Signs of market froth are rising in both digital and traditional assets. As we show, 10-20% fees on transaction value makes no economic sense, but that is the reality on Ethereum today. This points to expectation of higher asset prices offsetting the punitive fee. Rivian, the recently IPOed electric vehicle maker, reached a $150bn market value this week despite delivering ~ 200 vehicles, which epitomizes the excess in select stocks. Ford and GM, who sell thousands of EVs and millions of regular autos, are each only worth half of Rivian’s value. Peloton shares rising after a dilutive new share issuance this week is another warning sign.
We are closely watching the European lockdowns as they will test our high inflation thesis if energy prices decline permanently. However, data suggests that global oil inventories are tight, and we expect lockdowns of short duration. The Dispatch is unable to comprehend why countries with ~70% vaccination rates are pushing draconian lockdowns. There is greater global push back to lockdowns, and in the US, we see no tolerance for government mandated lockdowns. Our natural comfort is to look through the short-term volatility as the market is familiar with the shutdown/reopen cycle.
The full list of discussion subjects of The Dispatch #38, completed on November 19th, 2021, follows. The Dispatch will be taking a break next week. Happy Thanksgiving to our US readers.
- Ethereum network is unusable! Points to speculative forces
- Rivian market value shows the excess in traditional assets
- European lockdowns and energy prices
- Inflation pivot by the Biden administration
- Fannie & Freddie mortgage limits to jump sharply…supports house prices
- John Deere workers gain substantial wage hikes, including quarterly inflation adjustment
Signs of market froth visible in the Ethereum network
Here are a few screen shots of transaction fees for using Metamask to swap 1,000 USDC (same as US$1,000) into Ethereum (Ether) or Uniswap tokens. Transaction fees on the Ethereum network, called gas fee, are in the hundreds of dollars. While The Dispatch believes in the long-term growth of decentralized finance (the largest use case), but the high fees today point to irrational activity.
Source: Metamask wallet
In the above examples, the gas fee translates to 15-17% cost. Blockchains/crypto are supposed to democratize access to financial services, so it’s appropriate to use a US$1000 (1000 USDC) example. A 15-17% fee to valid a transaction is far from democratizing. Furthermore, participants would only pay such a high fee anticipating rising asset price to offset the transaction cost. That’s a troubling assumption, and a sign of excess.
Metamask is widely used
Metamask is the most widely used Ethereum wallet, and it also support a trading function. As this Delphi Digital chart shows, Metamask is seeing rising usage with revenue rising from the 0.85% commission charged on top of the gas fees. 0.875% is a high commission rate by both Defi and centralized standards.
For all the talk of democratizing finance, humans still run some of these Defi properties for high profit. Uniswap (the largest Decentralized exchange), in contrast, charges a fee as low as 0.01%, making it a genuine democratizing force. The larger issue, though, is the high gas price due to network congestion because of the surge in NFTs and other token transactions.
The high fees illustrate the need for the planned upgrades to the Ethereum network that will increased transaction processing and lower fees. Each day those upgrades are delayed allows alternative layer-1 protocols like Solana, Polkadot and others to gain market share. This Cointelegraph article looks at the far more efficient decentralized exchanges being built on non-Ethereum blockchains.
The key point of the story is that high fees today make the Ethereum network unsuitable for prime use-cases like crypto trading. Nevertheless, high network usage, which is the cause of high fees, suggests that asset returns have offset those fees. The past 12 months have provided high returns via NFTs, token issuance and price action. It’s a worrying sign when one of the core functions of a network becomes uneconomic, yet activity remains high.
Rivian market value and Peloton share sale are red flags
Rivian is the Amazon-backed electric vehicle (EV) start-up that publicly listed last week at a $70bn market value. It then doubled and became more valuable than all other traditional auto manufacturers except Toyota. The tweet sums up our sentiment.
A friend of The Dispatch recently placed an order for a Rivian truck and says delivery is two years out. This confirms that production will not ramp rapidly, which makes the valuations even more startling. The market for ~$70K base price electric truck/SUV with a two-year wait is limited.
The second worrying data point was Peloton (the exercise bike maker) issuing new shares that diluted existing shareholders. Typically, shares drop because of the dilutive impact. Instead, the stock rallied 12% after the new share issue as this WSJ story explains in more detail. Share issuance by loss making companies are a red flag to watch. These new shares will absorb capital that would otherwise be invested in existing shares. Loss making companies like Peloton need to tap either debt or stock markets to raise cash because there is no operating cashflow.
European lockdowns and energy prices
The Dispatch’s strong-energy view is being challenged by European lockdowns. However, the most recent global inventory datapoint supports the tighter balance theory, but that’s backward-looking metric.
Source: Kayrros via Twitter
Most European countries’ populations are ~70% fully vaccinated. 67.5% of adult Germans and 64.1% of adult Austrians are fully vaxed. The US total population in contrast is ~ 59% fully vaccinated.
Covid lock down cycles are well understood
The energy price pullback is likely be short-lived as economies re-open in a few months. The Covid surge cycle is well understood now, and there’s waning tolerance for these lockdowns. Economies going back to pre-pandemic activity remains the long-term trend, and lockdowns are a speed bump. We remain comfortable that energy demand will head to new highs and supply will not be able to meet that demand in the coming years.
Furthermore, lockdowns could extend inflationary pressure, especially if China goes into lockdown post the Olympics. Governments and Central Banks will use the current wave to justify easier monetary policy for longer, which increases the risk of policy errors. We are already seeing evidence of the inflationary loop (see US mortgage story below).
The Dispatch’s natural comfort is to invest in the long-term trends and not to trade this temporary government induced pullback in demand.
Inflation at the top of the Biden Administration agenda now
The President started his speech at the GM EV factory this week talking about inflation. This, as we expected, is a quick pivot following the Democratic election defeat in Virginia and near defeat in New Jersey.
Source: Whitehouse.gov (highlights by The Dispatch)
As this administration pivots, the increasingly politicized Federal Reserve will start to react to the changing vibe from the government. Even before the government’s changing priorities had time to filter down, we are seeing changing views from Fed Governors. Just today (Nov 19th) Fed Governor Christopher Waller signaled that the Fed should accelerate taper. With 10-yr treasury yields back at ~ 1.54%, we don’t believe a less accommodative monetary policy is priced in.
Fannie and Freddie mortgage limits to jump sharply
In the US, mortgages backed by quasi government entities Fannie Mae and Freddie Mac get a lower interest rate and are easier to obtain.
As this WSJ article explains, the size of mortgages that conform to the Fannie and Freddie backing will increase from $548,250 to closer to $650,000. In high-cost areas, the limit will increase from $822,375 to nearly $1m. The max loan limits are updated annually based on a formula using house price. We know house prices have surged since Covid and here’s the inflationary loop: house prices rise, increase the size of Fannie/Freddie backed mortgage, a larger group consumers get cheaper financing to bid on homes, driving prices higher. At the margin, this event should support further price gains, all else equal.
John Deere settles wage battle with workers
The agreement gives Deere workers get an immediate 10% salary increase, quarterly cost of living adjustments, additional 5% pay increase in 2023 & 2025 and a restart bonus of $8,500. The WSJ has more details of the agreement and the backdrop. Quarterly inflation adjustments and incremental pay raises are not what the average American worker is used to.
Source: St Louis Fed
In the six years to January 2020 (the Deere contract is for six years), average hourly earnings rose a cumulative 17.5%. For workers at Deere, the 10% increase and 5% inflation adjustment alone could provide a ~ 15% wage hike in a single year. It’ll be interesting to watch if other union group negotiate aggressively for higher compensation.
Stay safe, enjoy the last days of autumn and do reach out if you have any questions or comments about the material in this Dispatch.
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