Good morning everyone! I hope you’re having a fantastic week.
Quote of the Week:
“For every force, there is an equal and opposite force.“
The Week’s Developments & Thoughts:
Part 1 On Inflation.
1.1 Where are we? And how did we get here?
There has been a 8.6% rise in US CPI this past year, inflation has hit a four decade record and is expected to continue in that trajectory.
Supply and demand issues are the leading cause of inflation. The rally in commodities continues through the raw materials shortage and Europe’s retreat from Russian energy. Crude oil prices have readjusted, but wheat prices are still increasing. There has also been increased pressure on the service sector as a post-pandemic shift in priorities moved spending from things to experiences.
Biden’s $1.9 trillion stimulus package is also a possible fiscal policy contributor. Janet Yellen has tried to override fears that it has played a part, but I mean, that’s obviously a bit of a lie. Of course it has a role to play. It is an injection of extra cash into the economy. I think the right response is just to say inflation is not necessarily all a bad thing, instead of deflecting responsibility?
Trade barriers such as tariffs on Chinese goods is a third factor. Starbucks CEO Howard Schultz believes they should be lifted, noting that, today, inflation is increasingly influenced by global factors.
A final input, courtesy of the Democrats, is corporate greed. With some oversimplification, they suggest the hunger for unusually large profits was externalised through excessive price increases. It’s called the market mechanism. Google it.
1.2 What’s being done about it?
The Fed increased rates by 75 bps, the most dramatic since 1944, with another increase expected in July. They are hoping this will slow demand and reduce wages & price growth.
Yes. And to use product development speak, that is the output, but what is the outcome you’re looking for? How will this tangibly impact American lives?
Better question:
1.3 Is it broke in the first place?
Opinion polls indicate that consumer sentiment has plunged to the lowest on record. Okay, but what the fuck does that even mean? I doubt half the people answering those polls even understand what inflation is, but just know they are supposed associate it negatively…
Public confidence in the BOE is apparently at an all-time low? Apparently our beloved polls indicate that for the first time on record, more Britons were dissatisfied than satisfied with their performance controlling prices.
Okay, but I have a suggestion about a follow-up question asking the poll respondents what the BOE does to control prices in the first place…
In reality, I don’t really think any inflation panic is called for. Yes, it is happening, but it’s another one of those things that are mindlessly tied to a negative connotation.
The labour market is the strongest it has ever been in the entire post-war period. Unemployment is close to its all-time low. Like employment is so healthy that, in the UK, the majority of 50-69-year-olds who left the workforce during the pandemic chose to retire and many others are willingly leaving. There are a million unfilled jobs —employers are advertising more jobs than there are people looking.
BoA’s CFO admitted clients are spending “pretty robustly,” and sitting on more money than they had before the pandemic.
Yes, adjusted for prices, average earnings were 3.4% lower in April than a year earlier and spending power of UK households fell the most in at least 21 years. But even those who have needed to cut back, who’s looking at which type of goods they’ve cut back on? I bet you it’s luxury goods.
I don’t think you can call one less Rolex or Maserati a “fall in living standards“…
I think we’ve reached a point in human history where, at least in the US and UK, basic needs are easily met. Most inflation fluctuations do not really have a meaningful human impact. This isn’t the 1930s guys, chill out.
Obviously rate hikes seem rational. But I just wish people weren’t so dramatic about it. Genuine question: What are the meaningful benefits of lowering inflation nowadays? Or are all financial problems in the developed world meant to be trivial now?
The only real immediate negative impact of inflation has been its secondary consequences, such as dips in the stock market. Speaking of which…
Part 2 On Investing.
2.1 Who can lose the most?
The overall crypto market dipped $3 trillion since November, now down at $925bn. The 7 biggest crypto billionaires saw $114 billion wiped from their net worth since last November. Fortunes, on paper (or should I say, on blockchain), racked up from crypto are rapidly vanishing.
Accelerated losses and selling in spot markets are expected if key levels—$20K Bitcoin & $1K Ether—are broken. Crypto investors still risk losing more to crypto hacks, heists and scams.
Worse off than investors are their lenders, who hedged on their repayments.
2.2 Is Celsius over the Denial Phase?
The CEO tweeted: “Do you even know one person who has a problem withdrawing from Celsius?” Then, in a dramatic turn of events, Celsius moved exactly to freeze withdrawals, swaps and transfers—the very next day.
It seems all they did was be defensive; then, confirmed speculations about financial issues. And made themselves look like a fool. I guess it’s hard not to entertain rumours that hit so close to home :/
Some of Celsius’ problems included inability to earn a return above the yield promised to clients, injecting $470mn into an investment that nosedived, and needing to sell their staked Ether holdings at a significant loss if clients withdrew Ether deposits en masse.
They’ve just gotten restructuring lawyers onboard. Yenno what? This is really an improvement. At least they are admitting their problems now.
2.3 Loan Sharks, but Crypto?
In their typical “too late to be helpful“ fashion, the SEC is now warning about crypto lending platforms.
I mean, the whole reason loan sharks are illegal is that people who go to them are at such levels of desperation that they cannot be trusted with autonomy to be on the receiving end of a loan agreement.
The same mechanics apply to crypto lending platforms.
Have you ever met religiously active crypto traders? These people all have serious emotional and impulse control issues. I don’t think Gary Gensler saying “I caution the public“ is going to make a difference bro.
2.4 Who decides legality? And when?
There’s been a class action lawsuit filed in California federal court surrounding the $40 billion Terra/Luna crypto crash in May. Terra is meant to maintain a 1:1 peg to the USD, but fell to 11 cents.
Complaints are aimed at Binance.US, which touted UST as “safe.” The accusations claim that the company listed an unregistered securities offering and failed to register with the SEC.
I don’t know if trying to register with the SEC would have made a difference? Like I doubt the SEC would have known with what criteria to vet the securities. And not wanting to get blamed for doing it wrong, would have just put off examining the matter. So much so that Binance.US would have had no choice but to either release the offering without approval, or never release it at all.
Also, I guess you can sell things illegally as long as you don’t make your customers mad. Or maybe vice versa, if you make your customers mad, the things you sell will be considered illegal.
2.5 Banks or Blockchain? Who’s really your friend?
Banks have more regulation, i.e. liquidity requirements, to protect consumers than crypto does. But rather than being an indication that they are an inherently better solution; it only alludes to the length of time they’ve been around, enduring decades of regulatory legislation.
If used as an immediate alternative to overcome deficiencies of the banking system, it is a mistake to think crypto is the solution. However, I do think there is a fair long-term justification for placing trust in crypto in order to add momentum in a new direction.
I’m not sure if that is the argument most people are making though.
2.6 A final note from Matt Levine:
“We do seem to be in a world where crypto is deeply interconnected with itself, where bad stuff happening in one pocket of crypto can have unpredictable consequences in other parts of the system. That is not exactly a good thing, but it is an interesting thing, and it is in itself a sign of maturity. Crypto is big and valuable enough now to have banking crises.“
I am convinced that Matt is the only person in the world who metathinks as much as I do.
Anyways, that’s it for this week! It was so much fun spending time with you.
With love,
Angeline
Resources:
“Buckle up.“ The Bloomberg Close, Europe Edition, Bloomberg, June 15, 2022.
“Decision day.“ The Bloomberg Open, Europe Edition, Bloomberg, June 15, 2022.
“Do the maths.“ The Bloomberg Open, Europe Edition, Bloomberg, June 16, 2022.
“Falling behind.“ The Bloomberg Close, Europe Edition, Bloomberg, June 14, 2022.
“Hikes galore.“ The Bloomberg Close, Europe Edition, Bloomberg, June 16, 2022.
“Lehman redux?“ The Bloomberg Open, Europe Edition, Bloomberg, June 14, 2022.
“‘Pretty outrageous things‘.“ The Bloomberg Open, Europe Edition, Bloomberg, June 17, 2022.
“Shrinking together.“ The Bloomberg Close, Europe Edition, Bloomberg, June 13, 2022.
“Sinking feeling.“ The Bloomberg Open, Europe Edition, Bloomberg, June 13, 2022.
“What peak?” The Bloomberg Close, Europe Edition, Bloomberg, June 10, 2022.
Erb, Jordan Parker. “Tech: The new walking dead? Venture funds.“ Tech Newsletter, Business Insider, June 13, 2022.
Feur, Will. “Tesla Raises Prices Amid Surging Costs.“ Autos Industry, Autos & Transportation, Business, The Wall Street Journal, June 16, 2022.
Laurent, Lionel. “When Crypto’s Own Hedge Fund Geniuses Failed.“ Bloomberg Opinion, Bloomberg UK, Bloomberg, June 15, 2022.
Levine, Matt. “Crypto Debt Can Be Trouble.“ Money Stuff, Bloomberg Opinion, Bloomberg, June 15, 2022.
Levine, Matt. “Merger Buyer’s Remorse Sometimes Works.“ Money Stuff, Bloomberg Opinion, Bloomberg, June 13, 2022.
Levine, Matt. “Private Markets Will Pump the Oil.“ Money Stuff, Bloomberg Opinion, Bloomberg, June 16, 2022.
Levine, Matt. “Redbox Is Fun to Meme.” Money Stuff, Bloomberg Opinion, Bloomberg, June 10, 2022.
Levine, Matt. “Schwab’s Robo-Adviser Hid Some Fees.“ Money Stuff, Bloomberg Opinion, Bloomberg, June 14, 2022.
Nayak, Malathi. “Musk Hit With Tesla Investor Suit Over ‘Toxic’ Work Culture.“ Business, Bloomberg UK, Bloomberg, June 17, 2022.
Ossinger, Joanna & Akhtar, Tanzeel. “Bitcoin’s Unrelenting Selloff Puts Prices on Verge of $20,000.“ Technology, Bloomberg UK, Bloomberg, June 15, 2022.
Sorkin, Andrew Ross. “How much can the Fed do?“ DealBook, The New York Times, June 15, 2022.
Sorkin, Andrew Ross. “No relief in sight for prices.” DealBook, The New York Times, June 10, 2022.
Sorkin, Andrew Ross. “Office hours with Musk.“ DealBook, The New York Times, June 16, 2022.
Sorkin, Andrew Ross. “Preet Bharara’s new gig.“ DealBook, The New York Times, June 13, 2022.
Sorkin, Andrew Ross. “The currency of trust.” DealBook, The New York Times, June 11, 2022.
Sorkin, Andrew Ross. “When bears attack.“ DealBook, The New York times, June 14, 2022.
Zuckerman, Greogry & Huang, Vicky Ge & Singh, Hardika. “Celsius Is Crashing, and Crypto Investors Are Spooked.“ Finance, Markets, The Wall Street Journal, June 16, 2022.