Market Thinking

making sense of the narrative

MADE FALSE BANK, AM RUIN*

*On the basis that among the many things we couldn’t believe about the FTX debacle, we thought it couldn’t be a real name, we tried myriad versions of anagrams of Sam(uel) Bankman Fried and concluded that while Slam me a Defi Bank Run was good, Made False Bank, am Ruin was probably the clue that the universe was trying to give us ( albeit with an extra a).

In a world where it has taken us huge amounts of effort, paperwork, compliance and due diligence to open an office, get licensed and start to launch funds, it is genuinely baffling to watch how a pair of twenty somethings managed to first attract and then seemingly vapourise tens of billions of $ of investor money in an update of a classic bank run-albeit with a modern VC twist. Tales of how Sam Bankman Fried (perhaps it is simply nominative determinism rather than an anagram at work) not only fried his ‘bank’ but also managed to persuade some of the biggest names in VC to invest at high valuations in an unregulated business based in the Bahamas and yet none of them even wanted a seat on the board are simply extra-ordinary. Of course the fact that some of them included Softbank and Tiger Global should have been something of a red flag, for as Leo Lewis at the FT put it this week:

 But where there is an opportunity to lose money on tech these days, Masayoshi Son still seems one step ahead of the market at having found it ages ago

Leo Lewis, FT

In addition, we looked back at some of the comments we made in the past about Softbank, or Softtouch as we called it, and how they appeared to be at the bottom of every ‘crash’, (see Softbank, again?). Thus sooner or later it was going to be inevitable that they blew up in Crypto as well. In this one (paging Michael Lewis, from June 2020) or this one (when the bigger fool …is you) we noted the incestuous relationship between the assorted insiders and how the private markets were happy to make up valuations between themselves, but that ultimately what mattered is actual cash flow.

The Crypto markets then have simply been late catching up to what happened elsewhere in VC back in 2020, with seemingly some of the same players involved. As we noted (in won’t work), the Comedy Show Silicon Valley is looking more and more like a documentary, with the Indian Rope trick of investing small amounts at ever higher valuations and the need to ‘always raise at a higher price’ until ultimately you get an IPO and everyone gets paid. Softbank as well as Tiger Global were of course mixed funds between private and public equity and ‘famous’ for cutting in late in the day at the pre-IPO stage of VC funding and not wanting board seats, so perhaps there was an expectation of a lucrative IPO to come. Also, apparently, in a week of schadenfreude, a number of high profile ESG investors also appear to have got caught out, perhaps because apparently FTX got a higher ESG score for ‘Leadership and Governance’ than Exxon Mobil, so it’s likely that they, like many of the other investors simply assumed that other investors had ‘done the work’.

Creative Destruction?

In many ways this feels like the bookend to a year that saw the aforementioned Tiger Global go from Hero to (near) Zero and Softbank burnish its crown as a reverse Midas. Extra-ordinary to think that only a year ago we saw crypto and tech mega bulls ARKK peak on November 1st 2021 at $125, before dropping to a low almost exactly a year later of $32, while Bitcoin was $7561 and now $1800 and in the final throes of the ‘free money’ world the SPAC index hit $703 last November, but has since dropped to the current level around $500 as the Fed has finally moved. Tiger Global of course were busy cashing a reported $2bn of performance fees. Looking at comments from a year ago, we noted that the Thanksgiving year end effect was likely to reverse a lot of these ‘winning trades and that the US$ was finally starting to move higher – and of course the DXY has put on a +20% move since then, while all the VC, tech and crypto trades have not only taken profits, but properly crashed. A year on and it looks like the clear out is largely ‘done’ and interesting to note that the DXY now seems be rolling over again to complete the process. As indeed seem to be a lot of the big themes for 2022 as the market has now delivered its ‘creative destruction’, with FTX perhaps the latest (last) piece of the jigsaw.

Indeed, our suggestions that the 2022 trades are all set to reverse/see profit taking and short covering seems to be coming true very quickly right now. Apparently, our friends the CTA traders have been ‘forced buyers’ of $200bn+ of Equities in recent days for short covering and while the dramatic movements from the lows in indices like FTSE, Dax and the China Internet stocks give some clues as to where the shorts have been, similar moves in Emerging Markets and Japan suggest some rebalancing may be starting.

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