Bubblicious Crypto

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Speaker 1: Hello. Welcome to the Bubblicious episode of Sleep Money, Your Guide to the Business and Finance. News of a week in which the Fed raised interest rates by 75 basis points. I am Felix Salmon of Axios. I’m here with my colleague Emily Peck.

Speaker 2: Hello. Hello.

Speaker 1: And also with Elizabeth Spiers. Hello. And we’re going to talk about the Fed. We’re going to talk about what happened. We’re going to talk about those higher rates, which seem to have caused a little bit of a crash in the crypto market. Don’t believe anyone who tells you that crypto is a hedge against inflation. We certainly learned that in the case over the past week or month or a few.

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Speaker 1: So we’re going to talk about the crypto crash. We’re going to talk about Kraken, which is a crypto company and Sleepless. They are in the middle of getting canceled right now. We are going to talk about Revlon, which filed for bankruptcy this week. It’s all coming up in sleep money. Okay. It was 75 basis points. Elizabeth.

Speaker 1: This is the rate hike that shocked the planet. Or maybe it was the CPI report a few days earlier that shocked the planet, including the Fed. But over the past week this is after all the business and finance news of the week. And over the past week we have seen the bond markets just go crazy at the short end that the long end, the credit, the rates, you name it, every single interest rate has gone up, has gone up by about half a point, which is a lot in the world of interest rates. Is this the Fed is doing is is this just happening because everyone’s reacting to the Fed or is it the Fed and everyone else reacting to inflation?

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Speaker 3: I think it’s a combination of the Fed and vibes. And, you know, sometimes both of these things can have a spiraling effect. I was on the phone earlier with an architect, and the way he sort of described what was happening in real estate was a kind of hair on fire, everybody terrified. Scenario. And that’s partly because there’s a Fannie Mae report that just came out that says housing sales are going to drop 13.5% over the course of this year. And in January, everybody thought that number is going to be more like 1.2. So I think when you see chaos sort of happening in one sector, it tends to bleed over into another. And we just I don’t think anybody really knows how to stop it at this point.

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Speaker 1: Isn’t a cool the housing market exactly what the doctor ordered right now. Like everyone was worried about the housing market being crazy overheated. There were all of these bidding wars everywhere. The houses were selling in 10 seconds flat. There were no financing contingencies or inspection contingencies and everyone was like, This is dumb. This makes no sense. If things slow down, people take their time buying houses. Things become a little bit more considered. Maybe even prices soften a bit from that levels of crazy. Like how is that not a good thing?

Speaker 3: Personally, I think it is a good thing. I do see a lot of people panicking about it.

Speaker 1: So explain that to me. Like put yourself in the shoes of the panicky person. Why would someone be panicking about this and why would that feed into anything else?

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Speaker 3: Well, for instance, if you’re not thinking about this like an economist, you’re, you know, a homebuyer or something like that, or you’re in a business that’s entirely contingent upon stable market where you can somewhat predict housing demand. I think you have reason to be nervous.

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Speaker 1: I’m still not following you here because for home buyers, it seems the the crazy and the FOMO has gone away to a large degree and they get to sort of take a deep breath and actually look for the home they want and be able to take their time without worrying that everything’s just going to get snapped up in 5 minutes. And that’s the stable markets. Yeah. Like what we have reached is a point where house prices don’t go up like 10% every 3 seconds and they seem to be a little bit more stable again, like we seem to be moving in exactly the direction that people would want them to.

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Speaker 3: Yeah, I think their perception there is one of less stability simply because what people thought was going to happen is not happening. Predictions from the beginning of the year shaking out differently. So I think you’re right, but I think the way that people who are not looking at this as a needed correction or viewing it or just we don’t know what’s going on or how bad it’s getting yet.

Speaker 1: Does this make any sense to you, Emily? Because I’m I still don’t see what’s bad right now. What are we nervous about? What are we upset about? At least in the housing market, I can see the if you want to buy a house which costs a certain number of dollars and you need to get a mortgage to buy that house, then the cost of the mortgage has gone up because mortgage rates have gone up. And so you’re like, yikes. Like that’s increased my monthly mortgage payment. But beyond that, I don’t see what the nervousness is.

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Speaker 2: So I think the housing market is doing what it’s supposed to do. The Fed is raising rates. Mortgage rates are going up. Softening demand. That’s bad for first time homebuyers. People shopping for homes because home prices haven’t fallen, but mortgage rates have risen. So it costs more to get a house. But if you’re ready, have a house, whatever. It’s good. It’s fine. So that’s one thing.

Speaker 2: And I guess if you’re at a real estate company, you’re upset because the good times are clearly coming to an end. Redfin laid off workers, compass and other real estate company laid off workers this past week. Better Rcom The mortgage company has been laying off workers for a long time. I don’t know what’s up with that, but I feel like of all the sectors, real estate is kind of like doing what it’s supposed to do in response to the moment and it’s okay, you know what I mean? Like in the industry, yes, people are upset because the boom is coming to an end, but overall it’s okay. I think people are bummed out more because of CPI, of rising prices. Every day you wake up something, you want to buy a class more than you think it should, and people don’t like that, generally speaking.

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Speaker 1: Well, I mean, a third of CPI is shelter, right? So like there are two big massive components of CPI that are germane right now. One is gas prices and energy prices more generally. We’ve talked about that a lot. And really, no one in the United States has any real control over that part of the CPI. This is mostly up to the Russians, what happens there. And then the bigger part of the CPI that you do have a certain amount of control over is shelter.

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Speaker 1: Right. And so if rents are skyrocketing, if the cost of buying a home or what they call owner equivalent rent is going up, then that’s going to feed into very high CPI numbers. And there seems to be a bunch of like increase in in shelter CPI baked in and that’s going to keep inflation elevated for a while. I’m a little bit unclear where the higher mortgage rates are like bad for that or good for that. But the fact is that in the long term, if higher mortgage rates do tend to sort of take the housing market off the boil, that’s going to be good for the Fed’s mission of bringing inflation back down towards its 2% target. And so I think the oh, no, the people in the real estate industry are upset, is like, well, good, they kind of should be because that’s exactly what the Fed needs and wants, right?

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Speaker 2: Exactly. The Fed wants to tamp down demand and it’s doing that in the at least the market for buying a house. I feel like the rental market might be hot for a longer and more sustained period of time and that will keep pressure up.

Speaker 1: And that’s really the fundamentals of CPI is right there in the rental market. It’s simple supply and demand. It’s how much money the people have given a fixed supply. And so long as people have a relatively high amount of money, then they are willing to out with each other for rentals and rental prices go up. And in a sense, high rent price inflation is a sign of a very strong economy that people do have a lot of liquidity that they are able to spend. It is the opposite of a sign that inflation is really causing people to cut back and hitting people in the wallet and causing them to have less disposable income. I think you can really see in rents where the pressures are in the economy.

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Speaker 2: Yeah, but rents and CPI kind of lag, right, because they’re renewal rents and people are seeing less purchasing power. Food prices are up 11.9%. That’s really hitting people. At the same time, energy prices are hitting people. So I feel like you were like, well, what can you do? Energy prices, la la, la. But like, that’s a big deal. No, I’m saying I spend all their money on energy and food and housing and like maybe the Fed can cool the housing piece. But like you said, Russia is somehow control of our energy prices and there’s nothing the Fed can do about that with its 75 bips. And when it comes to food, that again, that’s like, how can you cool demand for food at home? I mean can you I don’t know. But the prices there are rising because of supply chain issues and because of those energy prices, which, again, the Fed cannot solve because it’s Russia.

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Speaker 1: That’s all. Remember that? Repeat after me the mantra that food prices are energy prices, that food is made by the bush process. And that is energy like food and energy are very, very closely intertwined.

Speaker 2: Right. Right. And those are cutting into people’s purchasing power and the Fed raising rates.

Speaker 1: It just doesn’t seem to me in the rental industry statistics that it’s cutting into people’s purchasing power. To the degree that landlords are having to reduce asking rents, people still seem to be able to find the higher and higher rents that landlords are demanding. So that money is coming from somewhere.

Speaker 3: Well, there are also housing shortages in a lot of markets. They may not have a choice in some cases.

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Speaker 1: But that’s not new. You know that the housing shortages have been around for decades and if anything, the amount of homebuilding and the amount of construction has been going up recently. The housing shortage argument is true. There is a housing shortage and we do need to build more houses. No one’s denying that, but that’s been true for a long time. And that was true when rents weren’t rising sharply as well.

Speaker 2: You could look at what happened in the pandemic households, new household formation, more people upgraded to bigger spaces. There was some people moving out of cities into other areas, putting pressure on rents in those places, like things have gotten kind of shaken up.

Speaker 1: I think the really big piece of this that people aren’t talking about nearly enough is the. We have seen a massive transference of effectively office space into residences as people work from home. They need more square footage at home. Light use wind up getting like extra bedrooms, spare rooms, whatever, spare space being used for workspace. And I just it’s a little back of the envelope calculations for if a typical person needs like maybe 15% more space to account for all of the extra time they’re spending at home and all the amount of work that they’re doing at home and all of that kind of stuff that more than makes up for even cities like New York, the the shrinking in population, the demand for square footage can go up even if the number of households is going down.

Speaker 1: And I don’t think that phenomenon has really entirely shaken out yet. And I think a lot of what we’re seeing in the rental market is exactly a certain percentage of people needing more space and willing to pay more money for more space. And that’s money on some level that companies used to spend for office space and is now individuals spending on residential space.

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Speaker 2: Yeah. Is there more to say about what the Fed did? I feel like it changed the vibes.

Speaker 1: The Fed did something super interesting. So there was this CPI report on last Friday, which we talked about last week, and it was kind of scary and the markets reacted. And then something interesting happened, which was that the markets continued reacting on Monday the like it took basically two full days for the magnitude and the breadth of the CPI report to sort of sink in to the market. This isn’t the kind of report that everyone digests in the space of 5 minutes and then it’s reflected in prices, and then prices find a new equilibrium.

Speaker 1: It took a couple of days because it was such a big deal and it took like the weekend and into Monday for the Board of Governors of the Federal Reserve to kind of just do a quick sort of straw poll among each other and say like, yeah, I know we said that 50 basis points is going to be appropriate at this meeting, but maybe in the light of this new information, we should consider 75 instead. But they also knew that they didn’t want to completely surprise the markets with a 75 basis point hike. So what suddenly, as if by magic, a piece in the Wall Street Journal appeared saying they might do 75 and the piece in the F.T. appeared saying they might do 75. And then the piece in Axios appeared saying they might do 75. And by the end of the day, 75 basis points is fully priced in. And it’s amazing how that like quiet and this is all technically in the blackout period when the Fed is not allowed to talk to the press or say anything because they want to be quiet before the Fed meeting.

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Speaker 1: But these these articles magically appear. They didn’t quote anyone at the Fed, but they just all appeared in Synchrony. And then the markets kind of got the message and everyone sort of positioned themselves for 75. And then the 75 basis point arrived on schedule on Wednesday. And the markets did what I think the Fed had hoped they would do, which is take it in stride and say, oh, okay, that’s more that’s what we expected.

Speaker 2: Right? There was no shock because it was massaged out early. Maybe we don’t know. There was a blackout period. Who can say?

Speaker 1: You know, there is definitely a part of Twitter saying this is not good, right? If you’re in a blackout period, you shouldn’t be messaging so clearly in the middle of a blackout period because it basically turns journalists into instruments of monetary policy who effectively have to kind of nod and a wink saying, like, I know I seem to have just come up with this idea on my own that they might do 75 and but clearly the Fed was part of that mechanism somehow. And it makes the act of monetary policy journalism a little bit more sort of stenographic.

Speaker 3: How much of that do you think is part and parcel of Powell having just fed that leans more toward transparency with the belief that it mitigates uncertainty. So very. Or is this an unrelated tactic.

Speaker 1: Do you think? No, I think it is related. Like we’ve seen a long term trend towards transparency from the Volcker days when he wouldn’t even say what the target interest rate was to Greenspan saying famously to a senator, if you think you’ve understood what I was saying, you probably weren’t listening to Bernanke’s saying, no, what we need to do is be much more transparent in terms of things like forward guidance in order to persuade the markets that we are going to keep rates low for a long time because there already is zero. And the only way we can loosen from the zero lower bound QE notwithstanding is by promising to keep rates at zero for a long time in the future. So then you need to transparently, incredibly make promises about the future. And at that point, then the markets expects you to sort of signal everything that you do before you do it.

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Speaker 1: In a weird way, I would kind of, you know, I wouldn’t be a vers to going back to the world where like the Fed has a meeting and I said we have a meeting and then the markets have to kind of work out. What the target Fed funds rate is that it’s not like a publicly announced number. But, you know, we live in this world, as you say, of increased transparency. And so they’ve kind of forced themselves into this corner.

Speaker 2: But what in the world of no transparency be more volatile and shocking? Like if they had just surprised everyone with a 75 basis point hike on Wednesday, the market would have probably been jolted in a really bad way and freaked a lot of people out.

Speaker 1: Well, not if they didn’t tell anyone that there was a 75 basis point hike.

Speaker 2: Just no announcement at all.

Speaker 1: Right. That’s what they used to do right back in the olden days. They never came out and said what they were doing. They just did it without saying anything. And then there was a lot of like Kremlinology going on in money market desks looking at the New York Fed’s open market operations and trying to work out what the New York Fed was doing and where overnight interest rates were being targeted, that it was all kind of we’re just going to have to look in the markets to see where interest rates are rather than just taking dictation from the Fed.

Speaker 2: Yeah, that is not the world we live in anymore. Like no institution has that level of kind of like cloak and dagger in finance. Like, it’s all open. It’s on the blockchain, right?

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Speaker 1: It’s all on the blockchain. Exactly. Just put monetary policy on the blockchain. Make it automatic.

Speaker 1: But talking of blockchains, we have been melting down in crypto. We should mention this because this is a serious sort of winter in the crypto world. We have this company called Celsius, which is a really big crypto lender and exchange. Like if you had a bunch of Bitcoin or Etherium or any other coin, you could just basically put it on deposit. Celsius use Celsius a bit like a savings account, an interest paying savings account. And they’d be like, We will pay you 7%, 9%, 15%, whatever on your crypto. And people did that and they were like, That sounds good. Rather than just sitting on my Ethereum and owning one ether, I can say only if they lend it out to Celsius and they’ll pay me interest on that, which sounded great at the time until Celsius said, Oh, wait, hang on a sec. We’re freezing on withdrawals because markets are crazy. And now no one knows whether they’re going to be able to withdraw that money at all.

Speaker 1: There was a hedge fund called CRC, which seems to have gone bust. There was a fund called Kraken which decided to take this opportunity to go all like Libertad crazy, starting complaining about pronouns and stuff and kind of most profoundly this is a little bit wonkish, but the exchange rate between the ETH and ether, basically the new proof of stake. Etherium That is going to happen in the future. And the actual Etherium that exist right now, that’s been 1 to 1 for months and months now. But it’s broken that parity and that’s causing a bunch of chaos in like the pipes and the market structure of the crypto world. And a lot of people are being shaken out and I feel like this is I know. Elizabeth Do you think this is like one of those good bear markets which shakes out the terrorists and just forces everyone to realize what they’re doing and is ultimately healthy? Or is this like the end of crypto now?

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Speaker 3: I don’t think it’s the end of crypto, but I think it’s a healthy shakeout. You know, I was thinking before we started talking about this, I don’t fully understand Celsius business model and I know it’s become a cliche that we look at novel crypto schemes and automatically say, Oh, that looks like a Ponzi. But I think part of the problem here is that, you know, there are so few actual standards for what crypto is supposed to look like and there’s no real regulation. I think to some extent, a market shakeout performs some of those functions in terms of increasing transparency about what’s really happening.

Speaker 1: Okay. You’re going to have to expand on that because I don’t quite understand what you mean. Like, okay, we’re getting a little bit of increased transparency about what was happening at Celsius, i.e. they were co-mingling the funds they owe to people and lending them out and weren’t getting paid back or whatever.

Speaker 3: You’re seeing the weakness in a lot of these games. That was not apparent necessarily when crypto was doing much better.

Speaker 1: Right?

Speaker 3: I mean, it’s kind of educating the market a little bit.

Speaker 1: Educating the market and being able to say, well, that didn’t work out very well, but you’re not really, as far as I can tell, educating the market in terms of being able to say this is something you can trust, this is something that it’s regulated, this is something where that’s the equivalent of FDIC insurance because there is no such thing in crypto, right?

Speaker 3: Yes. I think a lot of people are having to learn that lesson the hard way. They don’t want to see it because the true believers in crypto don’t have very much incentive to think about it in any way. That isn’t just completely utopian. So when you see these projects fail, at the very least, it’s sort of, I think, educate some of the crypto enthusiasts now about what the downsides are and where there are weaknesses in these projects.

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Speaker 2: Earlier this year, I wrote a very little about this Celsius and other. High yield crypto savings accounts. Like it’s just feels like a bank account, but it pays 10% interest or like 18% interest. And the SEC was looking to regulate this, obviously, because you don’t want people putting their savings into unregulated savings accounts. And I wrote about it and I think I tweeted, like, if you’re doing this, why? Like, it’s so risky. And a lot of people defend me and they were like, Yeah, I know it’s risky, but the yields are really good. And, you know, it seems like a safe like a safe ish risk. And now I feel like, to Elizabeth’s point, it feels a lot less like a safest safe ish risk. And sometimes you have to learn the hard way, I guess.

Speaker 1: I think part of the problem is that some of the risks. Were safe. If you were lending in certain defi protocols where collateral automatically got liquidated, if it moved against you, then you basically were fine and you just margin called whoever you are lending to and you got all of your money back. Whereas if you’re using an intermediary like Celsius who were lending on the slightly longer term time horizon and with less automatic margin calls and that kind of thing, then shit can go bad like.

Speaker 1: And it’s very hard to tell because like one of the standard tropes that you see a lot on Twitter and places like that, it’s like, you know, well, doesn’t everyone know that there’s no such thing as a high return without high risk? And there were these high yields. And if you see high yields and, you know, it must be risky just because it’s a high yield. And I don’t entirely buy that like there were high yields there, as I say in DEFI that made sense. And you could kind of see where the high yields were coming from because they were coming from precisely all of these levered long speculators who had like three AC, the hedge funds and that kind of thing, who wanted to have all of that, like Etherium or whatever, and then borrow against it to buy more. Going to go levered long to maximize their returns in a bull market. That’s clearly a very risky move for them.

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Speaker 1: But lending against those risky people, if there’s a mechanism where they automatically get liquidated, if the market goes down, then you get your money back is relatively safe. And as far as I know, most people who are in that market have got their money back and did get that yield, even though it was quite high. But then when you start using intermediaries like Celsius to do that lending for you, then even if Celsius gets the money back, you still need to get your money back from Celsius. And that’s where things can get start getting a bit fishy because it turns out the Celsius themselves were, you know, playing the market and a little bit levered long and that kind of thing.

Speaker 1: And so now, you know, I’ve seen a lot of comparisons to MF Global. Do we remember MF Global? Jon Corzine show up, which blew up, that was regulated, that was dollars. So like blow ups can happen in Tradfri as well. But this seems to be much more systemic and I think it’s going to be hard to recover. I’m not saying that there won’t be any recovery at all. There won’t be some kind of a a dead cat bounce. But people are beginning to see that Trustless finance is a little bit of an oxymoron.

Speaker 2: Our colleague at Axios, Neil Irwin, had a piece like a month ago comparing this downturn to the 2000 recession. You know, when the dot com bubble burst and everything, it does seem really similar to me. Like there was a frenzy. Everyone started investing. Just like back then. Everyone added a dot.com to their name and it was like retail investors went bananas over it. And this time around, it’s like everyone bought an NFT, started saying they were going to do crypto. I saw something about a big profit getting into crypto just yesterday. Like everyone went crazy for it. Everyone was crazy for the dotcom bubble, everyone went crazy for crypto. Back then there was a shakeout, but a lot of companies kind of emerged from the ashes and are now Amazon. You know.

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Speaker 1: Survivor emerged from the ashes.

Speaker 2: Amazon emerged from the ashes and a few other companies. Maybe eBay, maybe Cisco.

Speaker 1: I know. But most of the dot com bubblicious companies really did just crash and burn and die.

Speaker 2: But then there was then there was Web 2.0, which really wasn’t that long after. And a lot of new companies emerged that had learned the lessons of the bubble or whatever and basically drove what we had for the past 15 years.

Speaker 1: Economic growth. Yeah. And started making actual money, which was one big difference. The dotcom bubble companies, none of them were profitable, whereas Google and Facebook, the most profitable companies the world has ever seen. Right?

Speaker 2: So it’s like maybe this was crypto 1.0 or something.

Speaker 3: If you believe the utopians, the vision for crypto is that it ultimately it’s it’s sort of embedded in everything. And that’s the sort of change you see from Web 1.0 to 2.0 is that a lot of the really early coms had sort of technological functions that now are just part of the environment, business, environment.

Speaker 1: How do you mean?

Speaker 3: Think about some of the dot.coms that crashed and burned. You know, Pets.com, for example, if you’re a pet food retailer now, you’re automatically doing commerce online. There’s kind of no need for those kinds of businesses anymore because online transactions are normalized everywhere. It’s it’s just a basic thing that everybody has to do.

Speaker 1: I don’t know. I feel like the whole, like, Chewy coming in and disrupting the physical pet food retailer thing was a big thing. And didn’t we just see I think it was PetSmart spinning off its online business from its retail business? Like there’s still different things. It’s not like it always surprised me. How much we haven’t gone completely omnichannel. What was interesting to me is that they, the Pets.com, was the poster child for the dotcom bubble. And at the absolute height of its crazy bubblicious valuation, it was worth like $300 billion, which is, you know, half of a series C round for, you know, a e-tailer these days. And Chewy is worth like, what is it, over 10 billion or something. So the valuations that we thought were crazy in 2000 are just so tiny by contemporary standards.

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Speaker 2: But the point really is just like Crypto’s probably not going away. But the irrational exuberance for crypto maybe is.

Speaker 1: But is there any crypto without irrational exuberance? Like the irrational exuberance has been the only product so far that has actually succeeded. There hasn’t been any actual crypto fueled thing in the world that exists beyond people packaging exuberance in various different ways. You know, if you look at Coinbase or Robinhood or any block, it used to be square or any of these people which are making money off crypto. The way they’re making money off crypto is by monetizing that irrational exuberance and everyone wanting to buy crypto and then making massive commissions on crypto trading. It’s like, great, okay. Like we understand that the financialization of crypto has become extremely sophisticated, but really what that is, is just people trying to provide picks and shovels to the speculators, and that’s well and good, but there’s still no there there as far as I can make out.

Speaker 2: Well, there’s the digital dollar. That’s the thing. I don’t know either. I mean, if you had asked me in 2000, like this Internet thing, is that just like websites and who cares? That’s going to make a lot of money. I probably would have been like, I don’t see how this is going to make a lot of money. Like I had.

Speaker 1: I feel like I was I was around in 2000 and like you could see how videos streaming online would be a thing and if and when it became a thing and we had like the bandwidth to be able to do it effectively, then people could make a lot of money doing it, you know, and there was a a technological problem there that hadn’t been solved, but we kind of assumed that it would be solved at some point. And we knew that when it was solved, it served an actual utility, you know, something like tether or circle or whatever, like digital dollars. All they do is make it easier to do financial speculation and fueled that irrational exuberance. They give you a digital based currency from which to conduct your speculation. There’s still no actual real world product there.

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Speaker 3: I mean, this also reminds me of the 1.0 versions of all currencies. Do you guys remember flu’s the sort of fake money that you could buy that had a for a while, a 1 to 1 exchange rate with the dollar? But it wasn’t blockchain or anything. It was just I was in the middle of the dotcom boom. My first job out of school was at a startup, so I feel like there were also two or three other companies that did this that had huge valuations and big venture backing.

Speaker 1: And they all went to zero, right? Yes.

Speaker 2: The Federal Reserve wants to do digital currency. Like that’s a real thing that’s going to happen.

Speaker 1: Well, I mean, don’t hold your breath. The one thing that we learned from the latest congressional hearings about that is that the one thing that the Democrats and the Republicans can agree on is that whatever you think about a digital currency, no one’s going to do it without Congress mandating it. So it kind of doesn’t matter what the Federal Reserve wants. They’re going to have to wait for a bill that makes it a reality. And that bill is not going to arrive for many years seeing like the various dysfunctions in Congress in a way that no one can agree on anything or even whether we should have a digital currency.

Speaker 1: And the United States in general is, I think, very happy being very late to this game. They’re going to be very happy seeing a lot of other countries roll out their own digital currencies. Some will be on the blockchain, some won’t be on the blockchain. They will work in various different ways. We will see which ones come a cropper. We’ll see which ones turn out to be fabulous, and then we’ll probably learn from them in some way. And in 15 years time, eventually there will be some kind of digital dollar. Not the current voice on digital, by the way, let’s be real about this. The overwhelming majority of all dollars on planet Earth adjust ones and zeros in some kind of a computer database somewhere. The dollar is already digital. It’s just not cryptographically tradable in the way that cryptocurrencies are.

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Speaker 1: But yeah, the central bank digital currency, it may or may not come. If it does, it will be a while. It may or may not mark the death knell for Usdc and Usdc and all of these stablecoins, but that’s a very long way off, and it’s not even clear whether it would be good or bad for the crypto system more generally.

Speaker 1: Can we move on to Revlon?

Speaker 2: Yes, we can.

Speaker 1: Emily, what happened to Revlon this week?

Speaker 2: Said it was filing for bankruptcy.

Speaker 1: Yes.

Speaker 2: Well, basically.

Speaker 1: We’ve been waiting for this for a while. It finally happened.

Speaker 2: I mean, like literally waiting for it for maybe like 20 years because I was looking back. So Revlon is 90 years old, but in the late eighties, early nineties, Ron Perlman borrowed a lot of money and bought the company. And so it had a lot of debt. And like for the past 20 years, people have been writing about how Revlon is not doing well because it doesn’t innovate. So this company has just been kind of like limping along for a couple of decades and able to survive because money was cheap and it could borrow money cheaply and lever up. And now because the Fed did its thing that we talked about earlier, companies like Revlon that are kind of struggling and just limping along can no longer limp along. So it filed for bankruptcy. That’s my tldr. Also, it didn’t innovate and like the make up space has moved well beyond what Revlon has to offer, which I guess is like lipstick that matches your purse.

Speaker 1: Yeah. I had this theory that Revlon was the biggest corporate victim of the pandemic, that there was this period in 2020 that basically everyone stopped buying makeup because they weren’t going out, because we were all stuck at home, because we were in lockdown. And that was bad for cosmetics companies. But then, you know, 2021 comes along, 2022 comes along, people go out and start buying makeup again. And the makeup they’re buying is not Revlon and they’re buying influencer makeup off Instagram. They’re not walking into department store ground floors and buying Revlon nail polish.

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Speaker 1: So, yeah, I think they failed to keep up with the times. They were certainly hurt by the pandemic, and they were certainly hurt by higher interest rates because they were so incredibly levied. But they are still a massive, multi-billion dollar corporation. They will still continue to sell Revlon products to millions of people around the world.

Speaker 1: And this is one of those cases where I look at a bankruptcy filing. I’m like, this is financial engineering wrong. Perelman is no longer going to own it. Someone else is going to own it. Someone else is going to own a relatively de levered version of it because a bunch of that debt is going to get turned into equity and this big makeup company is going to just keep on going. And for the consumer, there won’t be any difference. And like my guess, my question is like, if some billionaire loses control of the company and some hedge fund gains control of the company, like, who cares? It doesn’t actually affect the makeup.

Speaker 3: I mean, their problem there, the innovation aspect of this is significant for them because there have been other companies that are in similar categories. So and drugstores that saw growth in the last year and Revlon has been flat. And I’m a person who buys makeup and I think of Revlon. It’s kind of your grandmother’s makeup company. Like it’s mostly in my mind is the company that was a big trendsetter in the eighties and nineties. You know, I have brown lipstick on white women and things that are probably never going to cost a brownie.

Speaker 2: Yes, that was a big a big.

Speaker 3: They don’t seem to have adapted to what trends are now. And I wouldn’t be surprised if makeup didn’t fall that much during the pandemic between people having to be on Zoom, but also the beauty and influencer trends among younger people. The category has expanded enormously and the kind of things that people are interested in just don’t look like Revlon products at all. Like the color palettes are a lot bolder, the range of products is more expansive. And now you have these direct to consumer brands that are competitively priced with luxury makeup products and they’re more customized. You know, if you can go online and take a quiz and get a serum that’s adapted specifically to your skin type and for your age, and you’re paying the same amount for it as you would, you know, a Revlon product in a drugstore. It’s just going to be very hard for them to compete.

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Speaker 2: I believe all of that is true. But I was reading a New York Times story from the year 2000 which attributed Revlon’s troubles to it, losing out to trendier specialty retailers like Bath and Body Works. Like literally, the company has not kept up with trends for a really long time. And I mean, the industry has really shifted, like you said, to influencers and to Kylie Jenner and to TikTok videos. And, you know, the.

Speaker 1: Fastest growing bit of the cosmetics industry is men’s makeup.

Speaker 2: I wonder if if one of the big takeaways is like guys like Ron Perlman levering up and buying companies, kill the companies. I guess that’s not a very original or new take. Like that was the theme of many movies from the eighties that we’ve probably discussed on Slate. Money goes to the movies already, but like this guy borrowed a lot of money to buy what was the successful makeup business and then didn’t. The money to innovate for a really long time. And it just kind of limped along. And the lesson is, I don’t know exactly, but that’s not the kind of person who’s going to do cool stuff with a make up company.

Speaker 1: I do think you’re right on some level that if a company is run by financiers who are worrying about turns of leverage and EBIDTA, that’s not the way to super innovate. Right. On the other hand, I remember sort of pouring one out for Kiehl’s, my lovely neighborhood cosmetics store, when it got bought out by. Was it Revlon? Was L’Oreal who bought Kiehl’s L’Oreal? And then the next thing you know, Kiehl’s is everywhere. And they like they scale Kiehl’s really well. And everyone’s like, This is great. And the Kiehl’s, you know, family are like, awesome. So sometimes that kind of financialization works and sometimes it fails. That’s, you know, the wonder of private equity.

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Speaker 1: And I’m sure Ron Perlman will still be able to put food on his table. You know, he’s not worrying too much about food price inflation, but I do think he’s defaulted on a bunch of philanthropic commitments, like there’s a bunch of Perelman Halls and various other bits of Perelman philanthropy out there which are taking his name or his daughter’s name down because they’re like, Oh shit, we don’t actually have the money that we promised you anyway.

Speaker 3: Yeah, this is the Wikipedia stat, so I don’t know if it’s real, but apparently it net worth in 2018 was 18 billion and now in 2020 it was for poor guy.

Speaker 2: I hope he’s okay.

Speaker 1: He’s the one billionaire I can think of who lost money over the course of the pandemic. The standard thing in, you know, economics has been the rich got much richer and all of the billionaires just made an absolute fortune during the pandemic. I guess now there’s a few crypto billionaires who are suddenly getting unstuck, but before the crypto crash it was him. He was the one who was going down while everyone was going up. But yeah, if if all of his equity in Revlon goes to zero, then yeah, he could be down to his last billion. Poor guy.

Speaker 2: Yeah. I guess it doesn’t matter that Revlon is going bankrupt. I mean, presumably for the employees in the company, it’s not great, but.

Speaker 1: Well, I mean, who knows if the company becomes much less levered, if it doesn’t need to be paying off enormous amounts of bond coupons every quarter, then that money can be used for payroll instead. Like on some level, if I’m an employee, I kind of like the idea of working for a much less levied company.

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Speaker 2: I guess that’s what bankruptcy’s for.

Speaker 1: Yeah. Discharge the debts.

Speaker 1: Move on to a brave new world. We should have a numbers round. I’m a little bit lost for a number this week, so I’m going to start with Elizabeth.

Speaker 3: Okay. My number is 1000. There’s a physicist who teaches at University of Pittsburgh, says that you can walk on, calls it a thousand degrees and it’s, say, for 20 feet or more. And this comes from a story where there’s an increasing maybe not increasing ongoing problem of people walking and calls at corporate retreats as part of a finding exercise. And there was a on Tuesday, around 25 employees of a Swiss ad agency were seriously injured when they tried to do this. And I kind of blame Tony Robbins for this because I feel like he popularized it in his heyday. I’m kind of amazed that people are still doing this. But one thing I learned from the article is that there’s a way to do this where you don’t actually get hurt. I don’t think that that’s an incentive to try it, but.

Speaker 1: I think the way to do it is to walk very quickly and make sure your feet don’t stay on the coals for more than like if you like. You have a little layer of moisture naturally on the bottom of your feet. And as long as that moisture just kind of is busy evaporating and you don’t your feet themselves don’t actually touch the coals, you can get away with it. But yeah, this is just dumb. Why would anyone want to do that?

Speaker 2: There’s a really good episode of The Office where the character of Pam runs across the hot coals with no one watching, and it’s very exciting for her. So perhaps that has led to increase in interest because the office is more popular now than originally. So maybe that’s it. People are weird now too, because the pandemic made people weird, so maybe they’re super excited at the corporate retreats.

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Speaker 1: Okay. I have a number. This is I’m stealing this one from the little Twitter spaces that I did with Emily, but also from a quote from Bob Shiller. My number is 0.5 50%, and it is everybody’s new favorite number for the probability of recession. The CEO of Morgan Stanley is like, I think there’s a 50% chance of a recession. And Bob Shiller’s like, I think there’s a 50% chance of a recession. And everyone’s like, This is terrible. It’s a 50% chance of a recession. And that’s higher than whatever the previous subject of chance of recession is. And my dumb, cynical take of this is that it is 100% guaranteed that you will be right if you forecast a recession with a 50% chance of recession.

Speaker 1: Right. There’s no way you can ever be wrong about that, which makes that forecast super profoundly meaningless and pointless. Like what? What is it supposed to mean? If anyone understands? What does it mean? There’s a 50% chance of a recession that is remotely sort of actionable or meaningful. Write in to sleep money at Slate.com and tell us or is it just complete 100% bullshit? I think it’s mostly just bullshit.

Speaker 2: Is there a 5050 chance it’s bullshit?

Speaker 1: I’d say there’s a 19 90% chance. It’s bullshit. It’s just the dumbest thing. The Larry Summers move is to say there’s a 33% chance, there’s a 33% chance of a hard landing and 33% chance of a rebound. And that difference in terms of recession, what I’m like and at least that way you’re like, he’s always wrong. Whatever happens, he reckoned it was only a minority chance of it happening. We know he’s always wrong, but like with a 50% chance, you’re always right. You can never say I told you so. You can always say I told you so. It means the same thing. Either way.

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Speaker 3: The most conservative estimate for any binary probability.

Speaker 1: So the most meaningless. Yeah. Yes. Possible estimate for any binary possibility.

Speaker 1: Emily, do you have number?

Speaker 2: I have a number 1.2 million. That is the number of women mothers that would enter the workforce if broad childcare subsidies were enacted, like the kind that were proposed under the all but probably dead build back better legislation package from the Biden administration. I wrote about this on Friday. There’s a really good, I think, paper out from eight different economists who study child care policy.

Speaker 2: That kind of breaks down what happens when you essentially give people money to pay for childcare. And I mean, none of it’s super surprising, but I think 1.2 million is a lot of people, especially at a time when a lot of CEOs are still crying over labor shortages. They found that more women mothers would become full time workers. The cost of care for families, particularly lower income families, would go down a lot. And the wages of people who work in the industry, which are really low, lower in a lot of cases than like fast food workers, would also go up. It’s like the kind of win win that a lot of people like to talk about. Win wins all the time. It feels like a bit of a win win.

Speaker 1: It’s a way for the White House to fight inflation, right? You increase supply of labor. This would help take the imbalances out of the labor market. They’d be awesome.

Speaker 2: I think so. Like we were kind of talking about this. So you give people money to buy childcare. Is that inflationary? Kind of. But not in a bad way, right?

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Speaker 1: Certainly if you’re worried about like a wage price spiral, then having an influx of 1.2 million women into the labor force is a great way of preventing that.

Speaker 2: Yeah. Yeah, I think it’s. It’s a great idea. So help it. Yeah.

Speaker 1: Go ahead. Make it happen. It’s not going to happen.

Speaker 2: It’s not going to happen.

Speaker 1: All right. I think that’s it for us this week. Thanks all for listening and sending in your emails to sleep. Money a sitcom thanks to Jessamine Molli and C Seaplane Mother for producing. I think we’re going to have a slate B+ on crack and one bit of the crypto universe that we didn’t get to in the main show and we will be back next week with even more sleep money.

Speaker 1: All right, Emily, talk about Crypto Brothers. What did the CEO of Kraken get up to?

Speaker 2: Oh, my goodness. Jesse Powell, the CEO of Kraken, has led a culture war inside his own company in kind of a situation that’s mostly played out on Slack. He’s asking questions like, if you can identify as a sex, can you identify as a race or ethnicity? He’s starting conversations about the N-word, which seems bad. He is telling people if they don’t like his kind of cultural outlook, they can just quit because he believes in free speech, which I don’t really understand how that tracks, but fine. So is that. Do I have it? Elizabeth. Am I missing something? Oh, and I think he called women dumb. I don’t know.

Speaker 3: I said they were mostly brainwashed.

Speaker 2: Brainwashed? But like women work for his company.

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Speaker 3: Yes. And also the question of whether men were inherently more intelligent if women was not, quote unquote, settled science.

Speaker 1: Well, who knows? Maybe we’re now more intelligent than men. After all. It’s just not settled. We’ll just assume they’re not.

Speaker 2: Let’s ask Larry Summers.

Speaker 1: Exactly.

Speaker 2: I thought the story was interesting. I mean, it’s interesting just on its face that a CEO would step in it that badly. It’s unbelievable. But also that it all kind of took place on Slack, which led me to think it’s not bad. It’s like really helping productivity in the nation’s companies or no.

Speaker 1: Well, I mean, I think we’ve talked about Slack at The New York Times. Right. And how they all of the like internal labor mission guys at The New York Times have basically track all back to Slack that where you have a workforce that is feeling very antagonistic towards senior management often plays out in certain slack instances. I think in some companies Slack is great, but in companies that have a tendency towards sort of internal chaos, it can be terrible.

Speaker 3: I think what it really does is it facilitates a really deep back channel for employees, and that can be a double edged sword. It can either make them more productive and satisfied in their jobs or if they’re slightly unsatisfied, or in the case of crack and massively unsatisfied, it brings those issues to the surface pretty quickly.

Speaker 2: And it gives the CEO this like direct channel to employees. That is probably ill advised, as you can see with.

Speaker 3: This CEO is I mean, this is beyond the typical, you know, some people unhappy at the company situation where the CEO seems to be throwing all of these grenades himself while also complaining that he’s pro-free speech and pro diversity of thought. And then a little bit after that, tweeting that his company has been he uses this phrase, an ideological purity test for whether or not you can work there. So in this case, you know, diversity of thought just means range of thoughts that I personally agree with. And to me, this is just part of a sort of larger trend of CEOs and tech companies behaving as if their companies are personal vanity projects or ideological vanity projects.

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Speaker 1: It’s also part of crypto, right? In the and he’s quite explicit about this. He’s like, we are a crypto company. The whole point of crypto is this anarcho utopian libertarian mindset. I am 100% bought into this libertarian anarcho utopianism. You kind of need to believe in that in order to work for me because I want us all to be on the same page. If you don’t believe in that, then fuck off. And I feel like it’s very hard to imagine that happening and certainly hard to imagine that happening at a company with a multi-billion dollar valuation anywhere outside the crypto world, when the crypto world is just more or less par for the course.

Speaker 2: I’m going to push back on that a little. Netflix, for example, they had a big dust up with Dave Chappelle special and employees were upset about it, etc., and they seemed to kind of agonize it over for a while. But more recently they were like, Look, if you have a problem with that kind of thing, you can leave. And I have noticed a couple of other companies the same way. If you have a problem with this culture wise, you can leave. And Netflix, of course, is a company with a big valuation outside of crypto, right?

Speaker 1: Oh, yeah. No. The idea of if you don’t like the way this company is acting, then you can leave. I think, yeah, you see that in many places. I just think that specifically when the philosophy or being asked to sign onto is so very heterodox and like wingnut and beyond, sort of very like corner solution extreme. That is uncommon, I think. Hmm.

Speaker 3: Well, I think the same thing happened with the person whose name we shall not speak. Space X employees wrote an open letter this week suggesting that life would be better for everyone in space x if.

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Speaker 1: If you just shut up.

Speaker 3: And just shut up. Like, for the love of God, stop tweeting. And it broke this morning that the employees responsible for that open letter were all fired. And I think, you know, sort of I believe in free speech and diversity of thought and criticism seems to never apply to chief executives. These are yeah.

Speaker 1: Of course. That’s why they get to make the rules.

Speaker 2: Yeah, it gets confusing because of what they say does not line up with what they do at all. We believe in free speech is not exactly what’s going on.

Speaker 1: Free speech has become this like dog whistle term that like just using that term just sets everyone on edge. My advice to all CEOs is never, ever use the term free speech. No good can come of that.

Speaker 2: Yes. Well, I wrote today that the most in-demand people to be CEOs right now are ones that have social skills and are nice and empathetic. So see how that shakes out. And I think this guy from Kraken fits into that kind. I agree.

Speaker 3: Yeah.

Speaker 2: But maybe I’m brainwashed as a lady.

Speaker 3: Yeah, well, he’s. He’s tweeting through it presently, and then Brian Armstrong, who owns Coinbase. And this is Felix point. This is definitely a cultural thing in crypto, is siding with the Kraken CEO and suggesting what they’re reporting is, you know, malicious set pieces.

Speaker 2: Coinbase had a similar dustup, I think. Was it last year?

Speaker 1: Yeah. That’s why with all these these cancel CEOs have to stick together, man.