Moral Superiority and Financial Stupidity

Something broke... SBF lent customer deposits... 'The prince of risk'... A 'sense' of margin... Magic Fairy Dust for Dummies... I was told there'd be snacks... Typical bear market action... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Something broke... SBF lent customer deposits... 'The prince of risk'... A 'sense' of margin... Magic Fairy Dust for Dummies... I was told there'd be snacks... Typical bear market action... --------------------------------------------------------------- I (Dan Ferris) said recently that the Federal Reserve wants to break something... In [the November 4 Digest]( I interpreted Fed Chair Jerome Powell's comments from the most recent Federal Open Market Committee meeting like this... At his press conference on Wednesday, it seemed like Powell really wanted to say... "Get this through your thick skulls... I'm nowhere near pausing or pivoting or whatever you idiots think. We're gonna jack rates up until we break something. Gabish?!" But of course nobody at the Fed will ever say, "We'll do this until we break something." They will just say what they've been saying... that they want to raise interest rates far enough to beat inflation down to the Fed's long-running target of 2% and they're dedicated to that goal, blah, blah, blah. Whatever you think of their true motivations, they must have at least cracked a smile over the past few days because, well... Something broke! On Friday, crypto exchange (whatever that really is) FTX announced that it's entering Chapter 11 bankruptcy. It blamed large customer withdrawals after rival firm Binance announced it would sell $529 million worth of FTT, FTX's "native token" (whatever that really means). FTX stopped allowing withdrawals after customers removed $5 billion from its exchange accounts last Sunday. Digest editor Corey McLaughlin [described the situation]( last week. According to the Wall Street Journal, FTX lent $10 billion of its $16 billion in customer funds to its affiliated brokerage, Alameda Research. That's why, when customers wanted $5 billion all at once, FTX failed. (Of course, if customers at any bank in the U.S. did the exact same thing and wanted enough of their money all at once, we'd all find out real quick that banks have lent out customer deposits, too... but we'll plumb those murky depths another day.) I'm no fan of the U.S. financial regulatory apparatus, which is designed to suppress competition and keep bankers rich even if they blow customer assets to hell and gone. But even I can't help noticing that had FTX been a U.S.-registered bank instead of a Bahamian-registered crypto exchange, its financial monkeying would have been stupid and a crime. I'm no lawyer, so maybe it will be a crime one day... but for now, it's only stupid. If you don't register as a bank, deposits are just supposed to sit there. They belong to customers, not FTX. They're supposed to be available to customers whenever they want them. If you're not a bank, you're not supposed to lend deposits out. It's dishonest. When you go to your favorite fancy restaurant and they take your coat at the door, you don't expect them to rent it out five minutes later. That's basically what FTX did. Its downfall came when Binance sparked a major crisis at FTX by unloading its FTT holdings. Binance then offered to buy FTX... only to withdraw the offer a day later, blaming the highly distressed and uncertain nature of FTX's finances. These Binance folks sound real nice. But it's not the details of these businesses or the mess their nerds-in-chief have created that most interest me... I'm primarily intrigued by the principal nerd, FTX founder and CEO Sam Bankman-Fried, known by many by his initials, SBF. SBF joins the ranks of other "bull club" members we've chronicled: Cathie Wood, Bill Hwang, Adam Neumann, and Michael Saylor. Bankman-Fried resigned on Friday. Let's get up close and personal with SBF... The son of two Stanford Law School professors, SBF studied physics at MIT, where he got interested in something called effective altruism. As far as I can tell, it's a philosophical movement whose Centre for Effective Altruism organization claims to use... Evidence and reason to figure out how to benefit others as much as possible... The most essential commitment of effective altruism is to actively try to make the world a better place. Followers of effective altruism claim to place a high value on openness and integrity. As those ideas mingle with SBF's actions and waft my way, I'm getting a powerful whiff of pseudo-intellectual virtue signaling for megalomaniacs... Effective altruism seems to have indicated, through evidence and reason, that SBF would most benefit others by going to Wall Street... Right away, we're in sketchy territory... Everyone on Wall Street is there to stand next to giant piles of other people's money with their hands out – not to "benefit others as much as possible." SBF landed at the trading firm Jane Street Capital after graduation, where he became an arbitrageur, exploiting pricing differences of the same asset trading in different markets... for the benefit of others, I suppose. He flourished there and was once called "the prince of risk" for his trading prowess. While at Jane Street, SBF gave half his salary to charity (actually for the benefit of others). He left Jane Street after three years to work for William MacAskill, a leader of the effective altruism cult. By 2017, having noticed opportunities for arbitrage in the crypto markets, he set up Alameda Research, a crypto trading firm... to benefit others as much as possible, I suppose. (Hopefully you can see where I'm going with this.) SBF was soon called "the Moby Dick of crypto whales," for moving as much as $15 million between markets in a single day. He moved his team to Hong Kong in 2018 in search of an easier regulatory environment. They launched the FTX crypto exchange in May 2019. The low-cost, flexible platform succeeded. SBF moved the team to the Bahamas – still a lax regulatory jurisdiction, but closer to the U.S. – in 2021. He made billions from FTX and spent $10 million of it supporting Joe Biden for president in 2020... for the benefit of others. SBF once said he'd give away all his money to charity and keep just 1% of his earnings, or at least $100,000 a year. I guess that plan will have to wait, now that his firm is failing and his net worth fell 94% overnight... a $15 billion loss and the biggest one-day drop among billionaires tracked by Bloomberg. The 'magazine cover indicator' is right again... As you can see by the graphic below, SBF recently appeared on the cover of the August/September 2022 issue of Fortune magazine with the headline: "The Next Warren Buffett?" You can't make this up... Insert comment about the "[magazine cover indicator]( here. In that issue's article on SBF, Fortune described FTX's founder as the crypto world's "white knight," rescuing troubled firms during the "crypto winter" downturn of the past year... Acting much like a one-man central bank, SBF has backstopped players including struggling lender BlockFi (with a $400 million credit facility) and crypto asset broker Voyager Digital (a loan of around $500 million), which is now in Chapter 11 bankruptcy proceedings. Meanwhile, he has also taken about a 7.6% stake in trading app Robinhood, and outright acquired a crypto gaming company. SBF's dominance has sparked comparisons to J.P. Morgan and other plutocrats who scooped up assets during earlier eras of turbulence in American finance. In SBF's interview with the magazine, the following exchange took place... Fortune: A longtime crypto insider told me you're going to come out of this looking like Warren Buffett – owning a lot, and everyone owing you a lot of favors. Do you think that's overstating it? SBF: I hope it's not overstating it, though it might be. I want to be in a position where when we work with people, we're a little more generous than we have particular reason to be. The bigger piece of this, frankly, is a trust thing where I don't want to have to worry when I'm doing a deal about whether the other side is going to try and f--- me in 20 ways I'm not anticipating. Because if that's true, just doing the deal becomes f---ing impossible, right? I want to set a standard, like, "Look, we're just not going to try and f--- you, we're gonna try and be reasonable, we're going to try and be generous when we can. Let's just try to work reasonably together and consider things from what is good for the sum-of-us perspective and then we can think about splitting the pie." Lack of trust is an enormous transaction cost, and I underestimated this when I first got into business. In the same interview, Fortune asked SBF about all the companies he'd acquired. He said, apparently without sarcasm... There are a few things that go into it. First: Is there a way for us to backstop customer assets? The second thing is stopping contagion spread. You know, if a place blows up, can it cause more places to blow up? Are we gonna see a chain reaction? Wow. I guess he was too busy backstopping other companies' customer assets to backstop FTX's... SBF is a vegan, drives a Toyota Corolla, and lives with roommates. I just heard on the evening news that he pledged to give $1 billion to the Democratic Party. His net worth stood at $26 billion in March. So that's our guy: The son of Left Coast academics, SBF is an MIT-educated trading genius who wants to get rich and give it all away for the benefit of others. He was as touted the second coming of J.P. Morgan and the next Warren Buffett. And until very recently, he was sitting atop a $26 billion fortune. The harder they fall... Given that anybody can seem like a wonderful genius when times are good, my only question now is... how is this genius, this paragon of virtue, this politically hyperactive and moral North Star handling the FTX crisis he created by lending out customer deposits? By downplaying his apparently unethical behavior... by feigning stupidity and by telling everyone he's not as competent as a CEO should be. According to the Wall Street Journal, SBF said that lending customer money to Alameda so that it could trade God-knows-what worthless, semi-nonexistent crypto crap was "a poor judgment call." Ya think? That comment was made in a private meeting. Sometime after that, having lit billions of dollars of other people's money on fire, SBF did what he thought would benefit others as much as possible: He posted about it on Twitter. On Thursday, SBF tweeted a long thread about how sorry he was, laced with his customary easy profanity. His first tweet said... I'm sorry. That's the biggest thing. I f---ed up, and should have done better. A few tweets later he said... I f---ed up twice. The first time, a poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users' margin. I thought it was way lower. What the hell is his "sense of users' margin"? Does his staff recognize this information by lighting scented candles? His second mistake was overestimating cash available for customer withdrawals. SBF thought users' margin was zero and that the firm had 24 times the amount of daily withdrawals ready for clients who wanted to cash out. But in reality, he now says users' margin was 1.7 times and FTX had just 0.8 times withdrawals. He used profanity throughout the thread, which he has always done... But this time, it seemed like he was trying to make himself appear more contrite and authentic. One tweet read, in part... And so I was off twice. Which tells me a lot of things, both specifically and generally, that I was s--- at. Is he joking with this explanation and apology? The "prince of risk" MIT grad wants us to believe he fed his clients and investors rat poison because the label said it was potato chips or something? And that he's only now finding out what he's "s--- at" as co-founder and CEO after raiding customer accounts and lending it out to a crypto trading firm he founded? You should know that sort of thing about yourself before you steal your clients' money. I mean... labeling? That's like saying 'magic fairy dust'... I remember making up some serious excuses as a kid to explain why I was late for dinner, when I was really smoking, blowing things up with firecrackers, or stealing candy, or other potentially illegal insanity we perpetrated back then. But I guess you need MIT-level smarts to come up with "labeling." I mean... it's genius. From now on, executives at busted finance companies can just say something like... Gosh, sorry about the corruption, leverage, and lack of liquidity, but we bought this accounting software called "Magic Fairy Dust Account Labeling for Dummies" that was supposed to label everything perfectly... except that it seems like it was all software and no fairy dust, and we were still supposed to know what we were doing. I don't know... maybe I was too busy being a paragon of virtue trying to make the world a better place with science and reason and integrity and get Joe Biden elected and other cool stuff to notice that we lent out a whole bunch of client money, which I guess is kinda like stealing or something. I don't know, but gosh, I'm s--- and I'm real sorry. I still have about $1 billion left. Maybe I'll use it to cure cancer or something to make up for being a liar and a cheat. So, yes, something broke... And it's exactly the type of breakage you'd expect during the unwinding of the most massive financial mega-bubble in all recorded history... An overhyped genius stole his clients' money after touting how trust and backing customer assets plays a big role in his strategy to save failing crypto firms. His rival sold his assets out from under him and then tried to buy the company he just wrecked... And lots of people who dabbled in FTT made and collectively lost billions trading something that doesn't exist if the power goes out. The story will show up on Netflix any minute. But really... is $10 billion that big of a deal? Bill Hwang of Archegos Capital Management lost $20 billion in two days, and Cathie Wood has lit $21 billion or so on fire in her flagship ARK Innovation Fund (ARKK) alone. I feel like a hungry guy at a poorly appointed social gathering who says, "I was told there'd be snacks..." I was told something big would break. And sorry, SBF, but your little crypto exchange is not big. It won't have giant ripples throughout the financial world. It might in the cryptocurrency world, but all it means is you have less money to virtue signal with from the cover of Fortune magazine, where you'll never appear again except maybe in prison overalls. The Fed and I will need to see something a little more impressive before we start congratulating ourselves (the Fed for breaking something really big, and me for warning you about it). For example, a major global currency meltdown would be something big... The Bank of England had to intervene [in the U.K. bond market]( amid "material risk to U.K. financial stability." And you may recall that the Bank of Japan intervention dropped 30 yards (trader talk for $30 billion) to prop up the yen a few weeks ago, too. That's the kind of thing I'm talking about... A massive global currency crisis is exactly what the Fed might see as seriously big breakage. Maybe we'll have one of those. Meanwhile, back at the Fed, progress is proceeding at a snail's pace... As [we reported on]( Thursday, the October consumer price index ("CPI") grew 7.7% over the same period last year, versus an 8.2% reading last month. So far, CPI inflation peaked in June at 9.1%. The Fed's stated goal is to get inflation back down to 2%. And not only hasn't the Fed lowered the CPI to 2%... it hasn't even lowered inflation by 2%. What's more, anything above 5% is a 30-year high for inflation. Anything above 6.2% is a 40-year high. So the Fed still has plenty of ground to cover. That's great for those of us who bought a ticket to a huge meltdown of some kind. The Fed will approach 2% inflation slowly and painstakingly while the British pound, yen, euro, and god knows what else all melt down. By the time it notices the breakage, it'll be too late... and the Fed will rapidly ease, causing a massive inflationary shock. Of course, the stock market is a manic-depressive idiot... So naturally, stocks soared on Thursday's CPI report... The Nasdaq Composite Index closed up 7%. The benchmark S&P 500 finished up 5.5%. And the small-cap Russell 2000 Index closed up 6%. I feel sorry for all the people who think this is some sort of obvious buy signal. It's not. Just look at how the market behaved during the bear markets that followed the other two U.S. mega-bubbles... After the Nasdaq peaked on March 10, 2000, it surged 6% or more in one day 12 times... before bottoming on October 9, 2002. After the Dow Jones Industrial Average peaked on September 3, 1929, it surged 6% or more in one day 14 times... before bottoming on July 8, 1932. Days like last Thursday are not an "all clear" signal. They're just reminders to anybody who knows market history that we're still watching the epic unwind of the biggest financial mega-bubble in all recorded history. --------------------------------------------------------------- Recommended Links: [AFTER Every Crash... Buy This Investment]( It only appears in the market once every 10 years or so. You could have doubled your money 63 times after the 2020 crash... 12 times after the 2008 crash... 12 times after the dot-com crash... and more. [Click here for details on tomorrow's special broadcast and to receive a free recommendation](. --------------------------------------------------------------- [33 Times the Performance of the S&P 500!]( Lifetime cumulative returns as high as 3.5 million percent... virtually recession-proof and inflation-proof... everything you could dream of in an investment can be found in one extraordinary sector you've likely never considered. Find out EXACTLY which sector when Dr. David Eifrig, MD, MBA, makes the most important announcement of his life. [Click here for the details](. --------------------------------------------------------------- New 52-week highs (as of 11/11/22): Chevron (CVX), VanEck Oil Services Fund (OIH), Ryder System (R), SLB (SLB), and Energy Select Sector SPDR Fund (XLE). In today's mailbag, we have a note for Marc Chaikin, founder of our corporate affiliate Chaikin Analytics and creator of the Power Gauge investment tool. As you might have seen in a few e-mails, Marc has a brand-new, free online event coming up at 10 a.m. Eastern time tomorrow. We urge you to check it out... Marc, a Wall Street legend with five decades of experience, predicted the 2020 crash... anticipated the 2022 market sell-off... and warned about 21 stocks that have since crashed up to 80%. Tomorrow, he's going to share a brand-new warning... feature a free demo of the Power Gauge... and offer two recommendations just for tuning in... [Sign up here to watch for free](. "Marc I am a believer in the Power Gauge; I became a member of your group mid-October 2022, at that time I was a lamb in the wolf's den. My stock choices were simply put, elementary (I was my worst enemy). Then you showed me the way by introducing me to the Power Gauge. From the first day I reconstructed my portfolio based on the results shown on the Power Gauge. "Now I run the Power Gauge weekly to stay on top of my investments, no surprises the goal. Even through the first week of November downturn and subsequent recovery I am up 9%, not bad for five weeks. Thank you for your hard work, you have helped me protect and grow my retirement." – Paid-up subscriber David J. Good investing, Dan Ferris Eagle Point, Oregon November 14, 2022 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 884.1% Retirement Millionaire Doc ADP Automatic Data 10/09/08 877.8% Extreme Value Ferris MSFT Microsoft 02/10/12 758.9% Stansberry's Investment Advisory Porter HSY Hershey 12/07/07 520.6% Stansberry's Investment Advisory Porter ETH/USD Ethereum 02/21/20 472.2% Stansberry Innovations Report Wade BRK.B Berkshire Hathaway 04/01/09 449.1% Retirement Millionaire Doc AFG American Financial 10/12/12 446.6% Stansberry's Investment Advisory Porter WRB W.R. Berkley 03/16/12 391.8% Stansberry's Investment Advisory Porter ALS-T Altius Minerals 02/16/09 320.9% Extreme Value Ferris FSMEX Fidelity Sel Med 09/03/08 294.9% Retirement Millionaire Doc Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 4 Stansberry's Investment Advisory Porter 3 Retirement Millionaire Doc 2 Extreme Value Ferris 1 Stansberry Innovations Report Wade --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst ETH/USD Ethereum 12/07/18 1,131.8% Crypto Capital Wade ONE-USD Harmony 12/16/19 1,108.6% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,064.2% Crypto Capital Wade MATIC/USD Polygon 02/25/21 912.7% Crypto Capital Wade TONE/USD TE-FOOD 12/17/19 430.3% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root Rite Aid 8.5% bond 4.97 years 773% True Income Williams ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. For questions about your account or to speak with customer service, call 888-261-2693 (U.S.) or 443-839-0986 (international) Monday-Friday, 9 a.m.-5 p.m. Eastern time. Or e-mail info@stansberrycustomerservice.com. Please note: The law prohibits us from giving personalized investment advice. © 2022 Stansberry Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Stansberry Research, 1125 N Charles St, Baltimore, MD 21201 or [www.stansberryresearch.com](. Any brokers mentioned constitute a partial list of available brokers and is for your information only. Stansberry Research does not recommend or endorse any brokers, dealers, or investment advisors. Stansberry Research forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees of Stansberry Research (and affiliated companies) must wait 24 hours after an investment recommendation is published online – or 72 hours after a direct mail publication is sent – before acting on that recommendation. This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.