FTX Downfall

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“It’s only when the tide goes out that you learn who has been swimming naked.” Warren Buffett

Things may look good and rosy up to a certain point, but if a company is leveraged too much expecting a wave to come, but instead the tide goes out, everything will be exposed. Federal Reserve Chairman Jerome Powell aggressive interest rate hikes to counter inflation exposed all sorts of companies that were relying on cheap capital to either grow or survive.

In FTX case, a Bahamian cryptocurrency exchange, things were great for a while. Investors were excited about the way the stock price continued to melt up.

FTX was the third-largest crypto market in the world at the start of last week when it announced liquidity problems and would need a massive infusion of cash to stay afloat. However, the tide went out and the problems at FTX began to surface and then totally self-destruct.

In theory, exchanges like FTX make money by allowing customers to trade cryptocurrencies and collecting fees for transactions.

“It was a success story almost too good to resist. In just over three years, FTX would go from nothing to a $32 billion company. Now it’s back to nothing.” ~ Brandon Kochkodin, Forbes Staff

According to WSJ, FTX problems are a result of the loans it extended to Alameda using money that customers had deposited on the exchange for trading purposes. It was a decision that Mr. Sam Bankman-Fried (SBF), the crypto wunderkind who founded the exchange and then drove it into bankruptcy, described as a poor judgment call, writes the Wall Street Journal.

In March 2022, the Fed started raising interest rates to battle inflation. Speculative investment assets started tanking and a number of crypto funds and brokerages crashed. FTX came in as a bailout “savior” with the apparent purpose of sweeping in depositor funds into FTX.

Additionally, SBF’s hedge fund Alameda Research was also hit hard by the crypto drop. SBF was able to temporarily hide the problem by “borrowing” customer deposits at FTX to plug the hole at Alameda. This move may be a violation of the terms of service and potentially violate regulations.

All in all, FTX had $16 billion in customer assets. It is believed that the unregulated exchange transferred more than half of its customer funds to its sister company Alameda, according to WSJ.

In traditional markets, brokers must keep client funds segregated from other company assets. Cryptocurrencies and brokerages that trade them remain unregulated, which means it may not be legally possible for any government agencies to step in to reimburse FTX customers, said corporate lawyer Eric Snyder, chairman of bankruptcy at Wilk Auslander.

“Absent any regulation, it’ll be difficult to show fraud if the agreements between FTX and their customers allowed FTX to use investments at their discretion,” Synder said.

The root of FTX’s downfall lay in its relationship with Alameda, a firm known for aggressive trading strategies funded by borrowed money and allegedly operated by Mr. Bankman-Fried’s ex-girlfriend as CEO of Alameda. Mr. Bankman-Fried is the majority owner of both firms, FTX and Alameda. He was CEO of Alameda until last year, when he stepped back from the role to focus on FTX.

“There’s one fundamental takeaway: Bitcoin itself should never be leveraged. It cannot be leveraged safely. And anybody who thinks that they can lever it safely is going to learn a very hard lesson: that illiquidity is the same thing as insolvency,” commented Caitlin Long, founder and CEO of Custodia Bank, on CNBC’s The Exchange

References:

  1. https://www.forbes.com/sites/brandonkochkodin/2022/11/11/the-red-flags-on-ftx-we-all-seemed-to-miss/?sh=23f8a20111f6
  2. https://www.wsj.com/articles/ftx-tapped-into-customer-accounts-to-fund-risky-bets-setting-up-its-downfall-11668093732
  3. https://www.oldschoolvalue.com/investing-strategy/warren-buffett-quotes/#8_Swimming_Naked_is_Cute_Only_for_Babies
  4. https://www.cnbc.com/amp/2017/12/11/bitcoin-millionaire-grant-sabatier-dont-buy-bitcoin.html
  5. https://www.marketwatch.com/story/ftx-filed-for-chapter-11-bankruptcy-heres-what-account-holders-should-know-about-this-very-messy-and-complex-bankruptcy-case-11668202547?mod=mw_latestnews

Recession and Investing

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A recession is a period of economic contraction. Recessions are typically accompanied by falling stock markets, a rise in unemployment, a drop in income and consumer spending, and increased business failures. ~ SoFi

Liz Young, Head of Investment Strategy at SoFi, talks recession.

A recession describes a contraction in economic activity, often defined as a period of two consecutive quarters of decline in the nation’s real Gross Domestic Product (GDP) — the inflation-adjusted value of all goods and services produced in the United States. However, the National Bureau of Economic Research, which officially declares recessions, takes a broader view — including indicators like wholesale-retail sales, industrial production, employment, and real income.

Recessions tend to have a wide-ranging economic impact, affecting businesses, jobs, everyday individuals, and investment returns. But what are recessions exactly, and what long-term repercussions do they tend to have on personal financial situations? Here’s a deeper dive into these economic contractions.

It’s worth remembering some investments do better than others during recessions. Recessions are generally bad news for highly leveraged, cyclical, and speculative companies. These companies may not have the resources to withstand a rocky market.

By contrast, the companies that have traditionally survived and even outperformed during a downturn are companies with very little debt and strong cash flow. If those companies are in traditionally recession-resistant sectors, like essential consumer goods, utilities, defense contractors, and discount retailers, they may deserve closer consideration.

During a recession, it’s important to remember two key tenets that will help you stick to your investing strategy.

  1. The first is: While markets change, your financial goals don’t.
  2. The second is: Paper losses aren’t real until you cash out.

The first tenet refers to the fact that investors go into the market because they want to achieve certain financial goals. Those goals are often years or decades in the future. But as noted above, the typically shorter-term nature of a recession may not ultimately impact those longer-term financial plans. So, most investors want to avoid changing their financial goals and strategies on the fly just because the economy and financial markets are declining.

The second tenet is a caveat for the many investors who watch their investments — even their long-term ones — far too closely. While markets can decline and account balances can fall, those losses aren’t real until an investor sells their investments. If you wait, it’s possible you’ll see some of those paper losses regain their value.

So, investors should generally avoid panicking and making rash decisions to sell their investments in the face of down markets. Panicked and emotional selling may lead you into the trap of “buying high and selling low,” the opposite of what most investors are trying to do.

Stay the course and stick to your financial plan to survive a recession!

Source: https://www.sofi.com/learn/content/investing-during-a-recession/

Inflation: Core Consumer Price Index

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Inflation is measure of the increase in the cost of living which can erode the value of your money, and more importantly – the goods, services, rent and mortgages that you can purchase with that money.

The U.S. Bureau of Labor Statistics showed that falling gasoline prices helped lead to a second consecutive lower annual U.S. inflation reading, but the consumer price index still edged up by 0.1% in August, contrary to the 0.1% drop expected by economists polled by The Wall Street Journal, writes MarketWatch. The core Consumer Price Index (CPI), which strips out food and energy prices rose by a much sharper 0.6%.

The year-over-year food index component of the CPI was up 11.4% in August. Higher food prices “reflect very tight global supply/demand dynamics,” says Jake Hanley, managing director and senior portfolio strategist at Teucrium. Rising costs don’t impact all households the same way. Some families may have a personal inflation rate that’s lower (or higher) than the national average, depending on what they buy.

Rising costs don’t impact all households the same way. Some families may have a personal inflation rate that’s lower (or higher) than the national average, depending on what they buy.

“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated,” says Patrick De Haan, head of petroleum analysis at GasBuddy. Diesel prices are a “major component of inflation in other areas of the economy, such as the cost of groceries.”

“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated,” says Patrick De Haan, head of petroleum analysis at GasBuddy. Diesel prices are a “major component of inflation in other areas of the economy, such as the cost of groceries.”

“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated.” — Patrick De Haan, GasBuddy

Diesel and natural-gas prices have remained high, despite a retreat in recent weeks, and fuel costs are a key component when it comes to growing the food the nation needs. Diesel engines power about 75% of U.S. farm equipment and transport 90% of farm products, according to data from the Diesel Technology Forum. 

Diesel “will likely remain at historical premiums to gasoline—and could see more disconnect if this winter is cold due to diesel and heating oil being essentially the same product, keeping demand elevated,” De Haan says.

Wall Street economists see the U.S. Federal Reserve lifting interest rates higher than they previously expected following the latest U.S. consumer price inflation data. Economists at TD Securities said they now expect the Fed to raise its benchmark rate by 75 basis points next week.

References:

  1. https://www.marketwatch.com/story/high-fuel-costs-will-continue-to-contribute-to-the-rise-in-food-costs-11663100705
  2. https://www.marketwatch.com/story/the-biggest-fed-rate-hike-in-40-years-it-might-be-coming-11663097227

Veterans Day 2022 – “Honor” 

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Veterans Day 2022 is Friday, November 11.

Every year around Veterans Day, restaurants and businesses offer Veterans Day discounts, meals or other ways businesses and organizations want to give back to Veterans.

Veterans Day discounts, free meals and other programs are available to Veterans, their families, caregivers and survivors. Below are several offers:

  • Starbucks – November 11, 2022: On Veterans Day, active-duty service members, Reservists, Veterans and military spouses are invited to enjoy a free tall (12-ounce) hot brewed coffee at participating Starbucks stores. And new this year, Starbucks is expanding this offer to include a free tall (12-oz) iced coffee.
  • California Pizza Kitchen – November 11, 2022: Veterans and active-duty military with a valid ID can grab a free meal and non-alcoholic drink from a pre-selected menu at California Pizza Kitchen for dine-in or takeout.
  • Applebee’s – November 11, 2022: Veterans and active-duty military can select a free meal from a limited menu on Veterans Day. Proof of service required
  • Golden Corral – November 14, 2022: Military Appreciation Night will be held on Monday, November 14 from 5pm – close. Golden Corral will once again be honoring our military heroes with a free “thank you” meal.

The theme for Veterans Day 2022 is “Honor.”  Veterans are proud of their military service in defending our Nation.  Honor reflects the military value and tradition of answering the call to duty.  There is distinct honor in serving to protect our way of life and the Constitution of the United States of America.  We encourage artists to consider Veteran history of service to our Nation and the honor we owe them for fulfilling patriotic duties.

To honor and thank Veterans for giving so much in service to America and protecting the freedoms of others around the world, the Veterans Day National Committee hosts a Veterans Day observance each year on November 11 at Arlington National Cemetery. The ceremony commences precisely at 11:00 a.m. with a wreath laying at the Tomb of the Unknown Soldier and continues inside the Memorial Amphitheater with a parade of colors by Veterans’ organizations and remarks from dignitaries.

References:

  1. https://news.va.gov/109711/veterans-day-discounts-free-meals/

US inflation cools in October.

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Overall inflation as measured by CPI rose 7.7% year-over-year (YoY), below the 7.9% estimate.

The annual inflation rate fell to 7.7 percent in October from 8.2 percent in September, according to the consumer price index (CPI), a closely watched inflation gauge. Economists expected the annual inflation rate to fall to 7.9 percent, according to consensus projections.

Core CPI, which excludes volatile food and energy prices, increased 6.3% YoY, below the 6.5% YoY change economists expected to see.

The October CPI report is an encouraging sign for the U.S. economy as policymakers rush to bring down inflation without causing a recession. While decline in inflation will not be enough to keep the Federal Reserve from raising rates, it may allow the bank to do so at a slower pace.

References:

  1. https://thehill.com/policy/finance/3729055-inflation-fell-to-7-7-percent-annual-increase-in-october/

More Than One in Four Americans Say Their Debt is Unmanageable

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Nearly one in five Americans are feeling bad or very bad about their financial circumstances. ~ OppFi’s 2022 Personal Finance Study

The FinTech company, OppFi, surveyed nearly 1,100 Americans to learn more about Americans’ financial situations,.

Respondents had mixed and uncertain feelings about where they stood financially, with nearly one in five feeling bad or very bad about their circumstances.

Key takeaways

  • Half of respondents to the survey are currently in debt, and 52% of those in debt say their debt is not manageable.
  • Just over 1 in 3 respondents have frequently experienced stress or anxiety about their finances since the COVID-19 pandemic started.
  • 1 in 4 took out a personal loan during the COVID-19 pandemic, most often to cover basic necessities such as food, clothing, and housing and credit card debt.

Americans’ financial health is often measured by benchmarks such as debt, savings, spending habits, and the ability to pay their monthly bills, writes Ashley Altus, CFC, a personal finance writer for OppU. OppFi survey respondents reported having difficulty with many of these things. Half said they’re in debt, and nearly half said they can’t pay their bills on time. Almost 2 in 5 live paycheck to paycheck, and 1 in 5 said they spend more than what they earn.

Budgeting is widely considered an important aspect of personal finance, but 1 in 10 said they didn’t have a budget at all.

Fewer than half (47%) said they have a savings account or emergency fund. Of those who did, nearly 1 in 5 said they could live off it for three weeks at the most.

How COVID-19 impacted Americans’ financial situations

The COVID-19 pandemic threw the American economy into chaos, with numerous businesses closing. In April 2020, the unemployment rate reached a level not seen since the 1930s. Near the end of 2021, 10 million households were behind on rent despite three rounds of stimulus checks.

More than half the people we surveyed said the pandemic worsened their financial situation. The biggest reason? Employment – more than 1 in 5 were working fewer hours and 15% lost their job. Others cited their own illness (17%), and 15% said their credit score decreased.

Financial stressors

One result of financial difficulty may be stress. Just over 1 in 3 respondents said they have frequently experienced stress or anxiety related to their finances since COVID started, with the most common stressor being paying bills other than mortgage or rent (cited by 35%). Debt was identified as a source of stress by 28% and 26% were stressed about not having enough savings.

Other stressors included basics like having enough food, high energy or gasoline prices, and paying mortgage or rent. Financial anxieties also reach as far as retirement, with more than 1 in 10 saying they’re worried they won’t have enough to retire on.

References:

  1. https://www.opploans.com/oppu/articles/personal-finance-study-2022/

6 Common Causes of Recessions

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“A soft landing is impossible. The economy is going to go into a recession fast. You’re going to see the economy just screech to a halt. That’s what the Fed needs to do to get inflation down.” ~ Mike Novogratz, Galaxy Digital CEO

The causes of recessions can vary greatly, according to the FinTech company Sofi. Generally speaking, recessions happen when something causes a loss of confidence among businesses and consumers. The recession that occurred in 2020 could be considered an outlier, as it was mainly sparked by an external global health event rather than internal economic causes.

The mechanics behind a typical recession work like this: consumers lose confidence and stop spending, driving down demand for goods and services. As a result, the economy shifts from growth to contraction. This can, in turn, lead to job losses, a slowdown in borrowing, and a continued decline in consumer spending.

According to SoFi, here are some common causes of recessions:

1. High Interest Rates

High interest rates make borrowing money more expensive, limiting the amount of money available to spend and invest. In the past, the Federal Reserve has raised interest rates to protect the value of the dollar or prevent the economy from overheating, which has, at times, resulted in a recession.

For example, the 1970s saw a period of stagnant growth and inflation that came to be known as “stagflation.” To fight it, the Fed raised interest rates throughout the decade, which created the recessions between 1980 and 1982.

2. Falling Housing Prices

If housing demand falls, so does the value of people’s homes. Homeowners may no longer be able to tap their house’s equity. As a result, homeowners may have less money in their pockets to spend, reducing consumption in the economy.

3. Stock Market Crash

A stock market crash occurs when a stock market index drops severely. If it falls by at least 20%, it enters what is known as a “bear market.” Stock market crashes can result in a recession since individual investors’ net worth declines, causing them to reduce spending because of a negative wealth effect. It can also cut into confidence among businesses, causing them to spend and hire less.

As stock prices drop, businesses may also face less access to capital and may produce less. They may have to lay off workers, whose ability to spend is curtailed. As this pattern continues, the economy may contract into recession.

4. Reduction in Real Wages

Real wages describe how much income an individual makes when adjusted for inflation. In other words, it represents how far consumer income can go in terms of the goods and services it can purchase.

When real wages shrink, a recession can begin. Consumers can lose confidence when they realize their income isn’t keeping up with inflation, leading to less spending and economic slowdown.

5. Bursting Bubbles

Asset bubbles are to blame for some of the most significant recessions in U.S. history, including the stock market bubble in the 1920s, the tech bubble in the 1990s, and the housing bubble in the 2000s.

An asset bubble occurs when the price of an asset, such as stock, bonds, commodities, and real estate, quickly rises without actual value in the asset to justify the rise.

As prices rise, new investors jump in, hoping to take advantage of the rapidly growing market. Yet, when the bubble bursts — for example, if demand runs out — the market can collapse, eventually leading to recession.

6. Deflation

Deflation is a widespread drop in prices, which an oversupply of goods and services can cause. This oversupply can result in consumers and businesses saving money rather than spending it. This is because consumers and businesses would rather wait to purchase goods and services that may be lower in price in the future. As demand falls and people spend less, a recession can follow due to the contraction in consumption and economic activity.

How Do Recessions Affect You?

Businesses may have fewer customers when the economy begins to slow down because consumers have less real income to spend. So they institute layoffs as a cost-cutting measure, which means unemployment rates rise.

As more people lose their jobs, they have less to spend on discretionary items, which means fewer sales and lower revenue for businesses. Individuals who can keep their jobs may choose to save their money rather than spend it, leading to less revenue for businesses.

Investors may see the value of their portfolios shrink if a recession triggers stock market volatility. Homeowners may also see a decline in their home’s equity if home values drop because of a recession.

When consumer spending declines, corporate earnings start to shrink. If a business doesn’t have enough resources to weather the storm, it may have to file for bankruptcy.

Governments and central banks will often do what they can to head off recession through monetary or fiscal stimulus to boost employment and spending. “It’s hard to not underestimate the huge impact that the response to COVID-19 had on all assets. We pumped so much liquidity into the markets it was crazy, we had never seen anything like it. We were throwing trillions of dollars around like matchsticks,” said Mike Novogratz, Galaxy Digital CEO.

Central banks, like the Federal Reserve, can provide monetary policy stimulus. The Fed can lower interest rates, which reduces the cost of borrowing. As more people borrow, there’s more money in circulation and more incentive to spend and invest.

Source: https://www.sofi.com/learn/content/what-is-a-recession/

Highly Processed Foods Can Result in Premature Deaths

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A growing body of evidence suggests that consuming too much highly processed food — items like hot dogs, chips, soda and ice cream — can have consequences beyond obesity and high cholesterol.

Foods that are “ultra-processed” contain more artificial ingredients than those that just have added salt, sugar or oil. These foods are ready-to-consume products that are made up entirely or mostly from substances extracted from food (oils, fats, sugar, proteins), derived from food constituents (hydrogenated fats, modified starches), or synthesized, based on organic materials (dyes, flavorings, flavor enhancers and other additives used to alter the food’s sensory properties).

Source: Bing.com images

They usually have very few whole ingredients and contain flavorings, colorings or other additives. Instant noodles, frozen pizza and store-bought cookies typically fall within this category.

In the U.S., ultra-processed food makes up around 57% of daily calories, on average. Based on that, Eduardo Nilson, a nutrition researcher at the University of São Paulo and the study’s lead author, believes the U.S. could expect more premature deaths associated with food.

Many previous “ultra-processed” studies have linked ultra-processed food to other negative health outcomes, including a higher risk for diabetes, cognitive decline, heart disease and cancer. An August study found that people in Italy who consumed ultra-processed food in large quantities had a higher overall risk of death.

Maura Walker, an assistant professor of nutrition at Boston University who wasn’t involved in the research, cautioned that this study did not show that ultra-processed food consumption directly caused premature death — only that there was an association. But the connection makes sense, she said.

Ultra-processed foods can often be identified by their long list of ingredients, many of which you wouldn’t normally find in your own kitchen and are often difficult to pronounce.

But not everything in this category is harmful, according to Dr. Walter Willett, a professor of epidemiology and nutrition at the Harvard T.H. Chan School of Public Health. For example, whole grain bread and whole grain breakfast cereals are sometimes considered ultra-processed, but they are also sources of dietary fiber, which can lower the risk of heart disease or cancer.

For that reason, Willett said, it’s important to focus on avoiding particular foods that are significantly associated with a risk of premature death.

The results from this study highlight the damage to health that is arising based on the observed trend in Brazil of replacing traditional meals, based on natural or minimally processed foods, with ultra-processed foods. These results also support the recommendation of avoiding the consumption of these kinds of foods.

References:

  1. https://www.ajpmonline.org/article/S0749-3797(22)00429-9/fulltext
  2. https://www.nbcnews.com/health/health-news/highly-processed-food-linked-early-death-study-rcna55455
  3. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4544452/

Monetary Tightening

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“We have overstimulated the economy by a big factor” ~ Sam Zell

Billionaire investor Sam Zell told CNBC Squawk Box that he sees no reason to be optimistic that there won’t be further severe economic (recession) and market (bear market) pains. “We have overstimulated the economy by a big factor,” Zell remarked. “We have to take the punch bowl away.”

He thinks a liquidity crisis may be up next and believed the whole “inflation is transitory” political soundbite originating from the Federal Reserve and the Biden Administration several months ago was an embarrassment and the phrase should be relegated to the dust bin of history.

Free money–monetary quantitative easing and historically low interest rates–leads to excess which leads to recession, states Zell. It’s really that simple.

Markets will not bottom until all that excess loose money bleeds out of the economy and Fed tightens its monetary policy. The pain of recession and further market decline are needed and will be good for long term markets.

The Federal Reserve maintained a too loose and easy monetary policy for too long.

“If you get really good at what you do, you get the freedom to be who you really are.” ~ Sam Zell

References:

  1. https://www.costar.com/article/1152237605/real-estate-magnate-sam-zell-moonlights-as-economist
  2. https://www.agriculture.com/news/business/risk-and-reward-a-conversation-with-sam-zell

Sam Zell, founder and chairman of Agricultural Real Estate, used to joke that his father made a life-or-death decision when he was 34 years old, and then never made another mistake again. Zell was inspired by his father’s confidence.

Daylight Saving Time

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Daylight Saving Time ended at 2 a.m. on Sunday, November 6, 2022. Don’t forget to reset your clocks and watches.

Daylight Saving Time has its roots in train schedules, but it was put into practice in Europe and the United States to save fuel and to reduce electricity usage during World War I by extending daylight hours, according to the US Department of Transportation’s Bureau of Transportation Statistics.

On the first Sunday of November, at 2 a.m., clocks in most of the United States and many other countries turn back an hour and stay there for nearly four months on what is called standard time, writes CNN’s Katia Hetter. On the second Sunday of March, at 2 a.m., clocks move forward one hour back to Daylight Saving Time.

For about eight months of the year, much of the US and dozens of other countries follow Daylight Saving Time. And for the remaining four months, they follow standard time.

There’s a move in Congress to make Daylight Saving Time permanent in the U.S.

Don’t forget to reset your alarm clock.

“Fall back; Spring forward.”

Sources:

  1. https://www.cnn.com/2022/11/05/health/daylight-saving-time-explainer-wellness
  2. https://www.cnn.com/2022/03/15/us/daylight-saving-time-history-trnd