News

What’s next for crypto as FTX collapse triggers ‘Lehman moment’? | CNN Business

Published

2 years ago

November 11, 2022

What’s next for crypto as FTX collapse triggers ‘Lehman moment’? | CNN Business

London
CNN Enterprise
—

The gorgeous downfall of the FTX trade, one of many largest and most respected gamers available in the market for digital belongings, is sparking alarm amongst individuals who personal cryptocurrencies as buyers run for canopy.

There are nonetheless many unanswered questions. However two massive ones loom: How far will the injury unfold? And may the beaten-down crypto trade bounce again?

Business insiders are debating whether or not to name the implosion of FTX, which filed for chapter on Friday, a “Lehman second,” referring to the 2008 collapse of the funding financial institution that despatched shockwaves world wide. Many assume it’s an apt comparability.

What’s clear is that the fallout from the FTX disaster injects vital volatility into the crypto ecosystem. The episode has destroyed confidence and emboldened regulators, which at the moment are on excessive alert.

“This was probably the most trusted entities within the crypto area, so it would take a while to recuperate,” stated Jay Jog, co-founder of the blockchain startup Sei Labs, which relies in California.

“Sh*tstorm.” “Insane.” “Chaos.”

These are phrases crypto buyers and pundits have used to explain the failure of FTX, which was launched in 2019 by Sam Bankman-Fried, a 30-year-old wunderkind as soon as hailed as a modern-day J.P. Morgan.

The corporate was valued at $32 billion in its newest funding spherical, and had recruited high-profile backers together with SoftBank, Tiger International, Singapore’s Temasek, in addition to celebrities like Tom Brady, Gisele Bündchen and Naomi Osaka. Its title is on the sector the place the Miami Warmth play.

This week, investor Sequoia Capital said it had marked the worth of its FTX stake right down to $0. The trade — stated to be brief between $8 billion and $10 billion — was unable to fulfill prospects’ withdrawal calls for. Bankman-Fried resigned Friday and FTX filed for chapter safety in america after a bailout from rival Binance fell by way of.

“Everybody’s just a little bit in shock,” stated Shan Jun Fok, co-founder of Moonvault Companions, a crypto funding agency primarily based in Hong Kong. “Lots of people trusted FTX because the gold normal.”

He in contrast the collapse of FTX to Enron, the 2001 company fraud scandal that resulted within the shock chapter of the US power firm.

The scenario remains to be creating shortly. However one concern is the way it might ripple all through your complete crypto sector, which was value greater than $1 trillion in August.

Over the summer time, as digital belongings tumbled in worth, Bankman-Fried put up about $1 billion to bail out corporations and shore up belongings to attempt to preserve your complete trade afloat. Now, few white knights are left to rescue FTX and others in misery.

“The variety of entities with stronger steadiness sheets in a position to rescue these with low capital and excessive leverage is shrinking inside the crypto ecosystem,” strategists at JPMorgan stated in a notice to shoppers this week.

The demise of FTX might produce different casualties. It’s arduous to know at this level who’s uncovered, although there are clear ripple results.

Costs of bitcoin and ether, the 2 most-held cryptocurrencies, are greater than 20% decrease over the previous week. The value of the Solana digital coin has additionally been battered because of stories that Bankman-Fried’s buying and selling agency, Alameda Analysis, had sizable holdings. The Tether stablecoin, which is meant to be a secure place to park money, lately broke its one-to-one peg to the US greenback. And crypto lending platform BlockFi stated Thursday that it was pausing customer withdrawals.

Conventional buyers have additionally been burned, although they’re reassuring shoppers they will deal with the fallout. The Ontario Lecturers’ Pension Plan stated that regardless of uncertainty, losses tied to its $95 million funding would have a “restricted affect,” given the stake represents lower than 0.05% of whole belongings.

Changpeng Zhao, the CEO of Binance, tweeted that he had been messaging with Nayib Bukele, the president of El Salvador, which has gone all in on bitcoin. “We don’t have any Bitcoin in FTX and we by no means had any enterprise with them,” Zhao relayed from Bukele. “Thank God!”

Analysts notice that loads of dangerous exercise has already been flushed out of the system after a tumultuous few months.

However as spooked buyers pull funds from crypto, extra ache might arrive. JPMorgan believes bitcoin might fall to $13,000, a decline of almost 22% from the place it’s now. Fok stated the digital coin might drop under $10,000, a low it hasn’t plumbed since 2020.

In that local weather, the “crypto winter” is poised to get even worse, particularly as fears concerning the broader financial backdrop proceed to erode the urge for food for dangerous belongings.

“Within the brief time period, that is going to be actually, actually unhealthy for the crypto trade,” stated Jog of Sei Labs. However he doesn’t assume it would “finish issues” solely, and is hopeful that it might bolster curiosity in his enterprise, which focuses on constructing extra clear, decentralized crypto exchanges.

Fok stated he expects the FTX collapse will push institutional buyers away from the crypto area simply as that they had been warming as much as it. Whereas some individuals will proceed to work on fascinating initiatives, it might take years to revive religion within the sector’s promise.

It’s additionally all however sure to embolden regulators to tighten the screws, elevating prices for crypto corporations that survive the unfolding purge.

“It reinforces the view that any form of monetary enterprise wants intensive regulation,” stated James Malcolm, head of international trade technique and crypto analysis at UBS. “In all probability by 2024, the entire world will look rather more coherent and watertight.”

Gary Gensler, head of the US Securities and Trade Fee, stated on CNBC Thursday that whereas the crypto area is regulated, buyers “want higher safety.” The Wall Avenue Journal has reported that the SEC and the US Justice Division are investigating FTX. (The Division of Justice declined to remark.)

At a convention in Indonesia on Friday, Binance’s Zhao stated that the 2008 monetary disaster is “in all probability an correct analogy” for what’s enjoying out.

“We’ve been set again just a few years,” he stated. “Regulators rightfully will scrutinize this trade a lot, a lot more durable, which might be a superb factor, to be sincere.”

— Allison Morrow contributed reporting.

Click to comment

News

Europe is not a business backwater

Published

60 minutes ago

January 5, 2025

Press Room

This article is an on-site version of Free Lunch newsletter. Premium subscribers can sign up here to get the newsletter delivered every Thursday and Sunday. Standard subscribers can upgrade to Premium here, or explore all FT newsletters

Welcome to the first Free Lunch on Sunday. I’m Tej Parikh, the FT’s economics editorial writer, occasional columnist and Alphaville blogger.

Economists, investors and journalists all like to develop neat explanations to help make sense of the global economy. In this newsletter I will test them by presenting alternate narratives. Why? Well, it’s fun — and because it wards off confirmation bias.

Let’s begin with Europe’s unloved equities. We’ve read ad nauseam about how booming American stocks are leaving their transatlantic counterparts in the dust, while European industry faces several headwinds. It leaves an image of Europe as a corporate has-been. Are the continent’s companies really that bad? Here are some counterpoints:

The case for European stocks

America’s S&P 500 is in the midst of an artificial intelligence-led boom. The “Magnificent Seven” tech stocks make up around one-third of the index, and their market capitalisation surpasses the entire value of the French, British and German bourses combined. Tech accounts for around just 8 per cent of the Stoxx Europe 600. AI euphoria has mostly passed the continent by.

But here’s something for perspective. Take Nvidia out of the S&P 500 and its total returns underperform the eurozone’s stock benchmark since this bull market began in late 2022.

There are a few interpretations of this datapoint. First, the S&P 500’s bull run mostly reflects a bet on AI (particularly Nvidia). Second, despite less tech exposure and a slow-growing economy, eurozone stocks have actually performed quite well. (The “S&P 499” still includes the six remaining “Magnificents”).

Charles Schwab’s chief global investment strategist, Jeffrey Kleintop, who flagged the above chart, also points out that the eurozone’s forward price-to-earnings ratio trades at a historic discount to the S&P 500, creating scope for European valuations to rise further.

Either way, European equities clearly have an underlying appeal. Where is it coming from? Goldman Sachs calls the continent’s dominant listed companies “the Granolas”. The acronym covers a diverse group of international companies spanning the pharmaceutical, consumer and health sectors. Together, they account for about one-fifth of the Stoxx 600.

Their performance against the Magnificent Seven has only recently diverged. The S&P 500 — which has around 70 per cent revenue exposure to the US — got a jolt following the election of Donald Trump.

They are no corporate pushovers. Novo Nordisk produces the in-demand Wegovy weight loss drug. LVMH is unrivalled among luxury brands. ASML is a global specialist in chip design. Nestlé is an international food staple.

They didn’t end 2024 well. Novo Nordisk’s latest obesity drug had “disappointing” test results, LVMH is suffering from weak Chinese demand and tough macroeconomic conditions are eating into Nestlé’s bottom line. Still, they are established, broad businesses with global exposure, low volatility and strong earnings — and some are now undervalued.

But Europe is more than the Granolas. Other companies are competitive across sectors, including in tech: Glencore, Siemens Energy, Airbus, Adidas, and Zeiss to name a few.

Small listed European businesses also tend to outperform their American counterparts. About 40 per cent of US small caps have negative earnings, compared with just over 10 per cent in Europe. The winner-takes-all dynamic may be stronger in the US, where tech behemoths suck capital and talent away from smaller companies. (This shouldn’t detract from genuine scaling challenges in Europe.)

European corporates also rely more on relationship-based, illiquid funding, unlike in the US, where listed equity dominates. That may encourage longer-term corporate governance in Europe, but also highlights the challenges of comparing US and European stock performance (the liquid equity flows aren’t in the same league).

Regarding the Trump tariff threat, it’s not all disaster for European companies either. Stoxx 600 groups derive only 40 per cent of their revenues from the continent. (For measure, Frankfurt’s Dax rose close to 20 per cent last year, outperforming European peers, despite Germany’s lacklustre economy.) A stronger dollar would also boost the earnings of European companies with sizeable US sales.

In sum, the stellar returns of the US stock market do not mean that European companies are no good. Rather, investors are willing to pay a premium to get exposure to AI (and Trump 2.0) — one that is looking harder to justify.

Other than the value proposition, there are catalysts that may lure more investors to European stocks: disappointing AI results, lower interest rates in Europe, Trump risks and further stimulus attempts in China.

And, even if its listed companies make a lot of their money outside Europe, there is a domestic upside, too.

First, the European economy has arguably shown agility and resilience in the face of unprecedented shocks, for instance by pivoting away from cheap Russian energy. Total manufacturing production is largely unchanged since the beginning of Trump’s first term (pharma and computer equipment have picked up the slack from car production). So-called peripheral European economies are also performing better.

Then there’s the longer-term domestic earnings and financing outlook. Though France and Germany face political instability, the rising urgency among policymakers to address the bloc’s subdued productivity growth is at least leading to a more encouraging discourse on reforms. There is growing consensus on the need for a true capital markets union to drive scale, deregulation to support innovation, a more pragmatic approach to free trade and China, a debt brake rethink in Germany, investment in digitalisation and lower energy costs. Mario Draghi’s report on European competitiveness has added momentum.

America’s financial, innovative and tech advantage is unquestionable. And whether Europe can actually execute important reforms is another matter. Yet the comparative surge of US stocks — given access to vast liquidity, tech expertise and exposure to AI — hides strengths in Europe’s listed businesses that I, at least, had under-appreciated. The continent has diverse, resilient and international companies with established use cases (while AI is still looking for one). That’s a solid platform for investors to exploit — and for policymakers to build on.

What do you think? Message me at freelunch@ft.com or on X @tejparikh90.

Food for thought

Age is a vital demographic statistic. But what if we are thinking about it wrongly? A fascinating working paper finds that chronological age is an unreliable proxy for physiological functioning, given vast differences in how ageing unfolds across people. The authors reckon our linear view of ageing could limit the ability of our economies to fully harness the benefits of rising longevity.

Recommended newsletters for you

Trade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here

Unhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here

News

Video New Orleans terror attack suspect made videos before the deadly rampage: Sources

Published

1 hour ago

January 5, 2025

Press Room

New Orleans terror attack suspect made videos before the deadly rampage: Sources

Sources tell ABC News that around 1 a.m. on New Year’s Day, suspect Shamsud-Din Jabbar made multiple videos in the rented pickup truck before the deadly terror attack in New Orleans.

January 5, 2025

News

Olympic Sprinter Charged in Confrontation With Miami Beach Police

Published

7 hours ago

January 5, 2025

Press Room

Olympic Sprinter Charged in Confrontation With Miami Beach Police

Fred Kerley, a two-time Olympic medalist sprinter for the United States and one of the fastest runners in the world, was arrested late Thursday night in Miami Beach, Fla., after an altercation with the police in South Beach, a gathering place for tourists that is known for its nightlife.

Mr. Kerley, who won a silver medal at the 2020 Tokyo Games in the men’s 100-meter dash and a bronze in the same event at the 2024 Paris Games, was charged with battery of a police officer, resisting arrest and disorderly conduct after arguing and then scuffling with officers just off the area’s main thoroughfare, Ocean Drive. The battery charge, a felony, carries a maximum sentence of five years in prison.

Mr. Kerley, who is 29 and from Taylor, Texas, also faces two other felony charges, for robbery and domestic violence in an unrelated case from last May. The police said they had been looking for him in connection with that matter. Those charges include allegations that he choked his wife and stole her phone.

Yale M. Sanford, a lawyer representing Mr. Kerley in this week’s arrest, said the police were in the wrong because a simple conversation with Mr. Kerley could have de-escalated the situation.

“It’s an overstep and, you can even say, an unreasonable use of force that could have been avoided,” Mr. Sanford said.

Richard L. Cooper, a lawyer representing Mr. Kerley in the domestic violence case, said those charges were “completely unsubstantiated,” and that it was his understanding that the case was not being pursued. The charges had been presented unexpectedly by the authorities after the altercation with the police in South Beach, he said. Mr. Kerley and his wife are separated and are seeking a divorce, the lawyer said.

The police defended their actions, saying that Mr. Kerley had interfered with an active crime scene at a tense time in the country, when police in Miami Beach were on high alert in the days after a van rammed a crowd in New Orleans, killing 14 people, and a Cybertruck exploded outside a Trump Hotel in Las Vegas, killing one.

On Thursday night, officers were investigating a man who had parked a car in a spot reserved for emergency vehicles near Ocean Drive, said Officer Christopher Bess, a spokesman for the Miami Beach Police Department. Mr. Kerley diverted their attention, Officer Bess said.

“We just saw an aggressive male impeding the crime scene,” Officer Bess said of Mr. Kerley.

While the police were dealing with the man who parked in the emergency area, Mr. Kerley approached the police, saying he was concerned about his own car, which was parked nearby, according to Officer Bess and an arrest affidavit. The police described Mr. Kerley as having “an aggressive demeanor,” the affidavit said.

One officer’s body camera video shows shaky glimpses of a chaotic altercation, which appeared to escalate when an officer used his arm to block Mr. Kerley from approaching, and Mr. Kerley batted it away. Several officers then wrestled Mr. Kerley to the ground and tried to handcuff him while he repeatedly attempted to climb to his feet, according to the video and police documents.

One officer “delivered multiple hammer fists toward the defendant’s upper head area and several elbows toward his upper back area,” according to the arrest affidavit, and the police body camera shows officers striking Mr. Kerley as they try to subdue him.

A girlfriend of Mr. Kerley appears in the background of the police video, holding up her phone to videotape while repeatedly calling out, “Stop! Stop!” At one point, she says, “He’s an athlete, please do not mess with him.” Later, she refers to him as a “U.S.A. athlete” and says, “Stop, he didn’t doing anything.”

Just over a minute into the struggle, several police officers step away from Mr. Kerley, letting him rise to his feet before using a stun gun on him, the video shows. He then collapses onto the street.

On the body camera video, Mr. Kerley can be heard saying, “I’m not resisting, get off me,” and “Get off my legs. I need my legs.”

Several times he called the officers weak and cursed at them. He also said they were going to jail for putting their hands on him.