Tether’s CEO: from IT sales to calling the shots in crypto land
Jean-Louis van der Velde’s career offered few clues that he would become a key figure in fast-growing industry
The Bored Ape Yacht Club is more than an NFT joke
The astonishing prices being paid for limited edition digital cartoons is a clue to the internet’s future
Receiving $3,000 for an asset that was worth a tenth of that last April would normally qualify as a fine profit. But when the owner of a Bored Ape Yacht Club non-fungible token (NFT) sold his digital cartoon last weekend, he made a costly error.
The seller, known as “maxnaut” on the OpenSea market where many NFTs trade, meant to offer it for $300,000 but entered the sum wrongly in ether, the payment token. A trading bot snatched it up before he could reverse the error, and the ape escaped.
These are not normal times for NFTs, with some digital images fetching astonishing sums, even when they were created as jokes. Jimmy Fallon, the late night television host, bought a Bored Ape dressed in a striped T-shirt and heart-shaped shades in November, asking archly on Twitter: “Permission to come a bored?”
Everyone from artists to auctioneers has rushed to hop aboard the NFT yacht before it sails, or sinks. So intense is the ferment of invention, speculation, scams and boosterism since ‘Everydays’, a digital collage by the artist Beeple, sold for $69m at Christie’s in March, that it feels like a grand illusion.
But the Bored Ape Yacht Club is a clue as to why NFTs, for all the metaverse froth, deserve to be taken seriously. The apes, including one with gold fur that fetched $3.4m at Sotheby’s in October, are more than just playthings for the wealthy; they are tokens of things to come on the internet.
The apes are the invention of a quartet of hipster creatives who saw the craze for buying CryptoPunks, the 8-bit-style images that became the first NFT collectibles in 2017, and thought of going further. They made a set of 10,000 cartoons of anthropomorphic apes with natty clothes and louche expressions.
The creators played with digital scarcity. NFTs gain their value from not being identical (or fungible) in the way that bitcoins are. They use similar blockchain technology to cryptocurrencies, but each NFT is identified by its own string of code. Many art collectibles settle through the ethereum blockchain, priced in ether.
The Bored Apes are a limited edition, with various expressions, clothing and accessories. As the makers put it, in a play on George Orwell’s Animal Farm, “All apes are dope but some are rarer than others.” That puts a premium on traits such as golden fur and laser eyes, which fewer than one per cent possess.
Buying an ape also brings admission to a club with exclusive membership, enforced with tokens. As Aleksandra Artamonovskaja, co-founder of the NFT consultancy Electronic Artefacts, says, “People talk about the money, but what’s really important is the status.” Like other luxuries, an NFT ape’s appeal derives as much from who owns one as its intrinsic value.
Bored Ape owners have gathered in cities, and even organised a party on an actual yacht, moored off Manhattan. Membership of an inner circle not only brings status but can be profitable — collectibles allow entry to private message boards on the Discord chat app, and privileged access to other NFTs.
This has been reinforced with dividend-like drops of other items to members of the club. Owners were allowed to adopt dogs with traits like their own apes, and in August were given digital vials of “mutant serum” to create a mutant ape. Those animals are NFTs in their own right, fetching thousands of dollars.
It is all a joke, but a highly artful one that mimics the tactics of contemporary art and luxury. There is a wealth of history and craft behind the new Patek Phillippe Tiffany & Co Nautilus watch in a limited edition of 170 that retails for $52,635 (with one auctioned for $6.5m last weekend) but it bears some similarity to a Bored Ape.
It hardly needs noting that the NFT market is full of flaws. Not only does ethereum mining waste a lot of electricity, but a token guarantees its own authenticity, not the status of the underlying object. Hermès this week denounced Mason Rothschild, the artist who sells MetaBirkins NFTs resembling its Birkin bags, for making “fake Hermès products in the metaverse”.
But it is significant. The fact that digital objects can be minted, owned and exchanged, rather than being copied untraceably, is a step forward for intellectual property on the internet, and a portal into what Silicon Valley venture capitalists now call Web3. That technology can be extended into games, music and other fields, and will build on CryptoPunks and other collectibles.
The beauty of an NFT ape is that it can escape — it is not trapped within one metaverse. If Web3 works as intended, anyone will be free to mint their own tokens, form their own clubs, and trade NFTs across the borders that companies such as Facebook impose. It is a big if, given the internet’s history of being corrupted, but a lovely idea.
Meanwhile, the Bored Ape Yacht Club has a lineage of its own. In his 1899 book The Theory of the Leisure Class, Thorstein Veblen applied the term ‘conspicuous consumption’ to deliberately wasteful displays of wealth. If paying $300,000 for a cartoon ape does not qualify, I don’t know what does.
The liquidity threat looming over markets in 2022
A higher debt burden in the financial system has institutionalised instability
After nearly two years of solid gains across stock markets, will the feared roller-coaster return? The answer is yes, due to higher debt levels, the tapering of central banks’ liquidity support for markets and the growth of indexation.
Only two things really matter in investment: how much money there is in the system and how it is deployed. Recently surging equity prices once again confirm that both are highly elastic concepts.
Some may argue this has always been the case. Fine, but we should ask whether we have reached the point where this elasticity is becoming a far bigger and more institutionalised problem. I think it has.
We calculate that global liquidity — the volume of cash and credit shifting around world financial markets — is testing $172tn. This figure is a stock of all sources of liquidity, including from central banks, traditional commercial banks and the so-called shadow banks that supply short-term debt and currency derivatives.
It echoes the words of Henry Kaufman, Salomon Brothers’ former economist: “Money matters, but credit counts.”
Since the financial crisis, the US and China have been the two dominant liquidity providers, but because China’s international financial footprint is small, America’s actions matter far more for global markets, particularly during crises.
Consider the importance of the dollar funding worldwide and the extension of lines of support between central banks to provide access to facilities backed by the US currency during the Covid-19 emergency. According to our calculations, these actions, together with a near-60 per cent jump in the size of central bank balance sheets to more than $30tn, have fuelled the 30 per cent rise in global liquidity since early 2020.
Yet these figures are still overshadowed by a huge debt pile that we now estimate exceeds $300tn — an eye-watering three times GDP — that burdens the world economy.
The problem is that debt ultimately has to be repaid or, more likely, rolled over. Taking an average debt maturity of five years implies a $60tn annual refinancing problem that requires balance sheet capacity, or, in other words, liquidity.
This means the modern financial cycle gyrates with the tempo of debt maturities. More liquidity requires more debt as collateral, and more debt needs more liquidity for refinancing.
Policymakers seem stuck in this cycle. They keep policy interest rates low and, thereby, encourage still more borrowing, but, often in the same breath, they threaten to withdraw liquidity through so-called quantitative tightening or tapering measures.
Several of the world’s key central banks, including the US Federal Reserve, the linchpin of the global monetary system, plan to reduce their quantitative easing programmes next year. Some have already started. Less liquidity makes it more difficult to roll over existing debts.
Meanwhile, capital markets have lately turned into large-scale debt refinancing mechanisms, easily eclipsing their textbook role of funding new capital projects.
The result is a dizzying spiral of debt, with central banks forced to respond by quickly restarting their quantitative easing programmes to support markets with asset buying whenever financial instability threatens. Consider the policy responses to the 2008, 2010, 2019 and 2020 market sell-offs, and the support given through the colourfully dubbed “Greenspan, Bernanke and Yellen Puts”, after successive Fed chairs.
A renewed dose of QE, or a “Powell Put”, seems the inevitable remedy for the next stock market sell-off. In short, future growth of global liquidity has seemingly become institutionalised by these debt burdens.
The irony is that when the Fed’s cash flows through the system, it often gets forced into a narrow list of often-illiquid securities and has an outsized effect on prices. It drives indices across asset classes substantially higher and compels other investors to chase prices upwards, which magnifies its impact.
Many of the largest investment managers now track these indices across both bonds and equities. About half the assets under management in US equity funds passively track indices such as the S&P 500, according to Bloomberg Intelligence. Traditional valuation metrics play no role in their decisions.
Unless the spiral is broken by higher interest rates, global liquidity will ultimately bound higher. At the same time, asset allocation has been put on a potentially self-destructive autopilot that ignores sensible investment criteria, so that money is focused on the largest stocks, driving their valuations and sometimes even their owners towards the moon.
Is breaking up all that’s left for telecoms to do?
How 20 years covering a declining and hapless sector left me feeling beleaguered
Two decades ago BT executives laid out a recovery plan involving a once-in-a-generation move to split up the hapless former monopoly and restore its position as a national champion.
They were greeted with a wall of scepticism. A meeting to explain the plan closed not on a high note but with a plaintive and fruitless request to stop using the phrase “beleaguered” when describing the company.
Those discussions, which took place in the wake of the company’s postmillennial near-death experience, were my introduction to a sector that had seemingly lost its way. It has struggled ever since to get investors, customers and staff — the stakeholders then chair Sir Christopher Bland had promised to appease — to see the light at the end of the duct.
The shadow of beleaguered BT has now returned after a harrowing share price collapse, strategy reversal and management shake-up. The new top team has delivered impressive cost cuts along with the promise of cultural change and digital jam tomorrow, as was the case in 2001. Yet its share price remains in the doldrums and the vultures are circling.
With Telecom Italia once again in crisis, Orange on the hunt for a new chief executive after a long-festering scandal and issues including roaming and net neutrality back on the agenda, forgive me for feeling like I’ve seen this movie before.
There is added tension this time as the barbarians have appeared at the gateway. BT has its hands full with billionaire Patrick Drahi. Telecom Italia has opened its books to KKR. KPN in the Netherlands has repelled private equity bidders. Telefónica is weighing up a sale of a stake in its fibre network. Even Vodafone, the once all-powerful telecoms empire built by Sir Chris Gent, has started to be name-dropped in deal-circle chatter.
This industry should be in rude health. Consumers and businesses have never been more reliant on what it sells, with the working-from-home and streaming eras highlighting how essential and valuable its services are.
Yet the industry entered 2021 with shares trading at the lowest levels in a decade as investors have been put off by high capital expenditure, poor returns, huge debts and unconvincing growth promises.
In response, telecoms leaders have renewed calls for consolidation and deregulation in a European market that has suffered a downward spiral in growth in the past decade.
It has also led to another bout of introspection from telecoms companies as potential buyers detail how attractive they would look if they were carved apart.
Denmark’s TDC is the litmus test as it enters its final phase of divorcing its network and consumer operations. Macquarie and local pension funds have spent three years quietly bifurcating the company. TDC and Nuuday, the consumer business, now operate free from the constraints of being part of a rigid, heavily regulated incumbent and have started to thrive. Similar separations seem inevitable elsewhere for those with the money and patience to make it happen.
Telecoms companies have broken themselves up in other ways. International empires have been dismantled while mobile towers have been carved out and sold.
A step further to deliver full TDC-like “structural separation” nonetheless raises an existential question for the industry. A company shorn of its fibre, masts and data centres may find itself reduced to the status of a call centre operator and a billing function selling other companies wares.
But if the status quo delivers another two decades of beleaguerment, there may be little choice. Didn’t someone once say that the future was bright?
Closing Stock Market SummaryThe S&P 500 fell 0.9% on Thursday, as the mega-caps fumbled their post-FOMC gains and dragged the benchmark index lower in a steady retreat. The Nasdaq Composite (-2.5%) and Russell 2000 (-2.0%) saw steeper declines, while the Dow Jones Industrial Average outperformed on a relative basis with a 0.1% decline.
The market had a bullish tone in the pre-market session, but that started to unwind after Adobe (ADBE 566.09, -64.24, -10.2%) issued downside guidance for fiscal Q1 and FY22. ADBE shares dropped 10%, and the lack of dip-buying efforts appeared to weigh on sentiment and other growth stocks with high valuations.
Moreover, the pace and ease at which the growth stocks retreated supported suspicions that yesterday's rally was fueled by short-covering activity. The heavily-weighted S&P 500 information technology (-2.9%) and consumer discretionary (-2.2%) sectors tumbled 3% and 2%, respectively.
The value-oriented stocks, though, extended gains. It's just that the mega-cap losses diminished their positive influence. Eight of the 11 S&P 500 sectors, including financials (+1.2%), materials (+1.0%), and energy (+0.7%), closed higher. The Russell 1000 Value Index gained 0.5%.
The financials sector drew support from the curve-steepening activity in the Treasury market, driven by a steeper decline in shorter-dated yields versus longer-dated yields. The 2-yr yield decreased six basis points to 0.61%, and the 10-yr yield decreased four basis points to 1.42%. The U.S. Dollar Index fell 0.6% to 95.98.
The gains in the cyclical sectors, the curve-steepening activity, and even an increase in oil prices ($72.36/bbl, +1.47, +2.1%) indicated that growth concerns weren't a driving force in today's index declines.
On a related note, housing starts and building permits for November were better than expected, and while weekly initial claims were higher than expected (206,000), the four-week moving average (203,750) declined to its lowest level since Nov. 15, 1969.
In light of the Fed's decision yesterday, other central bank meetings received additional attention. The Bank of England increased its bank rate by 15 basis points to 0.25% in a surprise move while the European Central Bank left rates unchanged, as expected, and announced a further tapering of asset purchases.
Reviewing Thursday's economic data:
- Housing starts in November increased 11.8% month-over-month to a seasonally adjusted annual rate of 1.679 million units (consensus 1.570 million) while building permits rose 3.6% to 1.712 million (consensus 1.670 million).
- The key takeaway from this report was the strength seen in single-unit activity for both starts (+11.3%) and permits (+2.7%), as new supply is greatly needed in a tight and increasingly cost-prohibitive housing market.
- Initial jobless claims for the week ending December 11 were a bit higher than expected, increasing by 18,000 to 206,000 (consensus 195,000), but still holding at a relatively low and encouraging level. Continuing claims for the week ending December 4 decreased by 154,000 to 1.845 million, which is the lowest since March 14, 2020.
- The key takeaway from the report is the understanding that the four-week moving average for initial claims (203,750) is the lowest since November 15, 1969.
- Total industrial production increased 0.5% in November (consensus +0.8%) following an upwardly revised 1.7% increase (from 1.6%) in October. The capacity utilization rate rose to 76.8% (consensus 76.8%) from an upwardly revised 76.5% (from 76.4%) in October.
- The key takeaway from the report is that it points to plenty of latent growth potential when the semiconductor supply shortage, and other supply chain issues, can get worked out.
- The Philadelphia Fed Index for December dropped to 15.4 (consensus 30.0) from 39.0 in November.
- The preliminary IHS Markit Services PMI decreased to 57.5 from the final reading of 58.0 in November. The preliminary IHS Markit Manufacturing PMI decreased to 57.8 from the final reading of 58.3 in November.
There is no economic data scheduled for Friday.
- S&P 500 +24.3% YTD
- Nasdaq Composite +17.8% YTD
- Dow Jones Industrial Average +17.3% YTD
- Russell 2000 +9.0% YTD
After Hours Summary: FDX +6.1% up nicely on earnings; RIVN -11.4%, EXFY -6.4%, SCS -6.2% fall on earnings; X -3.4% lowers EBITDA guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: FDX +6.1% (also authorizes new $5 bln share repurchase program), NX +0.6%
Companies trading higher in after hours in reaction to news: UIHC +7% (UIHC to transition its personal lines insurance business in GA, NC, and SC, to HCI), FOUR +4.8% (approves $100 mln share repurchase program), LYEL +4.5% (FDA clears IND application to initiate Phase 1 trial for LYL797), UPS +2.3% (in sympathy with strong FDX earnings report), REI +2.3% (increases Q4 sales guidance), NAAC +1.5% (announces business combination with TeleSign), CO +0.8% (rejects non-binding proposal from Alternate Ocean Investment Co), MOS +0.8% (releases November sales and volume data), LMT +0.8% (awarded a $286 mln contract modification from Saudi Arabia), K +0.3% (signs new tentative union labor agreement), FMC +0.1% (increases dividend), BA +0.1% (awarded $398 mln contract for the Royal Saudi Air Force)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: RIVN -11.4%, EXFY -6.4%, SCS -6.2%, X -3.4% (guides Q4 adjusted EBITDA below consensus)
Companies trading lower in after hours in reaction to news: GM -2.6% (Cruise CEO Dan Ammann to leave the company), TTI -2.1% (TTI and EOSE sign term sheet regarding supply and collaboration agreement), TSHA -1.6% (initiates clinical development of TSHA-118 for treatment of CLN1 disease), LXFR -0.2% (taking multiple actions related to U.S. and U.K pension plans), TFII -0.1% (increases dividend), MRK -0.1% (NEJM publishes positive results from its Phase 3 MOVe-OUT trial)