Crypto billionaire are dying off

Good afternoon, 

The S&P is falling for a fourth straight day, individual investor returns are falling 40% this year, and another CEO has called out the media for falling asleep at the wheel in reporting FTX’s fraud. 

We’re nearing the end of the quarter, so we’re splitting this one into two headline stories: one for the equity investor and one for you FX fans. 

Let’s dive in.

Bottom Line Up Front

• Carvana shares tank as bankruptcy concerns grow for used car retailer (CNBC)

• Fanatics hits $31 billion valuation in latest funding round (WSJ)

• ECB President Christine Lagarde urges the European Union to move quickly to approve cryptocurrency regulation that prevents Russia from evading sanctions after invading Ukraine (BBG) 

• JPMorgan double downgrades Royal Caribbean Group, says it’s “more vulnerable” to macro pressures (CNBC)

• Theranos COO and Holmes’ ex-boyfriend Ramesh “Sunny” Balwani will be sentenced in federal court today (1 p.m. ET), after being convicted of 12 counts of wire fraud and conspiracy (WSJ)

• Prime Minister Rishi Sunak said he’s “shocked” by allegations that a Conservative peer received money from a firm that profited from UK government contracts awarded during the COVID (BBG)

• A Russian billionaire has become the third top cryptocurrency trader to die suddenly in recent weeks. (And Vladimir Putin’s Russia, but that’s a lot less unexpected) (Metro)

But first, a quick note from The Information.

If you're looking for high quality tech / VC reporting beyond TechCrunch and The Verge, I highly recommend signing up for The Information, where they get a lot of exclusives on major VC fundraises, startup funding rounds, and layoffs. They also have detailed company org charts for those who are looking to breakdown major tech firm corporate structures. Sign up here.

Tesla’s Paradox - Record Sales but Plunging Stock Price

Tesla has never sold so many vehicles. At the same time, it is accumulating recalls and suffering from Elon Musk’s Twitter fiascos.

Tesla remains the world’s leading electric car manufacturer. It’s even preparing to break its production record once again. The same can’t be said for its stock price.

Tesla stock is heading for its worst year on record. Shares have lost more than half of their value since the beginning of 2022, going from ~$399 to ~$185 dollars in recent days. Since the stock’s recent peak in November, the electric automaker has shed around $650B in market value—more than the value of Exxon Mobil and Boeing combined.

In the broader industry, the electric vehicle market is up 28.7%, with sales exceeding 1.2 million units worldwide, compared with less than 800,000 in 2021. 

Tesla seemed to have survived the semiconductor crisis, but most big brands have been unable to escape the pitfalls of China’s zero-COVID policy. For Tesla, this has seen its Shanghai gigafactory, producer of the Model 3, to idle.

Chinese authorities then further imposed the recall of 80,000 Tesla cars for problems related to “battery management” and “seat belt operations'' in late November. It was yet another episode in the flood of criticism in recent months that has fallen on the quality of the cars Tesla produces.

Since January 2022, Tesla has had to issue nineteen recalls on its vehicles. The causes span a wide range of malfunctions, such as power steering or rear lights. For example, the latter problem has required a modification on 321,000 vehicles alone. In most cases, a remote software update was enough, but the recurrence of recalls are enough to cause headaches for the Tesla board. 

Added to these headaches are the recurring controversies related to Tesla’s “Autopilot” system, which is regularly accused of causing accidents. The last one took place in mid-November and caused two deaths. Tesla’s “technological choices,” in terms of autonomous driving, are at the heart of multiple investigations, including one involving the Department of Justice.

The Twitter circus is starting to hurt Tesla

It’s no secret that Elon Musk is opening a new chapter at Twitter while also remaining the head of SpaceX (rocket launch and satellites), startup Neuralink (brain implants) and The Boring Company (tunneling). These varied sectors have revived Musk’s title of being a “part-time boss,” a critique that resurfaced in a complaint filed by a Tesla shareholder.

The shareholder accused Tesla’s board of directors of granting Musk “the largest compensation plan ever awarded to an executive” in 2018. The amount is estimated to be ~$56 billion dollars over ten years.

During the hearing, Musk highlighted the “dramatic” turnaround of the brand and the efforts he made. He also pledged to “reduce the time spent on Twitter and find someone else to run” the social network. But layoffs, paired with reinstating controversial accounts, have accentuated the permanent controversy that accompanies Elon Musk.

Musk’s games have long served the anti-conformist reputation of Tesla. That brand favor seems to have worn off. Now, it contributes mainly to feeding the reservations expressed by some financial analysts. 

In the perspective of one: “Musk has succeeded in what his detractors had tried in vain for years: to crush Tesla’s share price,” said Dan Ives, of investment firm Wedbush Securities. He noted in early November that, “The Twitter circus is slowly hitting the immaculate Tesla brand and this could impact demand, as brand perception is of the utmost importance for electric vehicles,” he added.

Since its commercial takeoff, Tesla has not been confronted with the presence of strong competitors. However, its German, Korean, American, and Chinese rivals (including BYD, the world’s number two electric car manufacturer) have launched more and more premium electric models and are building wider ranges.

What is interesting is the fact that, in the face of this new and multifaceted competition, Tesla’s sales are based on two vehicles — the Model 3 and Model Y — which are getting older despite the ability to perform remote updates.

Analysts anticipate the relaunch of the Model X and Model S, currently planned for late 2022, will not be too much to face the new Asian challengers. On the other hand, consumers are still waiting for the launch of the Tesla Cybertruck. Time will tell if its design generates a fraction of the hype Musk currently sees on Twitter. 

Global Regulator BIS Warns FX Swap Debt is an $80T “Blind Spot”

The Bank for International Settlements (BIS) published on Monday its quarterly review, stressing that more than $80T in “outstanding obligations to pay US dollars in foreign exchange (FX) swaps and forwards and currency swaps,”  are missing from standard debt statistics. This hidden leverage comes due to accounting conventions on how to track derivative positions and was found based on data from a survey on global currency markets earlier this year.

According to the institution — dubbed the central bank to the world’s central banks — this off-balance sheet dollar debt exceeds the stock of dollar Treasury bills, repo, and commercial paper combined. It also said that a failure to factor in this debt could restrict policymakers’ ability to effectively monitor markets.

BIS officials estimate that non-bank entities outside the US owe as much as $26T in this hidden debt, and non-US banks as much as $39T. Residing outside the US, many of these firms do not have access to a lender of last resort that can provide dollar liquidity.

They also warned that this debt, “may remain out of sight and out of mind — but only until the next time dollar funding liquidity is squeezed.” Officials continued, stressing, “the hidden leverage in pension funds and insurance companies’ portfolios could pose a policy challenge.”

Analysts and credit rating agencies are unable to track these liabilities and it is unclear how many people are aware of the off-balance sheet obligations. In the past, funding scares have been “flash points” of the COVID market meltdown and Great Financial Crisis.

There’s a 50% chance that the next great financial crisis in the US will occur by November 2028, according to Metaculus. In our humble opinion, that sounds a bit like citing “99% of NFL teams win the game when entering the half up 60+.” But we’re not statisticians. 

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