FTX Was an Empty Black Box All Along

You can also listen to our radio show at two pm Eastern Time on Bloomberg Radio or watch us on YouTube and now also on Bloomberg Quick Take. A lot going on in our world, and especially when it comes to crypto and you were just drawing my attention, Tim to some the latest story when it comes to Sam make been freed, of course, the former ft X CEO, saying he was mistaken about the cryptocurrencies exchanges leverage levels, thinking it was about five billion when it was thirteen billion.

And he's putting this out in a series of tweets. Yeah, he twenty three tweets. He said, thirteen billion dollars in leverage, total run on the bank, total collapse in asset value all at once, which is why you don't want leverage all right, So let's get into because those are his words, Yeah,

those are his words. Good point. Um. The cover story of the newisho of Bloomberg Business Week, which is out on news stands tomorrow, already on the BLOOMBERGA and at Bloomberg dot Com, looks into f t X. It's undoing how it delivered a lot of shocks, but perhaps most of all the shock of what we didn't know, which is kind of interesting to hear what SPF maybe didn't know either about leverage at his own firm. Let's get to it. Bloomberg News crypto reporter Ohkarif has been following this.

Her reporting on f t X and crypto has been a musty. She joins us via zoom from Portland, Oregon. I'll go good to have you here with Tim and myself, So tell us about your story and what you looked into.

Thank you, it's great to be here. So essentially we looked at sort of what happened, what are the ramifications for the crypto industry, And this has been, of course a huge shock for everybody who's been in the crypto community for a long time him and as well as new newer investors who came in in the last couple of years. You know, it's a complete shock because uh

some bank Munfreed or sbfest he was known. You know, he was sort of considered to be one of the most sort of trustworthy, if you will, people in crypto. He was testifying in congress, he was meeting with regulators. He had um a lot of respect and a lot of a lot of weight in this industry, and all of a sudden his company has come and done a lot of respect and a lot of influence magazine covers is even he alluded to. He said he became overconfident

as a result of that. Hey, um olga. One thing that I'm having a really hard time reconciling with reconciling is, you know, the prominent backers of the company and the really sloppy, leaked balance sheet that we saw. I mean, how does the company this big uh have such a lack of understanding of what it has on the balance sheet? And we're seeing that play out in real time with Sam bankman Fried's tweets like he's saying, these are all rough and he said he didn't know how much leverage

he had. Yeah, you know, it's it's incredibly surprising. And I think what this means that is that there wasn't enough oversight. There wasn't enough due diligence that you need for a company this size with such caliber of investors. Typically you wanna for a company this size, you would have a board and you would have all kinds of you know, auditing going on and committees and you know, plenty of people who will be looking through what's going on.

And what we find is that for FTX, a lot of it has been just you know, Sam Bankman Freed overseeing the entire operation. You know, it's interesting, you know, you knowe to some of the other tweets that Sam Bankman Freed has has done and talked about how he messed up different words that he used and blaming were internal labeling of accounts. This is not someone who doesn't

understand right, how the sophisticated financial system works. If you look about his past experience, right, this is someone who should have known or do we give him some room for not having better systems in place? How are we supposed to look at this so on? On the one hand, he is only thirty years old. So but on the other hand, during this thirty years he has managed to do a lot. He was a trader at James Street of course, the very highly respected quantity trading firm, which

gave him Wall Street cred um. And then he also ran UM Alamida since Alameda Research was his trading firm.

Initially he Um Alameda essentially made money off of uh, you know, price differences on on different crypto exchanges and made quite a lot of money that way, and then he branched out into actually running a crypto exchange in twenty nineteen, and so he had he had a lot of experience I would think with financial matters, so um even though he's quite young, but but he has had a few years when he should have learned how to

run things properly. So what repercussions could he face? He does keep tweeting over and over again that his number one priority is making it right with customers. We'll see if he's able to do that, But what consequences could he face? So in terms of his tweets, they're getting a huge backlash online because people don't trust don't trust him anymore and essentially just almost wish that he didn't even say anything because instead of this empty promise is

in terms of what could happen to him, it's still unclear. Uh. You know, ft X is still in the process of filing um. You know, it's it's a bankruptcy all of all of its requisite sort of finitial bankruptcy documents. I'm sure there will be an analysis of what exactly went drawing and who's to blame. Uh, you know, nobody has been charged with anything yet, so so I think it's going to be a pretty long and drawn out process. Uh. Well,

we'll have to see how it plays out. But a lot of but but a lot of people are kind of convinced that somebody, you know could face charges for this. Well you know, okay, it almost feels like an uber uber case of FOMA, right, you know, as soon as he got momentum, and you know, media coverage, you know, lad you know, created some of that momentum, you know, you had certain venture capitalists are still and value investors

getting in. I'm sure friends were talking about, way what do you guys onto like, it's just you think about how the momentum and velocity that was created by SPF. I'm not you know, behind him for a lot of different reasons, and big name investors wanting to get in because you know, some other big name investors were in and not giving him a pass. But you realize this can happen, you know, when there are frenetic investments that

are out there. Absolutely, I think we because sort of until um this year, we were in this reaching crypto bull market where you know, prices were going up like crazy. Everybody, all of the venture capitalists wanted to find the next unicorn and crypto. Uh and uh when when they saw you know this, very respected investors like Sequoia, you know, backing f t X. Uh. Perhaps some of them haven't done as much due diligence. Uh. It sounds like guess

they should have just to check things out. There are sort of standard processes for due diligence in any industry, but I think some of them may have been forgotten in the rush to get in. Yes or no, Alga, we have ten seconds. Is this the end of crypto as we know it? I don't think so. I think it's gonna come out of it, but it's gonna be a long lull before while investors licked their wounds and and sort of crypto prices start moving up again and

everybody that comes invested in crypto again. Those wounds are deep Ogakarifa Bloomberg News. This is the cover story of the magazine you're listening to, Bloomberg Business Week with Carol Messer and Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. The last few years have reminded us of how the world as we know it can be turned upside down thanks to the global pandemic, the push back against globalization,

and rising an unexpected your political tensions. While this is all happening, of course, as G twenty leaders have been meeting in Bali, Indonesia, with all of that in mind, we welcome former U S Secretary of Commerce Carlos gutierres served under President George W. Bush. His co founder and

executive chairman chairman of EmPATH. It's a company that works with other companies and their HR teams really on identifying the skills of its workers, tapping into that talent to the benefit of both employee employer, and he joins us on the phone from Washington, d C. Mr Secretary, so delighted to have you here with us. I do want to ask you, and start with the G twenty, do

you think it was a productive round of meetings? If so or if not, if you could explain, well, you know, you never exactly I never expect a lot from those meetings. The statements for usually what you get, but very rarely do you get any concrete decisions. Um. One thing that the G twenty did do is is your statement against the war in Ukraine. Although it wasn't really UH and unanimous said that there were a couple of there was language that tended to soften the demand, let's say, on

the trade side. I found their statement to be very bland, very noncommittal. Um. They talked about trade, but they talked about trade and relation to sustainability. So anytime you see the word trade, usually see sustainability. UM. Nothing about tariffs, nothing about protectionism, um, really nothing about globalization. So it was a very weak endorsement of trade. UM. I agree that w t O needs reform, UM, and that goes ahead.

I wish we had a reformed the strengthened w t O when all the tariffs started, but it seems to me like it's going to continue to be the stay at his quote, how would you have advised the Biden administration to go into this G twenty with the results that you were looking for? Yeah, I would, especially now that um that the mid terms are over, I would

have leaned forward a lot more on the importance of trade. UM. Maybe the administration try to get a statement in there about trade and intellectual property and technology, but uh, probably could not get the whole group to go with it. But yes, you know, the administration has really left some big value on the table. For example, the uh ct P p uh A trade agreement which will bring or open up a lot of countries in Asia for US manufacturers,

US companies. That was an Obama era agreement and nothing has happened. I would have thought that President Trump took it out because he was following protectionist policies, and I would have expected President Biden to come back in because it's for the good of the US. It's actually it's hard to explain because uh, we're giving Asia essentially to China. Uh. They have our step which would unify Asia under one agreement,

and the US won't be part of it. So I think what's happening is that domestic politics are overshadowing and taking over any foreign policy, But you rarely hear any foreign policy strategy, UM, any doctrine of sorts. It really is behaving on the basis of what works domestically. Mr Secretary does feel like we've seen a lot of nations looking inward and maybe that's the result of the pandemic or they had to take care of their own even

though it was a global pandemic. Um, do you believe the era of globalization, the era of global supply chains? On a day when we see Apple getting pretty to begin outsourcing chips UH for its devices from a plant here in Arizona, which would be a big pivot from them away from Asia back here home. Um, do you feel like globalization and global supply chains that era is over? Well, there's no question that it's taken a pause, and how long that pause will last is really something to see.

But companies who bring manufacturing back, while that's very welcome from the standpoint of jobs, it does raise the cost so UH, at some point they're going to have to address that. We'll always have lower cost foreign competition. So yes, bringing manufacturing back is a great idea domestically, but it is going to increase the cost UM different supply chains, longer supply chains or even supply chains closer by they're not as efficient as they were, will also impact costs.

I think it's really interesting right now, and this is just anecdotally, but I am seeing more out of stocks then I remember seeing any time during COVID, and that what that tells me is where are you seeing that? What are you saying? I'm seeing them at pharmacies and I'm seeing at grocery stores, basically the two places where

I go, And Uh, it's incredible. It's just hard to find things, and the out of stocks go on for a week or two, and that just means that the supply, the new supply chains or whatever supply chains are being constructed, aren't working. We're not getting the right product to the right place at the right time. Kind of interesting, right, Uh, certainly fascinating in terms of what you're seeing in your and your thoughts on this the big picture. UM, thank

you so much. Carlos Gutierrez, former US Secretary of Commerce under President George W. Bush, who's co founder and executive chairman of em Path, joining us on the phone from d C. You're listening and watching Bloomberg Radio. This is Bloomberg Business Week with Carol Messer and Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio to next guest. Knows a lot about getting packages ship, especially when it comes to the e commerce world. So delighted to get to our

next guest. We've got Lauren Barn's Woo, co founder and CEO of ship So she joins us via zoom from the San Francisco Bay area. Laura, great touch out with you once again. Um, So you've got tons of thousands of businesses that Shippo serves, you work too, use software to get them the best deals on their shipping. Um,

give us an idea. I want to talk about business in a second, but just give us an idea of what you're seeing when it comes to the economy out there, because we're getting mixed reports from some of the biggest retailers out there. Yeah, it's great to be on Bloomberg Radio today. Thanks for having me. And then just to uh kind of set the stage around what we do here at Shipboat. So we're a software platform that connects e commerce companies to a network of different shipping providers.

So all of our customers there they need to ship there. They're selling products on the Internet and they need to move their products from A to B to the to the customers. And um, we're building that that software component there. Um, the carriers are doing the heavy lifting, they're doing the shipping, and we're building the technology giving access to discounted shipping

rates and just helping SMB ship like retail giants. And now to your question around what we're seeing, UM, it is it is a difficult prediction for this holiday season. I think what's what's for sure happening is that in previous years, we've seen that there was a big spike around the big deal days like Black Friday and Cyber Monday, and we're seeing that change. We're seeing elevated UM shipping and elevated discounts just way earlier in the season, which

is a very interesting trend. It's interesting. We don't yeah, we don't think that there will be as big of a spike on these two big like normal deal days, but those deals are happening much earlier in the season nowadays. And UM, yeah, customers or consumers are writing access to discount products earlier on I was gonna say, Laura, I mean I had to pick up something for my daughter and she's like, hey, mom, there's already a Black Friday sale,

so you can get it now now. So it's definitely happened. Having said that, I do like talking to folks like you because you do have a great indication of what's going on in the macro environment. What you are seeing in terms of activity and the upcoming holidays, does it speak recession to you. So we're for sure looking at a much softer queue for compared to previous que for us. But previous kew fors were out of the ordinary as well with pandemic limiting us from like going to physical stores.

So this year we're seeing a little bit of back to the previous trend lines um and then kind of below kind of that is that is what we're expecting also because consumers still have a lot of like the job market is still going strong, consumer spending is still doing okay, but it's it's very hard to predict. I think we're like next year, we're for sure looking at a recession year, and we're we're thinking that this holiday season will still be a good year for our good

season for retailers. Remind us to you talked about the business, and we appreciate you reminding our audience about what it is exactly that you guys do, but you do play into the e commerce sector. Who is your typical customer? Yeah, our typical customer is an SMB merchant, so merchants that are selling things on the internet SMB. SMB is between

five hundred and five thousand packages a month. Um, so it's a it's a pretty right wide range here, but our our typical customerships anything from fashion to make up, anything you can buy on the internet. And um, we're we've actually seen an explosion in the SMBC segment during the pandemic, like more businesses getting started, more businesses moving online. So that's the that's the perfect audience for us, and um,

we're not enterprised. So Amazon and Target and Walmart are out of stope for us, but like the smaller mid mark SMB and mid market segment, that's our that's our customer. What makes you so confident that we're going to see a recession next year? What's the data that you can

point to that indicates that. Yeah, it looks like it looks like all indicators the tech market is softening, we're seeing, Yeah, rounds of layoffs in the in the tech industry that will affect other other industries later later on as well. And um, I think that is just calling the negative spiral there to consumer spending being being worse. People are just not willing to just spend on discretionary products. Inflation is at our record high and we've seen the gas

crisis rising. So all all indications lead to a recession year next year. Um, but I'm not an economist, so fingers fingers across data, I'm wrong, all right, Yeah, well no, but you have a great, you know, view on vantage point when it comes to especially when it comes to small and medium businesses, which is so much the backbone of the US economy. Laura, thank you so much. Great to spend some time with you. Laura Baron's WOU co founder CEO Shippo joining SPA a zoom from the San

Francisco Bay Area. I'm road Mac Journal. Yeah but you let me drive? No, no, no no, please, I'll do the riding gravels. I want to drive. It's a good question. Drive. This is the drive to the clothes down on Bluebird Radio. All right, everybody just got about ten minutes left in today's trading session. It's been a little bit of a tortured trade, if you will. Little change though, but mostly it's the technology names. As we heard from Charlie, a

pressure today. Just a reminder, nastack down about one point almost one point four s and p though just down about six tents of a percent and call it flat. Slightly higher on the Dow Jones Industrial average. Yeah, but follows a couple of days of games for the major average is in a great week last weekend. That's what I want to talk to Emily Hill about. She's founding partner at Bauer Stock Capital Partners. They've got about a hundred million dollars in assets under management. Emily joins us

on the phone from Lawrence, Kansas. Emily, how are you? How are you? It's good to have you back with us. Hey, UM, so thank great. We're grateful for the notes that you sent to our producer Paul Brennan. And I'm seeing that you're saying that we're in a bear market rally right now. Um, what makes you say that? Well, I think I'm not alone in suspecting that this is a bear market rally, you know. I I think this is very similar. It's

it's a redo of what we saw in July. There's still so much liquidity in the market that, uh, you know, people are are looking for any kind of signal from the Fed that can be an that that that can lead to optimism. So I'm I think what we're what we're going to see is in the first quarter a revisiting of the lows we saw in June and again in October. And I think the primary driver for that

will be the fourth quarter earning the reporting season. It just takes time for higher interest rates, strong dollar, tight labor market to feed through into earnings, and I don't think we saw the full impact of that in the third quarter. Earnings were really a mixed bag. But I think the I think this this rally is overdone, And again I don't think I'm alone in in in believing that, And in fact, the one thing that gives me pause is that I'm so positive that it's the pair market

rally that I must be wrong. I'm rarely this positive of anything. It does feel like sometimes there's there's some significant swings emily in terms of sentiment. You know, when things are going bad, it does feel like everybody kind of overdes it to the downside and then all of a sudden, Wait, everything's okay and we're rallying. You know, like everyone said this was going to be a volatile year.

I think that's about the one thing we could count on here in Well, I agree, and I think people have to remember that this is still a liquidity driven market and it has been for years, and normalizing this market is going to be a lengthy process. So every optimism driven rally that we have like this delays the normalization process. This is not what the FED. This is the last thing the FED wants is these bursts of euphoria.

So you're taking me back to the spring when j Powell just came out and crushed the rally, Like, do you think he's going to do that again? Well, I listened to the same you're probably talking about. I think it was July when there was just this huge rally based on what you know, what your impulse said in the meeting, and I listened to the exact same conversation and did not see any any optimism in that speech. So my team laughed about it. We're an all female

team and we call it the testosterone driven rally. I mean, I don't know where they were getting the reasons for optimism and what he said, Well, I know, you know, and I do wonder too, Emily. I mean, we can go all macro here, and I feel like on any given day we can make a different macro story sometimes based on the economic data points or what FEEDE officials are saying. But when it comes to you know, the bottom line, I mean, you have to put money to work for your investors, So how do you do it

in this environment? Where do you do it? That's a very good question for people who have had liquidity events in the last year and have substantial amounts of cash, and I do have a number of investors like that I do. I think it's important to start putting money grab jo lead to work now because as I said, I could be wrong, and there's so much happening globally.

You know, all it would take would be some kind of resolution to the Russian Ukraine conflict or all sorts of things out of our control that could really turn this around. So it is important to keep putting money to work, and if you're a long term strategic investor, stay invested. But we are leaning more into cash equivalence, you know, I know, they're not really exciting, but T bills yielding almost you know, four point five percent in

the touring next May. This is a really good time. Frankly, we haven't seen yields like that in T bills and years, and there are worse places to be than that. You know, I think we're gonna we're in a U shaped downturn here, and I think we're probably probably going to be into you know, the second half of next year before we pull out of this. So that's a good place to part cash in the meantime. But you're not play here, you know, I do like small cap stocks. Small cap

stocks are trading You always like small caps. I say that, Yeah, you you liked small caps when you've been on with us before. Is that really kind of your sweet spot? Well, right now small cap is trading at a bigger discount to large cap stocks than they have been sincerely two thousands, So just on a relative value basis, they're significantly more attractive. So, you know, does that mean that they're gonna you know, that they're going to pay off in three months or

five months? You know, no, But in terms of long term for long term investors, this is a really good time to invest in small cap. Oh yeah, go ahead, sorry, Emily. Yeah, we also like uh, some international markets, but we definitely had our currency exposure because I think we're likely to continue to have a strong doll Emily, before we let you go, you said gradual if some of your clients have cash positions right now to start to flowing them into the market. What do you mean by gradual, Like,

how should they be dollar cost averaging? Well, we have a long term we will we will set a plan and it may be in this case we're using a lot of nine month plans, lve month plans where we're we have a long term strategic asset allocations strategy and we're investing a certain amount per month. But we also have trigger And what I mean by that is, you know, if the market drops beyond something we expect, then we're

going to accelerate that. So it's a little bit of a rigorous, rigorous country strategy combined with you know, some tactical maneuvering. Alright, we're gonna leave it on that note. Hey, Emily, thank you so much for joining us on this Wednesday. Emily Hill, she is founding partner at Bowers Capital partners. They've got eight million in assets under management, showing us

on the phone from Lawrence, Kansas. So interesting. I have to say, Tim, it does feel like there's a momentum about UH concerns about certainly at least early in the year. I think about what Emily was saying, I think about the company that we talked with, ship of the CEO, concerns talking about recession. It does feel like the conversation is shifting a little bit. Yeah, But as Katy Grafheld has said, like, you know, are we going to talk

ourselves into a recession? We could. Sentiment can be pretty powerful if everybody steps back. But if you're losing a job and you're not making money, you don't have a choice. You don't talk yourself into it. You just don't have the money. Thanks for listening to Bloomberg Business Week. Download the podcast on iTunes, SoundCloud, or Bloomberg dot com. You can also listen to our radio show at two pm Eastern on Bloomberg Radio or watch us live on YouTube now, also on Bloomberg Quick Take