Forward Guidance
It Can Always Go Higher | "On The Margin" Round Up with Byron Gilliam and Jack Farley
Sat Jul 22 2023Description
The episode covers various topics including crypto finance, recent developments, Ripple ruling, market sentiment, comparison to the dot-com bubble, banking sector performance, liquidity, future of crypto and stock market, and market performance and stock picking. It explores the lack of new developments in crypto finance, implications of the Ripple ruling on Coinbase, and the current market sentiment. The episode also discusses the performance of large companies like Apple, Microsoft, and Google in the current market and compares it to the dot-com bubble. It analyzes the performance of regional banks, credit, and net interest margins in the banking sector. The impact of Fed-induced liquidity on stocks and the future of crypto and DeFi are also explored. The episode concludes with insights on the future of crypto, Bitcoin's market cap, and the difficulty of predicting macroeconomic trends.
Insights
Crypto finance lacks new developments
Despite recent events, crypto finance is not being talked about as much as traditional finance. The lack of new developments and the departure of top executives from Binance have raised suspicions in the crypto community.
Ripple ruling implications for Coinbase
The recent Ripple ruling has implications for Coinbase, as it declared secondary transactions as not securities. This ruling could mean that Coinbase and other centralized exchanges are off the hook from a regulatory perspective.
Market sentiment and comparison to dot-com bubble
The current market sentiment is not indicative of a mania or bubble. The markets today are different from the dot-com bubble of 1999, with more companies staying private longer. The current market is dominated by large, profitable companies like Apple, Microsoft, and Google.
Banking sector performance and economic outlook
Regional banks have weathered the mini bank run and deposits are stabilizing. Credit has performed well so far, with no issues in commercial real estate loans. The economy has outperformed recession predictions, possibly due to falling oil prices.
Future of crypto and stock market
Crypto and DeFi are still building infrastructure rails for future use cases. Stocks are more likely to have a strong bull market than crypto in the next year or two. Bitcoin may become less correlated with the rest of crypto as other cryptocurrencies develop different narratives and utility.
Market performance and stock picking
Markets are close to random and very few people can consistently beat them. Stock picking is not favored in this market environment.
Chapters
- Crypto Finance and Recent Developments
- Ripple Ruling and Implications
- Market Sentiment and Comparison to Dot-com Bubble
- Banking Sector and Economic Performance
- Liquidity and Crypto Market
- Future of Crypto and Stock Market
- Market Performance and Stock Picking
Crypto Finance and Recent Developments
00:02 - 07:24
- Crypto finance is not being talked about as much as traditional finance despite recent events.
- The lack of new developments and the departure of top executives from Binance have raised suspicions in the crypto community.
- Binance, being a centralized exchange, is not considered true crypto by some.
- The high market share of spot volumes on Binance raises questions about what would happen if it were to go away.
- Centralized exchanges like Coinbase are important for on-ramps and off-ramps between crypto and fiat, but they are not considered true crypto themselves.
- The recent Ripple ruling has implications for Coinbase, as it declared secondary transactions as not securities.
- This ruling could mean that Coinbase and other centralized exchanges are off the hook from a regulatory perspective.
- The analogy of oranges and orange groves is often used to explain why XRP may not be considered a security.
Ripple Ruling and Implications
06:57 - 14:40
- XRP is not a security, but it was part of securities transactions when Ripple Labs sold it to institutional buyers.
- The judge ruled that XRP itself is never a security.
- The recent Ripple ruling has implications for Coinbase, as it declared secondary transactions as not securities.
Market Sentiment and Comparison to Dot-com Bubble
14:10 - 21:03
- Rising interest rates are good for banks and bad for tech stocks.
- The stock market has defied expectations by continuing to rise despite rising interest rates.
- The Nasdaq's performance this year is reminiscent of the dot-com bubble in 1999.
- The speaker joined the investment business in 1994 and witnessed the entire bull market.
- There was skepticism towards tech stocks initially, but they ended up performing exceptionally well.
- .com bubble started with Netscape's IPO in the late '90s.
- The current market sentiment is not indicative of a mania or bubble.
- The current market is not in a mania, as it is dominated by large, profitable companies like Apple, Microsoft, and Google.
- However, the markets today are different from the dot-com bubble of 1999, with more companies staying private longer.
- The markets have become a dumping ground for venture capital, with valuations creeping up higher before IPOs.
- There has been only one IPO recently, indicating that we are not close to bubble territory.
- The sign of a bubble about to pop is when speculative companies go public but fail to perform well in the market.
- The current valuation multiples of companies like Microsoft and Nvidia are not indicative of a bubble.
- Investment banks' earnings have been down, which suggests that we are not in a bull market or bubble.
Banking Sector and Economic Performance
20:49 - 27:58
- Return on equity was 4% due to writing down failed business units.
- Regional banks have weathered the mini bank run and deposits are stabilizing.
- Deposits have been going back up for regional banks with issues, while small commercial banks have no issues.
- Credit has performed well so far, with no issues in commercial real estate loans.
- Net interest margins are down but bearable, impacted by deposit costs and rising risk-free interest rates.
- The economy has outperformed recession predictions, possibly due to falling oil prices.
- Unemployment is low and individual small businesses are paying off their loans with low delinquencies.
- Banks want to make more loans despite high deposit costs, but availability of good borrowers and capital ratios may be limiting factors.
- Banks that have been in the news for having issues may face trouble with capital ratios.
- Higher rates may not discourage banks from lending.
- The quantity and cost of deposits affect banks' willingness to make loans.
Liquidity and Crypto Market
27:31 - 35:20
- Money market funds are buying more treasuries, leading to a decline in the reverse repo facility.
- The decline in the reverse repo facility may be a good thing for liquidity.
- The impact of Fed-induced liquidity on stocks is uncertain.
- Crypto has improved sentiment but is still far from its highs.
- DeFi has not found a real-world use case yet.
- Crypto and DeFi are still building infrastructure rails for future use cases.
- AI bots may drive the next narrative in crypto as they require a decentralized financial system.
- Crypto seems custom made for the coming economy of autonomous AI agents.
- AI bots won't be able to open bank accounts, so crypto can be used for transactions.
Future of Crypto and Stock Market
34:50 - 42:09
- Blockworks research is a platform that analyzes governance, tokenomics, and models of crypto products.
- Autonomous AI agents providing services will require payment in crypto, bringing more people into the space.
- Paying for services directly with crypto can create a vibrant economy and increase mainstream use of DeFi infrastructure.
- Stocks are more likely to have a strong bull market than crypto in the next year or two.
- The tech rally after the dot-com bust was based on real earnings and justified by fundamentals.
- Assuming every bust is followed by the next rally may not always be the case.
- There was an everything bubble in stocks in early 2021 and also in crypto at various times.
- Crypto markets go through cyclical gyration from extreme optimism to extreme pessimism.
- The 2017 bubble in crypto was small, while the 2020 rally was more substantial.
- The ICO boom in 2017 was short-lived and quickly deflated.
- The halving of Bitcoin production every few years is seen as a signal for a new bull market, but the sample size is small and it may not be a reliable pattern.
- Bitcoin's increasing market cap makes it harder to move compared to its early days.
- Bitcoin may become less correlated with the rest of crypto as other cryptocurrencies develop different narratives and utility.
- The guest believes that we have already experienced a soft landing in the economy after exiting the pandemic without going into recession.
- Predicting macroeconomic trends is difficult, and making bold calls can have reputational risks.
- The guest believes that markets are close to random and very few people can consistently beat them.
Market Performance and Stock Picking
41:49 - 48:40
- Markets are close to random and very few people can consistently beat them.
- Being right about a stock doesn't matter if you don't have the confidence to follow through and size up the trade.
- It's hard to beat the market on a long-term time horizon.
- Active bond managers may outperform passive bond funds because they gravitate towards riskier assets.
- This year has been challenging for stock pickers as the market has rallied from the inside out.
- The rally has been at the core of the market, not driven by outside factors.
- Stock picking is not favored in this market environment.