2023 - The Financial Year in Review

In this week's podcast we look at the biggest financial news stories of the year, bank runs, The Elon Musk - Mark Zuckerberg fight, The Sam Bankman Fried Trial and much more.

Patrick's Books:
Statistics For The Trading Floor:  https://amzn.to/3eerLA0
Derivatives For The Trading Floor:  https://amzn.to/3cjsyPF
Corporate Finance:  https://amzn.to/3fn3rvC

Patreon Page: https://www.patreon.com/PatrickBoyleOnFinance
Buy Me a Coffee: https://buymeacoffee.com/patrickboyle

Visit our website: www.onfinance.org
Follow Patrick on Twitter Here: https://twitter.com/PatrickEBoyle

Make More with Matt Heslin
Explore strategies to thrive financially, build legacy, and enhance life experiences.

Listen on: Apple Podcasts   Spotify

Transcript

It has become a bit of a year end tradition on this channel to look back over the big news stories of the year, many of which I discussed at the time, and wrap up with a discussion of what the next year might hold in store for us.

So, 2023 got off to a start with political turmoil in the United States as the US House of Representatives struggled to elect a speaker.  We saw the most drawn-out house speaker election since 1860 (who will forget that battle) and after four days and 15 ballots Kevin Mc Carthy finally won a slim majority.  He almost managed to hold onto the job for a full year.

No sooner had that drama ended when the US hit its debt ceiling (a limit on the amount of debt that can be incurred by the Treasury).  Republicans were demanding deep spending cuts in exchange for raising the borrowing limit and the White House and Democrats insisted that they would not strike a deal on that basis.  There was a real risk at the time that the United States might default for the first time in its history. (other than the accidental default that occurred in 1979 when a broken printer at the Treasury meant that interest payment checks didn’t go out on time.)  There was a lot of discussion around the idea that in the event of a default, the US dollar might actually rally, as even if the US had just defaulted, investors if they panicked would likely move their money into the safest assets they could find, which would likely still be US assets.  That would have been an interesting thing to see.

Meme stock investors were upset in mid-January to learn that their nemesis Ken Griffin’s Citadel hedge fund had achieved the largest single-year dollar profit of any hedge fund in history after returning 38% in 2022, a year in which the overall stock market had declined. 2022’s returns leapfrogged Citadel ahead of Bridgewater as the highest grossing hedge fund of all time.  Hopefully Kenny G’s celebrations were not interrupted by too many angry tweets.

The biggest financial scandal of January came when Hindenburg Research – a short selling hedge fund - accused India’s richest man Gautam Adani of "brazen" stock manipulation and accounting fraud. The report accused Adani of pulling "the largest con in corporate history." Hindenburg claimed that Adani group was using offshore entities and shell companies to invest money into its own stocks, driving up the stock prices.

While Adani denied any wrongdoing, the valuation of Adani’s companies fell from over $200 billion dollars to under $100 billion dollars. Adani who had been raising capital through a follow-on Public Offer cancelled its planned $2.5 billion capital raise citing market volatility. Later in the year, India’s Supreme Court announced an investigation into the scandal and the US Department of Justice and SEC announced investigations into the company’s communications with U.S.-based investors. 

The news in February was dominated by the Chinese balloons which were spotted flying over the United States and Canada.  The US said they believed the balloons, seen above a variety of sensitive military installations, were "high-altitude surveillance" devices, while China's foreign ministry said they were used for meteorological purposes and had blown off course.  

The US postponed a diplomatic visit to Beijing, and Canada summoned the Chinese ambassador in response to the incident.  

US officials waited until the first balloon was safely clear of land before shooting it down off the South Carolina coast using a heat-seeking Sidewinder missile fired from a fighter jet.  The missile was necessary as no one could find a pin large enough to do the job.  In the following days an additional three balloons were shot down.

General VanHerck, told the press “I’m not going to categorize them as balloons. We’re calling them objects for a reason.”  He went on to clarify that some sort of balloon might be keeping them afloat.

Other big news in February came when the commodities trading firm Trafigura announced the discovery of a “systematic fraud” and took a half a billion-dollar write down in their accounts. The fraud was allegedly committed by a group of companies connected to and controlled by Prateek Gupta. Trafigura discovered the fraud when they inspected shipments of nickel that they had purchased that turned out to be filled with worthless rubble. The nickel had been nicked… Gupta told the courts that Trafigura masterminded the fraud and asked him to be complicit in a scheme to boost their credit lines and their profits.  That case is ongoing.

Probably the biggest financial news story of 2023 overall was the hype around AI and AI stocks.  ChatGPT gained a million users in just five days after it was made available to the public late last year.  This was faster than some of today’s biggest tech companies like Facebook and Instagram had grown, which drew a lot of attention.  It took Facebook and Instagram months to reach the one million user mark, not days.

Chat GPT really hit its stride in February when it released a paid version, and it seemed to be all anyone could talk about at the time.  Google quickly released Bard, Microsoft released Bing Chat, AI chat bots were suddenly everywhere, and YouTube was filled with videos of people telling you how chatbots would make you rich – or unemployed.

According to Factset 117 S&P500 companies mentioned AI in their first quarter earnings reports and 177 S&P companies mentioned the term on their second quarter earnings calls. On top of that, the companies that mentioned “AI” outperformed the companies that did not.  2023 was the year that companies had to quickly claim that they had an AI strategy, luckily the blockchain strategy guys from the prior year were able to quickly repurpose themselves.

In March, an AI generated image of Pope Francis wearing a white puffer coat went viral along with fake photos of Donald Trump being arrested. Many social media users believed the photos were real, leading to worries about a coming wave of AI driven misinformation.  No one worried more about this than Elon Musk until he came out with his own chat bot a few months later. 

Guy Rosen, Meta’s chief information security officer, told reporters that “From a bad actor’s perspective, ChatGPT is the new crypto.”

My favorite part of the AI hype was when people started rebranding themselves as “prompt engineers.”

Other than AI, the biggest trend of 2023 was bank runs. You weren’t in style this March if you weren’t listening to the All-In Podcast while standing in line outside a bank demanding your money back.  Over a five-day period in March three small to mid-sized US banks failed due to runs on their deposits.  The first to go was Silvergate, then Silicon Valley Bank and then Signature bank.  Two of the three banks had provided banking services to cryptocurrency firms.  When FTX went bankrupt, crypto speculators began withdrawing their money from crypto exchanges, who pulled money from the banks.

The other bank, Silicon Valley Bank had grown deposits massively from VC funded tech firms during the pandemic tech boom.  As tech investment slowed and interest rates began to rise this became a perfect storm for SVB who had locked the money up in long term bonds to earn the juicy 1.56% interest rate that was available at the time.  As rates went up, the tech firms started taking out cash to fund their operations and the bonds that the money was tied up in had fallen significantly in value.  There were many risk management failures at Silicon Valley Bank, one of which was that the firm didn’t have a risk manager for almost nine months of the prior year. Many laid the blame for the Silicon Valley Bank run at the feet of Venture Capital Investors who urged their portfolio companies to pull their money from the bank.  Social Media users urged Elon Musk to bail the bank out at the time – like he was some sort of modern-day Sam Bankman Fried… Sam Bankman Fried – having been the modern day JP Morgan a few months earlier.

Not to be outdone by the Americans, Credit Suisse (Europe’s most hilariously mis-managed bank) went into freefall and in an emergency meeting, the Swiss Federal Council exercised emergency powers to force a merger between UBS and Credit Suisse without needing the approval of shareholders.  No one was more upset about the disappearance of Credit Suisse than me, as they had been the butt of my jokes on this channel for quite some time.  While I do still enjoy making fun of Softbank, I’m not sure that any other firm will ever really take the place of Credit Suisse for me.

In April First Republic Bank failed.  It was the second-largest bank to fail since Washington Mutual collapsed during the Global Financial Crisis.  This bar chart from the New York Times of U.S. bank failures, shows that First Republic’s collapse was the second biggest bank collapse in U.S. history in terms of assets and that the three US banks that failed in 2023 were worth more in inflation-adjusted assets than the 25 that collapsed in 2008.

Now, a bit too late in April to be an April Fool’s day joke, Elon Musk changed the bird logo on Twitter into a picture of a dog – the logo of “Doggy Coin,” which I’m told is his favorite coin.  This change caused the price of the “Doggy Coin” to jump 30% in value that day.  Later that week Musk’s legal team asked a judge to throw out a $258 billion dollar lawsuit accusing Musk of manipulating the price of doggy coin, which had caused idiots to lose their money.

In May Hindenburg Research hit the headlines once again with a report on Icahn Enterprises, which argued that the firm’s structure resembled a "Ponzi scheme” – which is bad...  Hindenburg argued that the company's valuation was pumped up because it paid unsustainably high dividends funded by investments from new investors. The analysis alleged that this was being done because Carl Icahn who owned 85% of the firm had leveraged a significant portion of his holdings to secure loans, and that these loans could be subject to recall if the stock price experienced a decline. On the day that this analysis was made public, the stock price fell 20%. Icahn enterprises went on to half its dividend.  The stock is down by more than 70% year to date.

The news in May was heavily focused on troubles in the commercial real estate market.  Investors had piled into commercial real estate when interest rates were low.  As rates went up and workers didn’t appear to be returning to the office, those investments began to falter.  According to Moody’s the US national office vacancy rate reached 19.2% close to its all-time peak. European commercial real estate took a harder hit than US commercial real estate as rental yields in Europe were much lower when interest rates started rising.  

May also saw the start of the Hollywood Writers’ strike which lasted until September.  The strike caused several studios to halt productions, and led viewers like you to watch low quality YouTube productions like this.  The focus of the strikes was on residuals from streaming media and of course (because it was 2023) restricting the use of AI models like Chat GPT.

Everyone was talking about the valuation of the Chipmaker Nvidia in May, as its stock price jumped 24% in just one day gaining almost a quarter trillion dollars in market cap in that one day after a good earnings report. The one day jump in value was equivalent to the entire market cap of Bank of America. JPMorgan doubled its price target on the stock stating that “Generative AI and large language models are driving accelerating demand for Nvidias AI chips.” 

The month of June was a big month in the world of cryptocurrencies and financial regulation. The SEC accused the crypto exchange Binance of diverting customer money and using secret trading firms to prop up trading volumes.  A day later, they launched a lawsuit against Coinbase, for operating as an unregistered broker and dealing in unregistered securities.

As interesting as those lawsuits were, what people really cared about in June was the Elon Musk – Mark Zuckerberg cage fight.  The battle of the nerds…  It started of course… with a tweet.  When Elon Musk saw that Facebook (I mean Meta) would be launching a competitor to Twitter (I mean X) he tweeted (I mean X’d) “I’m up for a cage match if he is lol.  Zuckerberg, who had recently won gold and silver in two featherweight white belt fights a few months earlier, accepted the challenge. The next day Dana White – the president of UFC said that both men were dead serious about the fight.  

Musk (a 52 year old man) went on to tweet “Zuck is a cuck,” and proposed “ a literal dick measuring contest. Yes… These are the business leaders of our time… Musk then announced that the fight would be streamed exclusively on X, and Zuckerberg suggested “Shouldn’t we use a more reliable platform.”

Elon Musk next claimed the need to postpone the fight as he required “back surgery” and finally announced that his mother would not allow the fight to go ahead.  Through much of the summer the two tech billionaires tweeted – sorry X’d and threads’d back and forth until finally Zuckerberg publicly stated in August that "it's time to move on," saying that “Elon isn't actually serious about the fight”.  I’m still hoping that this might go ahead at some point in 2024.  I’d even log into one of their awful apps to watch the event.  The loser should have to move to Mars…

In July, Instagram Threads finally launched and signed up more than 100 million users in less than five days.  The launch in Europe was delayed until just a few days ago - due to stricter privacy rules.  Its rapid success dwindled over the following months, possibly because much like X it uses an algorithmic feed showing you mostly content from people that you don’t follow, it’s also hard to get people excited about a new app that is essentially the same as another app that launched more than fifteen years ago. The number of daily active users on Threads has been steadily declining over the past six months according to various news sources.

There was a lot of talk in July about the bubble in Used Car prices. Not many cars had been built during the pandemic, due to lower demand and supply chain shortages.  Automakers had reduced the number of affordable models they were building and many had rolled out electric vehicles in response to government subsidies, but even with the subsidies, these new cars were not affordable to the average American.  

Consumers on a budget found themselves paying almost as much for a used car as a new car. As time has passed used car prices have been falling, but they are still more that thirty percent more expensive than pre pandemic according to data from Manheim Auctions.

In August, the big news was that China had officially fallen into deflation, with consumer prices having dropped by 0.3 per cent the prior month. On top of this, Chinese exports fell by more than 14% in dollar terms. Chinese authorities were reported to be pressuring domestic economists and analysts to avoid using the word deflation or mentioning any negative economic trends.  While most economies around the world were hiking interest rates to deal with high inflation, China was struggling with the opposite problem.  Economists worry more about deflation than inflation as when consumers expect prices to fall, they put off purchases hoping to buy the goods cheaper in the future which can lead to a deflationary spiral grinding an economy to a halt.

The other big news in August was that Sam Bankman Fried – The world’s Most Generous Billionaire – was sent to prison for leaking his co-conspirator and ex-girlfriend’s diary to the press. Prosecutors said that Bankman-Fried was trying to harm Caroline Ellisons reputation ahead of his upcoming trial, in which she was expected to be the star witness.  Bankman-Fried had his bail revoked in August and was sent to Brooklyn’s Metropolitan Detention Center. With no access to cryptocurrency – which he had previously used as money – Vegan Sam found himself trading fish for services in prison – things like haircuts...  Rumor has it that he is planning on turning the fish trading thing into a business – a sort of exchange…

In September we learned that Mexico had overtaken China for the first time in twenty years to become the number one exporter of goods to the United States.  Mexico benefited from strong automobile exports to the United States along with trends of supply chain diversification and nearshoring.

Huawei’s new smartphone – the Mate 60 Pro got a lot of headlines in September as it was not thought to be possible for Huawei to manufacture the advanced semiconductor chip that the Mate 60 Pro used after the U.S. imposed sanctions limiting the sale of certain types of chips and the equipment used to manufacture them to China.  The launch event became the most discussed topic on Chinese social networks in September.  TechInsights, a semiconductor research organization said that “the device shows progress towards using domestically-produced components rather than relying on traditional American suppliers”.

Other big news in September was the lawsuit against Sam Bankman Fried’s parents, who after the collapse of FTX had claimed minimal involvement with the company.  The lawsuit against Sam’s parents claims that they had significant involvement in the misappropriation of assets from the firm and had walked away with more than $26 million dollars in cash and luxury properties. 

The suit alleges that Allan Bankman (Sams Father) was a critical part of the FTX team due to his legal experience and connections and that he provided legal advice and networked on behalf of the company.  Barbara Fried was not linked to the operations of the firm, but the lawsuit alleges that her political agenda became vital to the company, and that she directed the political spending of misappropriated customer funds.

In October, it was announced that the U.S. would take additional steps to prevent American chipmakers from selling semiconductors to China that work around government restrictions. The Biden administration reduced the types of semiconductors that American companies were allowed to sell to China. The regulations expanded export curbs beyond China to 21 other countries with which the United States maintains an arms embargo, including Iran and Russia.  The goal was to block these countries’ ability to use American technology to build advanced weapons systems.

Nvidia’s A800 chip, which was allegedly created to work around prior export restrictions was now covered by the new export restrictions.  Nvidia announced that there was excess demand for their products worldwide and that the new restrictions would not have a meaningful impact on their financial results.

Probably the worst news event of the year, the Israel-Hamas war began in October when Hamas targeted Israel with rocket fire, while militants attacked civilian communities and military bases in Israel. An estimated 240 Israeli citizens were taken to the Gaza Strip as captives or hostages. Israel responded with what the FT describes as one of the largest bombing campaigns in history.  Nearly 20,000 Gazans are estimated to have been killed in the conflict. This conflict is responsible for the greatest number of both Palestinian and Israeli fatalities in decades and the events are ongoing.

Some of the biggest news in October was (of course) the trial of Sam Bankman Fried. The prosecution built their case on the testimony of Bankman-Fried’s inner circle at FTX and Alameda Research. His former partners and colleagues testified that he had directed them to commit fraud in order to steal billions of dollars from customers.  The much-anticipated book by Michael Lewis – who had been trailing Sam Bankman Fried at the time when everything collapsed was released a few days before the trial.  Many readers were surprised when it seemed to be more of a defense of Sam Bankman Fried than anything else.  Reviews for the book were not great, the New York Times described it as “stubbornly credulous”.

During the trial Sam’s co-founder Gary Wang testified that, since the very start, customer funds had always gone straight into to bank accounts owned by Alameda, who were then able to use the money as they wished. Wang admitted to hard coding an exception into FTX that made Alameda the only user on the exchange allowed to run a negative balance. Wang claimed that he had been directed to create that exception by Sam Bankman Fried. He went on to tell the court that FTX had lied about the size of its insurance fund, using a random number generator to create a big number that was then published on the FTX website.

Caroline Ellison who pled guilty to two counts of fraud and five counts of conspiracy told the court how she and Bankman Fried attempted to deploy Thai Prostitutes to unfreeze some money stuck in China. She described how she had provided SBF with seven different spreadsheets composed of misleading information on Alameda’s financials to present to lenders.  She told the court that Sam and her initially had luxury cars but that Sam decided it was better for their images to drive budget cars.

Nishad Singh testified that he had allowed his name to be used as the conduit for some of Bankman-Fried’s political donations to Democratic candidates.

Against the advice of his lawyers, Sam Bankman Fried testified in his own defense and failed to win over the sympathy of the jury with claims that he couldn’t remember any details of the events that led up to the disappearance of customer funds.

In November, the judgement was announced, and Sam Bankman-Fried was found guilty on all charges, including defrauding FTX customers and investors in the crypto exchange. Bankman-Fried is scheduled to stand trial again in March 2024 on charges of bribery and conspiring to make illegal political donations.  He is scheduled to be sentenced on March 28th of next year.

In November the news was filled with the drama of Sam Altman being fired, and then rehired as the CEO of Open AI – the company behind ChatGPT and Dall-E.

The other big news was that Changpeng Zhao – who is known by his initials CZ – as is tradition in the world of cryptocurrency plead guilty to a charge relating to failure to protect against money laundering and violating international sanctions.  He agreed to pay a $50 million dollar fine and step down from running the Binance as part of the deal with the Justice Department, treasury Department and CFTC. Binance (the exchange) additionally agreed to plead guilty to criminal charges and pay a $4.3 billion fine.  

The new CEO of Binance, Richard Teng who replaced CZ has continued to refuse to disclose the location of the firm’s headquarters.

In December Javier Milei a libertarian economist took office as Argentina’s newly elected president. On the campaign trail, he railed against Argentina’s corrupt political establishment and pledged a sweeping economic overhaul.  Milei will have his work cut out for him, as Argentina is one of the worlds most troubled economies, where inflation has exceeded 140 percent and more than 40% of the population are living in poverty.  Milei announced an emergency decree this Wednesday that included 300 measures relating to red tape, customs arrangements, employee contracts, permitting state owned companies to be privatized and much more.

The opposition accused him of ruling by decree to bypass votes on the new mandates in congress.  Thousands of protestors assembled outside of Argentina’s congress building, shouting: “Our country isn’t for sale!”

In the wake of the various crypto lawsuits and convictions this year, Bitcoin managed to rally significantly, meaning that the “Have fun Staying Poor” people returned to social media.

In Rap news, which long term viewers know is the main focus of this channel, Kanye West – also known as Ye, Saint Pablo, Yeezus, Yeezy, X, Meta and Alphabet is selling his Malibu home at a significant loss.  Over the two years that he has owned the property he renovated it by removing the windows, doors, plumbing, electrical, HVAC and other interior finishes.  If you have had a good 2023, maybe you are interested in buying it.

As we close out the year, the US Federal Reserve is keeping interest rates at a 22-year high of 5.25 to 5.5 per cent as of the last meeting. The fed did indicate that there could be 75 basis points worth of cuts in the pipeline for next year. The core personal consumption expenditures price index which came out this morning showed prices rose by less than expected last month, implying that inflation may finally be under control in the United States.  Loretta Mester of the Cleveland Fed warned earlier this week that financial markets have jumped “a little bit ahead” in their expectation of early interest rate cuts next year.  James Gorman, Morgan Stanley’s outgoing CEO told the FT that he expects markets to “take off” when the first rate-cut comes.  It is difficult to disagree with that argument, there’s some great research that was done a few years ago by Elroy Dimson at London Business School that shows that the majority of stock market returns occur during periods of falling interest rates.

The slowdown in China appears to be continuing, and I don’t expect a change of direction in 2024.  I’m in no way taking shots at China by saying this, there is nothing really too surprising about an economy that has grown as fast as China’s has over the last 30 years experiencing a slowdown as it matures. As we close out the year, the FT reports a sharp rise in consumer defaults in China driven in part by a decades long borrowing spree to buy real estate that has fallen rapidly in value over the last few years. The number of people blacklisted for missing payments in China has hit a record high this year. There are still big problems with malinvestment in infrastructure and real estate in China that have not yet been worked out. On top of this it’s difficult to grow as an export driven economy when you are locked in trade disputes with your biggest customers.  We are likely to see more trade disputes next year, in particular between China and Europe as Chinese EV exports into Europe have grown and threaten the profitability of the European auto industry. 

As we wrap up the year the Nasdaq and the S&P500 are near their all time highs, with just a few days left in the year. The rise in markets has been quite uneven, with the majority of the rise having been driven by just a few stocks.  More than 70% of S&P index members are lagging the overall market, the highest number of laggards that we have seen since 2000.  I was planning to wrap this video up with a song like the Blackstone Christmas video that came out a few days ago [clip].  But due to time constraints I’ll have to hold that back for another time.

Thanks for tuning in to this week’s podcast, I hope you have a great Christmas and an exceptional 2024.  Talk to you again soon, bye.