US inflation surge is the big news this week in the media, although The Dispatch is tired of the subject. Last week, we reiterated our high inflation view in Dispatch #36, which was first laid out in Dispatch #23. We continue to see shelter inflation catch-up offset the coming slowdown in transitory items that are modestly weighted in the CPI index. However, politics may throw curveballs. There are already calls for an oil export ban among some Democrats. We do not dismiss such talk but take it as a signal to evaluate energy exposure away from US shores.
In digital assets, a Pew Research survey says that 16% of American adults have used crypto. We see crypto owners becoming a rapidly growing US voter block in 2022. The SEC rejected Van Eck’s spot bitcoin ETF, citing the often used “investor protection” claim. SEC commissioner Caroline Crenshaw penned a lengthy article on Defi and regulation that offers interesting insights on regulatory thinking.
The full list of discussion subjects of The Dispatch #37, completed on November 12th, 2021, follows.
- US inflation surge becomes obvious
- Energy prices in the news – calls for oil export ban!
- Half of fossil fuel assets to be worthless by 2036!
- 16% of Americans have used crypto
- SEC commissioner on Defi and regulation
- SEC rejects bitcoin spot ETF
- China property sector update
- COIN SCHOOL: Bitcoin long-term on-chain indicators
US inflation surge is obvious. Is it transitory?
Almost everyone knows inflation is high, following October’s 6.2% YoY increase. The table below shows what’s hot, but it doesn’t show the relative importance of each item.
Source: BLS.gov. Highlights by The Dispatch
In Fed-speak, flexible prices are up sharply but sticky prices are grinding higher. The chart below clearly illustrates the jump in the flexible category. It’s not quite as obvious that the sticky price index is at a 13-year high. Shelter lies in the sticky category. For more details on these trends visit the Atlanta Fed’s sticky price CPI page.
Source: Bloomberg via Twitter
Expect some volatility in the CPI prints in the coming months as the flexible prices ease while sticky prices grind higher. Price won’t continue up at the current rate, and when we say “inflation will remain high”, that means headline CPI staying above ~5% through 2022. By the middle of next year, we expect shelter inflation-led sticky prices to assert leadership as flexible prices normalize. It’ll be tough to argue transitory when sticky prices are rising, but the Fed has done a remarkable job of extending the transitory narrative.
US inflation Surge partly due to durable good consumption
Flexible prices are up partly due to surging durable goods consumption and government transfers to consumers. The chart below supports the transitory argument, but it misses that durable goods weight in the CPI basket is just not that meaningful.
Source: EPB Research via Twitter
The rising sticky price view hinges on the large weight of shelter inflation index. The table below shows the relative importance of each category. Here are the weights of the “transitory” items commonly discussed: new cars – 3.76% weight; used cars – 2.75% and airfares – 0.63%. In contrast, energy is used in almost every good and service, plus shelter alone is a 33% weight.
In the near term, China just reported a 26-year high Producer Price Index in October. Some of these prices will continue to roll on to our shores in the coming months via imported goods like apparel (2.66% weight) and appliances (0.22%). We’ll end here on inflation. If you need an update on October inflation please read this WSJ report.
High energy prices make the news more frequently
As the CPI report makes clear, energy prices are a key cause of rising prices. That’s leading to a swiftly changing energy narrative. Some of the most vocal anti-fossil fuel senators are now pushing for an oil export ban. Even the WSJ is building a narrative that blames exports for higher prices. In natural gas, LNG exports are planned and known years in advance. Yes, some of this LNG is going to China, but this was already planned.
Wouldn’t that be hilarious? The leader of the free world, the flag bearer of capitalism instituting an export ban. All politics is local, as the saying goes. The US instituted aggressive price controls during the 1970s, including a Pay Board and Price Commission. Consumers today would welcome a solution to lower energy costs and politicians go where votes are available. We should not sniffle at the current headline.
While an export ban seems like an outlier event today, momentum can evolve quickly. The US had a multi-decade ban on oil exports that was lifted six years ago. OPEC, for their part, is claiming lower demand due to high prices. It’s hard to know how much of the claim is to deflect demands to raise production. We remain vigilant and will evaluate options for client portfolios in the coming weeks. A preference for overseas energy securities vs. US domiciled energy companies is one means to ease US regulatory risk.
Half of fossil fuel assets to become worthless by 2036
This headline in The Guardian once again reiterated the institutional pressure against traditional energy companies. The pressure will be most acutely felt by OECD companies, and the consequent dwindling investments are the basis for our bullish energy view.
The Guardian story is based on this article in Nature.com. It’s a dense article that references hundred of other research documents. The Dispatch has highlighted what it sees as the underlying thesis for the bearish fossil fuel view: consuming nations should decarbonize and producer nations should flood the market.
Source: Nature.com
Will consumers decarbonize and producers flood the market?
That is simply not what’s happening in the real world. OPEC just refused Biden’s plea for more oil production. Spiking coal prices in both Europe and Asia suggest that coal demand is rising too.
Yes, high prices usually lead to demand destruction that accelerates renewables expansion. What’s different this time is that there’s unlikely to be the typical supply response to high prices, which extends prices even higher. The Dispatch remains confident that asset prices will first react to higher energy prices before they price a longer-term demand destruction thesis.
Pew Research survey: 16% of adult Americans have used crypto
This provocative data comes from Pew Research survey that received 10,371 nationwide responses out of 11,505 sample. A little over 158 million Americans voted in the last Presidential election and the Census Bureau estimates 258.3m adult Americans. Taking a favorable view, this suggests 16% – 26% of the voting population has used crypto assets. Crypto investors are becoming a powerful new voting bloc, and politicians got a flavor of activism and energy during the Bipartisan Infrastructure Bill debate. We see crypto assets becoming a visible issue in the 2022 mid-term elections. The timing couldn’t be better because the government is pushing Congress to act on digital asset legislation. Together with rising industry lobbying, crypto investors will be able to voice their opinions in November 2022.
SEC commissioner on Defi and Defi regulation
The inaugural issue of the International Journal of Blockchain Law includes an article penned by SEC Commissioner Caroline Crenshaw. The SEC has four Commissioners plus Chairman Gensler. If you are an advanced user of crypto and Defi we highly recommend this approachable article.
Commissioner Crenshaw is a career regulator, and her thoughts cover a wide range of issues. If you are an individual already in Defi or considering Defi, this article is encouraging. The section to the right is bullish as it concedes that crypto assets are part of society today.
However, the part below has us scratching our heads. What’s the source of the “…markets tend towards corruption..” comment?
Source: Global Blockchain Business Council
We presume this is a reference to the use of private money during the 1800s, but can’t be sure.There’s plenty of digital asset fraud today, with much of it in the smallest end of the ecosystem. There has been scant SEC enforcement in that segment.
The Dispatch agrees with Crenshaw’s points around the asymmetry of information and coding skill. The numerous Defi exploits are executed by highly skilled coding expert. There are probably only several thousand of such people globally. The average consumer is always going to be at a disadvantage, which makes the notion “code is law” inapplicable, in our view.
Will the SEC regulate the most egregious parts of Defi/crypto?
We need more regulation in this part of the digital asset ecosystem. The growth today is not average consumers flocking to Defi, it’s in risk-seekers flocking to speculation. Every new project, which lately merely copies an existing blockchain project, turns into a multi-bagger. This is unsustainable and another manifestation of the Fed liquidity spigot.
Let’s see if the SEC goes after the smaller, more egregious frauds instead of focusing on the largest and best managed companies. Thus far the SEC has shown itself to be a political beast, focusing on Coinbase’s lend product without stamping out the 100s of questionable smaller projects.
SEC rejects Van Eck bitcoin ETF
The Dispatch is not surprised by this decision. Here are the 51 pages from the SEC that explains the decision.
Bloomberg’s ETF analyst, Eric Balchunas, to adds more color: technical legality trumps basic logic and reasoning. This Blockworks article also has more thoughts.
China Property downturn update
Staying on top of the China property and Evergrande event because it could have a global impact. The view here remains that Xi and China will have to ease monetary conditions in order to stem economic weakness caused by softer real estate activity.
There is still notable stress in the market as laid out in this WSJ article. For Evergrande, the most likely outcome is a controlled takedown as articulated by this WSJ story.
COIN SCHOOL – Favorable long-term bitcoin on-chain metric trends
These are a few of the indicators closely followed by the Dispatch
Let’s start off with the obvious…this is not investment advice.
Low percentage of young bitcoins (<3 months old)
Each of the prior long-term tops saw a notable increase in the percentage of young coins. That’s not the case today
Net flows of bitcoin into exchange is low
This metric is deemed valuable because owners need to transfer their bitcoin into exchanges to trade. This is only a factor for those who move their tokens out of an exchange.
Structural decline in bitcoin on exchanges
The bullish case is that larger owners and institutions take their coins out of exchanges for safer storage. Individuals into hardware wallets and institutions into cold storage segregated wallets at centralized custodians.
There’s an art to this chart as the exchanges are constantly moving and reorganizing their wallet structure. We rely on blockchain analytics firms like Glassnode to manual tag exchange wallets, vs. non exchange wallets.
Some custodians also allow trading from cold storage custody, which could make both the net transfer and exchange balances less reliable. Sophisticated investors employ centralized cold storage solutions. It’s not a retail offering. We can probably agree that sophisticated = more financialized, which is also likely to increase correlation.
Source: All the charts in Coin School from Glassnode
Stay safe, enjoy fall and do reach out if you have any questions or comments about the material in this Dispatch.
Asi
Important Disclosures
| This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results. |