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🤔 SEC-ond guessing
The agency must explain itself once again
Here’s what you’ll find in today’s edition:
A court has ruled an SEC order “insufficiently reasoned,” giving Coinbase a partial win.
This Forward Guidance podcast guest predicted a gradual tariff policy from Trump months ago.
A decent PPI report was enough to move markets a little, but stocks pared gains before lunchtime.
'Arbitrary and capricious’ strikes again
A federal appeals court took on elements of the SEC v. Coinbase legal battle yesterday, but we’ll need a bit more time to determine the decision’s exact impact.
The SEC sued Coinbase in June 2023 for alleged securities violations. It later denied the crypto exchange’s petition for rulemaking that December. The petition essentially argued that the SEC’s strategy of using existing securities laws to enforce crypto regulation is “unworkable.”
The agency’s response was a single paragraph, the court pointed out. Basically the SEC said it disagreed, noting it “has discretion to determine the timing and priorities of its regulatory agenda.”
Put simply: Agencies can choose between rulemaking and adjudication, Judge Stephanos Bibas wrote in a court order filed Monday.
“But they must explain their choice, and the SEC failed to do so,” he added.
The court isn’t ordering the SEC to institute rulemaking proceedings, giving the SEC what some might consider a partial win. The filing adds that the SEC has “reasonably explained that the existing securities law framework is not predicated on the assumption that it will never burden any potential new market participants.”
But the court does believe the SEC’s order was “conclusory and insufficiently reasoned, and thus arbitrary and capricious.”
The solution? Bibas has asked the SEC to explain itself, adding: “It should not give yet another poor explanation in an already-long line of them.”
“We’re reviewing the decision and will determine next steps as appropriate,” an SEC spokesperson told me.
Did you catch that “arbitrary and capricious” phrase in paragraph seven? It’s seldom used in everyday life, but you may recognize it from another case dealing with the Administrative Procedure Act (APA).
Grayscale Investments won that case after the court ruled that the SEC’s rejection of the Grayscale proposal to convert its Bitcoin Trust to an ETF (but approving bitcoin futures funds) was, you guessed it, “arbitrary and capricious.” The agency did not properly “explain its different treatment of similar products,” judges argued at the time.
A former communications VP at Coinbase worked the legalese into her blunt reaction to the latest court filing:
If I had "arbitrary and capricious" in my performance reviews as much as the SEC, I would consider a new line of work honestly
— Rachael Horwitz (@RachaelRad)
7:39 PM • Jan 13, 2025
Coinbase: we asked the SEC for new rules and they said no but didn't explain why.
Third Circuit: SEC, we're reading the like 3 sentences you wrote declining to help Coinbase and other crypto companies understand the rules better and are inclined to agree with Coinbase anything… x.com/i/web/status/1…
— Rachael Horwitz (@RachaelRad)
7:42 PM • Jan 13, 2025
The Third Circuit’s thoughts come after Coinbase last week won its motion for an interlocutory appeal on whether crypto assets constitute investment contracts.
Despite the court on Monday not forcing SEC rulemaking at this time, Coinbase execs count the latest opinion as another victory.
Uniswap Labs chief legal officer Katharine Minarik (and ex-deputy general counsel at Coinbase) called it a “hugely deserved result” that forces the SEC “to truly consider it and respond with some substance. As it should.”
Coinbase chief policy officer Faryar Shirzad wrote on X: “It’s not everyday that the courts issue a damning rebuke of a federal agency like [the SEC].” Chief legal officer Paul Grewal applauded Judge Bibas' forceful concurrence, calling it “an impressive piece of work.”
Bibas noted the “caginess” of SEC enforcement against crypto firms without telling them how to comply with the law. He argued such action “creates a serious constitutional problem.”
Sporadically enforcing “ill-fitting rules” against industry entities trying to follow regulations goes beyond fighting fraud, he added.
“It targets a whole industry and risks de facto banning it,” Bibas wrote. “On remand, the SEC must grapple with that problem.”
— Ben Strack
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The bitcoin allocation within a portfolio at which the Sharpe Ratio begins to level off, Grayscale research shows.
In other words, increasing the BTC position beyond 5% is no longer expected to improve risk-adjusted returns.
BlackRock recently called a BTC allocation of 1-2% “reasonable,” and a number of financial advisers and institutions are expected to mull over, and act on, holding the asset in 2025.
Stock futures rose this morning before the open — a move analysts largely attribute to reports that the Trump administration will opt for a gradual approach to tariff increases.
Even though a better-than-expected PPI report on Tuesday helped boost equities early in the session, the S&P 500 and Nasdaq Composite indexes quickly gave back these early gains.
But let’s rewind to the conversation on tariffs. Bloomberg after the close yesterday reported that Trump’s team is considering ramping up tariffs at a slower pace than many initially thought, potentially by 2% to 5% increases per month. Ideally, the strategy would allow for negotiations and prevent rapidly rising prices.
The vision aligns pretty perfectly with what Stephen Miran, Trump’s pick to lead his Council of Economic Advisors, told us on the Forward Guidance podcast a couple months ago.
Back during Trump 1.0 (2018-2019), Miran pointed out, the proposed 25% tariffs on Chinese imports did not come in one fell swoop. The actual ~17% effective rate increase we did implement on China was spread out over 12 months.
“The after-tariff dollar-import price of goods coming from China was practically unchanged,” Miran said on the episode.
On the campaign trail, Trump proposed a minimum 10% to 20% tariff on all imports, and a 60% minimum rate on those coming from China.
“In going to 60% tariffs on China or 10% globally, [a gradual] approach becomes even more important,” Miran wrote in a November 2024 paper on the global trade system.
If history repeats, we could see similar trade policies come down the line — which are likely to ease investor concern and boost equities.
— Casey Wagner
Markets got a pre-CPI treat on Tuesday in the form of a mildly cool PPI reading.
Producer prices in December rose 0.2%, down slightly from analysts’ projection of a 0.4% rise. Core PPI, which excludes food and energy, was in line with expectations and unchanged from November (+0.3%).
The report generally sets the stage well for tomorrow’s more-closely-watched CPI reading, slated to be published at 8:30 am ET. Still, analysts caution investors not to take a cool reading as a sign for future rate cuts.
“We’ve seen a stubbornness in inflation over the last few quarters, causing investors to wonder whether the Fed jumped the gun by cutting rates by 100 basis points in the second half of last year,” eToro US investment analyst Brett Kenwell said. “A strong monthly jobs report and a strong ISM services report didn’t help matters, although they do point to a strong economic foundation.”
As a reminder, analysts are calling for headline CPI to come in at 2.9% annually, an increase from November’s 12-month 2.7% reading. Core CPI is expected to remain unchanged at 3.3% for the 12 months ended December.
Looking ahead to March, today’s PPI did slightly increase odds of a 25bps interest rate cut. Fed funds futures are currently pricing in a 21.6% chance of such a cut, up from 19.4% a day ago.
— Casey Wagner
BTC rebounded Tuesday, retaking the $97,000 mark and settling slightly below that price by 1:30 pm ET — 2.4% higher from 24 hours ago. ETH rose above $3,220 (check out David Canellis’ piece for more).
US spot bitcoin ETFs collectively tallied a third day of net outflows on Monday — roughly $1 billion in assets left those funds during that time. About $350 million worth of assets has exited US spot ether ETFs in the last four trading days.
Benchmark’s Mark Palmer reiterated his buy rating and $650 price target for MicroStrategy on Tuesday. MSTR shares were trading around $343 at 1:30 pm ET Tuesday — up 4.5% on the day.