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#FinanceDaily: 🚨BINANCE Bombshell | Debt Ceiling Update
Recorded: May 23, 2023 Duration: 1:34:22Space Recording
Short Summary
The transcript discusses Binance's alleged co-mingling of customer funds with company revenue, drawing comparisons to FTX's fraudulent activities. This has raised concerns about Binance's regulatory compliance and operational integrity, suggesting a decline in its market position and trustworthiness. The broader crypto industry faces scrutiny as regulators and politicians aim to prevent a repeat of past failures, highlighting ongoing challenges in maintaining regulatory adherence and reputation.
Full Transcription
just waiting for scott to come up and then we and then we can all get started there's a lot to talk about today we actually had a completely different title like six minutes ago so trying to figure out the details of this news with the with finance if people listening know a ton about this please uh go into the comments on the bottom right and start putting them in uh
The information is obviously coming in piecemeal.
Looks like there was something in 2021
where they were co-mingling customer money
with their own, kind of like FDX.
And so the reason why I'm bringing this up is because
Again, I'm reading the article in real time.
It was just shared with me.
So if people already know a ton, it'd be great.
And Simon, we're going to wait maybe two or three minutes.
Thank you so much for joining us, Simon.
We're going to wait maybe two or three minutes for the room to fill up a little.
We only have like a few hundred people in here right now.
So probably let's give ourselves like two minutes.
But interesting start to my day.
I was hoping to just, you know, talk about debt ceiling and
Simon and I would talk about the Ponzi scheme that is the US government and a fiat currency and it was going to be great and chill and nice and
David would then tell us about you know the economy and and what what how China is stronger than we think they are and then Jeff would tell me that Tesla is
is the future no matter which topic we're talking about but regardless
Today, everything got sidetracked because of freaking Binance.
Crypto does this.
Crypto is a sinkhole of news.
It just takes over everything else.
And so this is obviously top.
top news right now.
We're still waiting again for Scott Melker.
I think he's driving right now, so we'll see if he can join us.
But let's give him a couple more minutes, and then we can get started.
But in the interim, I've posted the news, the Reuters article up in the nest.
Everybody educate themselves while we're waiting.
We'll be...
going soon. But, you know, actually, maybe it makes sense to kind of run through some of the other
news really quick. Well, not that it doesn't matter, but it's kind of nice to be able to run
through everything else really quickly. Hello, everybody. So I was going to say, you know,
let's start with some news that was close to, close to what we heard last week, which is that Lowe's actually
is down about...
one and a quarter percent.
Largely because it's, you know,
even though it beat its first quarter expectations
and earnings and revenue expectations,
Lowe did cut its full year, full year sales outlook.
largely driven by lumber prices and do it yourself customers buying less discretionary items.
Now I know it's not sexy to say this, but I think it's becoming very obvious.
We're seeing a pattern here.
Consumer staples are doing fine.
Consumer discretionary is not kind of expected right before.
what is likely to be a recession.
But I don't know.
Do people have anything to share about lows before we move forward?
I'm going to just start rushing through all of the other topics.
Because as I said, crypto is going to take over everything always.
Crypto is the real Ponzi scheme of news.
Just like as soon as something happens in crypto, everything else kind of goes to crap.
The only other big, big news was that the Saudi oil minister...
was telling people shorting oil to watch out something new is coming as a, you know,
As a heads up, OPEC plus actually has another meeting coming up.
And, you know, it's widely assumed that they're going to do more barrel cuts.
But whatever.
I think they're just upset because people are seeing.
I think they're like pulling a Russian.
I think there's a Qatari minister, by the way.
But, yeah.
No, Saudi oil minister.
No Saudi.
Oh, the Qatari minister has been saying stuff as well, I find a quote as well.
Yeah, yeah. So the big news actually came out from the Saudi oil minister, I can tell you. Prince
Abdulaziz bin Salman. He actually came out and told market speculators to watch out that they could face pain ahead.
You know, his words were speculators like in any market they are there to stay. I keep advising that they will be outching.
an adult
an adult should never use the word
outching
and the Qatari
Energy Minister said it was about Europe
he said the worst is yet to come
for Europe's energy crisis
Yeah, it's a weird thing when, you know, oil ministers are talking about, uh, ouching and the pain.
And it's just a weird world we're living in right now.
But I did want to read this sentence because this sentence made me, make me chuckle a little.
Speculators, like in any market, they are there to stay.
I keep advising that they will be outching.
They did ouch in April.
I don't have to show my cards.
I'm not a poker player.
But I would just tell them, watch out.
Those are the sentence.
I don't even know what that sentence means, you know.
Like, that is the most confusing thing.
I think I just got thrown off by outching.
Just as a heads up, OPEC plus is meeting on June 4 to decide on production policy.
Widely assume that they're going to do more barrel cuts.
So, you know, which is not surprising considering oil is still sitting at $76.49 per barrel.
So still low compared to all-time highs.
Yeah.
David, anything to add on oil before we move forward?
What are your thoughts on oil?
Do you think speculators will be outching?
Yeah, that is a funny comment there.
I don't think right now, oils, it's not going anywhere.
I mean, we've gone, what, six months of it just going sideways up and down.
And it's up today, but it's not like, it's not breaking out up today.
So I wouldn't put a lot of stock into this.
Not until you break above like,
82 bucks.
If it breaks above 82 bucks,
then that's when you have some concern.
But again, like you think about what would drive that.
You have two factors that would drive it above 82
and really get it trending.
One would be economic growth.
global economic growth expectations, which are, I don't think will necessarily be strong enough to drive commodity prices higher again, at least back up to its highs.
Or two would be inflation driving up again.
And I don't see that happening back to where it was.
So I don't see either one of those factors.
I'm still bearish on commodities in general.
So Scott's up here, Scott, I don't know how long we have you, but I wanted to pivot quickly to this Binance story.
I know in our messages, you were kind of mentioning that this is perhaps a nothing burger, but wanted to run through it in a little bit of detail and maybe the implications and why.
First of all, let's walk through the story a little bit, Scott, and then I want you to.
to correct me if I if I'm misunderstanding.
Binance,
it is the world's largest exchange,
crypto exchange.
And according to this article from Reuters,
They were co-mingling customer funds with company revenue in 2020 and 2021.
This is a clear breach of the U.S. financial rules.
They require customer money to be kept separate, according to three sources familiar with the matter.
that told Reuters, one of the sources with direct knowledge of binances, group finances,
said that the sums ran into billions of dollars and co-mingling happened almost daily in accounts.
The exchange held with Silvergate.
Reuters actually did not independently verify this, at least the figures of or the frequency,
but they did see a bank record showing that on February 10, 2021, so just to be clear,
Reuters did not independently verify the billions number, but they did actually see a bank record
where Binance, in February 10, 2021, Binance mixed $20 million from a corporate account with $15 million
that
received customer money.
And then, you know,
you know,
the point that Reuters is making that they didn't have internal controls,
that could allow you to be able to tell what's what.
And that,
John Reed Stark,
the former,
one of the former chiefs of the SEC,
office of internal enforcement said,
that a finance customer shouldn't need a forensic accountant to find
where their money is,
At the one point that Reuters did make that was that Binance clients did not lose any money or did not have any money taken.
But,
You know, wanted to start there.
This is just like the lay of the land on the main, main topic.
Sorry, Dennis, just to clarify.
No, Biden has denied all of this.
I'm sorry.
I'm just asking a clarifying question from what you just said.
Did Binance say that they didn't have the systems in place to tell the difference?
Was that Binance or is that somebody else saying it on behalf of them?
No, it was somebody else saying on behalf of them.
And obviously they did since no customers have actually said that their money was taken or lost or anything like that.
Yeah, because that would be a systemic problem in the company, right?
To admit to it.
The underlying point is more around the fact that legally they're not supposed to be able to do that.
So, Scott, I'll go to you.
What do I understand the situation correctly?
And isn't this sort of what FDX did?
No. I mean, sort of in a very superficial way. So, so I mean, FTX was outright fraud. They were effectively sending funds that were deposited by customers to their hedge fund, Alameda and going high leverage trading and buying Citcoins with leverage.
and losing all their customer funds. So that there's there's no accusation here of illicit
uses with the funds. It's merely commingling and like you said in 2020, 2021. So listen, I'm digging
into this like everyone else right now so I don't want to speak out of line on anything that's not
factual. I will say this. There's a lot of companies I would imagine in the crypto space who
previously did things that were on the borderline of
of legal, whether intentionally or because they were growing at a tremendous rate and probably
just struggling to scale or because the laws weren't particularly clear or because they weren't
even working with regulators at that point.
I mean, there's a lot of people who would say that Tether was a similar company who probably
wasn't fully backed originally, then was backed by commercial paper and other sort of shadier
investments and now is fully backed and has a surplus.
To some degree, I think a lot of these larger companies in crypto sort of learned on their feet and have become compliant over the last few years.
So there's a chance that that is the case here.
Now, FTX was an outright fraud, to be very clear.
Like it was effectively a Ponzi scheme.
Not only that.
I mean, FTX customers were literally depositing.
believing they were depositing into FTCX as an exchange and their money was literally going into the hedge funds bank accounts.
So they were not even depositing into FTCX exchange. They were depositing into Alameda.
So the claim here, first of all, should be noted that when we're talking about companies were tens of billions of dollars here.
are moving tens of billions of dollars on a regular basis,
$15 million, $20 million is a drop in the bucket.
That doesn't make it right, but it makes it a drop in the bucket.
Now, finances contention here, I'll have to find the quote
because I literally just walked in,
but their contention is that these funds were being used
that these were actually corporate funds.
There was no co-mingling and says when...
Yeah, I have their actual statement.
Yeah, okay.
So in a statement of ordealers...
Buying the stable coin, but you can read it.
Yes, the USD.
Yeah, Binance denied mixing customer deposits and company funds.
These accounts were not used to accept user deposits.
They were used to facilitate user purchases of crypto.
Brad Jaff said, there was no co-mingling at any time because these are 100% corporate funds.
When users send money to the account, he said, they were not depositing funds,
but buying the exchanges dollar-linked crypto token BUSD.
This process was exactly the same as buying a product from Amazon.
So I don't understand.
Can you translate for the non-crypto natives?
Far based on the spokesperson's words there, but they had their own stable coin, which
largely has gone to zero now as a result of enforcement by the SAC that you guys may have
seen with Paxos attacking BUSD stable coin.
But effectively to trade on the platform for quite a long time, people
prefer using stable coins over directly dollar linked, especially if you were American at the time
doing it.
So people would purchase the stable coin with their dollars or with other stable coins or
with other crypto for utilization.
The bulk of all volume, certainly on foreign exchanges, and there is almost no volume on American
exchanges now, is trading in stable coin pairs.
And for a very long time, actually, well after this, last year, especially,
if you deposited us dc or dollars at some point into binance they were automatically converted to bUSD
which was their stable coin uh for trading and on that pair so that the most highly liquid pair
for a very long time you know was b usd to the dollar to to bitcoin but but as soon as you
converted to b usd they could use it however they wanted
I think the claim here is that you were converting one to one your dollars for BUSD.
So they were issuing you BUSD with the money that you were depositing.
And it wasn't being deposited into this account.
The claim here seems to say that you were buying BUSD and then B BN internally was moving money around to facilitate that.
Yeah. I mean, it seems like a weak argument, no, Scott? I mean, ultimately, it's okay. There's a very small amount of money. I mean, if it's billions, I think, listen, I mean, 20 million or 15 million. According to an internal source, it was billions. Reuters did not actually look at the accounts themselves. And this is one of the hard parts, right? Which is.
You know, it's not like finance is going to open up their kimono and show bank accounts showing that they did not go mingle, right?
I mean, ultimately, the challenge with these exchanges is a lot of it, they're very susceptible to FUD.
And they're also very susceptible to bad actors.
Sure.
You know, it's this big issue.
And I don't know what the solution is, but if you, I don't know if you use finance or not.
I can't.
Oh, because U.S., you can no longer use finance.
So, yeah, I mean, U.S., we...
US used to, obviously, either you would use a VPN or they did KYC their customers.
But this is sort of my point that I went to in the beginning.
It was the Wild West for a long time and these exchanges have been forced to become compliant.
I mean, I was in Dubai with CD in February and we were talking about this and I kind of
joke to him.
It seems like you don't run an exchange anymore.
It seems like you're literally just interfacing with regulators and taking selfies
with customers.
And he said, yes, my only job now.
is literally to just get compliant with regulators
in every jurisdiction in the world.
And you can even ask him,
he gave a very interesting sort of analogy
as to what it was like to build Bidance through the years
and has been very open about this.
He likened it to sort of the early days of the automobile and regulation.
Listen, when the automobile was invented, it was slow.
There weren't many.
You were dodging horses.
There were no rules.
They got faster.
The roads got more full.
And then regulators stepped in and started to give more clarity.
And the automobile manufacturers became compliant.
You added seatbelts.
You abided by speed limits.
you stayed on your side of the road.
He said that, you know, effectively for him,
that's what it was like to build finance.
Because when they were doing this in 2017, 18, 19,
building it, of course, and launching...
There were no regulators even paying attention.
You couldn't get one on the phone.
You couldn't.
So it was either don't do anything or test the waters and then become compliant with time.
I'm not defending that position.
I'm just telling you I think that you can understand that that might be the case.
That doesn't clarify why they would be commingly accounts.
But if you're looking at a business that was effectively unregulated,
didn't even understand regulation at the very beginning and then had to become compliant,
you can see how these things would be happening before they cleaned it up.
So from a U.S. retail perspective, no issues for, in fact, sounds right.
There is finance.
There is finance U.S., but the claims here are not about finance U.S.
and it's a whole different rabbit hole to go down whether finance U.S. is directly tied to finance
where as a separate company.
That's a whole another few hours of topic.
But for Americans...
We are not actively trading on finance the main exchange,
and they have very, very strict KYC to disallow that.
Yeah, I wanted to go ahead, Justin.
I posted up in the Ness from an article back in March from CNN business where
I posted a quote,
Binance has long argued it isn't subject to U.S. laws because it doesn't have a physical
headquarters in America.
So I wonder if this, I mean, if this negative news actually impacts them in the long run.
You're regulated in America.
You're regulated in America if you allow one American to deposit in your platform.
And leave an American bank.
There's no question that Americans were using this for a very long time.
It's where I traded aggressively in 2019, 2020 with no KYC.
Maybe you had some limits on your withdrawals based on not being KYCed.
And then I did eventually make a switch to Binance US.
I just never effectively used it because all of this sort of negative news seemed you could just stick with Coinbase and
Listen, I was a Voyager creditor.
I was using FTX only as an off ramp for a while, FTX, US.
You learn eventually just avoid anything that even has a rumor.
But that doesn't mean that there's any risk.
My question, though, is, and I don't know the answer to this, obviously,
but my question is, are they subject to the same U.S. laws?
Because I'm extrapolating from this quote that maybe they're not.
If you allow one US dollar or Satoshi in your platform, then you have invited the US jurisdiction.
Now, whether you're regulated is a question of whether you actually apply for the licenses.
What we discovered is that many crypto companies were trading without licenses.
So that's a...
That's a breach of regulations, but you're still wrong license.
Yeah, the wrong license, I'll say.
And also shadow licensing issues.
So essentially there's also regulation and shadow where, you know,
you are operating a regulated business without knowledge
and without the regulator enforcing you to,
but can be retroactively regulated.
So you should have been acting a certain way,
which is definitely going to be the case if they were using a US bank account,
which they were.
You could use a US bank account for non-US customers with a non-US business,
and they'd only, if you did something extremely wrong and they'd want to overreach,
then they could try and gain jurisdiction by saying,
oh, you're using Amazon Web Services, therefore it's a US website,
or you're using a US bank account, therefore.
But that would normally be when you're like at the,
at the very extreme stage.
The bit that regulators care about is their citizens that pay tax in their country,
you know, being defrauded.
And so therefore, if you pay tax in, if you're in,
if you, if you pay tax in America,
then you are officially contributing to the protection bestowed upon the SEC.
And so as a US person, if you use the platform,
then the SEC as one regulator.
There's obviously those of them.
But that's one regulator that says,
because you pay tax,
we protect you.
And therefore, if anyone defrauds you,
or engages in, then they have to comply with all these laws no matter where they reside.
Exactly.
Yeah.
Yeah.
I think it's really, Donis, just really quick, a very important nuance here is that even at the peak of Americans using Binance, as far as I remember, so somebody could correct me if I'm wrong, there was never a direct USD on-ramp.
You...
deposited via crypto. So like what I wanted to use finance, it was depositing USDT or USDC a stable coin or Bitcoin directly to the exchange like blockchain based transfer. There was never, I don't think, a direct retail banking link where you could, you know, deposit to finance from your American bank account.
Yeah, by the way, Mark's funds were not commingled because Americans never had USD or a banking relationship with Binance.
Literally impossible that that was American users' funds on Binance in cash.
Interestingly, Coinbase is up free market, not much, but a little.
Mark, wanted to go to you.
Obviously, you play very strongly in this space, but wanted to get your thoughts on the Binance news.
Is this something or nothing?
Yeah, good morning, Dinesh, Scott, Simon, Rob Maria.
As always, thanks for having me up.
This is definitely something.
And a little fun fact, back when I was still practicing law for a living, one of the cases that I handled and I actually put together the class action lawsuit among the aggrieved plaintiffs in the case against a law.
MF Global. That was the FCM, the commodities merchant broker-dealer that famously went down under
former New Jersey Governor Corzine's tutelage for what, of all things, commingling, customer
funds.
putting customer funds at risk, taking funds from a SEGA account, segregated account, and putting them into the firm's prop account, leveraging those funds and losing money.
So this is definitely something. I've been concerned for a long time about finances, apparent lack of appropriate or thorough controls, internal controls.
And let's just talk about the long arm of U.S. jurisdiction.
If a non-U.S. corporation or individual avails itself of the U.S. markets in virtually any way by offering or selling a security to U.S. citizens, by offering or selling a service.
to U.S. citizens by having any contact materially with the United States, whether it's a regulatory reach or it's a law enforcement reach that are exercising...
enforcing, rather, I should say, anti-fraud provisions, laws against conducting business in the U.S. or with U.S. persons without the appropriate licensure, whether it's money transmitter licenses and what have you. There is no doubt.
that under this administration, with its remarkable and, in my opinion, ridiculous anti-crypto stance,
that if they wanted to use this as an excuse to take Binance out behind the same woodshed,
that they took signature bank, that they took First Republic, that they took Silicon Valley Bank,
chokeholds is real, they will do that.
I think that finance is in real trouble.
And the timing of this is very interesting.
Obviously, this last week, Biden said that he didn't want to leave loopholes for crypto, you know, crypto folks.
And for some reason, he, like, called crypto out specifically.
I know a lot of people were quite upset by this.
Do you think that the timing of this news is?
is is interesting or or of worth you know of note because that's something that I've been trying to understand you know Scott's completely right this is from 2020 2021 and so this is old news
Yeah, and Dinesh, I don't know enough about the source.
I'm only on my first espresso, so I need to get my seconds to get all of the background on this story,
appropriate to cover for this incredible audience.
But I had to laugh on Sunday when Biden make those statements in conjunction with the debt-sealing debate.
you know, after jetting off to China, like, you know,
excuse me to Japan, as if there was nothing wrong back here in the U.S.,
nothing to see folks.
You know, he's not going to let those crypto bros, you know,
have any role in these debt ceiling debates.
It was like,
I'm sorry, how did crypto come into the death ceiling conversation?
So it was definitely good for a laugh on Sunday afternoon.
But as far as the timing is concerned,
I don't know enough about the source of the story to comment in any meaningful way on that.
Yeah, if you read that, you would believe that Biden is implying that wash trading exemptions for crypto traders are the reason that they're starving children in America.
And I'm not doing.
But Scott, isn't that true?
He literally, well, yes.
I mean, I personally have carved children on a daily basis as a crypto trader.
God, someone's getting cut back.
Not his children.
Other children.
Right.
I take food from other children.
You won't do it on your own children.
No, but really, he's, he had an infographic on Twitter about two weeks ago that said the exact same.
It said, you know, Democrats are clear on closing tax loopholes for wealthy crypto traders.
By the way, there are four of those left in America.
And B...
was for, you know, cutting food subsidies for poor people, right?
And so it literally, and that was the optic and rhetoric.
I will say, as much as is the war against crypto, it's absurd, it's nonsense,
It was not on my bingo card for 2023 that crypto would somehow become a fundamental part of the debt ceiling conversation.
So if we can take the silver line, it's that we've actually become a major part of the conversation.
But yes, their attack is absurd.
I think, Mark, you probably have the best take there, which is whether this is or is not something.
It's very clear that the administration is looking for little things as excuses.
to mount their attack.
And I think that that's more likely what we would be seeing here
than this actually being significant.
I have zero doubt in my mind
with a lot of crypto exchanges and companies
did shading things either intentionally
or because they literally just didn't know better
and weren't working with regulators in the past
and have become compliant.
I would be very, very surprised
if someone could find evidence right now
with this much scrutiny in the spotlight this heavily on them
that finance is doing anything to vary.
Now, that doesn't make it right or wrong.
I'm just saying I'd be very surprised.
The story may or may not be accurate,
but if it is, rule number one of financial markets
in the US is don't steal money.
Rule number two, pretty close behind it is don't commingle funds.
I mean, it's a pretty basic tenant.
And any company looking to do business in the US
at any future point in time,
you know this is not a new rule this is something they should have seen so again it may be a
mistake it may not be accurate but you know i think it's i think it's more than just and by the
way it doesn't really matter if it's a billion dollars or a million dollars regulators look at it as
you know problems with control and that's an issue that matt that's absolutely right i bring up mf global
not because you know i wanted to tell people you know how cool i am although of course it's
important to footnote that but
But talk about regulated, right?
I mean, when you're operating an FCM, you're regulated by the SEC, by FINRA, by the CFTC, by the NFT, AARP, and God knows who else.
And you're right, dollar one, whether it's a million dollars, a hundred million dollars, or $1,000, it's an indicia of a lack of internal control that can lead...
very rapidly in today's world to, oh, my God, where's $3 billion in customer money?
We don't know how to account for it.
So this is going to be, I'd be shocked if this is not taken really, really seriously by U.S. regulators.
And if Gary Gensler's not waking up this morning and smiling over whatever dog's breakfast he eats every day.
I would say that Gary Gensler was smiling about it.
for the last few weeks knowing that the article was coming out of this perfect time.
Let's not pretend that this is a news to Gary Gensler, that this isn't completely intentional.
But also, this is not a new claim and this is not a new accusation and this is not really new news.
There's nothing we're winking up to today.
Binance has been accused of this now for years, right?
And especially in the heat of the FTX. I mean,
It should be noted.
I mean, Biden suffered a larger bank run than most of these United States banks that failed
after FTIX and survived and was able.
I mean, speaking of the other company I mentioned, Tether, I think that they managed
like $10 billion in withdrawals and redemptions in 48 hours and were completely unfazed.
If we want to talk about who fails our customers with fractional reserve banking or 15 million in co-mingle funds,
I'm not defending the action, but I'm saying that these companies have proven that they're solvent to the tune of tens of billions of dollars for a very short period of time.
Tom Crowell, I see you're here, you're joining me on YouTube in 20 minutes so we could consider this lubricant.
But what are your thoughts on this? I know that you're pretty deep in the space and understand what's going on probably with finance.
Hey, brother. Yeah, forgive my terrible connection. I'm driving home. But I'm listening in. I didn't know there was actually anything new about Binance and just listening in for the last five, ten minutes. It doesn't seem like there is. They had massive bank runs on their assets with no real issues.
to be heard of. And then we have the government going after signature bank, which was,
at least to my knowledge, not insolvent at all. And then we're seeing the rhetoric take up
about crypto with a dead ceiling. And it really seems as if we're,
aiming to just put crypto as the fall for whatever is coming.
And I mean, I don't think the US is going to default on the debt or anything,
but it almost even seems like it's lining up for them to say,
how we told you it was crypto's fault.
Even after years of saying crypto is not a threat,
crypto isn't a threat to our banks,
isn't blah, blah, blah, blah.
And now we're lining up these ducks to be knocked down in a row.
I find it really humorous.
Yeah, you know, Tom, one question I had was, so the big part of this news that I think is triggering our financial sensibilities is the co-mingling of funds.
I think that is the big thing that they're focusing on in this news.
It's not about, you know, just regulatory side.
They are, and many people remember that co-mingling of funds was one of the issues that other exchanges have suffered from.
Tom, what are your thoughts about that part of the story and it being used to now go after other exchanges and start looking through their books?
We know there have been actions made against Coinbase.
We know there have been actions made against other exchanges.
Is there something there in terms of the co-mingling of funds part of this?
I think everyone. No one can think that commingling funds is a good idea for a bank or an exchange.
So, I mean, that's obviously not good news, but it seems at least they have it under control.
You see things becoming insolving quickly. I don't really have that worry with Binance.
And that actually reminds me, I think it was Jesse from Cracken, who's on a space months ago, and said something about when users deposit to Cracken,
that's a liability because they're not doing things with those funds they're essentially now the custodian and they're in charge of them and they're at liable if uh if they're lost and i think that's probably the motto that all exchanges should have despite finance like i said i really don't think that i mean yes he could go after them i think they're going to be a hard target to pin down they have the resources and the ability to move around quickly but uh
Yeah, that just stuck with me.
What Jesse said is assets are actually liabilities because they're not making interest off of them.
I think it should also be noted that by the time any of these suits would come to fruition or be well into them,
Gary Gensler and this administration will likely be long gone.
So it's important to remember that if we have a change in sort of rhetoric
or change in who's in the White House or running these agencies,
it could be completely erased and become a non-issue itself.
So, I mean, these cases take years to even build.
And I think that this, I just don't see Gary Gensler here in another four years.
Well, Scott, the only thing I would say about that is,
That's true when there's an enforcement action that's brought and it's litigated in the courts and sort of the normal course.
As, you know, of course we see playing out with Coinbase and Ethereum.
But that doesn't stop them from exercising, you know, their emergency powers.
Restraining orders, cease and desists, asset seizures,
and the case of there being, you know, material allegations of wrongdoing and harm,
imminent harm to American citizens.
And my question is, if this isn't news...
What have they been waiting for, right?
And I think, Tom, you're absolutely right.
I've said this before.
I've said it earlier in this show.
I think regulators are 100% lining up these companies like ducks and shooting them.
As I've said before, Operation Chonold is, I think, very real, unfortunately.
But if it's not news, then what's like, why now to the question about timing?
Yeah, what I think would be useful is to just help people understand these different topics
because it's easy to conflate lots of different issues here.
So again, I'm not comparing my business to Binance because we're in completely different areas,
but we still have to do the same things.
And so...
When you're running a regulator company, firstly, whether regulators regulate you or not,
you have a duty of care to client money.
If we're in an ideal world,
you wouldn't need regulators to have financial institutions
exercise that care.
But history has shown that you need regulators
to give the oversight of centralized companies
because the financial institutions
tend to do bad things when you don't have an oversight.
And so that's kind of the first thing.
If companies, whether regulated or not, just separated client money and operational money, that's a decent thing to do for your customers if you want to have customers in the future.
Now, there's a reason for that.
And the reason for that, and this is where crypto companies, you know, kind of growing in a very fast industry and as a shareholder in a hundred of them, I've seen the journeys that they go through.
when you've got regulatory uncertainty, hostile banking,
the security of trying to secure client assets,
and then implementing all of the financial controls in a fast-growing environment,
it's a very challenging thing.
If to help people understand what this accusation is, is it starts at the base layer.
And the base layer is you offer a financial product and you've got three databases that you need to match up.
One is the actual money, which is client money at a bank account or money in cold storage if it's in the crypto space.
The second is your accounting software where you have to dollarize everything or put it into fiat currency.
And the third is your database on the centralized platform like Amazon, AWS.
And in your AWS or your platform database, Binance will know this many people hold this many B&B tokens.
This many people hold this many Bitcoin and this many people hold this many ETH.
And all of those have to match up.
And normally you have a reconciliation process and all sorts of systems and controls
because sometimes you charge fees.
And therefore you have to take funds that are in the client database
and move them over to the operational funds because the ownership when you charge a fee has changed.
These all require massive systems and controls because the consequence of getting them wrong
is you create Celsius or FTX.
And so start with that base layer.
So the commingling of funds is something that should not happen for a very, very important reason.
Because if everyone wants their money back, they may not be able to get it.
If you want to do that, if you want to be in a position where if everyone wants their money back, they can't get it.
Then you need to have a banking license.
Because a bank is allowed to spend client money, it is allowed to fractionally reserve,
and it is allowed to create digital currency every time it issues a loan.
In exchange for that, the government has FDIC insurance, and you have strict regulations and stress testing,
and those stress tests have failed, and they systemically can go wrong.
Take a step back.
You know, we started at Bank to the Future as a securities business.
That means that we offered investment products to investors.
When they want to invest in those products, they have to deposit funds
and we have to put them in escrow.
Escrow means...
that we can only, you know, those funds can only be transferred once the investment is complete in the middle.
And then you have to custody them.
Custody means you're simply holding them with title to the person that they belong to.
And you're probably charging a fee in order to do that.
Simon, I did want to share, I'm sorry to cut you off.
First of all, this is not financial advice.
So I wanted to share that out loud.
Sorry, Simon, because you were going very deep into what sounded like financial advice.
And then two, I do want to say that we actually, this is just a news story.
They have not confirmed.
I've been getting messages on the back end saying, hey, what's going on?
Am I going to lose everything?
I just want to tell people this is a news story that was released by Reuters this morning.
It's about what they were doing two years ago.
We do not know what Binance is doing today.
Also, you know, finance U.S. is a completely separate entity.
So, Simon, you know, I want to move on from this because I want to make sure that we do read what Patrick Hillman.
And he has been invited.
So if there are people in the room that know Patrick,
please invite him and tell him to come up here and speak for for binance he is the head of
comps for binance i'm going to read the statement from him um uh let me explain and this was just
ten minutes ago so it's brand new let me explain just how desperate a journalist reuters is to publish
a negative story the whole base of their story this morning is that when users purchase b us d
Paxos from Binance, they were taken to a transaction page that had the term deposit on it.
Users were making a purchase of a stable coin that was redeemable by Paxos, which was explicitly
stated on the page.
This story is so weak that they had to put up front.
Reuters found no evidence that Binance client monies were lost or taken in a transparent
attempt to protect themselves from a libel suit.
Underneath that, they then pinned 1,000 words of conspiracy theories,
which we explained were false,
with zero evidence other than a former insider, quote unquote.
We've been very public about whether the company
had regulatory shortcomings in the past.
There's no reason for a respected news outlet like Reuters to continue making stuff up.
Also, the xenophobia behind consistently mentioning CZ Binances, ethnicity,
without noting that he's been Canadian since the age of 12 is about as subtle as a hammer
wrapped in a pillowcase.
Modeling his words, then.
Yeah, yeah, he was holding back clearly.
But, you know, I have to say that when it comes to, to be fair, if there is a, again, I'm always going to take the other side on this because I think that there actually needs to be more regulation in the crypto space.
Trust me, I've heard some of these alt coins, let's call them, folks talk.
Yeah.
And it's all about pumping and pumping and pumping and I think it's hurting the whole space.
But with BUSD, this is very, very different, obviously.
But I do think that if it is just to be very clear...
that when users were purchasing BUSD and it takes them to a website that says,
to a page that says deposit on it, that is actually wrong.
That is actually wrong.
They thought they were depositing their money into an account.
It is really important because, look, if you are doing that with custody of PaxSos,
and PaxSos is a money market fund or it is just simply holding the money at a bank,
And whether it's got FDIC insurance, those are all important disclosures if you're complying with laws.
Because you need to tell people what types of risks they're actually taking so they can assess that they're not over exposed.
That's the foundation of the regulations.
Scott, you disagree with Simon and I on this.
Or maybe you were.
I don't know.
I'm not disagreeing.
I'm just saying it goes back to the point just to remind you, not that it makes commingling correct.
But.
we you know we're talking about the u.s regulator i can assure you that no americans were
depositing us d to buy the usd because that was not a capability on finance
Yeah, but what was a capability is if you're in a position where you can deposit $2,000 without K.C,
then you don't know whether they're American or not if they're using VPNs.
Now, if that exists or that was removed, and I'm sure it was removed at some stage,
because, you know, Scott gave a very, you know, detailed,
it's an evolving, it's an evolving trying to get into compliance process.
But what actually happens when you deposit money?
Is that going to the Paxos, which is a New York state charter?
Yeah.
Is it going to Binance?
Is it going on the Binance smart chain?
Are they minting, in which case they would be set, you know,
they would be issuing new tokens for those dollars?
Are they going into the corporate account or are they going into, you know,
an operational account where another investor is selling them?
Because this is the foundation of,
FTCs. If you hold funds in custody, you need to hold them in custody. If you invest them, you need to be given the disclosure and you need to know that you no longer have those funds. You have a security instead. And if those funds are then lent, then you need to know that those are being transferred into somebody else's ownership and put at risk.
And so that is the foundation.
But Eugene, go ahead.
Simon, I want to hear from others as well.
Go ahead, Eugene.
Yeah.
Yeah, well, one thing, one thing about the VPN thing.
I think there would be an interesting case to be made that the crypto exchange could say,
hey, you know, if you use the VPN, you violated it at terms of service.
I mean, a lot of these exchanges sort of have that.
But I want to make a meta comment on the, I want to make a comment on the,
I want to make one comment on the idea of media and this article, which was highlighted by Patrick Hillman, and then talk about the actual situation.
So the meta comment is...
I actually think it's really interesting.
If you actually click the link of this thing, and I've been reading the article, I actually
down in the details like a lot of others, but it's a fancy article.
It says a Reuters special report.
It's got this animated GIF that's like, you know, this.
I kind of miss it.
It brings me back to the nostalgic days of like decades ago when there was like real
journalistic reporting and real special reports and, you know, people like Michael Lewis
were writing long articles that actually had like real interesting data and real breaking
news in it.
I feel like, you know, the state of media has been so disrupted that, A, this thing doesn't really have that much info or new data, as Scott and others have pointed out. So that's kind of one. And number two, like this Reuters has like 20 plus million followers and
It's barely gotten any engagement on this article in two plus hours, two and a half hours or so.
So that's just a commentary on the state of media in general.
But as it relates to this report, I mean, you know, finance, you know, a lot of people
have said a lot of stuff just to add to the convos and not to repeat what others have said.
You know, finance was founded in 2017, right?
Coinbase was founded in 2012.
So these companies are relatively young, so they're obviously going to have growing pains,
right?
They've gotten a lot of money really quickly.
And it's just going to take time.
And I think people are being transparent.
The better exchanges are being transparent about the problems they've had.
And some people have mentioned that in the past.
But if you look at, if you look at, you know,
finance is five years like younger than Coinbase.
And Coinbase is pretty, runs a pretty tight ship.
I, you know, they're pretty...
you know, the fairly closed kimono about how things work, but you know, given that finance is younger, it currently like the, if you look at the last 24 hour trading volumes, they have like eight times a trading volume of Coinbase, right? Coinbase is now like number four. And if you like companies,
you know, that operate in the U.S. and doing crypto, I think it's just this continued like, well, you know, Coinbase is suffering just so much. It was the early leader. Now it's suffering so much from just being American, which I think unfortunate for both America as well as, you know, crypto overall.
But, you know, Coinbase, the little I know, and companies like Nidig, people have mentioned cold storage.
And for the audience who doesn't know, cold storage is literally like the original way to hold your crypto keys.
Like originally the Bitcoin, Bitcoin enthusiasts, we would write our private keys on paper and then put them into safes.
You know, the companies like Coinbase and Nidig and others who operate in the U.S.
who hold their clients fund in closed storage, cold storage, talking about commingling.
sometimes these things are written on you know things physically put into cold storage and then the
people guarding it are they're like machine people with machine guns you know guarding these private keys
right so uh you know i mean there's some great companies that are really running tight ships in the
crypto space and and yet unfortunately they're not able to grow because some of the regulatory stuff
The real question with this Binance thing is that, or Binance, sorry, I was being English there,
is whether or not this is a one-off thing that they found, and this is an error which they've resolved,
or whether or not this is a cultural way of handling money during that time, which needs further investigation.
I think that's the poised question.
Yeah, I think it's an open question, which, you know,
and with FTX and everything, all during that time,
I think it's valid that if somebody was doing,
you know, not what FTX was doing, you know,
to the extreme, but at least the initial parts of it,
co-mingling funds, it doesn't look great.
And so it's, and I guess also mainstream media,
yeah,
plus the institutions of government as we're now seeing
are targeting crypto as a bad thing
so this is a great way to try and throw them into a bucket
and discredit it.
So they've got a bit in the bud very quickly
to say this was a one-off,
this isn't a cultural way we handle money globally bang
and that's kind of on them to reply to.
Yeah, you know, one thing I was going to say is that this is the fact that it is a cultural thing, the fact that these decisions were made, I am going to play devil's advocate here. I think they're trying to make sure that the FDX situation does not occur again. Maybe. It's hard to play devil's advocate for that. But, you know, I think that's what at the time.
at the core of this.
I do agree with Eugene that it is interesting
how this Binance bombshell,
as it says in our title,
was not as much of a bombshell
as perhaps people were thinking.
But to be completely fair,
Binance,
actually you know what i know that not tiger who has his hand up may disagree with some of those
comments so i know you've been kind of raising the alarm not tiger about finance over the course
of the last few weeks uh maybe you knew this article is coming out just kidding but uh you know
would love to get your thoughts on what is going on uh and why this is big me because everybody
else is where deniscia did not plant anything
okay
um no i mean look unnamed sources called not tiger uh go ahead i'm sorry um no i i i think you said something
interesting about just from a political standpoint like let's just be real a lot of politicians were
embarrassed by ftx right like they had their handout so
I think that, I mean, like you said, they just don't want this to happen again.
I don't particularly think it's a shocker.
I mean, I don't, I, it's also not the first article to come out about this, right?
Like, this is, this is, this is actually probably the least detailed one.
There was one, like at the end of last year.
uh out of Forbes that I think was much more detailed um about the movement of the USD and
and stuff like that but um I don't know I would I mean look I'm not providing any financial advice
but just for the safety of every if you you are in crypto like
You really should, you really should move to self-custody.
Like, that's, I think, if you want to be in crypto, like, just fucking move to self-custody, guys.
Like, I don't trust any centralized exchange, not just Binance.
Even Coinbase, I don't trust.
I know that sounds weird, but I just don't trust them.
I don't trust anything.
That's anti-American.
What do you not trust?
What do you trust?
Anti-American.
I'm sorry.
I'm sorry.
Eugene, go ahead.
Yeah.
I mean, what do you not trust about?
What do you not trust about Coinbase?
I don't trust any cent Bill.
I'd love you here.
Because if they run into problems, right?
You're...
your funds could be used in bankruptcy, right?
So I don't,
I don't trust any sense of privacy.
they definitely don't be as bankruptcy.
I'm sorry.
You can't get this,
the Celsius scenario.
You're going to trigger a lot of people.
I'm sorry.
I'm just trying to,
I'm just trying to be honest.
I was just at the,
I was just at the Bitcoin conference in Miami.
And,
And like everybody hates Coinbase, okay?
Like, I know that that's a different...
Yeah, yeah, but not Tiger.
I wanted to correct one thing that you said, which is that...
if a bankruptcy occurs,
Coinbase creditors could get access to your funds
as somebody on the exchange, and that's just not true.
Yeah, just to help you understand that.
That's why you don't co-mingle.
I'm sorry, Simon, once again.
That's actually exactly why you don't co-mingle the freaking funds.
That's actually one of the biggest reasons why you don't co-mingle the funds,
because ultimately, if it shows up in a corporate account,
then yes, they could go after it, but...
To the point that we're trying to make, I think, one of the many reasons is that ultimately those funds are not owned by Coinbase.
So they're...
No, I get that.
It's, it's...
I mean, they did say it in their filings, so maybe I misread it, but that's just what I read in the filings, right?
I mean...
But anyway, like, look, I think that people need to remember, I mean, this is just more high level.
Like, crypto in general is still a pretty, like, new industry in the grand scheme of things.
And I think, like, what it looks like today is probably not what it's going to look like in 10 to 20 years.
So a lot of the companies that are notable today will, might not even be around in the next 10, 20 years.
And, like, you know, I mean, I hope no one takes offense to this, but, like,
you know,
crypto and Bitcoin can live on without companies like Coinbase and Binance,
right?
Like,
yeah,
there'll be a lot of pain if they all go.
if those,
I mean,
especially if Binance goes away,
but,
you know,
I mean, it can go on without it, right?
So, you know.
And one of the comments that was made earlier around volumes
that Binance has eight times the volume,
even though it's younger,
you know, we don't,
because it's so unregulated outside of the U.S.,
we don't know what that volume represents.
It could be Hawala, it could be, you know, money laundering.
It could be a million different things
that may or may not be good.
Also, all the volume now are,
fast majority, like almost 80%,
is in derivatives, right?
It's not even in the spot
of a market anymore.
It's all in perps and futures
on the option side.
It's all there a bit.
you're not seeing people wanting to trade the spot,
which is usually kind of a topy signal.
There's not a lot of acute accumulation there, right?
I'm just saying that like there are, there are,
some red flags, right? I'm not trying. I know I've made crazy
claims in the past and it's not, I don't really disagree with my claims,
but I also understand that like, you know, things like this take time. And also
listen, don't forget that finance is being investigated for
you know, violating Russian sanctions.
I'm just saying, guys, you know, there are certain things lined up. I also
don't think the CFTC complaint was like a
tap on the shoulder.
Like, it was,
it was a warning,
in my opinion.
But I don't know.
It just seems like it's getting worse and worse every day for them.
Like,
every week,
it just seems like there's something...
bad about to happen.
It does bring up the bigger conversation around
is Binance a flash in the pan
or are they going to have staying power?
And unless they're able to work
through a lot of these compliance issues
to your point, they're going to be
in trouble long term.
so you know Simon
wanted to...
No, I think that they have a serious problem.
Yeah.
The serious problem is in terms of
their behavior or their inability to comply.
Just want to make sure that there's...
I mean, it's both.
I mean, it's both.
Interesting.
Simon, go ahead.
Yeah, I was just going to say that the crux of this whole thing is assets and liabilities, and that's the whole conversation around whose assets are they and whose liabilities are they.
And, you know, that's where, you know, banks are allowed to just use people's money and create money.
And there's, because it's not backed by anything.
You don't really have to, you know, you just have this, this liability, but you can create digital currency.
But with with Binance and with crypto exchanges, they're actually backed by a bare asset.
So you can actually, they're just, the crux of the whole thing is, is there enough money?
Is the first question?
If everyone wanted to withdraw and you unwound the whole thing, is there excess money?
Because then that solves everything.
But then you have to look at are they taking direction or risk with client money by accidentally having the wrong coin in the wrong balance?
That's what, you know, the Celsius database was just simply anyone could trade and then nothing was backed by anything and they gave everyone.
They said all the money belongs to us.
Now, that can only happen in the chapter 11 because it was an illegal bank and the regulators allowed an illegal bank to get that size.
So Coinbase has a custody service and a separate service.
So you wouldn't anticipate it being in that same scenario.
But banks are in that scenario because the FDIC will backstop the whole thing or the government will bail it out.
But crypto businesses, they do have to have all that money.
And if there is, if for any reason something goes operationally wrong,
they need to take their operational funds and they need to put it back.
So the client balances are always lined up.
Now, imagine the complication when you're doing custody, trading,
something.
stable coin issues, futures, lending, yield.
And essentially, you've got all these different products
and all these different databases
and you have to ensure that the assets and liabilities
are all going to the right place at the right time.
And that's where when you offer all of these financial products,
all under one roof,
then you can end up, you know, if your systems are not damn good and subjected to external control, you can end up in a mess.
Yeah. By the way, of interest, somebody messed me on the back end.
saying that there was something really funny that happened this last week,
which is that political candidates started accepting crypto donations at the Bitcoin conference.
I found that very interesting.
Both RFK Jr. and Vivek Kramaswamy said that they were now accepting Bitcoin as a form of donations.
Not to say that the timing is connected, but it is interesting if that's going to lead to
you.
get, you know, more investigations from where is that money coming from, you know, and what to what purpose?
And again, remember, once you start mixing commingling money with politics,
It becomes incredibly dangerous.
I don't know what you're talking about it.
That's always gone well.
I don't know what you're talking about.
That's always been a good thing.
You put money with politicians and they always do the right thing.
Yeah, the ultimate is SBF.
Take client money and buy political influence.
That's brilliant.
Yeah.
And that's been going on since the days of George Washington, unfortunately.
I hate to say this.
How about Caesar?
Let's go back to Caesar.
Even better.
I was going to say, we imported that to you, my friend, from the Brits.
That's not George.
That was true.
Yeah, Bank of England was founded on that principle.
Exactly, exactly.
Unfortunately, I'm 10 minutes late now for a board meeting, so I got to hop off.
Sorry, Mark.
We always do that for you.
I apologize.
I could have dropped earlier, but I just wanted to make two quick comments.
One, Simon's very, very thoughtful comments from the perspective of an entrepreneur
and an operator in the space, I think highlights what happens when you have a regulator
in a country like the United States that's completely unwilling to provide adequate, clear, and appropriate regulation to a new and burgeoning industry has put its head in the sand and has chosen to regulate through enforcement without giving any guidance.
It leads to folks losing money.
That's unacceptable. We should all be angry about it. Whether you're pro-crypto, whether you're
tradfi, defy, D-Gen, I don't care. It should make you angry because it causes people to lose
money. And I hope that that regime change comes and that we do have a new SEC chair
and an administration that supports clear guidance, clear regulation for all industries,
including crypto. The other thing I'll mention is, and then I'll drop,
Critically important that you brought up Patrick Hillman's tweet in the other side of the story.
This new age of citizen journalism that you and Mario and all the other incredible pioneers are doing here on Twitter spaces comes with responsibility.
Right.
And that responsibility also includes sharing both sides of the story,
showing weaknesses in terms of sources,
and giving people the complete picture.
Because Reuters, this wouldn't be the first,
and I'm not targeting Reuters,
although I have gotten sideways with them in the past.
This wouldn't be the first time that they put something out
that is questionable as to whether or not it's news.
Everybody have an awesome day.
DeNash and everyone, always a pleasure to be on the show.
Thank you so much.
Thanks for joining us, Mark. Appreciate it.
And actually, that's a really good transition now for us to go into the debt ceiling conversation.
We do have to give an update before we close up today.
And actually, for the transition, before we transition, I do have to pay the bills.
And so let me just do the quick question.
uh one two so i bc incubates and accelerates a i and web three companies uh they partner with
vc's and funds to work with their portfolio companies so reach out to uh mario and his team also
we're going to start doing shark tank style pitches i know they've already been doing them for
crypto and some ai spaces but you know uh
If you are a startup or a VC with some portfolio companies that would like to pitch on these spaces, please do reach out to Mario and his team.
Okay, back to the fun.
So, you know, the one story I wanted to bring up really quickly is,
And then we can move on from it is Jamie Diamond, who is the highest paid, who said that yesterday, I can't remember.
The highest paid government employees.
Good job, Jay.
I remember that was the funniest comment.
That is something that I will start using in cocktail conversations and try to play off like it's mine.
But just kidding.
I'll always say it's special situations, Jay, that came up with that.
But yeah, he's the highest paid.
government employee, he came out and said, hey, I'm really worried about commercial real estate.
And so, you know, I don't know, Amy, if you wanted to weigh in on why he's talking about it right now.
He was talking about exposure of J.P. Morgan, but also of other banks to it.
Is he just waiting to gobble up some people? Is that what's really going on?
Um, gosh, you know, I don't know if it's just, you know, him waiting to gobble up people.
But I think it's gotten to a point now where there have been so many billionaires in this country who are involved in commercial real estate or banking that have started to speak out about just sort of raising red flags about it.
That I think it's really something we probably need to start paying attention to.
I...
I think it's, you know, been made pretty clear in the last at least month or two when you've got Warren Buffett mentioning it in Nebraska.
You've got Charlie Munger said something about it.
Sam Zell, may he rest in peace.
He was raising red flags about it over the last probably six months when he was making appearances on CNBC.
Um, Barry Sternlicht has been really, really vocal since October of last year, just about, you know, the loans that are on these books, the amount of, it's not as much about how much of the bank's balance sheets are in commercial real estate.
It's about what percentage of the risk portfolio is commercial real estate and that is a very high percentage.
And it's also about, um,
Just some with some of these smaller regional banks, they and if it's specifically the commercial real estate is in specific regional areas like we're seeing in San Francisco, that has the power to just sort of domino out some of these smaller banks. But, you know,
You know, why Jamie is coming out and saying this today, I don't know.
I don't know why today versus anything.
He also said, what did he say?
More hike rates are coming and something else.
He was just on a bit of a trip, I think.
Yeah, I mean, in terms of the rate hikes, and I think the Fed's Bullard came out and said yesterday that he could see another rate hiker too.
And again, I think that just comes back to that lag effect on the rate hikes.
And if we continue to have more rate hikes, when we're still in a situation now where we haven't even absorbed the prior effects of the previous rate heights,
and where I would argue commercial real estate currently is in a, it's hanging on for dear life.
sort of waiting to see the effects of these earlier rate hikes as it is. And when we've got people
coming out like Bullard saying, oh, there could still be another rate hike or two, people have got to be
nervous that are sort of looking at this time lag and just sort of waiting almost to see where is
this domino going to fall. I mean, I think we've got...
what I said, like 20% vacancy in office space in the US right now.
It was like the highest since 2011.
There's a bit of breaking these on the debt ceiling stuff.
Sorry to interrupt you.
The US Treasury has apparently informed its agencies
and is requesting that they give them scheduled payments
and asking if not they could make payments later
as part of its contingency planning.
That's Wall Street Post.
And I was going to talk about that, Amy.
I'm so sorry to cut you off as well.
We do need to kind of go to the dead ceiling.
Hakeem Jeffries came out and said that they are much further apart than what is.
He didn't say those words, but it was very clear with his words that he was very upset about it,
about the debt ceiling conversations, sort of alluding to the fact that we're actually further away.
Remember yesterday I said weakness is strength and strength is weakness.
Yeah.
Whenever everybody's trying to act like, oh, it's going to work out, I get my spidey senses go off.
And I'm like, oh, my default meter is going up.
Because why would they be so positive about it when it's so bad politically?
It must mean that they're further away from each other.
Now, I know Hakeem Jeffries is probably upset that the deal is.
is being quote unquote made.
But, you know, it is of interest that if the Treasury is starting to do things to tell people like,
hey, what can we push?
What can't we push?
Is that just another political posturing play?
Or are we actually further away than we think we are?
It's got to be both, isn't it?
It's definitely a political posturing play because the Treasury is a political,
Yellen's not exactly non-political, she, in terms of she responds to the president.
And so, and she'll be on their side.
But.
you know at the same time it is if yellen is correct and saying that you know that money is going to
become very tight as soon as next week or the week after next then it's also incredibly prudent for
them to be asking agencies for essentially what is a governmental version of a buy now pay later scheme
like another version of ios
Yeah, Jay, what do you think?
Do you think that we're closer to it?
What is the market telling us is going on right now?
Well, the market is saying two different things.
And the equity market, the market didn't really seem to care.
And we saw a rally in a lot of trash companies yesterday,
companies that you normally wouldn't touch with a 10-foot pole.
That could have just been, you know, posturing, short-covering, et cetera.
But even the broader market was relative, you know, the Russell was strong.
That was remnant that...
reminded me of short covering the broader market was kind of flattished up slightly today we're getting a little bit of reversal i don't know if you guys follow marco colanovic at uh jp morgan you know he was he's been he was wrong last year and wrong this year for different reasons but uh he reiterated that he is
bearish equities he thinks that you know that this whole thing is going to weigh on consumer confidence
and it's more likely we're going to have a recession he also said that gold is an interesting hedge
if the negotiations don't go through he thinks that the market has rallied because they think this
this sailing thing is going to be smooth and in reality it may not be and yesterday you had
this letter that i posted up top where
Yellen is insisting that, you know, and now she's saying for the second time that she thinks the ex-state is going to be in early June. We'll know very soon if that's the truth. But if they're already reaching out to government agencies and asking them to suspend payments...
then there is a chance then you could have a 2011 like issue where you know they continue to pay
interest but they default on social security payments temporarily and medicare and the post
office and the military and three million other government employees and that could just that could
create some volatility simply because it affects people's confidence and um
I think that they're pretty far apart.
And I agree with your comment that, you mean, even the last time that Biden and McCarthy met, at the very beginning of it, they're like, yeah, this is going to be great.
You know, the Biden, you know, the Democrats are at the table to negotiate.
And then, you know, literally a few hours later, Biden was like, yeah, we do want to cut the deficit, but we want to cut the deficit by raising taxes on the wealthy so they can pay their fair share.
And then MarkArthur goes, we're getting the highest tax revenues in history.
I don't know what you're talking about.
We're actually spending just way more.
So they're still very far apart.
And we don't know what the exact negotiations were yesterday, but I would not be surprised if they take us to June.
I just don't have a lot of faith in these guys.
And like, there's an election year next year.
So if Biden caves, like, he's going to look like he completely caved to the Republicans, right?
Then you're going to have Bernie Sanders and his 10 congressmen saying, oh, like, Biden's not a good guy.
Like, he, you know, he didn't fight for you.
So it's very political and they don't care about that.
Biden can get primaries?
I mean, is that really his biggest concern?
I think that the election matters a lot.
And everyone is going to be watching what these two parties do.
And it's actually worse for Biden, right?
Because it's not like the Republican candidate is part of these negotiations.
So it's really, you know, the only presidential candidate that is involved here is Biden.
So everyone is watching him like a hop because the last election was so close.
If he makes the wrong step, you know, and...
Three months down the line, you know, you're getting cuts to government spending that affect people who voted for him or they think they affect them.
Then they're going to think twice. They're going to be like, oh, he's a moderate.
Why, you know. So, and if there's another candidate that comes out that is more liberal, they might vote for that candidate and ruin Biden's chances.
Interestingly as well on this asking payments to be pushed out,
they're actually not being specific.
They're asking how much payments
how the payments could be pushed out and by how long they're asking the agencies to determine the length of time as well, which is I'm now erring on the side of Jay because they're not saying, you know, can we push this out 28 days, 14 days, 60 days, whatever.
They're actually asking agencies exactly when cash flow requirement is needed, which indicates they're probably looking at,
sort of a dragged out period
or they're preparing for a dragged out period
because that's what I'd do in a company, right?
You'd want to know exactly when payments are arriving,
exactly when you're going to need exact cash flows.
And if you're expecting austerity in the short term
It is, the broader question here is, will the politics trump rational decision making?
I do think that Jay is right that, look, ultimately brinksmanship sounds great in terms of like,
oh, they're going to go to the brink and everything will work out.
But the challenge is what effect does that have on confidence?
And then who blinks first in terms of,
actual, for example, if they cut budgets for specific items,
how does that affect the economy?
I mean, we don't even know what's being really talked about in the back,
you know, in the background.
And then finally, they need a vote on it.
So even if, even if McCarthy and Biden agree a few days from now,
then to both i think of congress both the senate and the house of reps they have to vote on it and
you don't know how that's going to play out they might be there might be reiterations they might
put some like freaking pork spending pork you know into the and make things worse things works yeah
Jay, can I ask you a question, Jay.
So I find that markets tend to be a lot more, like I pay much more attention to how markets move, even like political markets more than political posturing from, you know, senators and Congress people and even, you know, blustering news articles on on mainstream media.
So question of half for you is, have you been paying attention to USCDS?
in the month of may i mean it's been largely flat except for two except for friday when you know
biden did the whole like you know theater of coming back and to and and yesterday right yesterday
slash today this morning so i'm curious what your thoughts are on uscd yes it's actually moving
today i'm so sorry to cut off first second jay we're going to get back to this but uh big deal inked
really big news apple is deep is decoupling from china further apple and broadcom and jeff lutz
thank you for sharing that as well with us apple and broadcom just inked a multi-year deal for chips to be made
right here in the u.s um
and previous thought was that Apple would actually go into making their own chips.
I don't know what this means for AMD, but I'm interested.
Own chips for some of these applications.
Jeff, do you want to weigh in on this really quickly?
Just want to make sure.
Yeah, yeah.
Can you hear me okay?
Yes, yes, we can.
Yeah.
So these are the, these are basically in the wireless.
arena so in the wireless front end so the RF front end of the F bar filters
wireless connectivity so Bluetooth Wi-Fi and probably some in the charging arena and they're
going to use the the the Broadcom Fab in Fort Collins Colorado so that's where the US
piece of this comes in and they're basically going to upscale and help expand.
Basically with this,
it's a multi-billion dollar multi-year deal.
So it's an allowed broadcom to invest for greater capacity in Fort Collins.
They'll be able to do development work and production work out of that facility and support Apple.
And again, Apple was previously thought to be going deeper into doing their own silicon for other applications, you know, besides...
the application processor but i mean broadcom is literally the best uh for for these for these types of
chips and it's not surprising that you know they kind of took them to the brink but you know they
did this deal so really really want to understand this what chips so you know you did kind of speak to
this but uh what chips are these specifically are these the automotive
Or are these...
Oh, this is for iOS devices.
So think...
So every chip, M1M2, all of them.
No, no, no.
To be very clear, these are the RF chips.
This is not the...
These are nothing to do with the application processor
that's designed by Apple and fabbed at TSM
and potentially elsewhere.
But these are the RF chips.
So these are filters, Bluetooth Wi-Fi chips.
Okay.
which go in, you know, go in all their computers,
going all the iOS devices, basically.
So this is a high volume.
This is a gigantic deal for Broadcom.
That's crazy. And again, keeping manufacturing in the U.S. a very interesting move by Apple at this time especially.
So going back, sorry, Eugene, can you repeat your question for Jay again? I apologize.
Yeah, sure. Just USCDS. It's been largely flat since May except for Friday and basically today. So love your thoughts on that, Jay.
yeah so on friday we saw and and keep in mind that uscd s is actually very small market
so it can swing around very very sharply um but the uscd s actually came in on friday i'm just
post i'm just i'm going to show show it on the top here so everyone can see it and then it
gaped out again um yesterday so it's almost back at the highs
But you saw, you know, when McCarthy and Biden were speaking, you know, it came in from, you know, 175, you know, to 130. And now it's kind of back at 170. And, you know, we'll see how it trades today. But, you know, it's, it's not the main indicator I look at, but I think it's very, I think it's very closely...
it's one way to see how hedge funds are thinking about this and and i do think it's relevant
and if we see it continue to uh to head in this direction wider you could i could potentially
say that you know there is there are a handful of hedgers that are worried about the the debt
sailing more than biden mccarthy are uh are sharing so i know thank you for bringing that up um
At some point, you know, based on what's happening in other markets outside of equities, you know, I expect this to roll over in equities.
But we had, you know, a lot of the market has been run up by, you know, these AI stocks, right?
You know, Nvidia.
Microsoft and Google are, you know, very large components of the broad indices and they've had,
and they've been on a tear.
If you were to strip out their performance, the rest of the market is really not up that
much.
And, you know, the Russell stocks are trading at like nine, ten times PE.
um outside of that bear market rally yesterday so you know the index of of short like
goldman short stocks yesterday it was up like 4% um so it was like under under the hood like
it was it was you know panic covering it wasn't like new money coming into the market yesterday
but that but but but but i think that's relevant thanks for bringing it up uh about the cd yeah
Yeah, Alan, did you have, did you want to share something?
Yeah, I have three quick points.
I appreciate your enthusiasm about Bitcoin, but its relevance to the overall marketplace
is more, I don't know how we will.
I'll drop that.
I just don't understand your infatuation with this thing.
More importantly,
you know.
Germany's numbers were horrible.
The dollars broke below 108.
The euro is below 108.
It's a 107 change.
That's because the U.S. rates keep on moving up,
and it's dragging European rates up higher.
The spread is still between the 10-year German Bund and the 10-year U.S. Treasury is still 126.
But as you saw this morning, people are watching it,
the 30-year Treasury did broach 4%.
We haven't been there for a while.
So these are the things I'm watching.
The one thing that struck out, came out to me is the luxury stocks in Europe are down based upon fears of U.S. recession and China not coming along.
Those are just little bits here, and the default rates look like they're going up in high yield.
One thing that you didn't mention, which I'm very surprised, Doctor, is that Blackstone is negotiating with their creditors for some commercial space in Chicago, which I guess they're not paying their rents on or they want to lower their costs.
Right.
Blackstone doing this for months in fairness.
Like they've defaulted on a few buildings,
including a Nordic fund and then a few buildings in the US.
They also put out on notice in their earnings call
because on the Blackstone was a Blackstone shareholder,
that they were expecting huge,
what they called, it was fascinating.
They called it something like a re-evaluation of their monthly obligations to credit
ongoing or a period and I thought that is the best way of like PRing a way out of saying we're defaulting.
Well and they're set up to do this right like in bold bear cycles but Patrick wanted to have you
weigh in as well.
Hey, hey guys. Well, look, I, you guys have heard me that you got to start pricing everything in gold because while nominally, they could keep afloat, the NASDAQ, all that, pricing other assets in real terms. They go, they could go sideways, stagnate, even go down. But I just put in the NASDAQ 100 daily chart in the, in the tweet space. And I have below the bottom paint is the number of stocks, the percentage of stocks in this NASDAQ above their 200 day moving average.
And while people say the breadth is like everything's top loaded, but the number of stocks is about to go in the bull zone.
The percentage of stocks in the NASDAQ above their 200-day moving average is about to break out in what I call the bull zone where it's just like there's good momentum across the board.
And if you see like we bought them back in the with the crash recently there, the breadth was strong.
super low at low levels like already 2008, 9 when that crash, we were at those levels.
And nominally, the NASDAQ right now is overcoming bearish hurdles after bearish hurdles.
I'm a big picture guy, so I'm not saying this is a new bull era, but right now it's got some legs there under under it there.
So hold on.
Patrick, I just want to just echo what Patrick said.
Bloomberg came out and said that this indicator, this 200-day moving indicator is an article, is 100% accurate.
And it's saying that the worst of the market is over.
There was an article I read also this morning.
Hold on.
We're calling a bottom on the market right now with all of the stuff going on.
That's what this indicator says.
It says that this indicator 200-day moving indicator is calling a bottom.
I'm not a true believer of that.
Yeah, I mean, especially because Patrick, the only questions that I have is the market taking into account all of the different...
It's a 200-day indicator taking into account all of the uncertainty that surrounds, one, the debt ceiling, two, what we do with interest rates and three, what's happening with commercial real estate.
I just feel like, you know, we're going to see interest rates potentially stay flat for longer or go up.
Wouldn't that kill the NASDAQ at some level? Wouldn't that hurt the NASDAQ?
Well, that's exactly that. All the market participants, you see it there, right? So if there's overbearing, let's say you have all these worries about all these things that you enunciated. But what's driving the market is actually capital flows going in and just flooding the markets. Why do you think all these stocks, they look alike? There's terrible companies in the NASDAQ and they all have the same charts these things. And
You can't, it's something more powerful than all these debt and all that, all these issues right there.
Maybe on the smaller time frames, but when you zoom out, there's more powerful stuff happening.
But you got to be careful with this 200-day indicator.
It's a good thing.
It's not telling you because people always think there's a bottom, I'm a bull, or there's a top, I'm a bear.
There's a thing called no man's land where this thing goes sideways and just destroys everybody,
everybody looking for a 2010 to 2021 run.
People are expecting that because people think binary.
But because of the golds outperforming or holding its ground versus the NASDAQ, NASDAQ broke down versus Produce Price Index.
It's, we could be in a scenario here, like the 2000s, like the 1970s.
And people, that's how they have to mitigate their expectations.
He said, oh, the NASDAQ has bottom on the breath indicator.
Okay, fine, it has a rally, but then it does a marginal new high.
And then it's a rug pull.
And then their long positions, they get triggered out.
They sell stop, they lose money.
Then they try again and they get whipsawed year after year.
So that's what you got to be careful is right now.
Yes, the breath is looking good.
But it could have a little bit more heat, but it's not in the macro environment to go and double and triple there from here.
It's just not there yet.
What are the chances that it hits that 7206 number and then comes back down?
I see a few years along the way where it did that.
It touched it and then just came back down.
What are the chances?
I mean, isn't that a risk right now that this could be like a fake out?
70-606?
Oh, you mean that line?
Yes, it didn't break out yet.
I have a trend line.
So it has to break out above that line.
Then after they have to hold the breadth, you know,
it has to hold it, stay above, stay above.
But you can remove that breath indicator and just look at the price chart.
If you want to reduce noise, because people have fun with indicators and they get fancy.
But at the end of the day, just like the price chart,
And it's going to need to do, well, it needs to go above its all-time highs nominally.
And it has to start, it has to outperform.
It has to break out versus gold.
It has to break out versus producer price index.
Because if NASDAQ isn't breaking out versus gold, why are you holding NASDAQ?
Even if nominally NASDAQ is breaking out on its own chart, why are you holding NASDAQ if it's not breaking out versus gold?
Yeah, exactly.
Especially in a hyperinflation environment.
Patrick, you thought I wasn't listening.
I'm always listening.
I want to just ask Jay this one question.
You've had a contraction of the spread between the 10-year yield and the proposed inflation rate now.
At what particular point in here do you think that rates move up or inflation goes down?
You see anything in your charts that indicate that this contraction between those two
is causing any angst within the fixed income market?
Yeah, it's a good question.
You know, looking at that and also looking at the inversion of the yield curve today,
and what I think is happening...
in the short term is, you know, we had one of the largest IG
bond uh... pricing last week we had like fifty eight billion dollars of
of ij paper that was issued last week
we have forty two billion dollars a two-year auction later today
i just think that there's like a
a very large amount of supply hitting the market
over the last several days
uh... and that's a technical uh... when it comes to
you know eight days of of bond selling off in a row
uh... and i also think that
you know
that the economy has been stronger.
I mean, the labor report last week was,
was stronger,
and it's a lagging indicator,
but,
you know,
some of these lagging indicators are,
and,
you know,
have been pretty decent and,
At this point, you know, yesterday you had Bullard come out, and Bullard is the most hawkish.
She's also not a voting member.
But Bullard came out yesterday and said, you know, we could see upwards of, you know, two more hikes.
And then Diamond actually came out and said that the Fed could raise rates to 6%.
Keep in mind, he also said that they would raise rates to 5% in 2018.
You know, he will only benefit from rates rising.
So he's talking his book because he pays zero out on deposits.
But.
You know, regardless, I still think that we're in a camp that we are in an economic slowdown.
I think other things are going to break.
And I think that earnings are going to come down materially as soon as next quarter.
You know, this past quarter, I mean, we hadn't even seen any of the effects of the banking crisis, right?
This is reflecting January through March.
And the market was also very optimistic by a China reopening, which we've seen now has been
very lackluster.
And you're seeing signs that even travel spend, you know, airline ticket prices are no longer rising.
So it's becoming obvious even in the retailer earnings.
Like even Walmart outside of grocery was having a very difficult time raising prices on anything, right?
Apparel's in deflation.
You know, outdoor cooking, grills, the lows home depot, that's all in deflation, price cuts.
The thing that is keeping, you know, Powell...
worried about becoming the next Arthur Burns is just wage inflation.
But everything else, like real estate prices, commodity prices,
they're all in a downward trend.
So I think we'll have to see how wages play out.
And there's an interesting chart that Bank of America put out that's on my timeline that
shows, you know, based on what monthly inflation metrics, you know, will we see, you know,
two and a half to three percent inflation by the end of the year.
Two things to keep in mind.
The Fed looks at PCE, not CPI.
And the second thing to keep in mind is,
I frankly, I still think that goods inflation goes negative in the second half of this year.
outside of any of any energy spike and that by 2024 um i do expect cuts um and i think that
the inversion of the yield curve is is appropriate i can't tell you to what extent i think you know
the spread should be um but i think what we're seeing in the last week is a lot of that's also
driven by supply you know you had you know probably the biggest IG issuance we've seen in in several
in several months.
So, you know, we'll see how the two-year auction does today.
I just checked the, I just check the Pfizer issue, the $31 billion that they did.
All those bonds are trading right around where they came.
Those were put away and they're under the covers now.
Yeah, that's a good point.
And I also think that the $42 billion two-year auction will go pretty well today.
Yeah.
And on that note, thank you so much, everybody, for joining us.
We are going to be back tomorrow, 8 a.m. Eastern.
We're going to be talking death ceiling and a few other things.
So please feel free to follow everybody that's on stage and see you tomorrow at 8 a.m. Eastern.
