Inside Job 2.0

Stablecoins, sell-side lies and the next financial implosion.

I was looking for something to watch on Friday night when I stumbled upon the movie Inside Job on Amazon Prime. It’s a documentary from 2010 that vividly recounts the global financial crisis of 2008.

In the first half hour of the movie, they set the scene for what led up to the crisis: all of the deregulation, speculation, derivatives, lavish Wall Street spending and euphoric attitudes that ran the show right up until the very day the world ran face-first into reality and the global economy bricked.

Watching the movie, I couldn’t help but feel like I could draw direct similarities to the market we are in today.

Sell Side Analyst Reports: Still Biased, Still Bullshit

For example, every day I wake up to a new email from a friend ridiculing a sell-side analyst note. I think to myself two things: first, it’s criminal that investment banks are allowed to put out absolutely bullshit projections while simultaneously trying to win the investment banking business of the companies they cover; and second, I can’t believe anybody on the Street takes these reports seriously.

Sell side analyst reports have become fucking embarrassing. I mean, really bad. Making excuses for non-cash generating companies that can’t even hit whatever bullshit Non-GAAP KPI metric they’re distracting the market with. Initiating coverage on SPACs based on fairy-tale TAM slides, defending “disruptive” technologies that a 4th grader knows won’t work. Calling obvious financial frauds “overblown market concerns” . It’s theater dressed up as research, and the audience is clapping like trained fucking circus seals.

Day in and day out, we read about upgrades and downgrades—almost all of which are issued after stock price moves and not ahead of them. And day-to-day, the market responds to the “analysis” of these investment banks, despite the fact that most people who have been in the industry for a while, and who are sharp, know not to pay them any heed whatsoever. Hell, even the Financial Times put out an article a week or two ago questioning one of the most egregious offenders on Wall Street and the frequency with which he pens his “analysis.”

In Inside Job, they set the stage for the financial crisis by talking specifically about how investment banks issued bullish research on names that, privately, they were referring to as “dogshit.” Before 2008, major Wall Street banks were accused of using sell-side research as a tool to serve their investment banking interests rather than investors. Analysts allegedly issued biased ratings—rewarding companies that hired their banks with positive coverage and punishing those that didn’t with negative or withdrawn reports—while internal communications often contradicted their public recommendations.

Regulators found that analyst pay and job security were tied to banking deals, creating deep conflicts of interest. This led to the 2003 $1.4 billion Global Research Analyst Settlement, which imposed reforms to separate research from banking, though critics argued informal pressures persisted up to the financial crisis. Banks promised to do better in the future, which is now. If you ask me, it looks like nothing has changed.

Stablecoins Are This Crisis’ Unregulated Time Bomb

Also, while setting the scene for the financial crisis, the movie talks about the deregulation of the derivatives market and how that eventually caused money market funds to essentially lock up when selling began. You could almost make the exact same analogy to the crypto and stablecoin market right now. The derivatives market was $50 trillion at the time, and the stablecoin market now is in the trillions.

As Jim Rickards noted in what I think is an extremely important “must-listen” interview just days ago, the stablecoin market is also basically unregulated due to the Genius Act, and most of the companies participating haven’t even passed an audit.

“Stablecoin sponsors are almost completely unregulated, non-transparent; no one has ever audited one of them. We don’t know what’s inside,” Rickards says. “In 2008 the money-market funds froze up and the Fed bailed them out; is the Fed going to bail out the stable-coin market? I don’t think so.”

In his interview—where he describes exactly how stablecoins could eventually wind up locking up money market funds in the same way as 2008—Rickards says what I’ve been thinking for a long time: there’s already massive fraud out there being perpetrated, we just don’t know where it is. And we won’t know until — like 2008 — the shit hits the fan.

“Stablecoins are an enormous danger — they may cause the greatest financial catastrophe of all time,” Rickards said, echoing what I wrote about last month — that crypto will cause the next trillion dollar crash.

Crypto Will Cause The Next Trillon Dollar Crash

And in addition to being unregulated, we know that market participants in crypto are able to take on extreme leverage in ways that normal market participants are not.

Everyone Is Blissfully Ignorant Or Totally Lobotomized

It would be easy to make the comparison of everybody being drunk at the punchbowl between then and now as well. Major Wall Street investment bank stocks are at all-time highs, the general attitude on Wall Street is euphoria, bankers have for the most part stayed out of the crosshairs of criticism over the last decade, and executive compensation on Wall Street has been what many people would consider to be extremely excessive. Those sentiments all rang true leading into the 2008 financial crisis as well.

But what struck me more than these few things was the descriptions of how cavalier people’s attitudes were leading into the 2008 financial crisis.

If you need a refresher of what sentiment was like in 2008 and don’t want to watch the movie, watch this Peter Schiff Was Right video for a taste — listen to the sheep who refuse to acknowledge the reality of the situation:

I had seen them all already, but rewatching clips of analysts, government officials, and bankers assuring the public that nothing could ever go wrong—that there was no way to lose money on selling credit default swaps and that the U.S. housing market was indestructible—reminds me so much of how people view the market today.

There was the bailout in 2008, and then there was the extreme inflation caused by the Fed’s response to COVID. Before you know it, we’ve had two straight decades of conditioning investors to believe that nothing can go wrong and the market simply cannot—and will not—ever go down.

The gamification of stocks, combined with the influx of unsophisticated investors in the market, combined with the availability of extreme liquidity in options, combined with the multi-trillion-dollar, completely unregulated and opaque crypto and stablecoin market—layered on top of limitless hubris and arrogance—is the perfect Molotov cocktail for destruction.

The compass of what is right and wrong — what is speculative and conservative — for investors, is broken. We are so far off the path that not only can we not see it, but it’s almost foolish to expect people to see it. The recency bias has been so consistent for so long that it would be abnormal for people to expect chaos.

A Window Into What A Reality Check Looks Like

For me, watching this film on Friday night time-warped my brain back 15 years.

When you hear the people recounting how the crisis happened, go back and listen to how they speak about the world of finance after being humbled so significantly. Their tone and tenor are almost unrecognizable in this day and age. Just listening to the tone of the commentators while they talk about finance, just years after being reminded that things can go horribly wrong, is almost as valuable as the story of the documentary itself.

People recalled the events with a sense of modesty, humility, and humbleness that I haven’t seen anywhere in the world of mainstream finance for a decade.

Thus, the curse of history: if we don’t remember it, we are doomed to repeat it. The further we get away from any consequential event in history—whether it is World War II, 9/11, the great financial crisis, or anything else—the less we feel like it can ever happen again, and the more bravado we carry ourselves with.

But there is a karmic ebb and flow to life that somehow always reminds us: when we feel the best, things can get way worse; and when we feel the worst, things can get better. While living in an echo chamber, nobody knows better than me that it is extremely difficult to break thought patterns and somehow remind yourself of this.

But if you want to mainline some reality into your brain and open your perspective on such a calamity taking place, I’d encourage you to go to Amazon Prime Video and watch the same movie I just did.

Then, look at the financial and economic world—and the world of markets—and I dare you to tell me everything’s fine and is going to be for the next decade.

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