Greed, Trust, and the Federal Reserve

Headlines out of the Fed lately have been suggesting that a slow down in the pace of rate increases is imminent. Or not…

On November 13 the WSJ trumpeted…

And then on November 14…

And then on November 17…

Waller warned:

…the Fed will want to see more evidence of that (declining inflation) happening before it can consider any end to rate rises.

While Brainard boasted:

A slower pace of rate rises would allow the Fed more time to study how its moves this year are slowing the economy in ways that can’t be observed yet, Ms. Brainard said.

And Bullard bloviated:

Speaking Thursday, St. Louis Fed President James Bullard said interest rates have to rise higher to restrict the economy to an extent that brings inflation back to the Fed’s target. Mr. Bullard didn’t say a specific number, but a chart accompanying his remarks suggested the Fed’s policy rate could rise to a range between 5% and 7%.

What are you supposed to make of all this? 

Nothing. It’s all crap…

On any given day, the focus of the Fed is to placate markets via moderate inflationary policies. To talk the market up with its Fed-speak as best as they can. Until, that is, the $#!% hits the fan. At which point they have to go into full distraction mode…

Which is effectively where we are now.

Another One Bites the Dust

No doubt you’ve read about the most recent crypto-calamity involving the crypto exchange (slash democratic political donor) FTX. Here’s the Cliff’s Notes of the debacle.

Essentially a crypto wunderkind by the name of Sam Bankman-Fried (also known by his hipster moniker SBF) created a crypto token called FTT, raised several billion dollars on the back of that, then leveraged customer funds that had poured into his crypto exchange (FTX) by lending it to his “investing arm” Alameda Research to cover losses by doubling down on a bunch of bad trades. You know the rest of the story.

(The long version is pretty unbelievable — and way more sordid!) 

The companies involved in this collapse filed for chapter 11 bankruptcy protection and the new CEO put in charge of accounting for and liquidating the companies’ assets, John Ray III,  was not shy about describing what he found. According to ZeroHedge (who read the entire affidavit):

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

And just in case his shock at FTX’s fraud of epic proportions was not quite clear enough, he adds that “from compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

(Mind you, this is the guy who unwound Enron…)

Everyone Has a Sucker Threshold

Unfortunately it’s always been in peoples’ genes to look for a way to get rich quick.

In 1919, a failed “businessman” named Charles Ponzi discovered “international reply coupons” (IRCs) — prepaid postage coupons that could be sent from a person in one country to someone in another, and be redeemed by the latter for reply postage in the local currency.

He realized that if he bought these coupons in a country with a distressed economy, he could redeem them in the U.S. at a profit. Basically an arbitrage trade. 

Ponzi went public with the idea that by buying and selling IRCs, he could double someone’s money in 90 days and within a year had scammed unwitting investors out of some $15 million. (A little over $200 million of today’s dollars.) 

Fast forward to 2011. A bitcoin forum user who went by the name “Pirateat40” set up something called the Bitcoin Savings & Trust which promised investors 7% WEEKLY returns on deposits of over 25,000 BTC. (That’s over 3,000% a year.) He claimed to be able to make these kinds of returns “from Bitcoin market arbitrage, including selling bitcoins in person or in large quantities.”

Just before reality reasserted itself and Pirateat40’s scheme went down in flames, Bitcoin Savings & Trust held roughly 7% of all BTC in circulation.

And now there’s FTX.

What’s really amazing (and in some cases sad) is the list of investors who, given their supposed sophistication and the utter chaos FTX’s financial structure turned out to be, bought into the scheme: BlackRock, Sequoia Capital, Lightspeed Venture Partners… Even the Ontario Teachers Pension fund was in for $400 million. 

I’m a big proponent of web 3.0, the blockchain and most all things related to that technology. I believe it’s the future. But scam artists like SBF only serve to muddy the waters, and slow the progress, by stealing from investors. 

Not All Their Fault

It’s natural to want to lay the blame squarely on the Ponzis, the Pirates, and the Bankman-Frieds. But the truth is, there will always be scam artists looking to exploit any opportunity to make easy (illicit) money. 

The real problem is how easy it becomes to sell the scam in a market with a risk-hungry mentality. A mentality that arises because there are really few legitimate ways to earn decent returns — even in the “honest” markets. 

And that is the fault of the Fed.

The whole idea behind today’s monetary system (the fiat currency / fractional reserve / fake economy) is that cash is fungible. That a dollar is a dollar and as long as I can withdraw a dollar from my bank it doesn’t matter who deposited it… But that whole concept rests on one other factor — trust.

The idea that a bank can lend out 90% of its deposits (while keeping just 10% on hand) assumes people won’t come running for their money all at once. But again, that assumption requires a level of trust. That everyone won’t come running for their money all at once because they trust their money will always be available regardless of the economic $#!%storm going on everywhere else.

Unfortunately, everyone’s trust has a breaking point. A point at which reality sets in and my trust in you goes away. (And usually that point comes en masse.)

Enter the Fed

Despite what they say in front of the cameras about full employment and price stability, the Fed’s reason for existing is to protect banks when they get too far out over their skis. When they do things (think 2008) that destroys the trust of their depositors.

The Fed is meant to be the great restorer of trust. To deflect your attention away from the realities that are threatening your financial well-being. To assure you everything is OK.

They claim to be there for banks’ depositors and investors, but in reality, since they did away with the Glass Steagall Act – the law that separated commercial banks from investment banks — about 20 years ago, the only ones they’re really protecting are the the banks’ brass. 

Ultimately the little guy gets stuck with the bill in one way or another. 

Today, the banking industry is, at its core, little more than a better organized FTX. But with one HUGE difference — they have a “safety net” called the Fed backing them up.  A safety net that makes you believe there’s little or no risk when, in fact, risk is everywhere!

My job in writing this letter is twofold. First to drill down into the facts and reveal the real truth about what’s happening in the market and the economy. To give you a perspective of how things really work that I’ve gained from my 20-plus years as a professional trader. 

The other is to offer unique, value-based investment opportunities (and their associated risks) in companies that you won’t hear about anywhere else. So you can make intelligent, informed decisions on how best to enhance your investment portfolio.

In light of this recent explosion of stupidity, that’s a commitment I stand by…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Confidential