by Franklin J. Parker, CFA
The Summary
- The Bottom Line. With slightly lower inflation, investors caught hope that the Fed will slow rate hikes. Earnings are meh, but certainly not recessionary, and this week we get some important data on the fundamentals of the economy. I could see this as the beginning of a meaningful recovery rally. However, I would temper any enthusiasm with the longer-term outlook, which appears tepid at best.
- The big news last week was a lower-than-expected inflation print (7.7% versus 8.0% expected). This lent investors hope that the Fed will slow down their rate increases. Earnings are mostly finished with over 90% of S&P 500 having reported. Earnings growth across all sectors is just over 2% for the quarter, which is not great but not terrible. With revenues up over 10% (and earnings up only 2%), investors are seeing inflation take its bite.
- This week we get data on industrial production, retail sales, and producer prices (a measure of inflation). Each of these are important for insight on the economy. Investors will also listen to management outlooks from retail bellwethers Target and Walmart, especially with the Christmas shopping season rapidly approaching. Consumer spending has remained strong and has lifted the economy, but a slowdown in this would be bearish.
The Details
“It’s only when the tide goes out that you learn who has been swimming naked.”
Warren Buffett
Well… crypto markets have imploded over the past couple of weeks.
After sudden price plunges, one of the largest cryptocurrency exchanges, FTX, went suddenly and dramatically insolvent. Reuters reported that $1 billion to $2 billion was missing from client accounts and, apparently, executives at the exchange had surreptitiously moved about $10 billion to their trading firm to fund risky bets on other crypto businesses and market trades.
First of all, this has all happened before, which is why investors should be students of history as much as of markets. In the 1920s, banks and brokerage houses regularly used client money to fund risky market bets. It turns out this strategy still doesn’t work, but it is good to be reminded of that every century or so.
Second, it was amidst the fallout of those trades in the 1920s that lawmakers formed the FDIC, SEC, and the now-famous Securities Acts of 1933 and 1934, all of which still govern financial businesses and transactions. Crypto markets, of course, haven’t had such regulatory oversight and law, but I strongly suspect this is about to change.
Finally, crypto’s meltdown is a stark reminder of the difference between professionals and amateurs. Amateurs are obsessed with making money. Professionals are obsessed with managing risk. This event is likely to wash amateurs out of the business, making room for professionals to step in.
In the end, I see crypto laws and regulation coming quickly (politicians have already started making some noise about this), and I would expect a more professional class to begin managing these financial businesses. Both of these represent a real maturation of the sector and are very healthy, long-term.
Crypto isn’t dead, in my view, it is just growing up.
Chart of the Week
This week’s chart comes to us from Bloomberg News, and is notable for its historicity. The founder of the exchange FTX, Sam Bankman-Fried’s change in net worth may well be the fastest in the history of mankind—going from $16 billion to $0 in the space of about 36 hours.
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