The Breakdown - If Prices Keep Going Up, We Might Have to Start Calling It Inflation

Episode Date: May 11, 2021

Today on the Brief: Elon Musk saves an SNL flop with a dogecoin satellite  Growing interest in Ethereum  UBS explores offering crypto to wealthy clients Our main discussion:The Wall Street Journal and Bloomberg are both running headlines about increasing consumer prices. For now, most pieces like these remain a healthy combination of spot data (in other words specific companies raising prices) and anecdotes versus aggregate data. That isn’t stopping a new inflation narrative from forming, however. Listen to find out what it means. -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

One thing that seems for sure is that the dynamics are all coming together. Higher wage growth, higher prices, and continued issues with commodities and supply chains that all combined can foment exactly the type of inflationary cycle that has been pushing big institutions to Bitcoin. What's more, market actors are validating this point of view. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. The breakdown is sponsored by nexor.io and BitStamp and produced and distributed by CoinDest. What's going on, guys? It is Monday, May 10th, and today we are talking inflation.

First up, however, let's do the brief. First on the brief today, how did it go with Elon Musk on SNL? Well, basically, Doge started almost immediately tanking when everything on the show wasn't about it. Elon did mention Doge, but the most extended bit about it was during the weekend update segment, which is pretty deep into the show. Also on that segment, he called it a hustle. You could see the internet's betrayal written all over their faces, aka their tweets, and the price of Doge fell something like 30% while he was actually on it. People felt sad, they felt betrayed, and they realized that Saturday Night Live is truly an unfunny show. But then there was, of course, a new twist in the story.

On Sunday, Elon tweeted, SpaceX launching satellite Doge 1 to the moon next year. Mission paid for in Doge, first crypto in space, first meme in space, to the moon. Basically, a Canadian-based company is paying entirely in Dogecoin to hitch a ride on board a SpaceX satellite. With that news, Doge has started to regain some of what it lost, so who knows? Can it still make a run at $1? Or will other totally random bull market things compete for its attention? It's anyone's guess. Next up on the brief today, more stats coming out of Ethereum showing strong growth in the network.

The number of active addresses rose to 7.94 million. The previous high was 7.1,4 million on January 16, 2018. This is a number that has grown year-to-date by 86%. What's more, Google's search volume is significantly higher than the last bull market. Google's search volume uses a 100-point scale with the highest volume being at 100, and those previous years right now are below 50 compared to where things are at the moment. Frank Shapiro from the Block and others are also reporting that over-the-counter trading desks are saying that more interest is coming from corporate treasuries and other types of

institutional investors. Now, this is the trend that I'm most interested in, if and how the macro intersects with Ethereum, and even more for what reason? Speaking of the macro third and finally on the brief, Swiss Banking Giant UBS is exploring ways to offer crypto to their wealthy clients. This is according to a Bloomberg report. Now, we don't have a lot of details. It would involve third-party vehicles. It would be capped at a small portion of wealth, which, by the way, it's hilarious to me that these banks think they can or should set limits on what wealthy clients can do. In any case, it reminds me of my conversation

last week with Nidig's Robbie Gutman. Effectively, he said that Nidig had been focused on helping bring new people into the Bitcoin fold, but had been using very different intermediaries to reach different groups. The intermediary they were pursuing to reach everyday regular people we learned last week was banking software providers like FIS, who they're enabling to help some 300 million U.S. bank accounts access Bitcoin buy, sell, and hold services. The intermediary they're going after to reach the rich are these types of wealth managers. And we're quickly getting to the point where it's not will they offer Bitcoin to their wealthy clients, but in what way and how fast? Looking for the best way to unlock your crypto's liquidity, nexo.io is exactly what you need.

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speedy APIs, BitStamp gives you all the tools you need to reach your crypto goals. Visit bitstamp.net to learn more. BitStamp for all the ways we crypto. With that, let's shift to our main discussion. Anyways, the quintessential macro debate of our time is around inflation. On one side are those who point to asset price inflation, commodity price inflation, and increasingly anecdotes about rising consumer prices. On the other are those who point to what happened or more accurately what didn't happen in the wake of the great financial crisis and or who agree with the Fed that any inflation we see currently is transitory. The question of inflation matters in part because it effectively sets the boundaries of monetary policy. If the U.S. can sustain aggressive monetary money,

monetary policy and continued expansion of the money supply without inflation showing up in consumer prices, it is a variety of policy implications, most notably the affirmation of the modern monetary theory school of thought that says we have a lot more capacity to run deficits in the currency we print. Of course, the question also matters because it has significant impact on the lives of people, particularly those who live paycheck to paycheck and or whose wealth is saved in dollars. Now, there are a few different dimensions to the inflation conversation right now. there is obviously the conversation about asset prices, short-handed for many as the everything bubble. One of the standard rejoinders to people who say that there was no inflation in the wake of the great

financial crisis is to point to asset prices over the last decade or so. There is another dimension of the inflation conversation, which is increasingly in view as well, though, which is commodity prices. You can't turn around without hitting a story about commodity price increases right now. Today in the Wall Street Journal, it's corn, quote, the latest commodity to soar. prices of corn have risen 50% in 2021. A bushel costs more than twice what it did a year ago. You've also probably seen memes about lumber. Prices are about 4x normal right now. Copper hit new record prices last week. Crude oil is the most expensive it's been since 2018. Soybeans are at their highest price since 2012. Iron ore futures were up 10% today on China's Dahlion Exchange, which is the daily limit

causing concerns about steel. Now, we talk about these as their own category of inflation, but of course, are the ingredients and inputs for a huge array of the products that consumers buy. In other words, commodity price inflation can sometimes function like a leading indicator of consumer price inflation, which brings us, of course, to the third category of the inflation discussion which is around consumer prices. This one has the most resonant narrative power for two big reasons. First, it's the dimension of the conversation that policymakers have steadfastly and avowedly pointed to. The standard measure of inflation the CPI isn't about assets or commodities, per se, it's about what consumers end up spending. This gets to the second reason that consumer

prices have more resonant power as an inflation conversation. It is the one that's most directly experienced by people. I mentioned a couple weeks ago that there was a real uptick in the consumer price inflation conversation, and today's mainstream financial news supervalidates that point. Today, the Wall Street Journal's most read story, at least when I was looking at this, is called Higher Prices Leave Consumers Feeling the Pinch, quote, rising costs for everything from fresh fruit to freezers are shaping purchase decisions. Now, the question with any story like this is how much it's actually giving data versus just perpetuating a narrative through anecdotes and stories. To be clear, stories matter. The fact that we're seeing so many pieces like this suggest that if

inflation hasn't yet shown up in the data, it will at some point. What's more when it comes to societal impact, narratives have power to shape behavior regardless of how backed by data they are. If consumers feel like prices are going up, they're not going to wait to get data that would satisfy Jerome Powell about that, they're just going to shift their behavior. So given all that, is there data in this Wall Street Journal piece? Well, here's a little bit. Warpool Corporation said that prices on consumer goods from processed meat to dishwashing products have risen by double-digit percentages over the last year. Kellogg said that higher costs for ingredients, labor, and shipping are pushing it and other food producers to raise prices. Their CEO even said,

quote, we haven't seen this type of inflation in many, many years. The cost for apples is up 10 to 20 percent. similar with bananas, leafy greens, and vegetable oils. Overall, consumer prices jumped 2.6% year-over-year in March, which is the biggest increase since August 2018. Keep in mind, however, that why some aren't concerned about this data yet is that we're now exactly a year-out from the beginnings of shutdowns in the worst part of the economic crisis. This means that our year-over-year numbers are likely to be overstated around everything for a few months. But still, the article has even more evidence. Warren Buffett discussed inflation at their annual meeting on May 1st saying, we're raising prices, people are raising prices to us, and it's being

accepted. It's an economy that's red-hot and we weren't expecting it. Another dimension of this may be catching up with prices that didn't change last year. Chris Testa, the president of United Natural Foods, said that last year a lot of companies didn't pass higher costs along to consumers knowing how much they were hurting, so now they're trying to catch up. Procter & Gamble and Kimberly Clark are both raising prices on things like toilet paper, diapers, feminine care by mid-to-high single digits. When it comes to the counterpoint, Powell and the Fed have continued to say that this is all transitory. They think it's impacted by specific solved or solvable issues like supply chain delays. And there are some examples of this as well. Right now, for example, takeaway containers are more

expensive because a key ingredient in the plastic used to produce them was disrupted by winter storms in the south this year. But still, it's not just this Wall Street journal piece. Bloomberg also ran a similar headline this morning. inflation bruise for U.S. producers while service wages pick up. Here are the two banner takeaways from that. First, materials wait times for manufacturing is the longest it's been on record. Second, first quarter private wages and salaries grew the most that they have in 18 years. So on the first point, the wait time of factories for production materials grew to 79 days in April.

That's the longest in records that go back to 1987, according to the Institute for Supply Management Data. Between 2000 and 2010, the average time was about 40 to 50 days, and between 2010 and 2020, it was more like 50 to 60 days. So you're talking about a significant increase up all the way to almost 80 days. On the wage side, the employment cost index, which is a quarterly measure, registered its biggest increase since 2007. Companies are also reporting trouble-finding workers. According to the National Federation of Independent Business, 28% of small businesses reported raising compensation in March. And while that's across the board, some areas are seeing particularly high increases. Wages for truck drivers, for example, have gone way up. Night Swift Transportation Holdings, which is the largest carrier

in America, said in April that its wages for recently certified drivers have jumped 40% or more. So let's try to sum this up a little bit. One thing that is important is to specify our terms, which type of inflation we're talking about. The second is to discuss this as a process rather than a binary. It's not so much whether there is inflation or not, but how much of what type and most of all, why. As you can see, there are a variety of competing explanations. There is the generalist narrative of more money sloshing around in the system. But then there are more specific issues with supply chains that have caused cost to rise. What set of factors are driving inflation impacts things like how long we'd likely to see it as a force in the economy and also what type of policy remediation

we should be pursuing. One thing that seems for sure is that the dynamic are all coming together. Higher wage growth, higher prices, and continued issues with commodities and supply chains that all combined can foment exactly the type of inflationary cycle that has been pushing big institutions to Bitcoin. What's more, market actors are validating this point of view. I'll close with another headline from Bloomberg. Bond traders live five-year inflation outlook to highest since 2006. This is an ongoing story. It's going to be something I keep coming back to here. Lynn Alden has a new piece called The Ultimate Guide to Inflation, which is about 9,500 words that I have to go check out. And on Wednesday, we get the official numbers for

April, so we'll at least do a little update in the brief. But for now, hopefully this gives you a picture of what's going on out there. And I'm interested to see how it does or doesn't jive with your experience. Let me know on Twitter, on the YouTube comments. But for now, guys, I appreciate you listening. I hope your week is off to a great start. Until tomorrow, be safe and take care of each other. Peace. witnessing the greatest paradigm shift in finance in modern history. Join thousands of newsmakers and influencers talking the future of money at Consensus by CoinDesk. A live virtual experience of leaders, change makers, virtual reality meetups,

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