Juggling Dynamite

Last November, the global market value of crypto assets amounted to $3.2 trillion (FT Wilshire Digital Asset Index). Today, it is something less than $ 861 billion. In other words, the 73% loss in the crypto and NFT (non-fungible token) space in one-year is, so far, nearing $3 trillion and about 38% of the $8 trillion in stock market losses incurred during the 2007-09 financial implosion. The ripple effects of this speculative boondoggle are just getting started as contagion spreads among novice and so-called sophisticated investors alike.

A few weeks back CNN interviewer asked crypto-trading site FTX founder Sam Bankman-Fried (SBF) how common Ponzi schemes were in crypto, and his answer is iconic of the era that was. Here is a direct video link.

Forbes, the paid-to-promote-financial media conglomerate that repeatedly featured SBF as a billionaire wunderkind, is now asking Where did the money go?

FTX bankruptcy filings released Thursday revealed that FTX founder Sam Bankman- Fried, his cofounder Gary Wang and two other executives received a total of $4.1 billion in loans from his Alameda Research trading firm.

Of that total, $1 billion went to Bankman-Fried in the form of a personal loan, while $2.3 billion went to an entity he controls, Paper Bird (Bankman-Fried has told Forbes that he owns 75% of the entity, with Wang owning the rest)—so that’s another nearly $1.73 billion at Bankman-Fried’s disposal. FTX’s Director of Engineering Nishad Singh got his own loan of $543 million, while Ryan Salame, the co-CEO of FTX’s Digital Markets \subsidiary, received a $55 million personal loan.

“The obvious question: Where did all that money go? There are two principal areas we know about so far: political donations and personal investments.”

“Personal investments.” Sure; like a reported $648 million in trading app Robin Hood (-78%) since July 2021, more than $500 million quid pro quo in venture capital firms like FTX’s biggest backer Sequoia Capital, along with a few other gambling fronts like Multicoin Capital.

When financial bubbles burst, it is common for people to ask where did the money go? Much of it is vaporized as market values typically fall by more than 70 percent. But, it’s important to understand that it is not just scam companies and Ponzi schemes that tumble as forced selling and panic spreads.

As shown below, since 1987, courtesy of my partner Cory Venable, the Nasdaq composite index–a basket that includes some of the most successful, world-changing companies of the past twenty years–fell 77% after the last tech bubble burst January 2000 to October 2002 and 53% during the bear market of 2007-2009. After closing in April below its 26-month moving average for only the fifth time since 1987, the Nasdaq’s 30% decline thus far is tiny in terms of the extremity of the latest everything bubble. From 11,000 today, long-term support lies somewhere in the 3000 range- 70% lower and 80% beneath the bubble peak last fall.

As shown below courtesy of Bank of America, whether it be the Nifty Fifty stocks in the 1960s or tech stocks in 2000, whenever “new economy” companies are bid up to more than 40% of the S&P 500’s overall market capitalization, as they remain today, prices have collapsed back to less than 25%.As in the 2000-02 bust, mean reversion this cycle will have particularly far-reaching impacts because the tech sector was so widely loved and over-concentrated in individual and institutional portfolios and funds, far and wide.

Last week, the entire US yield curve inverted (a diffusion index of all spreads is shown below via ISABELNET.com since 1981), with the one-month Treasury yield rising above the 30-year Treasury yield.

The spread on two and 10-year Treasury bonds widened to -71bp–the most negative since before the double dip recession of the early 1980s (shown below courtesy of The Daily Shot).

At the same time, the spread between three-month and 10-year Treasury bonds (below via Jay Kaeppel from 1960 to November 15) ended Friday at -52bp, approaching the -64bp peak spread in February 2007 before the Great Recession began in December 2007.

EPB Macro’s latest economic update offers further insight into incoming data.

This weekly update will cover the economic data that was recently released, including industrial production, retail sales, and some leading indicators of inflation. Here is a direct video link.

Private equity firms and funds have doubled down on the realty space during the low-rate boondoggle of the last decade. As usual, this led to a massive surge in supply and leverage as most forgot (or never realized?) that real estate is a cycle. Now pounds of flesh are due.

In 2021, the tech sector accounted for 20.5% of U.S. office leasing activity, while the finance and business services sectors accounted for 16%.

In 2022, tech companies have announced some 120,000 layoffs, already more than the 100,000 people they let go during the dot-com bust and placed some 30 million square feet of office space up for sublease, more than three times the 9.5 million square feet they sublet in the last quarter of 2019 (CBRE data).

The national office vacancy rate in America at 12.5% is the highest since 2011 (CoStar Group Inc), with 212 million square feet of sublease space on the market (a record since 2005). See WSJ Tech firms dump space as they downsize:

The big technology companies that drove U.S. office demand for years as they expanded their empires are now canceling leases and flooding business districts with office space as they downsize. 

…Now, with the prospect of a recession looming and companies slashing payroll, tech firms find they have too many floors of office space and want to unload big chunks of it.

…The turnabout in office demand could mark the end of a long cycle where tech firms were often the biggest presence in new office towers. Even during the pandemic, when many businesses shifted to hybrid-work strategies, many tech companies kept leasing space because they were on a hiring spree.

Layoffs in the finance sector–the second-largest office leasing sector in 2021–are now following tech’s lead, as the deal flow on equity, debt and initial public offerings has plunged year to date, see: Wall Street Layoffs pick up steam as Citigroup and Barclays cut hundreds of Workers.

Meanwhile, office buildings are backed by $1.2 trillion of the $5.4 trillion in total commercial real–estate debt that was outstanding at the end of the second quarter—more debt than any other asset type other than apartment buildings (Trepp Inc data).

With rental income in retreat and mortgage costs soaring, defaults and distressed sales are the next part of the cycle.