. [...] The message of this election is: first fix crazy, then fix policy. If you're coming across like you're crazy, the voters will reject you. Now, that doesn't mean you can't stand for principle."

On FTX:

[23:57] BA: "My understanding of what happened [with FTX and CEO Sam Bankman-Fried] [...] is that FTX was in a position where they had this market maker Alameda that was investing in risky things. And that's fine, market makers, hedge funds [...] are designed to take more risk. It appears [...] that back during the last shake up in the crypto industry [...] Alameda took a big loss at that time as well. They may have even been underwater [but] [...] instead of just letting it blow up, Sam basically said, we have a bunch of customer assets over here at FTX or he somehow basically made a loan from FTX into Alameda to try to prop it up. [...] That's the moment in my mind where he crossed the line into probably committing fraud."

[29:42] BA: "You cannot use customer deposits to fund the operating expenses of your business. [...] If you use customer funds to pay for the burn of the business to operate the business, that is a [...] go directly to jail type offense. [...] Alameda had a bunch of these [...] FTT tokens and they basically use that [...] as collateral. So they basically borrowed [something] like 6 billion of customer funds from FTX. [...] Apparently CZ (Changpeng Zhao, CEO of Binance) got wind of this and he owned a whole bunch of these tokens. And he signaled that he was going to dump it and the price basically went down. So now all of a sudden, the collateral for the customer loans was insufficient and then there was a run on the bank."

[36:51] BA: "I think it's really important to distinguish between the centralized players in crypto, which are custodians, exchanges, etc. [...] and the decentralized players, which are self-custodial wallets, DeFi protocols, web3, that whole world. So the centralized players should be regulated. And today, they're regulated already like traditional financial service businesses, but they don't have the regulation clear when it comes to the crypto aspects. So for instance, in the US, we actually don't still have clarity about what is the commodity, what's the security which one should CFTC (The Commodity Futures Trading Commission) regulated versus SEC (U.S. Securities and Exchange Commission) [...]. And that lack of regulatory clarity and frankly the climate of regulation by enforcement [...] has created this sort of chilling effect in the US that has pushed a lot of that centralized actors' activity offshore. In fact, 95% of the trading volume in crypto is now outside the United States."

[43:11] BA: "If people want to issue a token that's raising money for a company, let's regulate it as a security. If they want to issue a token that's truly on a decentralized protocol, or has some other purpose like voting and a DAO or rewards or something like that, then that's probably not a security. And let's be honest about that and allow those things to trade in a different environment, a different regulator under the CFTC."

[50:30] CP: "I think the problem is bigger than FTX. And I'll say the uncomfortable part out loud: [...] there were an enormous number of venture firms that hawked their way into just completely doing zero work here."

[52:26] CP: "I just want to say the second uncomfortable thing out loud, which is there was a lot of venture firms in Silicon Valley in this period of both not doing any work or diligence, who also took the extra step and actually created classes and would teach teams how to create these tokens. [...] The game that they played, was they would get a team, they would create a token, they would also buy equity at some crazy valuation, the equity was locked up, but the tokens were not. And then they would put them on an exchange and sell them to unsuspecting people and they would be able to dump these tokens. [...] Those were the sale of securities, except it was done in a completely unregulated way. So if the SEC [...] and the DOJ is really going to take this FTT token issue seriously, and what happened to FTX, they're going to start to look at a bunch of other tokens and token sales and you're gonna end up looking at some very well known venture firms inside of Silicon Valley."

On Macroeconomics:

[1:12:26] CP: "I've been telling all of our startups that you need to plan to have money through the first quarter of 2025. [...] You absolutely must. [...] And the reason is that we have all of this positive news in the offing, [...] but the problem is [...] we haven't seen [the] second dip in the recession. So that double dip is going to be expensive. [...] The sharps think that inflation will come back at some point in the next six months. That will keep the Fed's foot on the gas, maybe it's two or three more 50 basis point hikes. The point is [...] we're going to get to a point [where inflation is] probably higher than what people expect [...] and will stay there longer than people want, that's probably through the middle part of 24. And if you don't prepare for that worst case scenario, you're doing yourself a disservice. I think the market can start to rebound in the second half of 24. But if you're a company, you need to balance and plan for the first quarter of 25."

[1:14:21] CP: "For people that care about early stage technology: since 2018 through 2021 and including an estimate for 2022, we have injected $1 trillion into venture capital. And if you look at historically how money has been lost in periods like this, and you layer that into 2018 to now, what it basically tells you is that about $500 billion of that trillion from [2018 to 2022] is going to be destroyed. We haven't even started to see that yet. And then if you factor in another 100 billion or so from older vintages, we're talking about a $600 or $700 billion destruction of paid-in capital."

Rating: ⭐⭐⭐⭐

Additional Links:
Article: "FTX Files for Bankruptcy, CEO Sam Bankman-Fried Resigns" (WSJ, 2022)
Article: "FTX Meltdown Has ‘Whiffs’ of Enron-Like Scandal, Summers Says" (Bloomberg, 2022)
Article: "Oops. Sam Bankman-Fried’s implosion took down Democrats’ second-biggest donor with it as the party gears up to regulate crypto" (Fortune, 2022)