Why the FTX Fallout is Worse Than You Think

Every single Friday we host a live discussion in our Discord Channel at 12:00pm EST. 

This gives you the opportunity to personally ask us any questions you have on the markets, the economy, crypto, and more!

Here are the 4 key things we went over for this week: 

• How the market is reacting to the continued fallout from FTX's implosion

• Why Biden and Xi Jinping's G20 summit meeting is a huge deal 

• Where we think the market will outperform in Q4

• What long-term trends we're bullish on

If you'd like to listen live and ask us questions throughout the next live session, just join the weekly Friday afternoon session at 12:00pm EST.

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Check out a broader summary & transcript below! 

Peter Starr:
From Moby.co, this is The Flagship Pod, a weekly podcast about the stock market, the economy, and the various market forces powering the world around you. As always, I'm your host Peter Starr, bringing you this time, folks, hopefully, we're hitting capitulation sometimes soon.

We're dealing with a lot of fallout from the FTX drama. We're dealing with the fallout from last week's midterm elections as well as we begin to understand the political landscape in America and how the market's going to react to that.

It's honestly a very wild time here in the markets. I've been saying that for literally a year straight now. We started this podcast at the very top of the bull run, and we've just been kind of riding this exciting bear period all the way down as we begin to understand how this recessionary period is going to take shape.

To help me unpack that and understand exactly what's happening week over week With that, as always, I am joined by Justin Kramer, CEO, co-founder, and chief analyst here at moby.co. Justin, man, what's good? How are you feeling about the market this week, dude?

Justin Kramer:
Yeah, it's an interesting week. As we start to digest better inflation-adjusted news, and better interest rate potential news coming, the outlook for the first time is starting to look a little bit better from that perspective, which has driven basically the entire direction of the stock market this year.

But at the same time, we're looking potentially at next quarter, if not the quarter thereafter, the serious pullback in earnings. So it'll be an interesting outlook to see potentially the Fed be more accommodative, but the economy starts to take a toll. So we're in a very, very interesting potential inflection point.

Peter Starr:
Exactly. Yeah. And it's one of those things, too, where we keep looking at just all the different factors here, trying to understand exactly what the single narrative is because there really isn't one still. There's a bunch of technology stocks that are getting absolutely hammered by rising costs. But then one of our technology standouts today, Palo Alto Networks, reported earnings and is now up 10, 15% just on the back of people being worried about cybersecurity.

So finding a single narrative here is really difficult. And so, instead of trying to predict what's going to happen there, let's kind of piece through each individual part of that. So, last week we just started talking about this, Justin, but we really didn't get the full picture until pretty much after the podcast happened. So now we were too early to the game before. Now we're way too late to the game, but let's make sure we give our take on everything going on with FTX right now.

So, Justin, crypto is still hurting badly on the back of all the FTX drama. FTX has filed for bankruptcy. The person who oversaw the Enron crisis is the CEO of FTX now. Just going through what he said was the worst corporate structure he's ever seen ever. And this is the dude who had to piece through the rubble of Enron. How are you feeling about FTX and crypto at large right now as we kind of reel from the damage and fallout from this $9 billion implosion, dude?

Justin Kramer:
Yeah, it's a really good point. I mean, the fact that the former CEO or the person who was involved in the whole Enron scandal saying this is worse is pretty significant. For those of you who are not familiar at a super, super high level, Enron was one of the biggest accounting scandals we've seen basically ever. It happened about, I think in the early 2000, the late 1990s, and at a high level there was just basically massive investor fraud with a public company.

It ended up leading to a huge unwind and that was a case study world famous. And the fact that this guy is coming in and saying the FTX stuff is worse, I mean just goes to show you how egregious this whole FTX debacle was. And it goes to show you that you shouldn't necessarily always be following the smart money because maybe not public investors, but VCs, private investors were pouring, pouring billions into FTX and it ended up being a massive fraud that it sounds like based on what we're getting now information wise if they even did an ounce of due diligence, would have seen all of this.

So it's really terrible. It ultimately ends up putting a ton of distrust in the system, scares investors, and just makes things frankly more volatile. So it's a pretty bad situation. On the outlook of crypto, I mean it is an isolated incident. The fallout and contagion effect is definitely not being contained. Block File looks like it's going under now. I wouldn't be surprised for crypto.com to start having issues. Obviously, the hedge fund Alameda Research is going insolvent. So, there is going to be continued fallout. And I think for just the ecosystem of crypto in general, this really now calls into question the notion of stable coins, more or less, or where coins needed to operate. We saw it now with FTT, which was crypto FTX native coin. A single tweet basically knocked them out of business. Binance, which is the world's largest exchange, said that it was going to ultimately liquidate a lot of its FTT tokens.

So a lot of people started selling FTT tokens and started basically causing a run on their native stablecoin, which ultimately, or not stablecoin, but just their native coin. And that ultimately kind of sent then FTX into this liquidity crisis and ultimately caused it to collapse in kind of like 24 to 48 hours. So the reason it's significant is now for other, whether it be exchanges or just anything that runs on a coin-based system, which is most of crypto, it calls into question now the validity or the volatility of these systems. At any point, if enough people are selling it, it can crash a system, which is obviously not beneficial for long-term stability.

So it'll be interesting to see how it shakes out. I'm sure Bitcoin, and Ethereum will rally and ultimately be fine, but just like we saw in 2017, a ton of these projects, I mean I would go as far to say as 95 to 99% of these projects are just going to go to zero. I mean everyone knew they were speculation and people didn't care and now they're really being flushed out of the market. It's just part of the normal cycle, unfortunately.

Peter Starr:
And that's kind of been our whole philosophy on crypto though, is the way we talk about it. We talk about it being an extremely small part of your portfolio and when you invest in crypto, you invest as a venture capitalist, not as somebody who is looking at it the same way you would a stock investor. You have to understand that a lot of the projects you invest in have the potential to go to zero. The whole industry, I'm not so certain, can go to zero with all the institutional money that's currently in Bitcoin and other large projects.

There's a lot of interesting stuff having with Ethereum right now as they kind of stabilize. But the main thing I'm thinking about is one thing the market isn't really reacting to and that's the fact that a bunch of central banks has begun the trial for CBDC, Central Bank Digital Currencies. And having that kind of competition, having all of that kind of international speculatory interest going towards those kinds of coins, that's the thing that I worry about in terms of sucking the oxygen out of the room.

What do you think about the government stepping in and making their own cryptocurrencies, Justin? Is that kind of a head fake and people are over worrying about it as they kind of leave even Bitcoin? Or is that something we should actually be watching as the actual large financial institutions see all of the money that's been thrown into these industries and try to get a slice of that pie, so to speak?

Justin Kramer:
Yeah, no, it's a really good question. I think countries will continue to ultimately try and develop their own, more or less, sovereign cryptocurrencies. Whether they end up being validated ends up being a long-term adoption, I think it's really tough to say at this point. But I think for now, if you're trying to invest in certain projects based on what certain countries are doing, I would definitely steer clear. There's going to be a ton of risk. And honestly, I don't think anyone knows ultimately what will win or what will prove to be successful.

So just know that if you are trying to track what a country's doing or trying to get in terms of the currency or coin that's backing a certain crypto of a new country, know that you're more or less just gambling. Which is, if that's a risk you want to take, that's fine. But, the entire crypto industry for the last decade has more or less just unfortunately been driven off speculation.

Peter Starr:
And so that, when you're looking at all of these kinds of avenues, obviously if you're a crypto investor, you know what you're doing right now. You're holding, you're doing spot buying holds, you're kind of waiting this out, your dollar cost averaging into the space, hoping to accumulate a foundation through which to ride the next bull run. Because the worst time to buy is during those periods where the market is actually ripping. But making sure you understand that bull runs always outlast these bear periods and these bear sentiment periods.

But one thing to really keep in mind, audience, is that fraud as big as this one, if you look at the actual chart, nothing was as bad as the Luna collapse. This is about half as bad for the industry as that was. But it's getting to the point where is this capitulation, or is this going to make the sort of long tail bear sentiment last, not months but years?

And that's the main question we're asking ourselves as we kind of watch the charts and do the technical analysis and see what the whales are doing in terms of buying, in terms of trying to do the price controls they usually do. And the jury is still really out there. I think people saying, "this sets the crypto industry back five years," that's way too bearish of a sentiment. But it's really the people who are more permeable who say, "this is just a temporary setback, don't worry. As soon as the macro environment improves, bitcoin's going to rip again," I think we're going to see a prolonged period of a lack of trust, especially combined with all the institutional money that's here that's going to buffet any price action we see moving forward.

So keep that in mind. Things are both faster and slower than folks are saying.

We're still getting a bunch of mixed signals from the industry itself. So it's about instead, the audience, finding these more long-term narratives and trying to understand where the broader market is going so we can have a little bit more confidence as investors. And Justin, the main question a lot of our audience has been having this week is on Monday, Chinese Premier Xi Jinping and Joe Biden had their big meeting as a part of the G20 conference, and it kind of feels like the market's buying US Chinese friendship. Taiwan Semiconductor is up 11% on the week. Alibaba, even though they had mediocre earnings today, is up on the week. No, that was yesterday, actually. Tencent Music is up gigantic. Even JD, the kind of awkward little brother of Chinese e-commerce is doing pretty okay. Are we back in buying China, Justin?

Justin Kramer:
The China stuff is interesting. You're seeing that as soon as foreign relations with China does better or does worse, investors act accordingly because they're nervous that Chinese stocks get delisted or they'll be further escalations, then ultimately they won't be able to do business here.

So, the underlying businesses, if you strip away that risk on top, which is obviously very warranted, these companies are significantly undervalued. So let's assume, let's do an exercise for a second that ultimately tomorrow, for example, all this regulatory oversight, all these fears with China goes away. These companies would go to... Could go up 2-3x easily because they're so, so undervalued if you're looking at pure fundamentals.

So, if you have a good insight into that risk or you're comfortable taking that risk with China, know you are buying undervalued businesses. The problem right now is, to your point, is the geopolitical relationships with these countries, are they going to be delisted? What is their outlook going to be like?

Over the next few months, it's truly tough to say. Over the longer run, here at Moby, we're pretty confident that a lot of these companies will continue to stay on exchanges and be invested. So we have added to our positions knowing when we look at the risk versus return, it's pretty high. But if you're listening to his podcast or you're thinking about getting involved, there is again similar to a lot of things that's going on right now, a ton of risks. So just, you need to be aware, if you're looking at Alibaba or all these companies, why are they down so much? Why have they lost so much in value? They run the risk of really, really heavy regulatory oversight, which could ultimately lead to their, not their demise as a company, but just their demise as foreign investors in the US.

Peter Starr:
And I think it's really important to keep in mind too, just on a long time scale. Our geopolitical system craves peace because a conflict between the United States and China would just be catastrophic, basically, for the whole world. And so when we look at this, we're trying to find those moments where we have a little bit more confidence in that relationship. And the political situation in America is shifting a little bit. And as we kind of discussed last week, that kind of favors a more positive US... a less chaotic view on US-Chinese relations.

But that could get more chaotic, Justin, as we finally have a sort of completely clarified political situation where we know, okay, Democrats have taken the Senate and the House has managed to take control of the House of Representatives barely. It's to the point that Nancy Pelosi is stepping down as the leader of the Democratic Party in the House of Representatives to let a replacement come in.

Kind of looking at this though, Justin, so we're going to have divided Congress and we're also going to have Trump running for office again. So question is, is chaos back on the pallet in terms of what we're doing here in America, or how's the political situation going to affect the market moving forward? Are we going to have two years of just nothing happening, unregulated business basically because we have a divided Congress? Or do you think that these slim margins in the House of Representatives can make certain things happen?

Justin Kramer:
Yeah, I mean with the Republicans taking more of a center stage, it's definitely good for markets. Historically, they've proven that they like this kind of balance with power between both parties. It'll be interesting to see what regulation ultimately gets put into place. Our best guess right now from what we've seen is that it'll just be more of a stalemate. So rather than there be pullbacks on good policy on green energy or other things that have favored the Democratic party, we will likely look at just a stalemate going forward.

So, I would say if you are investing in a pro-Democrat agenda, it's going to take a little bit of a hit. If you're investing in more pro-Republican agenda, like your long oil, your long stocks that do well under a Republican regime, it's probably beneficial, although not like a ton of new bills or regulatory oversight would be pushed into it.

So you look at, it's relatively new news, but if you look at the price of energy over the last month looking at a comparable ETF, it's up 10% over the last month. You look at some of the favorite stocks that we've liked in the energy sector, they've done really well. And then you look at other stocks that play in the sector in other sectors that are potentially getting impacted. But I mean I think long story short, the biggest takeaways that we need to be aware of are just, what is on the agenda for Democrats? What's on the agenda for Republicans? Going into the midterm elections, a lot of the voting or a lot of their policies is going to be set by voters. They want to appeal to voters going into the next presidential cycle with Trump especially now announcing his run for office, it definitely puts a little bit of a wrinkle in what's coming.

Peter Starr:
And I think it's a really good way of looking at it, too. It's just one of those things where you're going to see just a very mixed bag of signals moving forward. And so finding clarity is going to depend on the sector by sector. And so Justin, quick curve ball here, because one sector that makes literally zero sense based on earning season this week has been retail. We saw this week that Target completely just get smashed by having too much inventory and not enough revenue and reducing guidance massively.

We saw the likes of Walmart completely just pop off. Ross had earnings last night exploding. Farfetch, also earnings last night completely falling apart. Foot Locker, earnings this morning popping off. I cannot find a pattern here, dude. If you're looking for wins and losses in the retail sector, we're entering into the big period, this is Q4, and this is where all retail makes all of its money, basically. You look at all of that. Is there any kind of pattern you see in terms of who's going to win the battle of the bottom of the barrel of the US economy right now? Is it just like your Walmarts who are going to have the lowest possible prices are going to win? Or is there any other pattern you can see in retail that kind of suggests who's going to win in lose throughout this next literal bloodbath of a quarter?

Justin Kramer:
There's a really interesting dynamic happening right now where we have potentially this massive economic pullback paired with the fact that consumer debt is actually at all time highs. If you look at reports that Visa, Bank of America, and other companies like that have put out, consumers are actually still spending a ton.

The outstanding debt of the average US consumer in America is higher than it's ever been and growing faster than it's ever grown. So people are still spending money.

If you look at the outlook that Nike and Walmart and Target have put out, they definitely have curbed back expectations. Having said that, what we've seen so far from spending is that people are still really happy to spend. I think ultimately the biggest beneficiaries going into the end of the year, retail to your point, normally puts a ton of weight into the end of the year.

They're going to take a bit of a hit. But I actually think travel is going to do really well. Airlines have put out tremendous outlooks. They think travel is going to continue, people are going to spend money on that. Even though working at this recessionary period, hotels are projecting to do well. People were stuck at home for a few years and there's still a spillover effect that if they're going to curb back spending, they don't want to curb it back on travel and things they weren't able to do.

So, I think ultimately, yes, there's going to be a hidden retail. You're going to see companies like Target, Walmart probably, and Amazon does not have the revenue bumps that they're hoping to have. But other retail sectors like travel, like healthcare, things that we've been talking about honestly for the last 12 months are showing that they're going to actually have really good fourth quarters.

Peter Starr:
And that's just insane to me. Just thinking about just the amount of spending that's still in this economy, as you're watching the number of layoffs that are happening, it's very much just a white of the white collar recession. It's just a day tech recession right now. And so watching all these layoffs, you think the broader economy is not going to do so hot, but it's one of these deeply white-collar areas where you're seeing a lot of these layoffs.

So, I'm excited for two years from now when 200 new businesses pop up as a sort of realignment of all the tech companies that have shed 15, 35, 75% of their staff, of their Twitter. That's very exciting for me. But honestly, it's just going to be kind of an interesting period in consumer spending. I guess the other major signal, Justin, we keep watching too, yes, consumer spending is up, but at the same time, we're watching household debt absolutely skyrocket.

Meanwhile, housing prices keep coming down, too. Housing starts have absolutely, have not necessarily cratered, but we're down for housing starts, and for actual construction, we're down 9 and 10.1%, respectively year over year. So the Fed's obviously doing its job. Is the Fed getting a little bit too effective? How likely is this soft landing now that we're watching the housing market begin to crater a little bit, too, throughout all of just this uncertainty, dude?

Justin Kramer:
Yeah, I think this is the ninth, the housing data came out today. I believe this is the ninth week of the ninth month of decreased home-buying activity. And yeah, it's directly attributable to interest rates. Higher rates means your mortgage is more expensive. And with mortgages sitting around kind of the 3% level at this time last year versus they're around 7 now, the price of owning a home has almost doubled. That's because, in the first few years of a mortgage, about 90% of the payment is interest-related payments instead of principal-related payments.

So, when you double the mortgage rate, your mortgage is ultimately going to become almost double the expensive. So if you're buying a hundred thousand dollar home, a million dollar home, a 10 million home, if you had, for argument's sake, a $2,000 mortgage, that would be $4,000 now. So the affordability of homes has literally been chopped in half over the last few months alone.

So I mean this is what the Fed wanted and it does more so than most sectors impact housing tremendously. Having said that, if you're a real estate investor or you're hoping to buy real estate, now is actually a really interesting time. Based on what we're seeing, there's a pretty good chance the Fed stops raising rates within the next few months. If that's the case, they'll probably, based on estimates so far, subject change, estimates are that they'll start decreasing rates end of Q1, at some point in Q2 of next year.

Once they start decreasing rates, then the price of homes will start going up. So if you are an investor now, and you want to buy a home now, yes, it's going to definitely be more expensive from a cash flow perspective, your payments are going to be more expensive on a monthly basement.

However, the two things in your favor are going to be one, home prices have come down. Because mortgages are so high, people can't afford to buy them. The prices of homes have come down so you can get it at a little bit cheaper purchase price. And then as they start to decrease rates again, your home value can significantly raise faster than it would in a normal environment. So there's an obvious correlation.

Lower interest rates equal more expensive homes. So long story short, if you're comfortable buying now, the timing's not going to be perfect, but at some point next year, Q3 at the latest, from what we're seeing so far, your mortgage, your rates are going to go down, which means your home value's going to go up, which means you can refinance and start getting cheaper payments on the way down. So definitely going to be some cash out of pocket for probably the next six months. But it's actually, if anything if you're trying to time it, it isn't crazy timing to get involved now if you have the cash on the sidelines.

Peter Starr:
That's a really insane way of thinking about it. I love that. Not insane in a bad way, but people are saying, oh, no one's going to buy a house ever again. When people don't understand it's the Fed's job to stop raising rates, too. So I'm really excited to see that kind of play out. And, audience, too, as you keep asking what our major plays we're thinking about. Just remember, you've got to find things that are bulletproof.

Incredibly, Budweiser, Anhauser Busch is up 70% this month, despite the fact that Qatar just banned the sale of alcohol at the World Cup this morning. Budweiser is still up big, despite the fact they spent $75 million just to not sell anything at the actual World Cup. So, as you kind of look at that, just kind of find those things that are bulletproof as well.

Obviously, we're more, we're higher on other more consumable stocks, but it's just one of those things where you can't think day over day. We talk about these markets on a day-by-day basis, but the market really operates on a quarter-by-quarter basis, a six-month-by-six-month basis. So kind of stay the course.

If you were doing something six months ago and you'll potentially be fine. And make sure that you're thinking about not just buying a house right now, thinking about interest rates right now, but understanding that the game is interest rates will absolutely go down. As we kind of round out to the back end of this here, Justin, anything else we didn't cover that you want to make sure we jump on here? I mean, again, we're always kind of bouncing all over the place as we're trying to find these specific narratives. Because you need to go by a narrative-by-narrative in this market.

Justin Kramer:
Yeah, no, I think that covers it. I mean, the crypto stuff is insane. It's just adding more volatility to the situation. I think the only other thing is to look at this week is the G20 Summit. That's this week going into next.

Basically is just more or less an economic forum where emerging economies meet together and develop economies to figure out where they can partner and more or less make the world a better place. So obviously the forefront of foreign politics right now has been on the whole Russia, Ukrainian war, what's going on, which is awful. But this is actually the first time that President Biden and the leader of China are coming together and are actually going to try and focus on their foreign relations outside of Russia. So Russia's obviously a pain point for China and for the US. But the biggest pain point right now is actually over Taiwan.

What we want to avoid at all costs is China becoming the next Russia in the sense of invading Taiwan like Russia invaded Ukraine and creating another nightmare scenario on top of what's already a nightmare scenario in Russia and Ukraine. And so we as the US are trying to actively avoid that and that's going to be the focus of the conversations between us and China. Whereas on the other hand, China doesn't want us to take this positive stance on Taiwan and wants to act and wants us to remain more independent.

So, it's going to be hard to meet somewhere in the middle. But ultimately the best output can be getting away from this stalemate and almost a cold war between us in China where form just geopolitical relationships are continuing to worsen. They're looking to reverse that. As the two world's largest economies, that's beneficial for everyone if they can figure that type of stuff out.

So it's a little early to say how that will pan out. But if there's news coming out end of this week or at some point next week or even in the months to come as we start getting more information, that would be, I mean, just amazing if we can start having better relationships with China. I mean, you look at the news, it's just been bad thing after bad thing. So if we can work better with China and meet somewhere in the middle, that would do just amazing things for the economy and honestly for the world.

Peter Starr:
Exactly. And, audience, if you're thinking about this and thinking, "oh, World War III or Cold War part two", I think you need to understand that the interests of the US and China are way more aligned than the US and Soviet Union were. And so it's one of those things where peace is possible. So it's cool that we were looking down the barrel of potentially a lot of conflict at the beginning of this year, and we're seeing Ukraine make absolutely stunning strides in southern Ukraine pushing Russia out.

There's a massive flanking maneuver south of Khersan right now that's going pretty good, honestly. So we thought this war would be already at a stalemate as things kind of shut down for winter. But Ukraine's like, Nah dude, it's our homeland. We're going to fight in the bitterest of bitter cold. Just push these folks out. So it's awesome to see that side's winning as well as a more peaceful kind of approach between the US and China.

So honestly, we're in the depth of this recession. Not only are we calling the bottom just yet or anything because it could potentially extend out, but we're seeing many things that can lead to positive signs as the Fed tries really hard for a soft landing. Obviously, all eyes are on two weeks from now, three weeks from now we have that next Fed meeting and the next CPA report where we're probably not going to get a Fed... Are we going to get a Fed pivot next month, Justin? Is that possible? Fed pivot in December? Or are we thinking that's more the beginning of next year?

Justin Kramer:
No, I mean, I think I would be surprised if they didn't do 50 basis points next month, which is big because the months prior they've been doing 75. I think they'll go down to 50. I would be very surprised if they go down to 25 or go to zero. That's where the market's pressing in right now.

But I mean, wholesale inflation data came in yesterday. It looks positive with only a 0.2% raise. So I mean more data points keep pushing in the right direction. It is possible. At the next CPI print, it'll give us a really good indication of what they're thinking. But I think what the market's pricing is a best guess for now is we're thinking a 50 basis point raise, which would be amazing. Because it's been at the 75 level for some time now.

Peter Starr:
Riding the ship folks. It's really awesome to see that we're beginning to find those moments of clarity and find those moments where we're getting into that bottom. We're not calling a bottom yet. I'm going to say that for the fourth time today. But it's really interesting to see where we can begin to start thinking about where the bottom's going to be. My audience, I really appreciate your time. Justin Kramer, CEO, co-founder, and chief analyst here at moby.co. As always, I appreciate you being here answering questions. Any final thoughts from you before I go ahead and read the credits? As always, I'm amazed we covered what we did in what felt like 15 minutes as opposed to actually half an hour.

Justin Kramer:
Yeah, no, I think that's pretty comprehensive. For anyone who's listening to this, I don't know the percentage of our audience who lives in Buffalo, but with five feet of snow expected, just stay safe out there.

Peter Starr:
Survive. Yeah, seriously. Either way, audience, really appreciate your time. Stay warm out there and just keep staying the course. We will be taking next week off as instead of doing a podcast in the middle of Thanksgiving. So we'll see you guys in two weeks as we begin to digest what's happening in retail game time. Otherwise, audience, I really appreciate your time, but just so you know, this podcast is produced and hosted and voiced by me, Peter Starr.

All the intellectual value from this podcast comes from the Moby.co analyst team led by Justin Kramer, CEO, co-founder, and chief analyst here. If you have any questions for us, you can hit us up at [email protected]. Find us over on Instagram or TikTok if you want to see more of our sort of advanced thoughts. Or join us at moby.co/go if you want to see more of our in-depth analysis. We had a lot out this week about Uber, a lot of really interesting points on Greentech and Plug Power. And next we're going to have some really interesting points more on these sort of pharmaceutical and retail signs. Stay tuned for that there.

Either way, audience, I really appreciate your time. Thanks for being with us, but as always, we like to leave you with peace, love, and incremental gains. Everyone be well. Thank you so much.