Crypto, Stablecoins, Twitter, Capitulation – Notes from a Reunion


Chief Strategist at Interactive Brokers

Last weekend I attended my long-delayed college reunion.  Thanks to Covid-related cancellations, we had the unique confluence of three classes celebrating simultaneously, meaning I saw some old friends for the first time in years.  As you might have guessed, I became embroiled in several financially related discussions, and some of them are worth recounting here.

I used to be able to attend these gatherings with some degree of anonymity.  My friends knew that my job involved the stock market, but options market making was too obscure for most people to care.  Now that I have become a talking head – sorry, Strategist – people seemed to want my opinion about a wide range of financial topics that are in the news or affecting them directly.  For what it’s worth, here’s what we talked about.

Where is the Bottom? – My friends and I are at an age where we are beginning to consider retirement, and some have already taken the plunge.  Most are not pleased that their portfolios have taken a beating over the past few months,[i]  and like many investors, find themselves in a tough position.  They were so enamored of the past few years’ gains that they missed the various warning signs about higher volatility amidst Federal Reserve tightening.  Yet they still need to consider that their assets will need to support them through a retirement that should last 20-30 years.  Some are fully invested and looking for reassurance, while others have some idle cash that they want to deploy.  To the former, I said that this is a time for being more conservative, with low-beta or less volatile stocks offering greater security for the time being, and to the latter I suggested that they generally keep their powder dry.  It is always a good time to employ contrary thinking, just as there will be stocks that are “on sale” in nervous markets, and there will be rallies that will seem like a bottom is in place.  But it will remain a difficult and volatile environment until or unless we see a marked change in Fed policy or inflationary trends. 

My wife was recently asked by a friend of ours[ii] about when I thought the worst would be over.  After being given the spiel about volatility, inflation and the Fed, our friend replied. “Wait, are you saying it’s not going to just bounce back right away?”  Sorry, but we are very unlikely to find the market’s bottom until that mindset fades or we see the significant changes discussed above.

What is this Stablecoin Thing? and Please Explain Cryptocurrencies Obviously this was a tough one.  The concept of an algorithmically derived stablecoin is difficult to comprehend when you realize that the stability was based upon a mathematical formula that linked the stablecoin to a different cryptocurrency of dubious value.  The follow-up question was whether this could affect them even if they were not directly exposed to cryptocurrencies.  I offered the scenario that we discussed last week: Terra was probably an isolated event, but if there was a run on Tether or other stablecoins that are said to be backed 100% by liquid assets it could spill into fixed income and eventually equity markets.  The likelihood may be low and not immediate, but it is finite. 

As for cryptos overall, there is definitely an amount of generational skepticism.  Many have children who are familiar with cryptos, and some of those kids have done well for themselves with it.[iii]  Yet the parents don’t see the value in a currency that can’t be used for most purposes and is highly volatile.  My basic piece of advice remains that if you don’t really understand what you’re investing in, then don’t invest in it. 

What’s Going on with Twitter?  As far as I know, Elon Musk was a no-show at Alumni Day, despite this being his 25th reunion.  When asked about Twitter (TWTR), I did my best to avoid the political aspects and focused instead about the valuation.  I explained it this way:  Suppose there is a house that you really like, and you think it is in your price range.  So, you impulsively make an offer to buy that house and pick a value that has some significance to you, say $542,000.  In your enthusiasm to buy the property, you signed a contract that was not contingent upon the house passing inspection (aka due diligence) – despite rumors that there were issues with mold.  You then realized that no one else was even willing to pay even $440,000 for the house and the mortgage was going to be more costly than you expected, so you try to get the seller to cut the price because you now think the mold problem that you intended to fix is indeed quite bad.  The mold (aka bot accounts) may indeed be worse than the seller claimed, but you forfeited your contractual right to make that a reason to lower the price.  How do you expect that to work out for you?  The stakes are much bigger in the case of TWTR and the lawyers will be much more expensive than local real estate attorneys, but I believe that the analogy works.

Finally, I had a chance to talk with a friend’s son who is graduating today and will be starting a job at an options market maker – a long-time formidable competitor.  The young man and I have been in contact for years, but two of his most recent questions resonated with me.  First was, why does it seem that there are so many veterans who’ve been there for years, while his friends in investment banks have 2–3-year job horizons?  My answer was that there is a long learning curve and it’s not an “up and out” kind of job.  It’s fun, and it pays well if you’re good.  So why leave arbitrarily?  His second question wondered why Interactive Brokers once did options market making.  That one hurt.  Thomas Peterffy started Timber Hill as an options market making firm, and while we’ve since rebranded the firm and abandoned the bulk of our proprietary trading to reflect our customer focus, the company’s DNA and my career are rooted in that ethos.  Our customers are reaping the benefits of that experience, even if they don’t realize it.

[i] One huge exception is a friend who is the most financially literate doctor I know.  He exited the bulk of his equity investments in January, which allowed him to keep the bulk of his gains from the past two years and is being quite patient now.

[ii] An excellent doctor, but less financially literate

[iii] Me too

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