The Breakdown - Inflation Nation: US Sees Highest Price Increase in 31 Years

Episode Date: November 11, 2021

This episode is sponsored by NYDIG. New statistics show a 6.2% rise in the consumer price index (CPI) year over year for October. On today’s episode, NLW breaks down the news, discussing: How the 2020 inflation debate set up the current bitcoin bull run  The debate around “transitory” inflation in 2021  How the inflation debate is impacting U.S. politics  Why bitcoin is achieving new all-time highs  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. 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=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: sbayram/E+/Getty Images, modified by CoinDesk.

Whatever you think the case is out there with inflation, it's very clear that this debate is here to stay and that it is going to be a centerpiece of not just the economic, but indeed the political conversation in the months to come. If you want to get a sense of where Bitcoin's going to fit in that, just look right now at the price. 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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, November 10th, and today we are talking about perhaps the single most important and debated macro question out there, inflation.

The U.S. has just printed its highest price increases in 31 years. But to understand that, first we have to do the setup. So going back a year and a half, obviously in the wake of the COVID, COVID-19 crisis, the money printer revved, right? Around the world, central banks stepped in with extraordinary new levels of support for their economies. And while people didn't necessarily think that they were wrong to do so, many started to worry about the implications on the other side. A lot of traditional finance folks started sounding the alarm. Most notable, of course, was Paul Tudor Jones with his great monetary inflation thesis. It was, in fact, that great monetary inflation thesis that set off the Bitcoin bull run. Now, that thesis had two notable features. The first,

of course, was that the dramatic increase in involvement from central banks was something that was going to have major implications for the economy in ways that most people didn't know how. But secondarily, it was also about the fact that Paul had gotten interested in Bitcoin as an actual hedge. PTJ was far from the only person talking like this. He had many notable converts, including Stanley Drucken Miller and Bill Miller on his side, but then there was also Michael Saylor. Perhaps the most arresting visual metaphor of last year was Michael Saylor's metaphor of the ice cube of his treasury melting each year based on inflation. It was the thing that brought him to Bitcoin and ended in him making one of the most insane and lucrative trades in

public market history in his acquisition of Bitcoin and moving micro strategy to a Bitcoin standard. Now we move into this year. For the first half of the year or so, the refrain from the Fed was that to the extent there was inflation, it was transitory. Indeed, when we do the annual recap this year, transitory has to be among the top words. In any case, the logic was that it was just a supply demand mismatch, as businesses came back online after being offline effectively for a year. Once that mismatch was sorted out, prices would level off and everything would be fine. Over the summer, their tone started to shift. inflation had perhaps more longevity to it.

And what's more, while they weren't suggesting that they had been wrong about the supply demand mismatch, what they hadn't calculated was the continued disruption of global supply chains. This is something, of course, that we've covered on the show numerous times, the idea that supply chains have had much more severe and durable problems that continue to cause serious disruptions across numerous industries. But it's worth pausing here and asking, what's at stake with all of this discussion of inflation?

And part of it is, of course, Fing. policy. If inflation runs too hot, the Fed would have to be less dovish, less supportive of the economy. It would mean lifting bond buying and asset purchase support, and it would mean eventually letting rates rise to try to fight and bring down that inflation. Now, markets don't want rates to rise because it would hit stocks, particularly risk stocks that have been inflating like mad themselves over the last year and a half and making people extraordinarily wealthy, at least on paper. In a lot of ways, I think you can read the discourse this year as the Fed saying one thing and the market saying, we don't believe you. That goes all the way up until now.

The Fed has been preparing markets for a taper of its bond buying activities for months, but remains steadfastly committed in their public statements to not raising interest rates. The logic they keep citing is wanting to see more progress on employment. However, after the latest FOMC meeting, they fully admitted that they're in uncharted territory. For example, not being totally sure how to deal with people who have left the workforce and what the new normal should be in. terms of expectations. Whatever the case, though, markets haven't really bought it. They've basically been saying over and over and over that you can talk about transitory all you want and have this very sort of calm, tapering plan, but this inflation thing is going to be a thing and you're going

to have to deal with it. Now, whatever you think of the Fed, you have to recognize the rock and the hard place that they're in. Do nothing, let inflation rip, and potentially deal with severe dislocations of the real economy. Get aggressive, on the other hand, and tip the stock market upside down and push us towards recession. There is a whole question of the stock market's addiction to cheap Fed money and the fact that a small interest rate hike would cause such problems, but regardless, that's the reality the Fed faces. So they're forced to tow this line and hope headlines in public perception don't get too extreme. Well, that won't be helped by news today. I think it's safe to call these headlines blaring. Bloomberg writes, inflation in U.S. builds with biggest gain in prices since 1990. The Wall Street

Journal writes, U.S. inflation reached 30-year high in October as consumer prices jump 6.2%. The New York Times, inflation surges dashing Washington's hopes that price gains would slow. So the details of what actually happened. Well, the Consumer Price Index rose 6.2% from October 2020, as well as 0.9% month over month. Both of these numbers were way above estimates. So what was up? Well, higher prices for energy, shelter, food, and vehicles. You know, not super necessary things. Food is up 5.3% from a year ago. Gas is up 6.1% from last month. Electricity is up 1.8% in a month and a ton of supply chain and good related things are also seeing increases as well. Bedroom furniture up 1.3%. Outdoor equipment and supplies up 5.1%. Women's suits up 2.4%. Car parts

up 1.4%. Gardening and lawn care services up 1.1%. Legal services up 1.8%. Postage and delivery services up 4.6%. And again, all of those are month over month. Now, while the CPI report was the headliner, there were some other related reports that we've seen recently as well. For example, prices paid to U.S. producers climbed 0.6% month over month and 8.6% year over year. This is the largest advance since 2010. On the producer costs, the big thing seems to have been the increasing cost of energy. As Bloomberg puts it, quote, the report underscores how transportation bottlenecks, material shortages and increasing labor costs have sent prices soaring across the economy in recent months. Trucking freight costs jumped a record 2.5% from September. What's more, compensation is also going up.

Currently, a record 32% of small business owners plan to raise compensation in the next three months, and while on the one hand, people getting paid more is nominally good, the impact of that is pretty muted when everything they buy is going up faster. Over in China, meanwhile, inflation at the factory level increased last month by the most in 26 years. NIDIG, the sponsor of this podcast, provides banks, corporate treasuries, pensions, and hedge funds with ironclad Bitcoin custody and white-gloved service. Learn more at NIDIG.com slash NLW. That's nydig.com slash NLW. What are the implications?

Well, let's talk the Fed first. There will certainly be increasing. pressure to increase the speed of the Fed purchase taper, and also likely increased pressure to raise interest rates as well. The Wall Street Journal is running a companion story today. Inflation pickup makes Fed more likely to raise rates next year. The latest rise in inflation helps to explain why investors are increasingly asking not whether the Federal Reserve will raise interest rates next year, but rather how much and how quickly it may do so. What's clear from all this is that gone is the language of the transitory. Jerome Powell said last week, we see

higher inflation persisting, and we have to be in a position to address that risk should it create a threat of a more persistent longer-term inflation. And back to that rock in a hard place, the Wall Street Journal writes, quote, when it comes to raising interest rates, Fed officials don't want to overreact and cool down the economy over the next year, by which time supply chain kinks may have faded, but they also don't want to underreact as employers raise wages, which could fuel a more traditional inflationary cycle. End quote. So basically the idea here is that if the Fed is right, and that this is all mostly supply chain related, and it does actually resolve and call it the next six to nine months, they don't want to have overcorrected.

But if it really is creating a traditional inflationary spiral where increasing wages, create increasing costs, and so on and so forth, it might not matter that this all started with supply chain disruptions. Earlier this week, St. Louis Fed President Jim Bullard said that he had worried that a, quote, inflationary process had started over the last few months. quote, there's a case to be made that inflation is going to be mostly transitory and dissipate, but you can only put so much probability on that scenario. There are also political implications of this as well.

Inflation and consumer prices are actively impacting the Biden administration's ability to push through their agenda, particularly around the infrastructure bill and a $2 trillion tax and spend package. Biden felt the need to comment on this report today, saying, On inflation, today's report shows an increase over last month. inflation hurts Americans' pocketbooks, and reversing this trend is a top priority for me. The largest share of the increase in prices in this report is due to rising energy costs, and in the few days since the data for this report were collected, the price of natural gas has fallen. I've directed my National Economic Council to pursue means to try to further reduce these costs,

and have asked the Federal Trade Commission to strike back at any market manipulation or price gouging in this sector. So, what are the markets doing? How are they reacting to this? Well, stocks fell, although not a huge dip, perhaps in preparation for pricing in some inevitable rate hikes and the corresponding pullback in stock prices. Still, some see these moves as relatively minor. Afin Debit, the CIO of the Moneta Group, said that markets are showing, quote, stubborn resilience. Inflation is very much here and arguably not transitory, but markets don't seem to be too concerned about that. What does this all mean for Bitcoin? Let's get to the part that I know you're all here for. Bitcoin is really showing off how unique

placed it is. Remember, Bitcoin represents different things to different people. It is definitely playing a safe haven role. How many times have we heard from traditional finance folks this year that more and more of the safe haven trade is moving into Bitcoin? Paul Tudor Jones made news a a couple weeks ago and he said he prefers it to gold for that purpose right now. Part of the reason folks like Jones prefer it has to do with the characteristics of the asset itself. Bitcoin is a lot more liquid and a lot more useful than gold. But part of it is that there is also a specter. trade around Bitcoin. There are still more and more people coming to the Bitcoin digital gold trade, which means that even betting on that role, you're also betting on the upside of other people

coming to that conclusion as well. This is sort of what makes Bitcoin so unique right now, and something these investors can't quite believe others haven't figured out. Now, all that said, the speculative nature around Bitcoin does mean that it can be washed out in part by general market moves down like any other risk asset. However, the safe haven trade and the growing set of people who believe it provide a countervailing force on the downside, continuously resetting the price floor upwards and creating a new set of buyers who will scoop up anything that they perceive to be discount Bitcoin. Now, let's get to some commentary out there on Twitter. Doug Bonaparte writes, it's the year 2022. A cup of coffee costs $10,000. The Fed says there's no

inflation. Preston Byrne dramatizes the announcement, saying, to official numbers, your money is now losing 1% of its value every 30 days. Jack Dorsey tweets now try measure using the pre-1980 methodology, referring to an older pre-Vulker measure that had a different approach, described by one site John Williams' shadow government statistics as, quote, in general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living. William's site sees true inflation at closer to 15% based on those measures. What's more, it's not just a shadow government statistics site where

this approach is getting play. Lawrence McDonald, who's a macro guy, not a big Bitcoin or anything like that, writes, Biden is now officially in Jimmy Carter territory. Inflation is as high as the 70s and 80s using the CPI formula trafficked in those days, inflation is above 14%, matching the height of the worst consumer price pressure era. Even if you don't go in for that pre-1980 measurement, Lynn Alden still points out how extreme a situation we're in. She tweets, this is the widest gap on record between the Fed's short-term interest rate setting

and year-over-year CPI, including the 1970s. We would have to go back to the 1940s to find a similar situation. Senator Joe Manchin, perhaps the key Democrat for the $2 trillion bill, tweets, by all accounts, the threat posed by record inflation to the American people is not transitory and is instead getting worse. From the grocery store to the gas pump, Americans know the inflation tax is real and D.C. can no longer ignore the economic pain Americans feel every day. Conor Sen points out the political issue here. The Fed has gotten inflation wrong this year. The Biden admin has gotten it wrong. Even if the transitory view expressed by the bond

market is correct, the Fed and White House will get crushed by the press and Republicans, and that could force a policy response. Downplaying inflation might be what was necessary to stick with the monetary policy path, but it's awkward politically when your forecast keeps low-balling it. Biden passed trillions of dollars of stimulus, has dragged his feet on Fed appointments, and has been absent on inflation is a very fair political attack, even if we'd all geek out about used vehicles and all that. So I guess the question is, is anyone giving a counterpoint? And for that, we have to go over to Joe Wisenthal from Bloomberg. He writes that we are experiencing a big on the labor market, saying, so inflation is hot, but it's just one number and any assessment

of the overall economy has to look at multiple facets. And the fact of the matter is that the job market has also been incredibly hot. The U.S. has gained nearly 18 million jobs since the pandemic nadir last spring, an extraordinary recovery, and the pace of job creation is still robust. Last Friday, we got 531k new jobs for the month of October, plus another 235K and positive revisions to the data in the prior months. This is crucial. Inflation is bad, but the booming labor market makes the situation more tolerable. Whatever you think the case is out there with inflation, it's very clear that this debate is here to stay

and that it is going to be a centerpiece of not just the economic, but indeed the political conversation in the months to come. If you want to get a sense of where Bitcoin's going to fit in that, just look right now at the price. At the time of recording, we had just touched a new all-time high just below $69,000. Until tomorrow, guys, be safe and take care of each other. Peace.