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Welcome to On the Margin, a newsletter presented by Casey Wagner and Felix Jovin. Here’s what you’ll find in today’s edition:
- We analyze the charts of the latest weekly review On the Margin.
- We know what to expect from tomorrow’s FOMC decision, but here’s what to look out for.
- The SEC is taking a new approach to unregistered securities. We look at some theories as to why.
Concluding the review
For those who aren’t regular Weekly Roundup listeners, or perhaps want some additional clarification on some of the charts discussed in our last episode, we thought it would be helpful to wrap up the roundup and give a high-level overview of some of the key topics! Let’s dive in.
Growth restoration
Last week we received the GDP data for the second quarter, and it was positive – 2.8%.
Why the big changes? We have a few ideas:
- There was a significant increase in consumer spending, indicating a resilient and strong consumer base.
- Net exports, driven largely by the strong dollar, continue to weigh on GDP growth.
- After months of falling government spending, we have seen a rebound. In a world of huge fiscal deficits and dominance, this is a key factor in the resilient economy we have seen.
Digging deeper, after the reduction in the previous quarter, there was an increase in prices for goods:
This is a critically important indicator, as goods disinflation has been one of the key drivers of the CPI over the last couple of years. If goods growth starts to pick up again, it could lead to a rebound in goods inflation from the current goods deflationary regime we are in.
PCE in line with small surprises
We also received updated personal consumption expenditure data on Friday.
Overall, the print was in line with expectations and resulted in very minor changes in the market:
The really interesting thing here is the small jump in core PCE from 0.1% m/m to 0.2%. Core PCE is the Fed’s key inflation measure and is therefore an input used in various models such as the Taylor rule to measure tightness.
Yen carry trade unwinds
With the Bank of Japan’s slightly more hawkish rhetoric and the US Federal Reserve’s simultaneous intention to cut rates in the near future, we are seeing the yen finally starting to strengthen.
With the popular yen carry trade — which involves borrowing yen at low/negative rates and buying U.S. dollar-denominated tech stocks — starting to unwind, we have seen a significant sell-off in the QQQ ETF. As you can see in the chart below, this is closely correlated with the strengthening of the yen against the U.S. dollar:
This carry trade downturn comes at a fragile time for U.S. tech companies because of how broad and stretched valuations are. The resulting air pocket in the sector continues to suffer as the yen strengthens.
— Felix Joven
257 million dollars
The amount of money the SEC alleges Nader Al-Naji raised through unregistered offerings and sales of BTCLT, the native token of media platform BitClout.
The securities regulator announced charges on Tuesday afternoon against Al-Naji, who launched BitClout under the pseudonym “Diamondhands” in March 2021. Regulators allege that Al-Naji misled investors by fraudulently claiming that BitClout was a fully decentralized organization.
U.S. prosecutors in the Southern District of New York also filed criminal charges against Al-Naji.
Direct Guidance Tutorial
On the eve of FOMC decision day!
Markets retreated on Tuesday, led by Big Tech, as investors awaited the latest earnings reports. The S&P 500 and Nasdaq Composite indexes lost 0.7% and 1.4%, respectively, at midday Tuesday.
As we mentioned yesterday, markets are already pricing in central bankers to hold rates tomorrow. Investors are hoping for any hints from Fed Chairman Jerome Powell and central bankers that rates will be cut in the fall.
All eyes will be on the so-called “forward guidance” portion of the FOMC statement, which is in the third paragraph.
Here’s what the Committee members wrote in June:
“The Committee does not expect it will be appropriate to lower the target range until there is greater confidence that inflation is moving sustainably toward [2 %].”
If the Fed believes that rates can and will begin to decline in September, that will be reflected in the edited version of the proposal above. Note the language like “The Committee is satisfied” or “The Committee is confident” that inflation is on a downward trend.
If the Fed decides to maintain current guidelines, we should expect a market collapse.
“Investors have aggressively priced in a rate cut in September, and this will challenge those expectations, and we could easily see something similar to last Wednesday (when the S&P 500 fell more than 1%, possibly 2%),” said Tom Essay, founder of Sevens Report Research.
Buckle up, we have 23 hours until the statement is released.
– Casey Wagner
Hey SEC, what are you up to?
The Securities and Exchange Commission (SEC) has been very busy over the past 18 months, so here’s a quick recap:
In June 2023, the SEC filed two lawsuits against Coinbase and Binance. The charges weren’t exactly the same, but regulators accused both exchanges of selling unregistered securities and operating as unregistered brokers, exchanges, and clearing houses.
In both cases, several third-party tokens were also named as securities, although the issuers of those tokens were not named as co-defendants in either case.
This situation got me thinking: Why is the SEC naming these third-party tokens in lawsuits against exchanges, rather than just suing the issuers themselves, as it did with Ripple?
I’ve heard different theories. The SEC can’t sue all the hundreds of issuers it believes are creating unregistered securities. It lost to Ripple, so it decided to change its strategy. It’s just easier to go after exchanges.
A quick note for securities law experts: I love a good theory, and if you have any others to share, I’m here.
But things changed early this morning — at least for Binance. The SEC filed a motion to the court saying it plans to withdraw the portion of its complaint that pertains to “third-party crypto-active securities.”
You might be thinking, “Wait, I thought Binance’s legal issues were all sorted out by now?” Wrong. Binance settled with FinCEN, CFTC, and OFAC in November, but No Securities and Exchange Commission.
The SEC has not yet filed any such motions in its case against Coinbase.
And again my main question: Why? But here it is also important: What does it mean?
Attorney Jake Chervinsky says it doesn’t mean anything. The SEC simply didn’t want to go through the disclosure process for those 12 additional tokens.
Seems entirely plausible. But then again, in this case I would expect the SEC to make the same amendment to its complaint against Coinbase, which is also moving into the discovery phase. We’ll have to wait and see.
– Casey Wagner
Bulletin board
- Crypto infrastructure firm Oxhead Alpha announced a partnership with the California DMV on Tuesday to bring 42 million vehicle titles online to Avalanche. California vehicle owners will soon be able to claim their digital titles on the DMV app.
- Days after former President Donald Trump promised to stop selling confiscated bitcoin, a US government-linked wallet moved $2 billion in BTC to Coinbase Prime, according to Arkham Intelligence.
- On another note: An anonymous and very generous newsletter reader made a donation to Casey’s NYC Marathon for the Lung Cancer Research Foundation yesterday. Thank you very much!
