Wall Street Fears the Fed Could Cause ‘Some Damage’

The markets can’t figure out Powell

Global markets are showing red on Thursday as investors grow concerned about just how far central banks will push up interest rates to tame inflation. The Bank of England on Thursday raised its prime lending rate by 0.5 percentage points, and the European Central Bank is expected to follow suit with a similar increase.

The market volatility was on full display on Wednesday in the U.S. Stocks jumped at the open as investors anticipated that Jay Powell, the Fed chair, would signal that the central bank would soon pull back on its policy of aggressive rate increases. But he did the opposite, and stocks slumped.

In his afternoon news conference, Mr. Powell said emphatically that “we have more to do” to bring inflation down to the Fed’s target rate of 2 percent. The Fed now forecasts it will raise its policy interest rate to 5.1 percent by the end of 2023. (It’s currently set to a range between 4.25 to 4.5 percent.)

Many on Wall Street still think the Fed won’t go that far. “This aggressive hiking cycle is going to cause some damage,” Tom Porcelli, chief U.S. economist at RBC Capital Markets, wrote in an investor note on Wednesday evening. (RBC thinks the Fed will cut rates twice next year.) Meanwhile, Bill Ackman, the widely followed hedge fund billionaire, tweeted Wednesday that the Fed’s 2 percent inflation target “is no longer credible.”

Porcelli believes the Fed’s current plan risks pushing the world’s biggest economy into recession. Powell’s response on Wednesday to the recession question: “It’s not knowable.”

But Porcelli thinks Powell is “watering down the recession risk” and playing up the inflation risk, perhaps to justify the hawkish rhetoric on rate increases.

Asia also slumped on Thursday. Stocks in Hong Kong fell 1.6 percent after Beijing disclosed that industrial output and retail sales for November came in below analyst expectations, as the costs of the country’s (now largely eased) zero-Covid policy have become clearer. Researchers in Hong Kong say China could see nearly 1 million Covid deaths as it changes policy on fighting the virus.

HERE’S WHAT’S HAPPENING

Goldman Sachs is reportedly cutting banker bonuses by at least 40 percent. The firm is considering the sharpest drop in payouts since the financial crisis. Some executives are worried that such steep cuts, which would be deeper than those of its rivals, could lead to a swell of banker departures.

Influencers are charged with running a $100 million “pump-and-dump” scheme. Eight men who collectively were known as FinTwit were sued by the S.E.C., which accused them of touting penny stocks to their social-media followers — only to sell them without warning as the shares’ prices rose.

Vanguard is excused from a Texas hearing on E.S.G. investing. The asset manager will escape what’s likely to be a grilling by Texas lawmakers after it quit a global business alliance focused on climate change. Other firms, including BlackRock and State Street, are still slated to testify about their approach to investing in fossil-fuel companies.

Long Covid has contributed to over 3,500 deaths in the U.S. The finding by C.D.C. researchers is the first official tally of the condition’s toll. Long Covid comprises various ailments whose causes still aren’t known. The C.D.C. warned that it may still be undercounting deaths attributable to long Covid, since it’s hard to identify.

The S.E.C.’s market makeover

Nearly two years after a meme-stock frenzy blasted a hole in many investors’ trading portfolios, the S.E.C. wants to introduce the biggest changes in over a decade to how the stock market operates.

Atop its list would be changing “payment for order flow.” Brokerages like Robinhood, Schwab and Ameritrade, which were at the center of the meme-stock mayhem, credit the practice — which involves selling customer trades in bulk to a market maker like Citadel or Virtu —with making their commission-free trading business model possible, and bringing a new generation of Americans into day trading.

Retail traders have long been suspicious of whether P.F.O.F. gives them a good price for their trade, however. Gary Gensler, the S.E.C. chair, seems to be in their corner. “Zero commission doesn’t mean zero cost,” he has said.

Mr. Gensler had threatened to ban P.F.O.F., which would have been detrimental to the likes of Robinhood. In recent quarters the popular stock-trading app has earned more than half its revenue from the practice, which generated billions for such brokerages during the bull market years. Under the proposal unveiled Wednesday, most retailer investors’ trades would be funneled into a kind of auction where customers could get more visibility into how the trade execution price was set.

The hope is that the added transparency would bring more competition, and better prices for the trading public, with the S.E.C. estimating that the plan could improve prices for investors by $1.5 billion a year.

The auction model is just one of four new S.E.C. proposals on the table. “With so many moving parts, it is difficult to determine the net effect, and I worry we might not realize the unintended consequences until it’s too late,” Brett Redfearn, former director of the Division of Trading and Markets at the S.E.C., told DealBook.

Brokers and market makers plan to push back. The changes may “hurt millions of retail investors,” said Lucas Moskowitz, head of government affairs at Robinhood Markets. He accused the S.E.C. of “playing politics with individual Americans’ ability to improve their financial lives.” If the rules are approved, legal challenges appear likely. In the interim, opponents are coordinating their efforts during the 60-day public comment period.

A top FTX executive blew the whistle

As Sam Bankman-Fried sits behind bars in a Bahamian jail, how the 30-year-old one-time crypto mogul ended up there is becoming a bit clearer. Among the latest revelations: One of his former lieutenants at his crypto exchange, FTX, cooperated with authorities in the run-up to his empire’s collapse.

Ryan Salame, the co-C.E.O. of FTX, told Bahamian regulators on Nov. 9 that Bankman-Fried had likely transferred customer money to Alameda Research, the company’s trading affiliate. Salame’s allegation spurred the authorities into action, and they soon appointed liquidators for FTX.

That disclosure, in a court filing in the Bahamas, is the first documented sign that an ally of Bankman-Fried — or S.B.F., as he’s known — has turned on him. But the fact that S.B.F. is the only FTX or Alameda executive facing charges so far suggests that other former executives may also be cooperating with law enforcement, perhaps including his close ally Caroline Ellison, who led Alameda.

In other crypto news:

• A Github account created by a senior FTX executive appears to have housed code that helped mask huge debts at Alameda, according to Bloomberg.

• S.B.F. is no longer listed on the website of the Giving Pledge, a group of billionaires who have committed to giving away most of their fortunes to charity.

• A hearing on crypto held by the Senate Banking Committee Wednesday shows how lawmakers remain split on how to regulate the industry.

“2023 will be a year of growth; it’s just that not all growth is up and to the right.”

— Aryeh Bourkoff,the C.E.O. of the merchant bank LionTree, forecasting in an annual letter to investors that he sees continued uncertainty in the year ahead — not all of it bad.

Elon Musk goes back to the Tesla well

If Tesla shareholders were already worried that Elon Musk is too distracted by his work at Twitter, they now have more reason to be upset: Mr. Musk disclosed Wednesday that he had sold another $3.6 billion worth of Tesla stock, possibly to prop up his embattled social network.

Mr. Musk has now sold $23 billion worth of Tesla stock this year, much of it after he pledged in April to stop selling shares to finance his Twitter deal. Musk hinted at what he was up to on Tuesday, tweeting, “Beware of debt in turbulent macroeconomic conditions, especially when Fed keeps raising rates.” That suggests he either plans to buy back some of Twitter’s billions in debt — including the $13 billion it took on as part of his takeover — or, perhaps less likely, buy back some of the company’s equity.

None of this will reassure Tesla shareholders who are fretting over the 61 percent drop in the carmaker’s stock price this year — and a C.E.O. who has admitted to spending nearly all of his time at Twitter nowadays. Leo KoGuan, one of Tesla’s biggest individual investors, tweeted Wednesday, “Tesla needs and deserves to have working full-time C.E.O.”

Meanwhile, Mr. Musk has been busy suspending more accounts at Twitter. Most notable among them was @ElonJet, the brainchild of Jack Sweeney, a 20-year-old college student who drew on public data to track Musk’s private jet.

The move marks a shift in Mr. Musk’s approach to Sweeney, after the billionaire — a self-proclaimed free speech absolutist — initially pledged not to suspend the @ElonJets account. (On Wednesday, Musk said he would take “legal action” against Sweeney.) As The Times notes, Twitter justified suspending the accounts based on a change in its rules that appears to have been implemented only within the last 24 hours.

A new poll suggests some C.E.O.s remain wary of what Mr. Musk is doing at Twitter. At the invitation-only Yale C.E.O. Summit held this week, attendees were asked to weigh in on top business topics. Here’s where those leaders came down on some of them:

• 56 percent of respondents said companies should stop advertising on Twitter (though a majority later said their own companies hadn’t).

• 69 percent said they believed Twitter’s best days were behind it, while 79 percent said Musk had become a detriment to the value of his companies.

THE SPEED READ

Deals

• AIG’s financial products division, whose disastrous bets on mortgages nearly capsized the insurer during the 2008 financial crisis, has filed for bankruptcy. (WSJ)

• HSBC will stop financing new oil and gas fields, a major step up in its climate goals. (BBC)

• Warner Bros. Discovery raised its forecast for restructuring costs to as much as $5.3 billion by 2024, up $1 billion from October. (WSJ)

Policy

• A former Twitter employee was sentenced to 42 months in prison for spying on behalf of Saudi Arabia. (WSJ)

• The European Commission plans to relax rules around state aid early next year, as the E.U. seeks to compete with President Biden’s climate stimulus plans. (FT)

• A tech trade group sued California over its new children’s online safety law. (NYT)

Best of the rest

• The Washington Post plans to cut jobs next year. (NYT)

• A lawsuit filed in Kenya accused Meta, Facebook’s parent company, of inciting violence and amplifying hate speech in Africa and asked for $2 billion in restitution. (Bloomberg)

• Google executives defended their conservative approach to A.I. chatbots in the wake of ChatGPT’s success, citing reputational risk. (CNBC)

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