RE: My summary of the Grant Williams July 2021 podcast on Tether
Tether is tightly linked to an entity called Bitfinex.
Together, they lent $1 billion of corporate and client cash to a Panamanian firm called Crypto Capital Corp; there was no contract or other legal documentation supporting this cash transfer.
In 2018, Crypto Capital’s bank accounts around the world were seized to take down their money- laundering capabilities.
Crypto Capital owners embezzled all money flowing through the entity. Part owner Ivan Manuel Molina Lee laundered Colombian cartel money through Bitfinex. By the summer of 2018, Bitfinex used Tether’s cash to service Bitfinex withdrawals. From this point on, Tether was never fully backed by cash.
Crypto Capital President Ivan Manuel Molina Lee was arrested and extradited to Poland on charges of laundering money for said Colombian drug cartels via Bitfinex.
Supposedly arms-length transactions between Tether and Bitfinex were executed by the same individuals on both sides of these dealings.
$61 million of their corporate cash was held at one time in the personal bank account of the company’s general counsel.
The NY Attorney General (NYAG) has accused Bitfinex and Tether of “recklessly and unlawfully” covering up “massive financial losses to keep their scheme going and protecting their bottom lines.”
Tether has been promising to have its financials audited since 2014. An audit has yet to be completed. The company has cited as a reason that such an examination would be “excruciatingly detailed”. (My note: isn’t that the point of an audit?)
In lieu of an audit, Tether resorted to a much less rigorous process known as an attestation. The firm providing the attestation heavily relied on $382 million of cash reserves at the time; however, as the NYAG wrote in its finding, no one reviewing its representations would have reasonably understood that these reserves had only been placed in Tether’s account on the very morning of attestation.
As noted above, Tether and Bitfinex paid an $18 million fine to the State of NY and they were banned from transacting business in the Empire State.
According to the Office of the Attorney General (OAG), Bitfinex previously siphoned off $700 million from Tether funds, leaving the latter’s coins less than fully backed. This was prior to the explosion of issuance of Tethers from $2 billion to $64 billion in recent months.
It is difficult, if not impossible, to know how much of the added $62 billion was due to actual customer deposits/inflows versus what might have been counterfeiting of the coins.
According to the NY State court documents, in November 2018, Tether transferred $625 million in an account at Deltec, its bank in the Bahamas, to Bitfinex. In return, Bitfinex caused $625 million to be transferred from an account at Crypto Capital to Tether’s Crypto Capital account.
Essentially, Bitfinex tried to create the money by doing a one-for-one transfer of real money at Deltec for funds that don’t actually exist at Crypto Capital.
Disclosures from Tether suggest it has become one of the world’s largest investors in the US commercial paper market with about $30 billion in supposed holdings. But this reported accumulation has largely gone unnoticed on Wall Street, according to several of the biggest players in the market including bank traders, analysts and money market funds.
In one day, early in 2021, over two-thirds of all Bitcoin buys—$10 billion— was purchased with Tethers. (My note: According to Crypto Compare, as reported by the Financial Times on July 21, half of all Bitcoin trades are transacted in Tether.)
Does all the above conclusively prove fraud? No. Does it indicate an extremely suspicious and perilous situation? Absolutely! Since, as Yogi Berra said, “It’s always hard to make predictions, especially about the future,” the best a financial forecaster like me can do is to weigh the odds. In this case, my view is that the odds heavily favor fraud.
RE: One of Warren Buffett’s earliest investment coups.
The Oracle of Omaha’s soon-to-be-fabled career received a big boost from the crisis of confidence in American Express as a result of the infamous (at the time) “Salad Oil” scandal. This episode centered on a confidence man, Anthony De Angelis, who had convinced AMEX to guarantee his shipment of food oils overseas to needy countries. Most containers were discovered to be full of water and the collapse of the scheme left AMEX on the hook for as much as $150 million, a sizeable sum back in 1963. Undoubtedly, Mr. De Angelis would salivate over the prospects of being able to operate in 2021’s SPAC market. The “Salad Oil” scandal faded into the news scrap heap of history and Mr. Buffett made billions over time on his AMEX holdings.
RE: Miscellaneous absurdities
The soap dish displayed below with an estimated value of $800 sold for nearly $38,000 at a Sotheby’s auction in the spring of 2021.
Far more bizarro, a ceramic cabbage with chicken feet (there it is, in all its glory) went for $1.77 million around the same time.
A pair of Kanye West’s used sneakers sold for $1.8 million (no doubt Mr. West was not happy that his footwear was priced comparably to a ceramic chicken’s feet).
In 2021, Initial Public Offerings (IPOs) broke the issuance record set during the biggest U.S. equity bubble ever, the late 1990s tech bubble (Bubble 1.0).
On October 4th, 2021, Elon Musk tweeted a photo his shiba inu dog sending the Dogecoin imitator named after this breed up 30% that day alone. For the year, it had risen a totally rational (of course) 8000% to a market value of $12 billion! Underlying value? Almost certainly zero.
The aspiring electric vehicle battery maker Quantumscape rose to a valuation of $50 billion in late 2020 despite being revenue-free. (This caused me to slam it in our January 4th, 2021 EVA. As of October 6, 2021, it had lost 80% of its value despite a rising overall market.)
Electric truck start-up Rivian rose to a market value of $160 billion in November 2021 despite having sold just 156 vehicles.
ClubHouse Media Group rose by 1000%, to a market value of $2.2 billion in early 2021 because it was confused with a popular conversation app called Clubhouse to which it had no connection.
The brilliant and always-readable Andy Kessler, in the September 13, 2021, Wall Street Journal, wrote that “an Italian artist auctioned an invisible statue for $18,000 — in reality it was an empty box the artist claimed was a ‘space full of energy’. WeWork energy? Yeah, maybe fundamentals are a quant relic of a bygone era.” During the mass insanity years of 2020 and for much of 2021, fundamentals did seem to be quaint relics of a bygone era but as of early 2022 it’s a very different story. To be blunt and a bit crude, the bull market in bull shit is what now appears to be bygone.
RE: Cathie Wood and her ARK mutual funds
One of the sadder examples of performance-chasing, and the speculative lunacy of 2021, relates to the ARK fund family founded by Cathie Wood. By all accounts, she is an exemplary and ethical person. In late 2020 and throughout the first half of 2021 she achieved almost instant superstar investor status. However, she lost track of the fundamental rule a successful must remember at all times: price matters. She built her funds around dozens of companies that became valued like meme stocks. Certainly, they had much better fundamentals but their prices rose to levels that made them exceptionally vulnerable to disappointment. And disappointment arrived like a thunderclap in 2021, even as the S&P 500 and NASDAQ returned over 20% (almost 30% for the S&P).
From mid-January of 2021 to mid-January 2022, her flagship ARK Innovation Fund trailed the NASDAQ 100 by 65%. Since that index owns the type of high-growth, high P/E stocks that populated her fund it’s a reasonable benchmark. Unquestionably, that type of underperformance is simply astounding.
Despite the disastrous last twelve months, the ARK Innovation fund has still returned 31% per year since its inception in 2014, far better than the overall market. But here’s the punchline that drives home the extreme danger of chasing hot performance: adjusting for when investors bought into the fund and how much they put in or took out, the average Ark investor has lost money!
At the end of 2019, Ark’s total assets were a relatively modest $1.9 billion. By July of 2020, they had tripled to $6 billion. By the end of 2021, Ark managed a staggering $55 billion, despite its horrific performance. To make matters worse, it has fallen another 25% in the first three weeks of January 2022. It’s my contention as I write these words in late January, that she is now facing a tsunami of redemptions. The odds are high Cathie will get a hot hand again; but they’re just as high that most of her investors won’t be around for the rebound.
Per the Wall Street Journal, as of 3/7/2022:
“The second stimulus program in December 2020 and January 2021 showed even more striking results. In that round of payments, citizens received up to $600 each, totally nearly $150 billion. Over the three weeks following the day on which the stimulus payments started showing up in bank accounts, the meme stocks on average did 18.7% better than the non-meme stocks.”