Weekly TLDR - Sunny With a 30% Chance Of Recession
In this week’s TLDR, we talk about the fight over content creators, consumer confidence and recession indicators, and Binance dropping crypto trading fees.
The TLDR
In this week’s TLDR, we talk about the fight over content creators, consumer confidence and recession indicators, and Binance undercutting Robinhood and Coinbase by dropping crypto trading fees.
Interest rates are going up all around the world, resulting in a currency war (higher interest rates means a stronger currency) as central banks race to see who can keep their rates higher than their neighbors on a relative basis. The losers of this race end up importing the most inflation. Regardless of which countries are left holding the bag, consumers are losing in a big way with the global consumer confidence index dropping below pandemic lows and nearing 2008 financial crisis levels. Funnily enough, the stock market is almost hoping for a hard landing and a recession so that central banks can start lowering rates again. Are we too addicted to low interest rates?
Stock Market TLDR
The Fight for Creator Market Share
The Short: It’s a good time to be a content creator as popular platforms (e.g. TikTok, Instagram, Twitch) are all racing to increase creator revenue share and launch new creator-friendly features. It’s a bad time to be a company catering to creators as your margins are probably taking a hit.
The Long: Zuckerberg recently announced in a Facebook post that the company will hold off from taking revenue share until 2024 for a slew of creator-focused features. This closely follows Twitch’s announcement to up its ads revenue share to 55%, matching YouTube. These creator-friendly changes are likely, in part, a reaction to YouTube announcing 1.5 Billion MAUs for its YouTube Shorts product, which is rapidly catching up to TikTok’s 1.6 Billion estimated MAUs. Creator-centric business models enjoy strong network effects and a powerful flywheel whereby acquiring creators directly drives user growth and monetization, which then begets more creators. I expect revenue sharing to continue to tilt towards creators as companies fight for market share, taking a hit to their margins in the process.
Investor Settlement is Dead
The Short: Bank of America’s Bull/Bear Indicator is at dead zero.
The Long: High energy prices, falling markets, an escalating conflict in Europe, and tightening central banks have caused investor sentiment to crater to zero. This has happened only five times since the creation of this indicator in the early 2000s. Interestingly, the Bull/Bear indicator is often a contrarian indicator. The reasoning goes, when investor sentiment is extremely low, most people have already sold. Could a cratered Bull/Bear indicator add more fuel to the idea of an end-of-month/end-of-quarter stock market rally that I introduced in recent FinanceTLDR newsletter issues? Or could the indicator flatline for a while like in 2008? Regardless, we’re certainly going through some extreme times in the market.
TSMC Introduces 2nm Manufacturing Process
The Short: TSMC is pulling ahead of Intel again in manufacturing prowess. However, expect significant capital expenditures and some margin compression for TSMC as it ramps up this new process.
The Long: The 2 nanometer process from TSMC is industry-leading and propels the company’s manufacturing technology even further ahead of Intel’s. However, these new processing nodes are also capital-intensive and risky to build, requiring tens of billions of dollars of capital expenditures with uncertain yields. If yields don’t increase, TSMC may see significant margin risk. Another risk is that the 2nm node’s performance increase over its predecessor (3nm node) is much smaller than previous upgrades. These risks could all be moot if Apple and Nvidia end up adopting the 2nm node anyways… but then there’s the question of how much time it takes for these two companies to transition over. Instead of focusing on 2nm, TSMC might get the best bang for its buck by clearing up manufacturing capacity for its 3nm and 5nm nodes, thus undercutting Intel’s fledging foundry business before it even gets started. In any case, who’s to question innovation? Onwards and upwards.
Sunny With a 30% Chance Of Recession
The Short: As we head into the summer months, recession warnings are flickering as Goldman Sachs increases their recession probability to 30%.
The Long: Increasing prices and increasing interest rates are squeezing consumers worldwide. In the US, the Fed has been aggressively raising interest rates and hinting at more aggressive action if inflation remains stubborn. The thing is, the economy often lags monetary policy changes and the Fed will very likely overdo things. It’s hard not to, given their blunt tools. Many economists also see this risk and are upping their recession probabilities. At this point, the markets seem to be looking forward to a recession, since recessions are typically a catalyst for cooling inflation and the loosening of monetary policy. That’s something the market can rally behind.
A Heavy-Handed Government
The Short: Alibaba Health rallied almost 14% two days ago. Yesterday, China’s National Medical Products Administration drafted an amendment bill to the Drug Management Law, prohibiting 3rd party platform providers from directly selling drugs online. Alibaba Health proceeded to fall 13%.
The Long: As we’ve warned before, although China appears to be a highly attractive market to invest in given the growth opportunities, the heavy-handedness of its government makes investing in the country a risky business. One really needs to understand how the government works and what their goals are to pick companies at low risk of being suddenly subject to heavy-handed regulations.
Crypto TLDR
FTX Bails Out Crypto Pseudo-Bank BlockFi
The Short: BlockFi recently secured a $250 million revolving credit facility from crypto trading giant FTX to bolster its balance sheet. BlockFi is a major pseudo-bank for crypto. Last year March, the company had 265,000 funded retail clients, over 200 institutional clients, and had lent over $10 billion to its clients.
The Long: Sam Bankman-Fried (SBF), the CEO of FTX, thinks that BlockFi has a great management team that knows how to carefully manage risk, unlike other crypto firms that recently found themselves in hot water through the overuse of leverage (e.g. Three Arrows Capital, Celsius). It appears BlockFi is preemptively securing this revolving credit facility just in case the crypto market worsens, which is definitely the right move. SBF also hinted that this deal opens the doors to a closer partnership between FTX and BlockFi moving forward, with the possibility of collaborating to launch “industry leading products”. Finally, SBF had this to say about the deal: “We take our duty seriously to protect the digital asset ecosystem and its customers.” Is FTX becoming the central bank/buyer of last resort for crypto?
Binance Ups The Pressure on Coinbase and Robinhood
Binance.US recently cut Bitcoin trading fees to zero for select trading pairs. Since Coinbase and Robinhood derive a lot of their revenue from crypto trading fees, this move puts pressure on both companies and could signal the start of a race to zero trading fees, similar to what happened with stock trading. Coinbase and Robinhood’s stock prices fell on the announcement.
Tether Is Carrying Out an Audit
The Short: Controversial crypto stablecoin Tether, which is currently the largest stablecoin by market cap and volume, will go through a full audit by a top-12 accounting firm. The company wants to provide more transparency into their USDT reserves.
The Long: Tether has been a highly controversial stablecoin since I started dabbling in crypto in 2017. Many accuse the company of not having enough reserves to back all the USDT in circulation. Some even go so far as to accuse the company of printing money to pump the crypto market. Tether has also gone through its fair share of government scrutiny, such as being fined $18.5 million by the NYAG. With the recent collapse of algorithmic stablecoin Terra Luna, the spotlight is yet again on Tether and many are predicting that Tether’s collapse will seriously crash the crypto market. The thing is, Tether isn’t an algorithmic stablecoin and is backed by actual US dollars and Treasuries. This creates a much more secure stablecoin system. Tether has survived for five years and counting, despite the criticisms and government investigations. Even the CEO of major ETF issuer VanEck has stated that he has seen Tether’s books and that they are sound. The upcoming audit will hopefully put to rest most of the concerns around Tether.
Ebay Buys NFT Marketplace KnownOrigin
Ebay signed a duel on Tuesday to acquire UK-based NFT marketplace KnownOrigin. It’s interesting that this deal still went through given the extremely bearish market conditions for crypto (and by extension NFTs). Ebay has been dabbling with NFTs since last year when it began allowing users to buy and sell NFTs on its platform. The company could be taking the opportunity during this harsh bear market to make strategic crypto acquisitions at bargain-bin prices.
The One Chart That Matters the Most
I’ve shared this chart before. Although the recent crypto bear market is intense and painful, it could open up yet another buying opportunity. Crypto has always experienced severe drawdowns given its nascency and widespread / unregulated use of leverage, but it has always rebounded to new highs. There’s opportunity behind today’s extremely negative market sentiment.