The Debt Ceiling, DeFi's Horrible Week and An IPO You Have To See To Believe
Welcome to "This Week In The Market" where I break down the week's biggest financial news into easy-to-read pieces. Today, we'll look at the macro-economic story of the week involving the U.S debt ceiling, a possible case against decentralized finance and the Warby Parker IPO. Let's go!
The U.S Is Out of Money
The Headline: U.S Secretary of the Treasury, Janet Yellen, announced Tuesday that the federal government will run out of cash by October 18 unless Congress passes an agreement to raise the debt ceiling. Cue mass panic and a transition to a Mad Max-style society where everyone communicates in grunts and cookware is the seasonal fashion of choice.
The BFD: Congress can't figure their shit out again. After publicly declaring "we have a deal" several months ago regarding the $3.5 trillion infrastructure spending plan, Democrats and Republicans continue their epic battle that could culminate in the U.S running out of cash. Despite the House of Representatives temporarily passing measures to suspend the debt ceiling prior to judgement day, it's unlikely to pass the Senate's 60 vote threshold, as Republicans wave a giant constitutional middle finger to the other side of the aisle. It isn't just Reps v. Dems, however, in the battle for infrastructure supremacy. The Democrats thin majority just got a whole lot thinner thanks to our previously mentioned cult hero Joe Manchin and newcomer Senator Sinema of Arizona, who is a Democrat but identifies as fiscally conservative. She is very uninterested in a $3.5 trillion bill and is similarly uninterested in raising the debt ceiling, leaving Democrats in a bind.
If it does indeed reach October 18 with no resolution, the United States will default on its debt, marking the first time in this country's history where that happens. You might be asking "Well what's the big deal?" Economists...aren't really sure. It seems like the best case scenario is a "mild recession," but will also see the scaling back of government funded programs like Social Security, military paychecks and child care. Others are...not so optimistic. Moody's Analytics warned of "cataclysmic" events for the country, including the loss of up to 6 million jobs and a 30% drop in the stock market (about $15 trillion). U.S debt would also likely receive a downgrade, shaking global faith in the country's ability to pay back its loans.
How Can This Make Me Rich?: Look, we know the media's tendency to say the sky is falling, but this time, it actually good be. This situation could be brutal if the Republicans actually decide to pull out of negotiations. Having said that, the Treasury reports that this has happened 78 times in the past, and each time it's been extended, so the odds are good we pass a resolution. Either way, stay invested. Keep a long-term time horizon. We've learned that time in the market is more important than timing the market.
DeFi's Tough Week
Decentralized finance is often seen as the "holy grail" of what cryptocurrencies are attempting to achieve. By using the blockchain to produce a completely transparent record of transactions, the idea is that a bank or central finance governing body won't get in the way. Currencies like Ethereum and Cardano us what are called "smart contracts" to link buyers and sellers of the token to allow it to function as, well, a currency. But here's the issue: with a bank, if your credit card gets stolen then you can report it, open up a case and get refunded. If there's no bank, what do you do when money goes missing?
That's the question that Compound, one of the largest DeFi exchanges and tokens, is attempting to answer this week as a coding error in its newest release mistakenly distributed over $90 million to various random users. How do they get the money back? It seems like they have two options:
Roll back the chain of transactions, which involves repurchasing 51% of all the Compound in the world and purposefully executing a 51% attack on your own currency, or
Take to Twitter to have the founder go nuclear on everyone's asses, threatening reports to the IRS and the release of private information.
And guess which door founder Robert Leshner picked? Door Number Two Please! That's right: Leshner went scorched-earth like Tom Cruise in Tropic Thunder and is now threatening his own users with intentional leaks of personal information and reporting to the IRS if they don't return 90% of what they were mistakenly awarded (Leshner is allowing them to keep 10% as a "white hat.").
Here's the funniest part: these users will make way more money if they just report themselves to the IRS and pay the income tax, according to CPA Shehan Chandrasekera in a statement to CNBC. And, while reports of users returning the currency have already come rolling in, it's still a story that shakes the foundation of DeFi. Can this work? Will this work? What's the best protocol for a situation like this moving forward?
The Company We Can See Clearly Now
This section is rapidly becoming "IPO Corner," but the volume of high-profile IPO's this year has been remarkable. Well add one more to the pile, because direct-to-consumer darling Warby Parker went public this week at an extraordinary $6 billion valuation. Hilariously enough, all of the people at the opening bell representing the company were wearing glasses.
The company saw a 36% pop on its first trading day, but this is one I don't really trust. It effectively founded the DTC lifestyle business model in the digital age, but others around it adopted something similar, with Casper and Smile Direct Club being the highest profile, that have gone public before Warby. Let's just say that Wall Street doesn't exactly love companies with this business model, so it'll be interesting to see how the company fares over their first couple of quarters.