Centerfin Collective Weekly

Weekly Update November 11, 2022

The stunning downfall of FTX, Inflation cooling, Russian retreat

The stunning downfall of FTX

Unless you have been hiding under a rock, you have likely heard about the spectacular collapse of cryptocurrency exchange FTX and its charismatic founder, SBF. The size and speed of the collapse is incredible and follows a very steep ascent in just a few short years. While details are still emerging, it seems like FTX was using client funds to cover losses in separate but related entities. This is sad news and a huge setback for the industry. To all the naysayers who have come out to say this only happens in crypto, we would like to refer you to MF Global under Jon Corzine’s leadership over a decade ago. This was a failure of regulators in the US for refusing to proactively provide a regulatory framework for the industry. This was also a failure of the investors who plowed billions of dollars into the company without doing the proper due diligence. Our perspective on the crypto space has not changed. We have long maintained that we see huge long-term potential value in Bitcoin and Ethereum; however, given its very nascent and volatile state, exposure needs to be sized accordingly (small).

Inflation shows signs of cooling

The Consumer Price Index (CPI) came in slightly lower than expected, sparking a dramatic rally in stocks. The market has been looking for signs of cooling inflation in hopes of a Federal Reserve pivot (a slowing or pause in interest rate hikes). What was encouraging was that shelter inflation was responsible for more than half the reading this month. As we know, shelter is a lagging indicator and has been cooling. This bodes well for potentially lower future readings. As it pertains to the response in the stock market, there was evidence of short covering; however, what was more telling was the response in the bond market. Both short and long-term treasury yields declined significantly. The federal funds futures market also repriced the terminal rate lower (the level where the Fed ultimately hikes to). While it's probably too early to call an all-clear on inflation, the data point was encouraging.

Russian retreat

After starting a counter-offensive effort in the Kherson region in August, the Ukrainian army showed significant progress this week, causing Russia to announce a retreat. In addition, there was news of diplomatic efforts by the US to cool nuclear tensions and bring Ukraine to the negotiating table with Russia. Any signs of a potential resolution to this tragic war are encouraging. In addition to putting an end to the human tragedy, it would remove a significant cause of uncertainty in markets.