FTX and the banana bend in the markets

Here we are again at two of the market issues that appear again and again this year: the chaotic game with the catastrophe in crypto and hunting for a milder attitude of the US Federal Reserve.

Both are dramatic in their own way, but the latter is much more important for the health of the portfolios of mainstream investors.

The malfunction that arises when crypto slips is always alleviated by the dark knowledge that some naive amateur investors lose their savings. Bitcoin, the largest token in the group, has fallen by around 18 percent in the course of this week.

But all new buyers who were added afterwards gave up 70 percent from November to June and then stated at around $ 20,000 each, probably knew what they were involved in. If they took on the crash, they probably knew that it was a barge.

Small investors are particularly damaged by the gliding value of the coins. The professionals take the pain through their stocks. And they suffered a brutal collision with reality this week after Sam Bankman-Frieds FTX-supposedly the more reliable stock exchange in this free-range market-had suffered a good old-fashioned bank run before registering bankruptcy.

Firstly, the trust from the native token of FTX, FTT - a fairly frequent occurrence of tokens that are based on trust and hand -moved ambitions instead of traditional boring things such as income, dividends, interest payments and institutional resistance.

that was bad enough, but the FTX rival Binance came in and made things worse. First of all, through the public declaration of intent to sell their stocks to FTX tokens, and then to save the stock exchange itself through the offer before withdrawing from such a deal, which means that her CEO Changpeng Zhao is the last remaining king of cryptography. SBF, as he is called, had to resign as CEO.

This is all first-class drama and humiliating for FTX's donors who drank the Kool-Aid safely. One of them, the risk capital company Sequoia, said this week that she would write off her 210 million investment in FTX to zero, and found that "a liquidity crisis has created a risk of solvency for the stock exchange".

Compare this with Sequoia's exuberant assessment of the prospects of FTX in an extremely long article that it published online less than two months ago. In a now deleted profile with 13,800 words (this is about 16 times the length of this column), Sequoia Bankman-Frieds described "Legenda Status". His explanation of how one could "buy a banana" with FTX one day (I don't joke), put the Sequoia team in enthusiasm. "I love this founder," said one. "It was a vision about the future of money itself," said the profile. Now you will have difficulty calling up your money from FTX, let alone buy fruit with it.

The best comedy or drama script authors in the world could not come up with a more ridiculed conference for an industry that has been absurd for a long time. Remember that Bankman-Fried himself said that he would like to buy Goldman Sachs only last year. And yet the coins are still liable. Even with all these spinning and arrows, Bitcoin is traded at around $ 16500. Morgan Stanley assumes that many will not sell until we decrease to $ 10,000, based on when private investors get in and on trading psychology.

In fact, the price of the tokens recovered briefly from its lowest this week after finally a break in the inflation clouds finally formed.

The data published on Thursday showed that the annual US inflation was 7.7 percent in October. After reasonable standards, this is extremely high and far above the finish. But it marked the smallest 12-month increase since January.

All year round, investors desperately searched for a sign that the Fed could at least slow down their interest rate increase, and finally they found one, in cold, hard data.

The market reaction was absolutely explosive. The S&P 500 Index increased by 5.5 percent. If you take out the wildly volatile scenes in spring 2020, this is the largest daily rally for more than a decade and one of the greatest ever. The technology -based Nasdaq Composite made 7.4 percent higher.

The courses of government bonds shot up and pressed the returns. The return of the two -year grade fell by around 0.25 percentage points to 4.33 percent, the strongest decline since October 2008.

This is how the market says: Mission fulfilled. Crisis over. Are the investors overtaken? Yes. This is just one data point, and it is not guaranteed that it is pressing down the end point of the interest rate increases of the Fed. But that's how the game works. And according to the Bank of America, fund managers have kept more cash since 2001 than ever, which offers enormous punch for the upswing.

"The markets have finally got what they wanted," says Emmanuel Cau, strategist at Barclays. The reaction was "euphoric" and strengthens Fomo - the fear of missing something, he says.

The fact that after a week that it turned out that the foundations of the market were built on sand, even seemed to have given Bitcoin a thrust, tells them two things: First, after a few start, this could be the big one, the beginning of a significant market recovery after terrible 12 months. Second, you cannot buy bananas on the Blockchain, and you will probably never do that.

katie.martin@ft.com