50% down

Everyone is super chill, people-people banking, SBF and a death or glory business.

📚️ PDF ⏳️ 8 min 📖 7


If the stock market falls 3% in a day. It’s news. If it falls 10% in a day, it goes into the archives and if it ever fell by 50% we would be talking about it for the next 100 years. I do not have an answer to Meb’s question other than to say the correction in the bond market looks like it might continue for a while.

The Americans continue to spend like a drunken sailor but their two biggest financiers Japan and China have had enough. Yet bond auctions in the US are still bubbling along.

Who is buying them? You!

5.2% on your current account … and deep in the bowels of the balance sheet the whole thing will be standing on top of some government bonds, the biggest ponzi of them all.

Historian Niall Ferguson has a great piece this week in Bloomberg about the bond market rout and its likely consequences. Suffice to say, he puts it rather better than I do.

Metro Bank

In the UK there had not been a new high street bank in 150 years until Metro Bank came along in 2010. Out of the ashes of the financial crisis, Metro Bank was different. It claimed to ‘focus on people’. As if that were not warning enough.

people-people banking – the philosophy that whatever happens in the future of banking, people need people and value human relationships

The bank listed in 2016, closing its first day with a share price of £21 and a total market cap of £1.6 billion. Shortly thereafter, there was an accounting scandal about regulatory capital and the bank has never looked back. The share price is now bouncing around at 41 pence, down 98% from the heady days of the listing.

Breaking into banking is really hard. The industry is old, deeply established and in my view is not likely to be disrupted by someone with a copy and paste business model like Metro Bank had. “People-People banking” might sound good, but palpably, it is total nonsense.

Now lots of retail investors have lost lots of money. Will there be an inquiry? Will the CEO of this magnificent enterprise be hounded out of the country for fraud or money laundering or some other trumped up charge? I think not, after all they do have a banking license.

The history of UK banking is rather interesting and Wikipedia provides a nice list under the banner “Defunct Banks of the United Kingdom”. Turns out there are many. Even so, since 2008 it has not really happened and it’s perhaps an ominous sign that one should just fall over like this.

Yet another reminder that there are fun ways to lose money and less fun ways. A less fun way is by investing in bank stocks. Like airlines, the ultimate end for every bank, everywhere, is bankruptcy or rescue by a bigger bank.

The story is similar in the US. They have a far more robust market with 4,000 Federally insured institutions, although the number has halved since 2020. Banks just keep on dying or getting swallowed by someone bigger, usually JP Morgan.

Compare that to Australia where there are barely 50 banking licences and only 4 places you could really leave any money.

A competitive industry sometimes known as a cartel.


The trial of Sam Bankman-Fried, CEO of FTX, is underway in the US. Expected to last six weeks, I consider that we won’t really learn anything from it other than they simply stole other people's money and bought loads of political influence and property in Bahamas while simultaneously appearing on as many podcasts as possible.

If there is any intrigue at all it will be the testimony of the sister trading company Alameda Research headed by Sam’s not really girlfriend, Caroline Ellison. Her diaries include details of their many break-ups as well as this rather prescient piece of self reflection from early 2022:

“Running Alameda doesn’t feel like something I’m that comparatively advantaged at or well suited to do.”

The trial has been described as “complex” but I disagree. They stole $8 billion, gambled it very stupidly on nonsense and now they are going to jail. Not complex.

This picture is from April 2022, just over a year ago. It was taken at a conference in the Bahamas. I wonder if Bill and Tony hand back their appearance fees? Probably not, after all it's been a few years since Bill had an all expenses paid trip to the Caribbean.

Hash rate soars

Bitcoin’s hash rate shows now sign of abating. Recently touching 420EH/s; it’s an incredible level.

By way of short explanation, bitcoin mining effectively involves guessing a number. The more guesses you make, the more bitcoin you mine. Once you guess correctly you win the privilege of forming the next block in the chain by filling it with transactions and collecting the fee; along with doing so, you also publish the solution to the mining puzzle so everyone can confirm you did indeed get it correct.

Bitcoin’s price remains well over 50% down on ATH’s (depending on your currency - in Argentina and Turkey it is at all-time highs), yet mining investment continues unabated. See the latest announcement from Australian listed miner Iris Energy. 100% renewable energy and more investment in new mining equipment.

We are now six months out from the bitcoin halving. The reward that miners enjoy will drop from 6.5 bitcoin per block to 3.25 bitcoin in April 2024.

So in essence, millions and millions of dollars of investment in businesses across the globe whose revenue will halve in April? Why?

The calculus is this: Miners know, of course, that the revenue drop is coming. It means only the most efficient miners will survive so marginal efforts will be reduced and the hash rate should fall. Secondly, historically the supply halving has pushed the price up compensating for the drop in absolute reward.

Most importantly though, miners believe the price will rise so strongly over the next two years that mining will become insanely profitable once more. Surely though, this attracts more miners? It does, but it takes years for competitors to launch. Buying mining equipment, securing cheap energy contracts, building facilities at scale.

There is a super-normal profit window of 18 months where mining companies make so much money nobody can believe it. That is the bet they are making.

My general view is that it will be a combination of all three things come next year. The price will rise, for some miners it will not be enough and they will go bankrupt. For others it will be sufficient. Either that change is so huge that it attracts lots of new competition and they make lots and lots of money, or it is less dramatic which will leave the super-normal profit window open for longer.

Iris publishes their monthly statistics, as you can see their marginal cost to produce a bitcoin is $10,586 (before any equipment, staff, rents costs etc). There is wriggle room then after the halving but it really is a death or glory business.

I admire the risk taking that goes on but consider the safer proposition to be simply buying bitcoin.


“Price stability is our compass. And interest rates is our tool”

Rare footage from inside the ECB as careful policy making strategies were revealed.

‘Our compass and our tool’, says President Lagarde. The only issue with this of course is that the tool is rather blunt. There are two sides to a price, demand for products and supply. Most of the price issues in Europe are supply related thanks to a series of insane policies that freeze out overseas competition and impose huge regulatory production costs on European manufacturers. Europe’s inflation issue is not one of excess demand.

Yet the policy response is simply to crush demand even further. The result? Success. Demand in Europe is collapsing but supply issues continue. Lagarde’s interview here is awful. Imagine describing yourself as optimistic while projecting GDP growth of 1% in 2025.

This statement took the biscuit really.

5.3% then 4.3%, then 3.8% is a 14% increase in wages. Consistent with 2% inflation?

So what should they do? They should stop following the Fed. Interest rates are too high in Europe and they will have to let the Euro drop well below parity. 80 cents or something like it. The EU is nothing like as vibrant an economy as the US, as we demonstrated some weeks ago, over the last decade the US economy got 50% bigger and the EU is the same size.

In the end it’s not that the ECB means ill or seeks to deliberately impoverish people. Surely though, if they did less and intervened less and let the market be the market then the outcome would be better. Interest rates would have started rising 7 years ago, not 7 months. Right now they would be falling as we go into recession, not rising because “my good friend Jay is raising his”.

Side note:

For those of you interested in the image (which is not real). It was produced using the latest MidJourney AI model.

The model is now sufficiently sophisticated that one can specify not only the image but the style. In this case, photographic, which allowed me to choose the camera film and shutter speed as well as the aspect ratio of the photo.

In a similar way if you were to specify oil painting you could choose the paint and brushes used. It’s amazing and I’m sure I do it a tremendous disservice with my limited skill.

This tech is an ample demonstration of the issues in the EU. America is galloping forward with what represents a massive leap in productivity, while the EU dithers and regulates and doesn’t let its people use it. It’s already a technological wasteland from Gibraltar to Lapland. I can see it, you can see it, somehow though the European Union cannot.

Incidentally, Europe’s biggest tech company is called ASML. Have you heard of them?

Further information

Read our bitcoin news wrap-up on Livewire: When money doesn't work, people stop working

Our September 2023 report to investors can be found here.

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