Wall Street Breakfast: RIP Diem
Facebook’s (FB) grand plan to bring cryptocurrency, or more specifically stablecoins, to the social network’s billions of users has reportedly gone up in smoke. The idea was to have money spent, transferred and paid across its platform just “as easily as sending a text message” and could even bring financial services to many of the world’s underbanked citizens. While the company initially hoped to peg the asset to a basket of currencies, which used distributed ledger technology, it eventually narrowed its focus to one-for-one to the dollar to reduce volatility.
Backdrop: Facebook founded the Libra project, now known as the Diem Association, back in 2019, though the initiative immediately struggled to get off the ground. As regulatory scrutiny picked up across the globe, many founding members pulled out of the endeavor including PayPal (PYPL), eBay (EBAY), Stripe, Visa (V) and Mastercard (MA). Policymakers cited existing privacy concerns about how Facebook handles user information, and they saw the potential for the new scheme to enable crime, money laundering and erode their control over the monetary system.
Last October, Facebook (should we be saying Meta?) finally launched a “small pilot” to test its crypto wallet Novi, but without its planned cryptocurrency called Diem (it used a different stablecoin called the Pax Dollar instead). Criticism from lawmakers immediately erupted, while David Marcus, the founder of Diem, subsequently left the company. The project also attempted to shift its operations from Switzerland to the U.S. – with crypto-focused bank Silvergate Capital becoming the exclusive issuer of Diem – though the Federal Reserve “dealt the effort a final blow.”
Outlook: Meta currently owns about a third of the Diem venture, with the rest retained by venture capital firms and tech players that are members of the association. While discussions are still in the early stages, Bloomberg reports that Diem’s intellectual property might be sold to in order to return capital to its investor members. The association is also looking out for a new employer that could take on the “engineers who developed the technology, and cash out the value left in the project.”
If you thought the press conference of Jay Powell would provide some clarity for the markets… guess again. Stocks initially rallied Wednesday, but ended the day lower, and futures sold off heavily overnight, only to pare much of their losses. Meanwhile, the yield curve shrank to the flattest since 2020 following the FOMC meeting, with two-year Treasuries extending declines today even as 10-year notes rebounded.
Quote: “This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic,” Powell declared. “I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming conditions are appropriate for doing so. I don’t think it’s possible to say exactly how this is going to go, and we’re going to need to be, as I’ve mentioned, nimble about this so that we can respond to the full range of plausible outcomes.”
The hawkish pivot, coupled with uncertainty, comes as red-hot inflation plagues the economy with an annual rate of 7% seen in December. The central bank also approved one final round of asset purchases, bringing an end to its pandemic-era bond-buying in March. There will be additional discussions about reducing the Fed’s nearly $9T balance sheet, which will be “led by the incoming data and evolving outlook.”
What’s in the cards? Following the press conference, futures betting markets showed an 86% chance of a 25 basis point hike for the March FOMC meeting, while 14% predicted a 50 bps increase (a half-point hike hasn’t occurred since May 2000). “Powell said that the Fed’s focus has always been on the underlying economy, and a byproduct of that has been inflated asset prices,” noted Max Gokhman, chief investment officer at AlphaTrAI. “But now that inflation is here and real while labor markets have slack, it’s time to focus on fighting that fire, and if that burns euphoric bulls then so be it.”
Despite earnings smasher in AH trading on Wednesday, Tesla (TSLA) shares drifted lower on supply chain developments that got some investors nervous. Its factories have been running below capacity for several quarters due to low quantities of semiconductors and related parts, and that headwind is expected to persist throughout 2022. “The chip shortage, while better than last year, is still an issue,” CEO Elon Musk said on a conference call with analysts.
By the numbers: The EV maker beat on both the top and bottom lines, reporting a record of $2.3B in quarterly profit (+65% Y/Y). It also showed off a 14.7% operating margin for Q4 in an industry where single-digit margins are regarded as average, while automotive gross margins came in at 30.8%, above the consensus mark of 29.9%. Tesla ended the quarter with a cash position of $17.6B, while total debt – excluding vehicle and energy product financing – fell to $1.4B at the end of 2021.
As far as deliveries guidance, the electric vehicle juggernaut stuck with a multi-year deliveries view for 50% average annual growth. Of note, Tesla expects hardware-related profits to be accompanied with an acceleration of software-related profits this year. Musk also stressed (once again) that “Full Self Driving is not fully appreciated” and would be shocked if the technology is “not safer than a human this year.”
Production updates: Tesla is in the process of finalizing the manufacturing permit from local authorities for the Berlin gigafactory, which will allow it to start delivering German-made vehicles in Europe. After the final certification of Austin-made Model Y, the company also plans to start deliveries to customers from that new gigafactory. Meanwhile, Tesla will not introduce the highly-awaited Cybertruck this year, risking falling behind orders for Ford’s (F) F-150 Lighting, which is poised for delivery in the first half of 2022.
Spotify (NYSE:SPOT) is in the midst of removing Neil Young’s music from its platform after the company refused to take down Joe Rogan’s podcast amid the folk-rock star’s objection to “vaccine misinformation.” That means no more listening to hits like Heart Of Gold, Harvest Moon and – ironically – Rockin’ in the Free World. The controversy touches on the free speech debate and if a public platform should be held responsible for content as a publisher. Similar arguments have also played out on related tech platforms like Twitter (TWTR), Facebook (FB) and YouTube (GOOGL).
The letter: “I sincerely hope that other artists and record companies will move off the Spotify platform and stop supporting Spotify’s deadly misinformation about COVID. They can have Rogan or Young. Not both,” he wrote on his blog. “I am doing this because Spotify is spreading fake information about vaccines – potentially causing death to those who believe the disinformation being spread by them. Please act on this immediately today and keep me informed of the time schedule.” Spotify represents 60% of Young’s streaming music via record label Warner Records (NASDAQ:WMG).
At issue is a recent episode with Dr. Robert Malone, a virologist who worked on early research in mRNA technology. During the discussion on The Joe Rogan Experience, he drew comparisons to the climate surrounding “mandates of an experimental vaccine” to “mass formation psychosis” and “the rise of the Nazi party in Germany” among other claims. Twitter and YouTube have since removed the episode citing misinformation, while Spotify is keeping it, though it did point out that its “detailed content policies” have resulted in the removal of over 20,000 COVID-19-related podcast episodes since the start of the pandemic.
Go deeper: The controversy is a significant test of Spotify’s big bet on podcasting’s most popular voice. The streaming service struck an exclusive licensing deal with Rogan in 2020, worth a reported $100M, that was central to its podcast strategy of attracting listeners and ad dollars to its platform. However, it is not the first time Rogan has gotten in hot water with the medical establishment. He has discouraged vaccination in young people and children, claimed that mRNA vaccines are “gene therapy” and promoted off-label use of Ivermectin to treat COVID-19.