06 January 2023
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US large-cap S&P 500 closed 1.11% DOWN 🔻 Tech-heavy Nasdaq Composite closed 1.15% DOWN 🔻 Pan European STOXX Europe 600 closed 0.12% DOWN 🔻 HK’s Hang Seng Index closed 1.25% UP ▲ Japan’s Nikkei 225 closed 0.4% UP ▲
📊 IN THE MARKETS
Bad good jobs news, Inverted Yield Curve, Crypto Friday: Genesis/Gemini, Celsius, Silvergate
Meta’s global hit on data privacy ruling in Europe, ads at risk
📖 MoneyFitt EXPLAINS
🎓 Inverted Yield Curve
📊 IN THE MARKETS
US stocks gave up everything it had made yesterday and more after a stronger than expected jobs report (and further reading of the previous day’s FOMC December meeting minutes) dampened market hopes that this year could see interest rates not just peaking, but actually start coming down.
GOOD JOB NEWS IS BAD
Good news in the real world, taken negatively (not unusually) by financial markets, with both stocks and Treasuries selling off, while the US Dollar strengthened. ADP, a payroll processor, and the Stanford Digital Economy Lab uses ADP’s anonymized and aggregated payroll data of over 25 million US employees for a read on US private sector employment. December showed this rose by 235,000 in December, well ahead of economist estimates of 150,000. The Labor Department also released new jobless claims for the last week of December which were still at historically low levels and came in lower than market expert expectations.
The fear is that the still red-hot US labour market is exacerbating upward pressure on wages, which in its worst form could lead to a “sticky” wage-cost spiral that can lead inflation to get out of control. (Prices of things go up, workers ask for more pay because things cost more, employees have no choice but to pay up, cost of things those workers make goes up, other workers ask for more pay because things cost more, employees have no choice but to pay up, cost of things those workers make goes up…)
If the Fed wants to squash future wage inflation by continuing to raise interest rates while the economy shows signs of slowing, it may inadvertently (or on purpose) push the economy into a recession.
INVERTED YIELD CURVE
Many investors typically look at the gap between two- and 10-year yields as a predictor of future recessions. Long rates dropping below shorter ones has frequently preceded recessions by about 18 months. Campbell Harvey, the economist who pioneered the link between an inverted yield curve 🎓 and recessions, uses 3-month Bills and 10-year US government bonds, or “Treasuries” and from 1968 to 2021 it inverted 8x and preceded a recession 8x… with NO false alarms. (It’s also used by the New York Fed in its recession probability models.)
It’s now the ninth time, having just gone negative in late Oct-22 and is flashing “Code Red”… but he’s saying in a LinkedIn post that we can dodge the hard landing bullet IF the Fed stops tightening now.
Among the factors giving him some comfort are the red-hot labour market in the US, which markets are so worried about (see above.) Labour excess demand means that laid-off workers can find work quickly so the economy can better absorb slower or negative growth. Meanwhile, consumers’ balance sheets (including housing debt) are in a much stronger position now and the financial sector is (partly thanks to regulations since the GFC) much healthier now.
CRYPTO-FRIDAY: GENESIS/GEMINI, CELSIUS, SILVERGATE
Crypto broker Genesis is sacking 30% of its staff as the collapse of FTX continues to hit both the crypto space and the company directly. Ironically, it was sister company Coindesk, a crypto news site also owned by Its parent company, Digital Currency Group, which first broke the news about FTX and Alameda that ended up… the way it’s ended up. DCG is trying to raise investor money to pay back creditors, which includes customers of the Winklevoss twins’ Gemini exchange.
Gemini had a programme called “Earn” which on its launch in Feb-21 promised “You can now earn up to 8.05% APY on your crypto held at Gemini” which it could do by making loans to corporate borrowers through Genesis and others. Wow, 8.05%? Sounds too good to be true! Well, you know what they say…
“Earn up to 17% APY and get paid weekly when you HODL your coins with Celsius.” Wow, 17%? Sounds too good to be true!
A US judge ruled that the bankrupt Celsius Network owns most of the cryptocurrency that customers deposited into its interest-bearing Earn account. This means 600,000 customer accounts (with assets valued at US$4.2 billion when Celsius filed in July) would be last in line for repayment in the crypto lender’s bankruptcy.
The terms of service made clear that Celsius took ownership of customer deposits in the interest-bearing Earn accounts, so Earn customers will be treated as unsecured creditors in Celsius’ bankruptcy. Hence last in line. This will affect crypto investors in similar products across other interest bearing platforms as well, like BlockFi (though wallet customers seem to be in a better position.)
Also, on Thursday, New York’s attorney general sued Alex Mashinsky, the founder of Celsius Network, claiming he defrauded investors out of billions.
Meanwhile, crypto-focused bank Silvergate is sacking 200 employees, or 40% per cent of its staff, in what looks like a run on the bank, with an US$8.1 billion drop in deposits. (A “bank run” occurs when bank depositors worry that the bank will fail and all try to withdraw money at the same time. Most central banks have customer deposit guarantees to help prevent this and act as lenders of last resort, lending the bank the cash it needs, if it does still happen.)
Total deposits from digital asset customers declined from $11.9bn to $3.8bn in the fourth quarter, but luckily (or skilfully) three-quarters of the “crypto-friendly” bank’s deposit base and equity capital were held in government bonds, which meant that even though many were sold at a loss to return money to depositors, at least it could do so. Still, the shares of Silvergate Capital dropped 43% on Thursday, leaving the stock down 90% in the last one year.
(As an aside, Silvergate was already down 83% from 6-Jan-22 to 4-Jan-23, so if anyone says to you “after dropping 83% how much more downside could there be?” forward them this newsletter.)
Meta’s global hit on data privacy ruling in Europe, ads at risk
European Union regulators have ruled that Meta illegally forced Facebook and Instagram users to effectively accept personalized ads and fined the company EUR390 million for breaching the General Data Protection Regulation (GDPR), the EU’s far-reaching 2018 data-privacy law. Meta basically snuck into its lengthy terms of service or TOS agreement (which everyone reads in its entirety,,, right? Right?) language that effectively meant users must allow their data to be used for personalised ads or else not use Facebook and Instagram altogether.
This is important for Meta not only because Europe is a huge market for Meta, but also because of GDPR’s “extra-territorial effect.” GDPR applies to any company anywhere in the world doing any kind of data-related stuff (i.e. everything) with European citizens and residents. Yes, not just within Europe. So adjusting its business and terms of service etc to comply with this ruling “just for Europe” would most likely be impossible.
Meta has already been smacked with a major drop in advertising revenue from the data privacy-related changes made by Apple in 2021 that gave iPhone users the ability to choose whether advertisers could track them. Most users have blocked tracking and Meta estimated Apple’s changes would cost it about US$10 billion in 2022.
Meanwhile, on the competition front, Meta and Alphabet have dropped to below a 50% combined market share of the US digital advertising market for the first time since 2014, and which they dominated for years before that. Competition is coming hard and fast from Amazon, TikTok, Microsoft and Apple.
Thank you for spending a few minutes of your time with us. Remember to take time for yourself and be thankful for what you have.
📖 MoneyFitt EXPLAINS
🎓 Inverted Yield Curve background 476584
All US government-issued bonds are seen to be very safe (“risk-free”) and are watched closely as an indicator of broad investor sentiment. If investors are confident, they will prefer to be in riskier but higher return stocks and vice versa.
The difference between bonds with a maturity of two years and ten years is known as the yield curve and typically the yield on the 2-year is lower than that of the 10-year because there is more uncertainty further out (anything could happen!) than in the nearer future.
(Any pair of different maturities is “a yield curve” but this pair is the most widely followed. The 3-month and 10-yr is used by the NY Fed in its recession probability models.)
But when the 2-year is above the 10-year the yield curve is said to be “inverted” and many economists take it as a reliable sign of a recession ahead in the next 1-2 years.
One interpretation is that investors see that short-term rates are so high in the short term that it will trigger a recession and that the response will be to lower rates to stimulate the economy in the future (not literally in ten years from now, but some time later.)
OOPS – this Explainer was truncated in yesterday’s MFM. Apologies.
Unemployment, is defined as people of working age who are not in either paid employment or self-employed but ARE available and actively seeking work.
It is measured by the unemployment or “jobless” rate, the number of people unemployed as a percentage of the labour force, which is the total of people employed and unemployed. (The labour force as a percentage of the entire working-age population is the “participation rate.”)
Unemployment can be caused low demand during business cycles or for structural or technological reasons when certain people stop being employable.
Some believe in the NAIRU, the Non-Accelerating Inflation Rate of Unemployment, when labour demand and supply are in balance and therefore not putting pressure on wages and prices in either direction.
If inflation gets too high, the economy is often slowed down on purpose, often leading to rising unemployment (though governments and central banks can soften the blow), triggering a further drop in consumer spending, which may then lead to a recession or worse.
Besides politics and voting, it can, of course, also lead to individuals suffering financial hardship that impacts mental and physical health, families, relationships and communities.
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