Weekly Alpha Leak - 2023 Outlook - Looking Forward
December 10-16, 2022
The year end is fast approaching and we’re already thinking about 2023 and beyond. What’s the game plan? All eyes are on the Fed and they’re being pretty direct about what they’re doing.
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The Fed is in Control
This was a big week, we got the last 2 major macro events of the year back to back. First, CPI came in under expectation at 7.1%. Markets liked that! Then we got the 50 bps rate hike we all knew was coming, which was the 7th consecutive rate increase this year bringing the federal funds target range to 4.25%-4.5% - the highest level in 15 years! The terminal rate for the current hiking cycle will likely be over 5% and is expected sometime next year. Long story short: despite the smaller rate hike, the Fed looks likely to maintain its aggressive monetary policy in 2023 in its ongoing fight against inflation.
Looking at the new dot plot the Fed released (always take these with a handful of salt), which represents the top Fed officials' projections, a majority 10 out of 19 officials expect the terminal rate to be higher than 5% but lower than 5.25% by the end of 2023. Recall, we are currently at 4.25%-4.5%. Looking even further ahead, for 2024, the majority of dots are in the range of 4% to 4.25%! Rates could continue to stay elevated for quite a while.
Fed chair Jerome Powell has been in your face clear during his public speeches that they’re prepared to continue raising interest rates/keep them elevated as needed to rein in inflation. 7.1% is still much too high and coming in slightly better than projections really doesn’t change when the Fed will actually pivot. That’ll depend on growth and future inflation data.
Jerome Powell has been parroting the same line during all his previous FOMC commentary - and that is that the target inflation rate is 2%! We just came in at 7.1% - down from 9.1% in June and for context, we were at 6.8% last November. The rate hikes may be slowing down but there will need to be continued hawkish monetary policy for some time before the economic environment really flips to being risk on again.
That’s basically what it boils down to. When do investors risk-on again and bullish conditions return?
The following quote says everything you need to know about what’s coming up: “The most important decision is no longer the speed,” Powell said, but rather for how long the Fed needs to stay restrictive until inflation comes down significantly, which he said will “be some time.” “It’s our judgment today that we’re not at a sufficiently restrictive policy stance yet.”
Stand firm. The patient are rewarded!
Note: Let’s address a popular counter thesis which says that the Fed is only attempting to paint an image that they’re serious about fighting inflation and will reach a point where they abandon the fight and pivot because they’ve caused too much damage with restrictive monetary policy. This is of course an option on the table, however for the time being, we have to work with the information as it’s presented to us. They have been aggressively raising hikes and say they plan to for the foreseeable future until they reach their target. If the data and situation changes, then your bias and outlook should also change. The game is dynamic. Don’t get stuck in one way of thinking. Stay flexible and open to all possibilities.
FTX Saga Continued - The Dirty Details
On one hand, you may be sick of reading and hearing about FTX by now but the details that are coming out are almost so egregious, it would be criminal to not talk about. This really will make a killer movie. Think like The Wolf of Wall Street meets Margin Call. Hopefully! Some of these details are almost bigger than fiction.
How FTX/Alameda hid their moves:
In the spring of 2022 Alameda experienced a large number of margin and loan recalls and used customer funds to meet external debt obligations. Alameda's total fiat liability with FTX was around $8B
SBF directed company executives to reallocate Alameda’s large liability with the exchange to an account marked "the weird Korean account" to mask its liability
Account belonged to Alameda but was not tagged with an Alameda identifier - instead described as "FTX fiat old”
Alameda's multi-billion dollar liability was stored in an internal account in the FTX database as fiat@ftx.com
Alameda received numerous privileges from an "unlimited" line of credit on the exchange to an exemption from FTX's heavily touted risk management system
The Korean account had privileges to execute a transaction even if it did not have the funds to do so, through a piece of code labeled as "allow negative flag"
Former FTX executive Nishad Singh, who was responsible for overseeing engineering at FTX, annotated the code linked to the Korean account
The story legitimately evolved from poor risk management and slovenly accounting to full on fraud with customer funds! With special backdoor code implemented to allow it. SBF even contemplated closing Alameda Research in September due to the fact that Alameda was not making enough money to justify its existence! Imagine if he would’ve just taken the L instead of committing fraud with his customer’s money and letting it all burn to the ground.
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Crypto Highlights of the Week
This Week’s Top Daily Bullets
Monday, December 12th
Do Kwon said to be residing in Serbia
Justice Department considering charging Binance for possible money laundering and criminal sanctions violations
The Block CEO resigned after failing to disclose loans from Alameda Research
SEC filed first legal brief in Grayscale lawsuit over rejection of spot bitcoin ETF
Class-action suit against Yuga Labs and MoonPay claims they used celebrities to misleadingly promote NFTs
News organizations filed a lawsuit seeking to unseal the creditor’s names in FTX bankruptcy case
Uniswap fee switch governance voting begins
The Tron network's algorithmic stablecoin USDD fell under $0.97 - lowest since June
Lodestar Finance, a lending platform on Arbitrum, was attacked and exploited for about $6.5M
Vast reduction in the number of Twitter bots due to clamp down on scammers and bot accounts
Chinese authorities arrested 63 people in association with a scheme that allegedly laundered 12B yuan ($1.7B)
The Bank of England is seeking a proof of concept for a sample wallet for a CBDC
Institutional crypto trading platform FalconX has 18% of its "unencumbered cash equivalents" locked on FTX
Tuesday, December 13th
SBF arrested and facing 8 different charges with the SEC detailing a list of wrongdoings
U.S. CPI: 7.1% YoY, 0.1% MoM. Expected: 7.3% YoY, 0.3% MoM - Better than expected
Binance FUD sees over $2B withdrawn from the exchange
Tether coordinating with Binance to convert 3B USDT from Tron to Ethereum ERC20 to address concerns
Tether intends to reduce secured loans in its reserves to zero in 2023
Discord's new Linked Roles include support for Solana
A federal judge ordered the CFTC to serve Ooki DAO founders Tom Bean and Kyle Kistner
Native USDC on Avalanche is now integrated on Coinbase
Canada enforcing stricter requirements for crypto following FTX including a ban on margin and leverage trading
Illuvium Labs released a new private beta for "Illuvium: Overworld”
Wednesday, December 14th
SBF’s request for bail denied, he’s remanded to Bahamas department of corrections until Feb 8, 2023
FTX stored private keys without encryption and Alameda had a secret speed advantage when executing orders
Binance’s CZ warns the crypto winter isn’t over, and the months ahead won’t be easy
US Senators Warren, Marshall introduce Digital Assets Anti-Money Laundering Bill
Apple plans to allow the installation of iOS apps from external sources may benefit crypto
Gemini data breach affects 5.7M users' emails, account numbers, and partial phone numbers
Maple released version 2.0 focusing on diversifying borrowers and improving risk management
Bitcoin and ETH ETFs listing on the Hong Kong Stock Exchange by Dec. 16
Several influencers accused of stock manipulation by the U.S. SEC. and earning about $100M
SushiSwap Head Chef discloses $5.2M budget for DAO operation in 2023
Thursday, December 15th
Coinbase launched a new asset recovery tool to help customers recover mistakenly sent funds
MetaMask partnership with PayPal allows purchasing and sending ETH to connected wallets
Microsoft updated its policy terms to not allow cryptocurrency mining on its online services
Unstoppable Domains will integrate in early 2023 with Etherscan and Polygonscan
Binance Futures integrated with TradingView
Curve Finance will deploy on zkSync’s mainnet in 2023 - first Curve deployment on a ZK-rollup
Trust Wallet adds in-app cross-chain swaps functionality with THORChain integration
Magic Eden Rewards - ranking system will reward users with unique benefits
Forbes partners with The Sandbox for an interactive multiplayer experience
The Sandbox hiring blockchain infrastructure security provider OpenZeppelin for security service
Friday, December 16th
Auditor Mazars suspended all services including proof of reserves for crypto exchanges
A class action lawsuit against Silvergate Bank allege they directly aided and abetted FTX
FTX wants to sell off parts of its global business it says are solvent and in good standing
Binance chose not to refund the deposit of 200,000 BNB to Mithril after delisting their token
European crypto exchange Bitvavo owed up to $300M by Genesis
Solana-based exchange Raydium $2M exploit
ENS launched an official merch store
Jack Dorsey donated 14 BTC to further fund development of decentralized social network Nostr
Dutch central bank issued a warning to KuCoin for operating without registration in the Netherlands
Chainlink offering NFT price feed oracle to expand DeFi usage
These are just our top bullets, want more? Check out our daily newsletter:
What’s your take on this week’s news? Anything interesting that you have to say about these stories? Did we miss anything that should’ve been included?
Crypto Market Data Highlights of the Week
Overall, things aren’t looking bullish. Prices still down, volumes low. The Santa rally people were hoping for isn’t currently showing signs of showing up.
Year to date, Bitcoin and ETH have yet to make considerable developments. We continue range and crab bound. For the time being, patience is your friend.
Exchange volume continues dwindling. Last recent spike we had was from people panicking during the FTX ordeal.
Futures open interest and volume also continues to dwindle.
DeFi TVL looks like it wants to fall below $40B. We haven’t been that low since February 2021.
NFT volume likewise is currently nonexistent. Overall, interest in crypto is currently low across the board.
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