CPI data show easing inflation … stocks erupt higher … a meltdown in the crypto sector … a multi-billion-dollar personal fortune is destroyed

This morning’s Consumer Price Index numbers surprised on the “cool” side, and stocks are exploding higher as I write Thursday early-afternoon. The Nasdaq leads the way, up 5.6%.

Here’s CNBC with the details:

The consumer price index, a broad-based measure of goods and services costs, rose just 0.4% for the month and 7.7% from a year ago. That was its lowest annual increase since January.

Economists were expecting increases of 0.6% and 7.9%, according to Dow Jones.

Excluding volatile food and energy costs, so-called core CPI increased 0.3% for the month and 6.3% on an annual basis, also less than expected.

In the wake of the cooler number, the 10-year Treasury yield has fallen off a cliff.

Yesterday, the yield was as high as 4.16%. As I write, it’s plummeted to 3.86%, well below the critical psychological level of 4.00%.

Combine the cooler inflation data and lower 10-year Treasury yield and stocks are exploding.

The fuel for this explosion comes from two hopes: one, we’re beyond peak inflation; two, today’s CPI print will provide the Fed the necessary evidence that it can slow down its rate hikes.

It’s a welcomed relief to see such huge gains on the day. After months of market pain, this is a wonderful, long-awaited moment.

Full disclosure: We’re still concerned about the potential for unbridled bullishness to push stock prices to levels that 2023 earnings won’t support.

On that note, here’s Barron’s:

Historically, next-year S&P 500 EPS expectations drop about 10% on average in the second half of a calendar year. However, earnings estimates have not fallen that much yet.

In addition, this year Wall Street is worried about a recession, so 2023 EPS estimates could drop even more than usual…

The next question is whether that means more downside for stocks as well. The short answer is yes, most likely.

Despite this, we’ll tackle the earnings issue in greater detail in a different Digest. Today, let’s enjoy the cooler-than-expected inflation data, and the massive market surge.

Amazingly, today’s CPI print isn’t the most interesting story of the moment – the crypto market has been melting down

In recent days, bitcoin has tanked, Ethereum has plummeted, and there have been genuine fears about one of the world’s biggest crypto exchanges going under.

But how we got here is the most fascinating part of it.

The story begins with Binance, a huge offshore crypto exchange owned by a Chinese billionaire who goes by the name “CZ.”

It’s been crypto’s top exchange for many years. But recently, the newer exchange, FTX, has begun challenging its dominance.

You might recognize the name FTX because its founder is the high-profile, 30-year-old billionaire Sam Bankman-Fried.

You probably also recognize the names FTX and Bankman-Fried (SBF) because back in June, they came to the rescue of BlockFi, which had run into liquidity issues and was at risk of going under. We covered that story here in the Digest.

For years, SBF and CZ were chummy. In fact, CZ even invested in FTX.

Eventually, CZ wanted to sell his stake. The sale happened, with CZ taking his payment through FTX’s native crypto token called “FTT.” FTX customers can use these FTT tokens for trading discounts. But, importantly, they’re not very liquid.

Now, relations between CZ and SBF began cooling as SBF lobbied more and more for a bill that would create a brokerage-like licensing system for decentralized finance. He also argued against financial privacy. CZ wasn’t supportive of this.

But it seems this disagreement was just the public-facing part of the rift between CZ and SBF.

We don’t know exactly what SBF said behind closed doors, but it was enough to ice the relationship. On Sunday, CZ tweeted:

We gave support before, but we won’t pretend to make love after divorce.

We are not against anyone. But we won’t support people who lobby against other industry players behind their backs.

What happened next would destroy a company, eviscerate a personal net worth, and roil an entire investment sector.

CZ crushes SBF and FTX, nearly toppling the entire crypto sector in the process

In retrospect, SBF’s decision to pay CZ in FTX’s native token was incredibly foolish. Rather than boatloads of cash, the boatloads of FTT gave CZ enormous leverage over the rival exchange.

It’s a bit like Nike paying Adidas with Nike stock. This would give Adidas the power to tank Nike’s stock if it so desired by flooding the market with those shares.

And this is exactly how things went down.

Let’s go to Yahoo! Finance to explain what happened after CZ began unloading his shares of FTT:

This was devastating because SBF also owns a trading fund that has a whole lot of FTT tokens on its balance sheet.

When the price of FTT tokens began to crater, SBF tried to defend its value by selling other assets in order to buy up the FTT tokens flooding the market—but it didn’t work, and, as the value of FTT tanked, SBF discovered his liabilities began to exceed his assets.

By Tuesday, his companies were facing insolvency, and he had to turn to his rival to take them off his hands.

In the wake of this chaos, FTT sank 75% on Tuesday. Yesterday it was down another 10%.

For greater context, three days ago, the coin traded at about $23. As I write, it’s at $3.32.

But then came the broader, sector ripple effects

The trading fund referenced in the article above is called Alameda. Leaked financial statements show that the majority of Alameda’s assets were either illiquid or in locked altcoins – one of which is the very popular altcoin, Solana (SOL).

You can see where this is going…

On Tuesday, SOL plunged 27%. Yesterday, it was down another 30%. It’s steadied as I write on Thursday, up about 6%.

Here’s CoinDesk describing the interrelated nature of many of these cryptos, and the resulting potential for ripple effects:

It was clear the contagion would be severe if SBF’s empire fell.

Crypto is tied-up in intricate knots, and once it frays the whole ecosystem can unravel – like after the collapse of hedge fund Three Arrows Capital. A stablecoin called magic internet money (MIM), capitalized primarily with FTT, lost its peg to the dollar.

At least with open financial systems like MIM investors knew at what price they would be liquidated. FTX is a blackbox, and people only have the information SBF chose to reveal.

Speaking of fallout, SBF has lost an estimated $14.6 billion through this wipeout. That’s nearly 94% of his total wealth.

It’s one of the most astonishing personal fortune collapses ever.

So, where are things now as the dust begins to settle?

Who says the dust is settling?

At first, it appeared CZ and Binance would save the day, buying FTX, therein adding liquidity to the exchange and calming the crypto world.

No more.

Here’s CNBC:

Binance is backing out of its plans to acquire FTX, the company said Wednesday, leaving Sam Bankman-Fried’s crypto empire on the verge of collapse.

The reversal comes one day after Binance CEO Changpeng Zhao announced that the world’s largest cryptocurrency firm had reached a nonbinding deal to buy FTX’s non-U.S. businesses for an undisclosed amount, rescuing the company from a liquidity crisis. Earlier this year, FTX was valued at $32 billion by private investors.

“In the beginning, our hope was to be able to support FTX’s customers to provide liquidity,” Binance said in a tweet Wednesday. “But the issues are beyond our control or ability to help.”

As I write on Thursday, SBF is suggesting FTX could still survive:

There are a number of players who we are in talks with, LOIs (letters of intent), term sheets, etc. We’ll see how that ends up.

In the wake of this debacle, bitcoin fell to roughly $15,700 yesterday. It’s back up to about $17,500 as I write.

Meanwhile, Ethereum nearly fell below $1,000 before pushing back to $1,325 as I write.

This is a massive black eye on the crypto sector

It’s unclear who will save FTX, which means the potential for more sector volatility still exists.

Even if a white knight comes to the rescue, this is a massive black mark for the industry. The lack of transparency regarding SBF’s Alameda fund, as well as its role within FTX, is bad news for investor trust and wider crypto acceptance within mainstream investment circles.

This underscores how critical it is that investors do their due diligence on any altcoin they’re considering adding to their portfolio. After all, if a legitimate exchange like FTX can suddenly implode, how much greater is the potential risk with a fly-by-night altcoin?

This is a developing story. We’ll keep you updated as things unfold.

Have a good evening,

Jeff Remsburg