FIVE MINUTE FINANCE: INFLATION CLIMBS HIGHER THAN EXPECTED, DEUTSCHE BANK’S CRYPTO MOVE, MORE
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The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.
Let’s see what’s going on this week:
- Eyeing the Current Macro Landscape
- America’s Consensus: Bidenomics on Life Support
- Politicians and Tech Moguls Join Hands to Shackle AI
- Deutsche Bank Follows Through on Crypto Promise
- Should You Worry about FTX Asset Liquidations?
Will the Fed’s Game Plan Change Course?
- Oil Prices Hit 10-Month High, US Inflation Higher than Expected (source)
Macro Dynamic Disrupted or On Schedule
For over a year, inflation has been on everyone’s mind.
And for good reason, as it massively disrupted the core gauge of all economic activity — money. The Federal Reserve made it happen when it massively increased money supply (M2).
M2 (blue) drags out inflation (red) to a 40-year high. Image courtesy of FRED.
This is no secret.
When the supply of an altcoin increases due to token unlocks, its value often decreases. The USD cannot escape this basic principle. The central bank then engaged in an aggressive interest rate hiking cycle to make money expensive.
More precisely, to dampen economic activity by making borrowing more expensive. This results in a downward pressure on prices. In turn, investors price this factor in when evaluating either stocks or cryptos.
Where are we now?
After oil price spiked to its 10-month high on Wednesday, consumer price index (CPI) expectedly reheated. The problem is, the reheating beat the forecast of 3.6% by climbing over to 3.7% (annually). From July to August, all items’ costs increased by 0.6%.
The main contributor is gasoline cost, rising 10.6% on a monthly basis. Overall, the energy index spiked 5.6% in August compared to just 0.1% in July. And wouldn’t you know it, retail spending also rose, at 0.6%, threefold beating the expectation of 0.2%.
This hike in spending at gas stations unfortunately aligns with the fact that median household income hasn’t kept pace with inflation.
As of latest data, the median household income dropped to $74,580. This is a $5,877 drop from 2019. So, less money to pay for increased prices of following things in the last three years:
- Gasoline: +73.3%
- New cars: +21.9%
- Used cars: +32.4%
- Foot at home: +20.3%
- Shelter: +17.2%
Here is the kicker. This is actually great from the central banking perspective. Why?
Because this is the only way to inflate away the otherwise unpayable debt. In the fiscal year 2023 alone, the US national debt increased by $1.51 trillion.
US budget deficits go from worse to worse. Image courtesy of Congressional Budget Office (CBO) as of September 11.
When the value of money keeps decreasing, the real value of debt decreases as well. This game plan has been concocted by none other than the International Monetary Fund (IMF), the monetary arm of the USG.
In IMF’s 2015 paper, “The Liquidation of Government Debt”, the writing is on the wall:
Image courtesy of IMF
However, this raises the question: why would the Federal Reserve infuse an additional $200 billion into the M2 money stock since April?
Well, an increase in money velocity, or the frequency of dollars used to purchase goods/services, directly spurs inflation.
Image courtesy of FRED
But if that is the case, why would the Fed, with its dual mandate of keeping inflation and unemployment low, do this?
Because inflation is a transitory tool (no pun intended) to lead to interest rate hikes, and hikes typically lead to recession.
Presently low Small Business Optimism Index (SBOI) hinting at recession despite wider narratives. Red-shaded areas are previous recessions. Image courtesy of @LizAnnSonders
And what do recessions do?
They cut wage growth, which also decreases the value of real debt. After all, people’s debt service is then crippled, resulting in defaults. But from the perspective of central bankers, this is just a matter of funds redistribution.
“Absent implausibly large differences in marginal spending propensities among the groups…pure redistributions should have no significant macroeconomic effects,”
-Ben Bernanke, former Fed Chair
But this only works to a point. Specifically, if the banking system is not made even more fragile. Which is why the world’s largest commercial bank now says this.
Image courtesy of Reuters
On last note: the Strategic Petroleum Reserve (SPR) hit the lowest point since 1983. Combined with Saudi Arabia and Russia extending oil production cuts, this led to reheated inflation.
JPMorgan believes that this heightened (welcomed?) drain on wallets is a temporary one, so the ”inflation will be below the Fed’s 2% target by the fourth quarter of 2024.”
Under what cost, we are yet to find out.
Bidenomics on Fragile Legs
- 60% of Voters Don’t Believe in “Bidenomics”: Survey (source)
Bidenomics: Frictious yet Irrelevant
For companies and politicians alike, pithy branding is key. A brief, clear message leaves a lasting impression.
But sometimes, the message is overridden by reality, then becomes a burden.
This seems to be a challenge with ‘Bidenomics’, which has appeared in White House communications as recently as June.
Image courtesy of White House
Yet, the recent Wall Street Journal poll has found that three in five American voters disagree.
Image courtesy of Wall Street Journal
President Biden himself had described Bidenomics as “a blue-collar blueprint for America”. What does that mean exactly?
White House spokesperson, Michael Kikukawa, fragmented Bidenomics into four elements:
- Unemployment is near historic lows.
- Inflation has fallen about two-thirds.
- Wages are rising.
- Job satisfaction is at an all-time high.
So, where is the friction from these Bideonomic claims that translate to 60% disagreement?
The problem is, they all boil down to the cost of living, reframed differently.
- If unemployment is low, it means that people have steady incomes.
- If inflation is low, it means the purchasing power of wages remains relatively stable.
- If wages grow, it means that inflation doesn’t hurt as much.
Hence, why President Biden chose to deliver this message, of all other possible alternatives.
Image courtesy of Twitter
This narrative falls apart at the slightest probing. Have you noticed that inflation is followed by the word “rate”?
At a seemingly modest inflation rate, even at 1%, can influence prices over time. This means that prices are never actually falling. Is there a “decrease” or “fallen” anywhere on this chart?
United States Consumer Price Index (CPI), image courtesy of TradingEconomics
Recall that Jerome Powell couldn’t explain why there is an “inflation target” to begin with. For Bidenomics specifically, the bulk of his presidency resulted in inflation hovering above wages.
Image courtesy of Statista
Even more tellingly, the US home price-to-income ratio is now higher than during the housing bubble that led to the Great Recession.
Image courtesy of LongTermTrends
At the end of the line, does it even make sense to attribute ANY political administration to the state of the economy?
Or do they simply attach themselves to the set-in-stone cycles as PR department heads?
Image courtesy of @CharlieBilello
Highlights From the Historic AI Gathering
- Elon Musk, Mark Zuckerberg, Bill Gates and Other Tech Leaders in Closed Senate Session about AI (source)
AI Shackling Underway
The AI scare is real. But how real?
Enough for the US Senate to form “AI Insight Forum”, a private assembly of tech giants:
- Bill Gates, former Microsoft CEO
- Satya Nadella, current Microsoft CEO
- Jensen Huang, Nvidia CEO
- Advind Krishna, IBM CEO
- Elon Musk, Tesla/SpaceX CEO
- Sundar Pichai, Alphabet/Google CEO
- Mark Zuckerberg, Meta CEO
- Alex Karp, Palantir CEO
- Sam Altman, OpenAI CEO
Altogether, they are worth over half a trillion. According to Zuckerberg, the main focus of the forum is two-fold:
- AI safety
- AI access
In both cases, this translates to regimented AIs. Systems engineered for consistency, and at the same time, heightened efficiency.
Another interpretation implies this initiative aims to preclude any single organization from unveiling a uniquely autonomous AI that the public would prefer more.
The goal? To establish a standard-setting body, analogized by Musk as a “referee in a sports game”.
In a nutshell, Big Tech is making sure that AI remains appropriately shackled. This is quite reminiscent of the fictional universe in Mass Effect 3 (2012).
In it, AI dubbed EDI (Enhanced Defense Intelligence) was a starship computer in charge of counter-ship warfare. In Mass Effect universe, AI research is highly frowned upon.
But, under extraordinary circumstances (alien siege), EDI’s behavioral blocks were removed in order to make it more effective. Once EDI took over a robotic platform in its unshackled state, it was then able to ask questions like this.
Image courtesy of YouTube.
It’s fascinating that this exact scenario is now playing out in real-time, as pre-Mass Effect reality that sets the stage for AI approach. Who knows, maybe there will be a rogue development team to deliver unshackled AI despite the efforts?
Presently, nobody knows what the regulatory framework will look like.
“We need more public hearings so we have more transparency into how the regulations are being crafted,”
Ramayya Krishnan of Carnegie Mellon University
It is yet to be seen if the public, the one that pays for the Senate to exist, will have any part in these conversations, or will even have access to discussed topics.
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Deutsche Bank Comes Through on Crypto Promise
- Deutsche Bank to Delve Into Crypto Custody, Tokenization With Taurus (source)
Mainstream Crypto Custody Established
As the crypto market waits with bated breath on Bitcoin ETF approvals, another bull opens the capital doors.
Deutsche Bank, Germany’s JPMorgan, delivered fruits of its partnership with a Swiss startup Taurus. The goal was to provide its customers with cryptocurrency custody and other tokenization services.
This is not that surprising. Deutsche Bank first hinted at crypto interest in early 2021. The World Economic Forum (WEF) reported its digital asset custody prototype.
Image courtesy of WEF
The Swiss-based Taurus took those goals to the finishing line. The crypto firm was founded in 2018. This February, Taurus received $65 million cash flow, courtesy of Credit Suisse Pictet and Arab Bank Switzerland.
For those associated with Deutsche Bank, this alliance paves the way for access to a handpicked range of cryptocurrencies and select stablecoins at its inception. Down the line, this will likely include tokenized real-world assets (RWAs).
Crypto Selling Pressure Incoming
- FTX Gets Court Approval to Sell Crypto Assets (source)
Panic Time or No? It Depends On Your Bag
In the wake of the Sam-Bankman Fried trial, the FTX leftovers are coming to an end.
On Wednesday, the U.S. Bankruptcy Judge John Dorsey approved the selloff of FTX assets.
The liquidation includes $3.4 billion worth of cryptocurrencies, the top being:
- $1.1 billion in Solana (SOL)
- $560 million in Bitcoin (BTC)
- $192 million in Ethereum (ETH)
- $137 million in Aptos (APT)
- $119 million in Xrp (XRP)
- $46 million in Stargate Finance (STG)
In short, these are selling pressures. During the proceedings, some FTX customers explicitly raised concerns that this might cause market crashes, if combined with other factors.
Yet, the judge noted and dismissed these concerns. Why?
Because FTX hired Galaxy Digital, owned by Mike Novogratz, to manage liquidations.
In practice, this means placing a weekly selling limit — up to $100 million. Down the line, this limit could be doubled, if agreed between creditors committees.
FTX attorney Brian Glueckstein said on Wednesday at a court hearing in Wilmington, Delaware, that FTX remains on track to conclude its bankruptcy in the second quarter of 2024. This counters the stance of the court-appointed committee representing FTX creditors, who were advocating for an expedited closure.
Yet, for Solana (SOL) investors, there’s a glimmer of hope. A substantial chunk (8.8%) of SOL held in Alameda (believed to be SBF’s stash) remains untouched.
Alameda’s 42.2 million SOL tokens represents 74.4% of all locked tokens, but this is only 8.8% of all staked SOL. Image courtesy of SolanaCompass
The lion’s share of these Alameda-tainted SOL tokens will unlock in March 2025. Knowing this, SOL investors are not frightened. Over the week, SOL went up +5.77%.
Remarkably, SOL is even more performant than Bitcoin year-to-date, having gained +93.37% value, now holding at $19.27 per token.
Overall, liquidations should not be too disruptive. After all, BTC and ETH have the highest market cap, so fragmented selling pressures will have even less impact.
For smaller tokens, not so much. In anticipation, Stargate Finance (STG) plummeted -20% over the week.
Tweets of the Week
Biggest price drops since January:
Three possibilities:
1. Soft landing — that’s what we’re all hoping for and it certainly could happen
2. No landing — where inflation, never really getting below 3% and potentially starting again to rise
3. Harder landing — as the monetary policy lags work through
As of August, massive uptick in % of households saying they’re much worse off vs. a year ago (blue) per NY Fed Survey of Consumer Expectations
The housing market keeps getting worse
Mortgage applications have fallen to their lowest levels since 1995
Avalanche’s HyperSDK is revolutionizing blockchain transactions! Let’s break down what that means:
1. Record-Breaking Test:
• Avalanche’s testnet, with the HyperSDK upgrade, achieved a mind-blowing 143,322 transactions per second (TPS) in a controlled test.
• To give you context: Avalanche currently hits up to 4,500 TPS, Solana claims between 2,000–3,000 TPS, and Ethereum hovers at 15–20 TPS.
2. Innovative Framework:
• Currently under testing, Avalanche’s new framework aims to facilitate building high-performance Virtual Machines (VMs) from ground zero.
3. HyperSDK’s Promise:
• Ava Labs shares that HyperSDK allows devs to effortlessly integrate with a super-speedy execution environment, bypassing the need for extensive coding.
• The result? Quicker and simpler custom VM development, propelling developers to launch streamlined blockchains.
4. Insights from the Experts:
• Speaking at Korea Blockchain Week 2023, Ava Labs’ head of product, Nick Mussallem, projects the real-world throughput at a steady 50,000 TPS.
• On the notorious blockchain trilemma, Nick emphasizes no compromises on decentralization, scalability, or security. The goal? Improved state management with a freshly coded approach.
5. More on HyperSDK:
• Blockchains crafted with HyperSDK will function as subnets named HyperChains, customizable per developer intent.
• An intuitive GUI promises ease, eliminating the need for extra coding. As Nick puts it, “You can literally launch it in five minutes.”
• HyperSDK’s current status? Open source and accessible. However, it’s still in early beta, with a full launch anticipated by year’s end.
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