FIVE MINUTE FINANCE: POWELL’S DARK MESSAGE, ETH IS NOW LESS INFLATIONARY THAN BTC, MORE
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:
- Powell’s Stark Warning
- Did ETH Just Merge its Way into a Security?
- Ethereum Overtakes Bitcoin as Less Inflationary Asset
- NFTs See Surprising Popularity Boost on Reddit
- PFOF Won’t Be Banned in the US
12 Fed Governors Decide the Economy’s Course
- FED Raises Interest Rates by 75 BPS in 2022’s Fifth Hike (link)
- Full Recap of the Fed’s Rate Hike and Powell’s Comments on the Outlook for Future Increases (link)
The Fed’s Quest to Make Everything More Affordable, By Making It Less Affordable Short-Term
The Federal Open Market Committee (FOMC) delivered its 5th interest rate hike of the year this past Wednesday. As the rulers of global money liquidity, the 12 Fed Governors didn’t surprise anyone.
The third 0.75% increase had been expected across the board, so the market had already priced it in. However, the press conference that followed exerted market selloffs nonetheless.
BTC, SPX, and NDX react to Wednesday’s FOMC meeting and Powell’s remarks. Image credit: Trading View
It appears that the “soft landing” narrative has been thrown out the window. Firstly, Powell emphasized that employment is too high, “rising by an average of 378,000 jobs per month over the last three months”. Because the demand for workers is above the supply, it doesn’t suppress wages enough.
This is bad from the standpoint of lowering inflation because it doesn’t lead to sufficiently suppressed consumer demand. Secondly, Powell wants to see the housing market go down:
“So the deceleration in housing prices that we’re seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals and that’s a good thing.”
Indeed, since Q1 2020, the median home price ballooned by +74%. Fed hikes are doing a good job in puncturing that bubble. For instance, the Home Ownership Affordability Monitor (HOAM) index has now dropped to decades’ low.
This year’s Fed hikes have had 5x more impact on housing than home prices. Image credit: HOAM.
The median US household would now have to spend nearly half of their income for mortgage payments. In turn, because the Fed raised short-term interest rates above the mortgage rate, we’ve seen the sharpest decline in single family home sales since 1980.
Of course, auto-financing and credit cards will suffer the same fate. With the new fed funds rate at 3% — 3.25%, Bankrate already aggregated the average credit card APR at ~19%.
The Fed’s goal is then clear:
- Lower the price of all assets, with real estate being the largest group.
- Suppress wage growth by increasing unemployment from present 3.7% to 4.4%
- Make borrowing more expensive across the board, so debt isn’t readily available to meet consumer demand
Powell openly admitted that a soft landing will be “very challenging” and that “no one knows whether this process will lead to a recession”. He concluded that funds rates would have to be held at a “restrictive level” for a prolonged period to slow the economy. Meaning, to induce a recession.
“If we want to light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish that there was a painless way to do that. There isn’t.” -Powell.
This implies another 75 bps hike in November and another 50 bps after that, which would be above market expectations, resulting in this week’s fresh market selloffs.
The Merge Turned ETH Into a Security?
- Ethereum Under Threat From the SEC, Down Nearly 20% After the Merge (link)
- SEC Claims All of Ethereum Falls Under US Jurisdiction (link)
SEC’s Gensler Probes All Weaknesses
Did you know that 45% of all validator-run Ethereum nodes are in the US? SEC chief Gary Gensler certainly does.
This was revealed in the SEC lawsuit against crypto influencer Ian Balina for failing to register his cryptocoins as a security, after rolling out an ICO.
Image credit: SEC complaint filing
Why would the SEC care to emphasize this? To fully exploit the regulatory crypto void and treat the entire Ethereum network as a US securities exchange, like NYSE or Nasdaq, treating nodes as broker-dealers. Although this legal framing doesn’t have legal weight yet, it does frame a path in that direction.
After Ethereum turned proof-of-stake, Gensler also noted that staking may be equivalent to shareholding. As in, pledging assets to receive rewards, making ETH a security. Of course, because Ethereum makes 57% of the DeFi ecosystem, Gensler is casting a web for the entire crypto landscape.
While this may seem like an overreach, it is not surprising one bit. Keep in mind, Gensler is a former Goldman Sachs banker, and is commonly critiqued as a participant in the financial industry’s revolving door between the private banking sector and its regulator, the government. Do firms in this private banking sector see digital assets as a threat to their business?
Jamie Dimon clarified such sentiment on Wednesday. As the CEO of the world’s largest commercial bank, JPMorgan, he said “crypto tokens…are decentralized Ponzi schemes”. Even more tellingly, the notion of a revolving door between banks and Congress is apparently a casual laughing matter in the highest offices of power.
Although BTC miners are also concentrated in the US, the reforged PoS Ethereum is now in deeper vulnerability straits. Bitcoin’s ASIC-based PoW mining is highly unprofitable via cloud computing, but this isn’t true for staked Ethereum.
Even after the Merge, Amazon Web Services (AWS) hosts over half of Ethereum nodes. Image credit: Messari.
This is the same Amazon that was just picked by the European Central Bank (ECB) to build a front-end for the digital euro.
All things considered, it looks like all vulnerabilities and loopholes will be closely examined. In the end, we may have digital assets, but under what conditions?
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What’s Up With Post-Merge Ethereum?
- The Sell-the-news Event: Ethereum Plunge and Fork Fire Sale (link)
Ethereum More Deflationary than Bitcoin
Like all markets, Ethereum couldn’t withstand the bear-lunging Fed hikes. The Merge hype ran out of steam a week before it successfully completed, with continued investor outflows.
After the Merge, ETH dropped by -16%, to its current price point at just above $1,300. But, there is much change in ETH fundamentals. First of all, did you know that ETH is now less inflationary than Bitcoin?
While it is true that Bitcoin has a max coin cap and ETH doesn’t, the circulating supply dynamic has now shifted in Ethereum’s favor. Since the Merge, ETH annual inflation is at +0.2%, while Bitcoin is at +1.72%. Alongside -99% reduced energy, this is another side-benefit of going PoS, as there is less computing power needed to issue ETH reward blocks.
True to estimates, ETH issuance decreased by 90% post-Merge. Image credit: Ultrasound.Money
Through halvings, Bitcoin should reach Ethereum’s present inflationary level by 2032.
The situation adds to the long-term bullish case for Ethereum. After all, hundreds of lending and NFT dApps make Ethereum more used on a daily basis, exerting additional anti-deflationary pressure.
And that doesn’t even account for the next Ethereum upgrade, the Surge, which scales up its mainnet through sharding. In the meantime, Ethereum’s layer 2 scalability solutions that offer negligible fees, such as Polygon, Arbitrum and Optimism, have more total value locked (TVL) than most Ethereum alternatives.
Just Ethereum’s 11.54% of locked ETH (worth $18.9 billion) is larger than market caps of Cardano, Solana, TRON, Avalanche, Cosmos and other Ethereum competitors. Image credit: Dune Analytics
After sharding, which will increase Ethereum’s throughput from 14tps to up to 100,000tps, it is very likely that Ethereum will become deflationary, adding to the scarcity of each ETH.
Are NFTs Dead? Not on Reddit
- Reddit Avatar NFTs Raise Eyebrows as They Rocket to $5K (link)
Will Reddit’s 430m Active Monthly Users Revitalize the NFT Market?
While NFTs have been on the decline, returning to their July 2021 trading levels, there are still plenty of enthusiasts around. In fact, those active traders are now more numerous than before, somewhat compensating for the bearish winds.
Despite lowered monthly volumes, speculative NFT hooks are firmly planted. Image credit: Dune Analytics
From this pool we see a modest NFT resurgence. Reddit-themed avatars, dubbed The Senses, have sold for 4 ETH each, or about $5,300. Reddit user Rojom created them under Reddit’s official Collectible Avatars Creator Program. You can be the judge of their artistic worth.
By selling for 4 ETH, the first The Hands #46 owner made a 166% profit. Image credit: OpenSea
The entire The Senses x Reddit Collectible Avatars consists of 1,300 NFTs with an average floor price of 2.75 ETH. Interestingly, the collection has 90% unique owners, which indicates low NFT flipping intent. Rojom received 2.5% out of each sale, totaling 59.6 ETH volume, or ~$80k.
It is also notable that Reddit users tend to mock the very concept of NFTs. Such attitudes were even present on r/Cryptocurrency, so this may signal a trend reversal.
“Absolutely insane to think that before these, this sub[-Reddit] hated digital assets with a passion,”
After Meta rolled out its Instagram avatars, we can expect to see omnipresent NFT avatars, uniquely tying users’ online identities to their wallets and content. Even if a fraction of Meta/Reddit/Twitter userbase takes in NFTs, the inflow will be massive. According to Grand View Research, the NFT market should reach $200 billion by 2030.
Image credit: Grand View Research
After NFT-powered play-to-earn (P2E) games are rolled out, that growth might even accelerate beyond the projections. Yuga Labs’ Otherside (APE), Decimated (DIO) and Elumia Crown (ELU) are just some of the rising contenders when it comes to gaming experience. As these are yet to be released however, their true value is unknown.
Report: SEC Will Not Ban PFOF
- Brokerages Jump on Report SEC Stops Short of Banning PFOF Deals (link)
Robinhood (HOOD) Briefly Rallies After PFOF News
Payment-for-order-flow (PFOF) has been the bread and butter for brokers like Robinhood. To offset zero-cost access to stock trading, brokers make deals with market makers by routing trading orders for a cut.
Obviously, this introduces a moral hazard, as we’ve seen from trading restrictions during the GME/AMC short squeeze. For a while, it appeared that the PFOF model was too moral-hazardy to survive, but no longer. The SEC made the call to not ban it after all.
Instead, the SEC is proceeding to make PFOF less morally grimy by making it more competitive. To do so, the SEC will outline fees, rebates, and the best way it is executed. All of that is expected to be clarified in the upcoming months.
Although new competitive-boosting rules will make PFOF less profitable, it is superior to a ban. Robinhood has been particularly hit hard by PFOF-ban rumors this year, pressing HOOD down by -47% YTD. Even prior to the GME/AMC short squeeze, the SEC punished Robinhood with a $65 million fine for failing to disclose PFOF revenue.
Last year, Robinhood reported that the “majority of our revenue is transaction-based (including PFOF)”. PFOF is believed to comprise about 75% of that inclusion, so it is no wonder HOOD took a momentary rally following the news. Interestingly, market maker Virtu Financial (VIRT) sustained the rally, but HOOD plummeted shortly after.
After a +9% bump, HOOD lost all gains and headed to a three-week low. The more diverse Charles Schwab (SCHW) barely moved. Image credit: Trading View
It appears that the market prefers market makers instead of brokers when it comes to expected revenue boost. That’s because broker competition is much stiffer now, as demonstrated by June’s PFOF revenue among popular brokers. Both Charles Schwab and E*Trade topped Robinhood in PFOF earnings:
Stock brokers’ PFOF earnings for orders routed in June of 2022. Image credit: Bloomberg.
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Tweets of the Week
$100,000,000 was just sent for 46¢
This is very important
#Yen strengthens after the Japanese government sells #USDs to prop up the yen in its first intervention since 1998.
The #Milkshake theory is in full motion
The #USD wrecking ball. Expect more central banks to do the same!
Once inflation is above 5%, it takes 10years on average to get it to drop to 2% again.
Will this time be different?
30-year fixed rate mortgages up another 20bps today, now at 6.62%.
BREAKING: Euro falls under $0.98 for the first time in 20 years.
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