5MF (WEEK 4): SURPRISE GDP GROWTH, BTC OPEN INTEREST, MOODY’S STABLECOIN RATING
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The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.
Let’s see what’s going on this week:
- GDP Growth: Is a Recession Delayed?
- Diving into Tesla’s Financials in Q4
- How Tech Job Cuts Aren’t Really What They Seem
- CME Bitcoin Futures Show Return of Big Money
- Moody’s Stablecoin Rating System in the Works
GDP Growth Surprise
- U.S. GDP Rose 2.9% in Q4, More than Expected Even as Recession Fears Loom (link)
GDP Stronger than Expected
Lately, recession forecasts have been everywhere.
From Bank of America to BlackRock, they all expect it and say they’re preparing for it.
Are we there yet?
The latest gross domestic product (GDP) report shows +2.9% growth for Q4. This is better than the forecasted +2.8%, as projected by economists surveyed by Dow Jones. Yet, it’s still a decline from Q3’s +3.2%, meaning we’re in a phase of deceleration.
Image credit: BEA
For a textbook recession to be called, real GDP growth must be negative for two consecutive quarters, unless judged otherwise by the National Bureau of Economic Research (NBER).
To see what’s going on, we must first see what contributed to the unexpected growth for Q4.
As you can see below, much of the GDP weight relies on consumer and government spending, with a marked increase in federal spending.
Consumer spending + fixed investments account for 88% of GDP. The former decreased slightly, from +2.3% to +2.1%, with inventories up by +1.46%.
Image credit: Charles Schwab, BEA (note: residential 26.7% is erroneously marked as positive, it is -26.7%).
Nonetheless, business equipment, durable goods and housing (all three make up 20% of GDP) are on an accelerated decline of -3.2%.
Does this mean the unexpected GDP growth is a one-off fluke?
We know Fed Chair Jerome Powell probably isn’t reassured to see consumer spending in the positive range. And as he has repeatedly noted, he definitely doesn’t like a tight labor market.
Thursday’s jobless claims are at 186,000, down by 6,000 from the week prior, despite continued tech layoffs. Both consumer spending and its primary enabler (jobs) are inflationary forces. Since it’s the Fed’s job to stabilize prices, Powell wouldn’t favor either at this stage of the macro game.
Remember, the Fed’s official core inflation target is +2%, which is still at +5.7%. This is on top of January’s market rally, with the S&P 500 up by +6.27%.
All things considered, Fed governors could interpret this as extra ammo to inflict more hikes beyond February’s 25 bps. But even if the Fed eventually pivots (starts cutting rates), it would just mean that the market would dump on retail down the line.
At least, that’s been the case with previous Fed pivots.
Image credit: ElliottWave
However, the majority of these downturns happened after recessions already took hold.
The timing is then of critical importance.
This time, will the Fed pivot before or after a recession hits? We might soon finally find out.
Is TSLA Making a Rebound?
- Tesla Sold No BTC in Q4 and Beat Earnings Estimates (link)
Tesla Springs from the Year’s Bottom
As Musk got entangled with an expensive $44B Twitter purchase, Tesla (TSLA) stock saw a steep, downward trajectory.
To prop up his new social media project, Musk sold $3.6 billion worth of TSLA shares.
This selling pressure coincided with the general gloomy recessionary outlook, resulting in a -44% TSLA drop in December alone.
At the start of 2023 however, things have started to turn around:
Year-over-year, Tesla (TSLA) lost -48% of value. However, year-to-date, TSLA shares are up +48%, from $108 to $160. Image credit: Trading View.
Wednesday’s Q4 2022 earnings report has seemingly bolstered investor confidence further to keep the trend going:
- $24.3 billion revenue is a +37% YoY increase despite missing the Wall Street consensus by $300 million.
- Earnings per share at $1.19, beating the Wall Street expectation of $1.13 per share.
- Operating costs decreased by -16% while operating profit increased by +49%, to $3.9 billion.
Image credit: @EconomyApp
Overall, Tesla generated $7.6 billion free cash flow (FCF) in 2022. This is the volume of cash after deducting operating expenses and capital expenditures. As such, FCF indicates a company’s ability to fund further growth and pay dividends to shareholders.
Reflecting these positive figures, TSLA shares went up by +16.67% since Wednesday, from $138 to $160. To put these moves in perspective, Tesla’s success is quite remarkable. Between 2007 and 2019, the EV vanguard had a negative net income every single year.
This shifted in 2020 with the first positive net income at $690 million, followed by +700% the next year at $5.5 billion.
As a whole, Tesla ended 2022 with another profitability surge of +128%, from $5.5B to $12.5B.
Interestingly, in Q4, Musk decided to leave his Bitcoin stash alone despite BTC’s massive drop, neither buying nor selling. Up until Q2 ’22, Tesla had already sold 75% of its initial $1.5 billion BTC investment, with the present BTC value holding at $184 million.
Despite Surge in Tech Layoffs, Headcount Remains High
- Despite Massive Layoffs, Most Tech Firms Have More Employees Now than Pre-COVID (link)
- Gemini to Lay Off 10% of Its Staff (link)
Job Cuts Result in Positive Price Action
Ever since Musk took over, Twitter has lost around 80% of its original 7,500 employees.
That’s a pretty significant number. Yet the social media platform seems to be operating without issue.
Does this mean Twitter previously had a large number of redundant employees?
Big money investors are asking the same question — but not just for Twitter. Hedge fund billionaire Christopher Hohn openly asked Google/Alphabet CEO Sundar Pichai to downsize by 20%. Hohn believes Google’s latest 12,000 jobs cut isn’t enough:
“The decision to cut 12,000 jobs is a step in the right direction, but it does not even reverse the very strong headcount growth of 2022. Ultimately, the management will need to go further…. I believe the management should aim to reduce headcount to around 150,000, which is in line with Alphabet’s headcount at the end of 2021. This would require a total headcount reduction in the order of 20 percent.”
When it comes to Hohn’s reference to headcount growth prior to 2021, he is correct — not just for Alphabet, but for the larger tech industry in general.
We’ve all seen the string of tech layoff headlines recently. Even accounting for them, Big Tech still has more employees than at the start of 2020.
This largely happened for two reasons:
- Enormous money supply injection by the Fed in a near-zero interest environment, enabling companies to borrow extra-cheap capital. In turn, this led to expansions and hiring sprees.
- Retooling both work and home lifestyles to an online mode in the covid environment.
With both out the window, investors expect a reversal. And the recessionary outlook amid rising interest rates only compounds their expectations. So far, most tech companies that ramped up layoffs have seen positive share price upticks, at an average of +5.6%.
Image credit: Bloomberg
On the crypto front, layoffs are more event and crypto-dependent. For the longest time, Gemini of the Winklevoss twins enjoyed a highly reputable exchange image. When its Earn program went bust, in large part due to Barry Silbert’s Genesis, that image was eroded.
As the exchange bled users and outflows, the brothers decided to lay off 10% of Gemini’s workforce this past Monday. The news comes on the heels of Genesis itself firing 30% of its staff. Gemini’s top American competitor, Coinbase, also laid off 950 employees earlier this month.
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FTX Blow in the Rear View Mirror?
- Institutional Participation in Crypto Hit Record Low after FTX Collapse, but Data Indicates a Resurgence (link)
- After a $60M Series B Round, QuickNode Now Valued at $800M (link)
Institutional Money is Slowly Returning
After a relentless string of crypto bankruptcies leading up to 2023, the outlook is shifting.
Year-to-date, the top cryptocurrencies are up significantly in their own arenas. Bitcoin is up by +36%, while Ethereum is up by +30%.
On the derivatives front, Bitcoin CME futures have also gone sharply up, by over +20%.
Image credit: Arcane Research
This resurgence is a big deal for three reasons.
First, the Chicago Mercantile Exchange (CME) is a well established global marketplace for trading derivatives. As such, a ramp up in Bitcoin futures reflects increased institutional interest in the crypto space.
Second, these institutional players are growing more comfortable with their bets. After all, Bitcoin futures is a game of betting whether the price of Bitcoin will go up or down in the future. The “open interest” part tells how many are playing the game.
The more people play the game, the more the price of Bitcoin can be affected by bets made. With the CME Bitcoin futures open interest high again, more institutional investors are refocusing their attention from the FTX-triggered exodus.
Third, there is a stark contrast between CME BTC futures and offshore exchanges, at +23.6% vs. -18.6%.
Image credit: Arcane Research
This tells us that open interest in the CME market has remained relatively stable, unlike the short squeezes that have caused a drop in open interest in offshore exchanges.
In other words, shorters bet on Bitcoin’s price to fall. When this backfired, they closed their positions, which reduced BTC’s open interest.
Given that CME is primarily geared towards institutional investors, this once again shows that retail investors are more reactive to market conditions compared to institutional investors with better resources to make informed decisions.
We’re seeing institutional money enter the space in other areas as well.
Miami-based QuickNode aims to make it easy for developers to deploy dApps, such as exchanges or marketplaces, without dealing with blockchain infrastructure itself. In turn, both small and big businesses can enter the Web3/DeFi arena without the extra steps and costs.
Tuesday’s $60 million funding round raised QuickNode’s valuation by +220%, from $250 million to $800 million. For the blockchain ecosystem to prosper, it’s another positive sign that vital infrastructure continues to see inflows.
Today, we look at the 2014 Mt. Gox hack (when investors lost 850k BTC) as irrelevant, despite its devastating impact at the time. We’re certainly not there yet (and far from it), but the FTX crash isn’t preventing all institutional money from entering the digital asset space.
Legacy Moody’s to Rate Stablecoins
- Moody’s in Early Stages of Creating Stablecoin Rating System (link)
Another Step Toward Stablecoin Reserve Transparency?
2022 came with a lot of tough lessons in the crypto space.
One of which is the importance of stablecoin reserves.
Terra’s UST algorithmic stablecoin once had a market cap of over $18 billion. Yet due to its algorithmic backing, it failed to actually maintain its backing by any true reserves.
A market upset unpegged UST from the USD, which spiraled into a cascade of crypto bankruptcies and financial disaster.
Yet stablecoins serve as a foundational bridge connecting the fiat monetary world to the world of digital assets. With the convenience of stablecoins, it’s hard to imagine the crypto world existing without them.
Pegged to the dollar on a 1:1 ratio, they beat international money transfers by orders of magnitude:
- For example, if you were to send $1,000 from person A to B via Swift bank transfer, it may take days or weeks. Worse, a single intermediary bank in that long custody chain may decline the transfer for a number of reasons.
- But, if you send $1,000 in 1,000 USDT across the Tron blockchain network, the transfer is not only instantaneous but at a negligible fee level — from one self-custody wallet to another.
They also provide a safehaven from the volatile world of digital assets, while still remaining inside that world.
Yet the missing piece of the puzzle seems to come down to backing. How can digital asset users know that their digital dollars are indeed backed by real dollars?
The crypto space has yet to find a satisfactory mechanism here. So — who just joined the scene?
Moody’s — one of the Big Three credit rating agencies.
As third parties, they evaluate the creditworthiness of both companies or governments. Moody’s ratings range from AAA (the highest) to C (the lowest), as the likelihood that the entity will be able to repay its debts.
Investors then use this information to take action. The same will soon be possible with stablecoins. Still in the early development stage, the rating system will cover the top 20 stablecoins and their reserves.
Top stablecoins with a market cap above $1 billion. Image credit: coinmarketcap.com
Little is known about the program thus far, such as how it’ll work or which factors Moody’s will examine to rate stablecoins.
Tweets of the Week
Eye on the Fed: The market continues to price in a very fast pivot from a terminal rate of 5% to less than 3%. It’s really hard to imagine that this scenario will play out without a recession (which would prove current earnings estimates as too optimistic).
The drop in real M2 is the deepest since 1980 … 👀
When researching a company, try this in Google:
filetype:pdf site:.gov “investigation” [COMPANY NAME]
You will be surprised what kind of docs you will find.
(For more recent docs, go to Tools -> Past Year)
US Debt to GDP ratio moved lower for the 2nd straight year, from a peak of 128% in 2020 to 120% today. Why? High inflation caused nominal output to spike, and it has risen faster than new debt. National Debt rose $3.7 trillion over the last 2 years while GDP rose $4.4 trillion.
Bitcoin network has settled $339 billion of #BTC in the first three weeks of 2023