Toxic Monetary Policy Created The FTX Monster
"The Fed sent a behavioral incentive to markets that speculation was fine for way too long - a signal to markets that there was no risk when, in fact, risk was everywhere."
I had a conversation with my good friend Tom Bodrovics from Palisades Gold Radio earlier this week. Tom is a private investor from western Canada with a background in oil and gas. In 2014 he identified the top of the housing cycle and sold his home to invest in the junior resource sector. He gained a libertarian and contrarian perspective in 2013 when he attended an entrepreneurship course in Europe and has been studying markets of all types ever since. He operates a successful business servicing the oil and gas sector in Alberta and is the host of one of my favorite podcasts, Palisades Gold Radio.
We took an hour this week to discuss all things FTX, crypto, the Fed, the economy, monetary policy, some of my recent blog posts and, of course, gold. Our entire conversation was recorded as a podcast and is available to listen to, for free, at the end of this post.
The first topic Tom broached with me was the ongoing FTX saga. He asked about what I thought about Sam Bankman-Fried blowing up his firm and I told Tom that I couldn’t believe how quickly it happened and how swift the fall was.
“A week ago this guy was the savior. He was just generally being praised,” I told Tom.
“Then, what we found out is that it was just another straight up ponzi scheme fraud, which is just incredible,” I said, stunned by how quickly it came crumbling down.
“I’m often saying to people ‘Everything is fine until one day you wake up and it isn’t.’ That’s my stance on equities right now. I think we have a 400 bps pipe bomb making its way through he economy right now and we’ll wake up limit down. That’s what happened with Bankman-Fried. One day he was the man and the next day we woke up and there was a tremendous shift in psychology.”
I summed it up: “We woke up one day and the guy that was supposed to be the end-all be-all turned out to be nothing more than a run-of-the-mill fraudster. It was just a bunch of kids playing with billions in customer deposits like they were playing World of Warcraft. I don’t know if the reality has sunk in for them as to how big of a deal this is, but I’m sure it will. You had a group of kids just…fucking around with customer deposits. It’s not fraud on the blockchain, its not decentralized fraud…it’s just run of the mill fraud.”
Tom then directed the conversation away from FTX and SBF and onto the broader topic of bitcoin. He asked me why I owned and continue to buy a very small position in bitcoin, which Tom referred to as a “religion”.
I responded: “I’m pretty religious about gold actually. I think gold is going to be the answer come hell or high water for this looming global economic mess. Bitcoin I’m interested in probably moreso as just a contrarian - watching a huge blowup like this cast a negative light on crypto in general is something that piques my interest.”
“I think 95% of coins out there will have no use case,” I told Tom. “To the extent that Bitcoin remains the grandaddy of them and the underlying, I’m more interested in listening to the bull case when Forbes is doing a cover story on how crypto is the biggest fraud of our generation.”
“Really, it’s just pure speculation and I’m fine with taking 100% loss,” I said about my Bitcoin position. “I’m still very skeptical that it’ll become a global reserve currency. Now it’s going to be a time for far more regulation [thanks to FTX].”
From there, we moved the conversation on to where more blowups in the crypto space may take place. I mentioned to Tom that Michael Saylor, Binance and Tether are all in my crosshairs.
“Either way I think we’re going to see more blowups,” I said. “How do you let Tether go forward now without producing a full and complete audit of all of their assets at this point? This is a company with $60 billion in stablecoins that’s deeply intertwined into the crypto universe.”
From there, we moved on to the topic of the Fed, monetary policy and interest rates. Tom asked about my contention that I still think equities will move lower, as I wrote about just days ago.
I told Tom: “I think that if the Fed even came out tomorrow and cut 100 bps…I think even in a case where the Fed came out and cut rates tomorrow that there would still be a looming blowup. The speed with which we’ve raised rates so far is breakneck and stunning. The reason the market hasn’t reacted yet is there’s a lag."
“That’s all playing out now and will continue to play out regardless of what the Fed does in December,” I added.
Tom asked about the idea of a soft landing, to which I replied: “Everyone is acting as though Powell has already achieved a soft landing. CPI came in at 7.7% - not exactly where we want to be. If I had told you 2 years ago that’s what CPI would be at you would have had a f*cking heart attack. And now we’re going to celebrate it as a win?”
“The Fed is going to do what it always does: too much, too late. And it’s not going to stop the selling when it starts,” I added. “Imagine in 2018 when we were trying to do unlimited QE to get from 1.7% to 2%…imagine if I told you rates were at 4% and the market is celebrating. You would think that I’m smoking some shit. I mean, even when I’m high I make points that make more sense than that.”
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Finally, Tom asked me about whether or not the Fed was ‘winning the war’ on inflation - and where I see inflation going next year.
I told Tom: “There’s so many unknowns. A lot depends on Russia and Ukraine, China has basically been conditioning their economy with this Covid Zero policy to shut down and open up whenever the government says. Xi Jinping is flipping the economy on and off like a light switch. Then you have Russia, and then OPEC - and who knows what color their mood ring is on any given day - and then the BRIC nations trying to start their own global economy. So who knows where CPI will come in?”
“It’s completely opaque, other than what we can do just tracking spot prices. That can be helpful.”
Finally we talked about the idea of a Santa Claus Rally, which I wrote about days ago.
“The point of the article is basically ‘look, we’ve spent the last 3 or 4 years trying to make investing, which is a risky business, dumbed down for retail investors’,” I explained.
“If there’s one piece of nefarious patronizing lingo that I hear every year it’s the idea of a ‘Santa Claus Rally’ - just another bullshit term made up by the financial media to further the Keynesian monetary policy experiment as if it is some virtuous undertaking that is never going to end poorly. It’s terminology that tells people it’s OK and normal for markets to only go up.”
I added: “That kind of stuff does a disservice to amateur investors.”
“The same monetary policy experiment that the media is trying to legitimize and encourage is the same policy that got us into the current crisis that we’re in,” I said.
I continued: “Rather than celebrating it and passing it off as some raging success, I think people need to recalibrate themselves and understand monetary policy is why we’re watching Sam Bankman-Fried blow up and incinerate people’s cash. The Fed sent a behavioral incentive to markets that speculation was fine for way too long - a signal to markets that there was no risk when, in fact, risk was everywhere."
You can listen to the full interview below.
Time Stamp References:
0:00 - Introduction
0:50 - FTX Crypto Carnage
9:03 - Massive Deception
13:14 - Bitcoin and Gold
19:44 - Fed Pivot & Reality
26:58 - 'War' on Inflation
30:20 - Statistics & Signs
40:07 - Rates & Housing
47:50 - Fed & Credit
55:50 - Central Bank Gold Buying
1:01:12 - Wrap Up
You can listen to the full interview here:
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