Weekly TLDR - Hunting for Liquidations
In this week’s TLDR, we talk about tech layoffs, the bank of Apple, Amazon drones, and a crypto liquidation hunt.
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The TLDR
In this week’s TLDR, we talk about tech layoffs, the bank of Apple, Amazon drones, and a crypto liquidation hunt.
Chart of the Week
Average gas prices across the country have reached historical levels of $5 per gallon and many consumers are looking to reduce their commuting to save money. However, rising costs are following folks home. Natural gas prices have reached an all-time high as well, right in time for the summer months and a huge heat wave that is affecting much of America. As folks turn their ACs on full blast, expect a blast from the end-of-month energy bill as well. It’s unfortunate, but not uncharacteristic of this year, that so many inflationary factors are yet again aligning to push energy costs up.
Stock Market TLDR
Tech Companies Are Slimming Down Their Workforce
The Short: Layoffs, rescinded offers, and hiring freezes are in focus this week for tech companies like Coinbase, Klarna, Twitter and many others. With decreasing stock prices and private company valuations, expect more tech CEOs to slim down their workforce in preparation for uncertain times.
The Long: The tech industry benefited immensely during the pandemic but as the country emerges from it, the industry is seeing some of those gains retreat as Tesla, Coinbase, Klarna, Twitter, Convoy, Stitch Fix and many others look to reduce their workforces. Lean days are coming for tech workers and most may not be ready for it. Long used to enjoying incredible work perks and high salaries, tech workers may soon face a job market that’s in the employer’s favor. Uncertainty around how the Fed’s actions will decrease consumer demand / slow down the economy will continue for a while so we expect more workforce decreases as VCs warn portfolio companies to mind their burn rate while public tech companies have seen their stock prices plummet. This is in stark contrast to the non-tech world where the labor market has continued to be incredibly tight.
2-Year Treasury More Volatile Than Bitcoin?
The Short: The Compound podcast shared a chart in their most recent episode showing that, relative to each asset’s historical volatility, the 2-Year Treasury yield was recently more volatile than Bitcoin!
The Long: The 2-Year Treasury yield has a significant influence on the global cost of capital and is thus the lifeblood of the global economy. It shouldn’t be moving the way it did recently. From about 2.6% at the start of June, it shot up to more than 3.4% after Friday’s release of May’s CPI report. CPI inflation came in much higher than expected, surprising both the Fed and the market and many started questioning whether the expected 50 basis point rate hike in the upcoming FOMC meeting was no longer valid. Earlier in the week, several media reports came out claiming, via insider sources, that the Fed was pivoting to a 75 basis point hike. The looming possibility of major rate hikes by the Fed to suppress this stubborn inflation caused the market to aggressively reprice Treasuries to match rising Fed Funds Rate expectations.
The Bank of Apple is Open
The Short: To support its newly announced buy now, pay later service, Apple is handling the lending to consumers itself. This model opens up all sorts of financial products and services like credit cards, banking, and investing.
The Long: Apple’s current smartphone market share is around 15% and its customers represent the most wealthy demographic in the world due to the company’s premium product line. As such, imagine the amount of wealth Apple would have access to if they offered financial products to its customers. This is a major opportunity for Apple and could fuel their next phase of growth. Buy now, pay later and other credit services will also expand the affordability of Apple products which should increase demand for them as well.
Flight of the Drones
The Short: After working on delivery drones for years, Amazon is finally starting to test drone deliveries in Lockeford, CA. The service will be called Amazon Prime Air.
The Long: Amazon is working with the FAA to test drones in Lockeford. It will be a small scale test conducted in close collaboration with local authorities. Drone deliveries, if they’re ultimately feasible, will be a huge part of the future of Amazon’s retail business. Drones bypass traffic congestion, are easier to dispatch and route due to being point-to-point, and are fully automated. This news from Amazon is highly promising for the prospects of drone deliveries but there’re still many steps before it becomes a mainstream technology. We can’t wait to start hearing about pirate drones stealing Amazon packages.
Crypto TLDR
The Liquidation Hunt Begins
The Short: Hedge funds spot weakness in the crypto market and are hunting for liquidations of irresponsibly leveraged participants by rapidly selling Bitcoin and Ethereum into thin orderbooks. Their efforts have been wildly successful and the liquidations are rushing in, including from some of the biggest projects of the recent bull market.
The Long: The first major crypto project to fall and trigger the current freefall of crypto is the stablecoin system Terra Luna, which started to break its USD peg in mid-May. As is typically the case, the collapsed system was poorly and irresponsibly designed, able to thrive in a bull market but had a sinkhole foundation in a bear market. Stress in the Terra Luna system forced the Luna Foundation Guard to dump $2.4 billion of Bitcoin in a failed attempt to save the system.
The next poorly run major crypto project to come under stress is Celsius, a de facto shadow bank for crypto that promised “safe” and inexplicably high annual yields for crypto stored on their platform. It turns out, despite all their claims of safety and expert governance, the fund was irresponsibly leveraged, having invested large portions of customer funds into obscure DeFi systems to maintain their suspiciously high advertised annual yield.
Finally, we learned just yesterday that a major crypto hedge fund, Three Arrows Capital, has likely become insolvent after being hit with a $400 million margin call. Just last December, it was reported that the hedge fund snatched up $400 million worth of ETH (about 100k ETH). The fund’s founder claimed that this purchase was just “dust” and they’ll keep buying more.
The resiliency of crypto during the growth stock crash earlier this year was impressive, yet the nascency of the space drew in too many unqualified financial fiduciaries that went too far out on the risk curve during the bull market such that falling macro conditions would eventually trigger a wave of liquidations. Between the shattered remains of the fallen giants listed above are thousands of smaller projects that have also been liquidated. The liquidators are hunting for overleveraged bulls and the bulls have less and less places to hide.
This is Yet Another Cycle
The Short: This is yet another crypto bull-bear cycle. It’s nothing new and should not be surprising. Despite falling prices, crypto’s story remains intact and it continues to have the potential to dramatically appreciate. The asset class has survived a series of intense bear markets in its more than a decade of existence and it’s never been better equipped to survive one now.
The Long: Having been through the brutal 2018 to 2020 bear market, we can say for certain that what’s happening to the crypto market now is very similar to what transpired in the early stages of the 2018 market, except at a larger scale. As before, a bull market encourages the irresponsible buildup of leverage and when it inevitably turns, the reckless leverage unwinds causing crypto prices to fall dramatically. As we mentioned in previous issues, the current orderbook price is only meaningful if you make a trade. It holds little meaning for long-term positions, especially in crypto. The current environment is actually very positive for opportunistic investors that are waiting for a “crypto winter” to establish positions before the next bull run.
Massive Layoffs at Coinbase
The Short: Coinbase announced that they were laying off 1,100 employees yesterday. This comes in the wake of a hiring slowdown that started in mid-May and a hiring freeze and rescinded offers that started in early June.
The Long: At the start of 2020, Coinbase had 1,250 employees. In the last 2 years, they quadrupled headcount amid a major macro bull market. It’s interesting how bull markets can skew expectations to the upside to seemingly irrational levels. When Coinbase embarked on their massive hiring spree, did they factor in a possible bear market? Hiring more than 3,500 people in under two years suggested that they believed the bull market would last for much longer. Another possible scenario is that it was in the company’s fiduciary duty to invest the massive amount of money raised from their mid-2021 IPO given that it was hard to predict where the market was headed at the time. Sitting on so much money would have appeared to be irresponsible at the time. Regardless of how Coinbase made the decision to hire so many people, it’s clear that with the company’s heavy reliance on crypto trading fees as well as looming competition from FTX, it’s the right decision to heavily cut costs now, increase discipline, and invest in depth rather than breadth.
Don’t Miss It: How Should Crypto Be Valued?
Watch out for an upcoming FinanceTLDR issue on why we think crypto has such strong staying power as an asset class despite all the volatility. The issue should provide unique insights beyond the typical “store of value”, “inflation hedge”, or “new Internet” arguments. Don’t miss it!