The Breakdown - Inflation Plateaus, but Now Markets Fear Recession

Starting point is 00:00:04 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 nexus.io, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, May 12th. And today we are finally, about 24 hours after I expected to, discussing where we are with inflation. Before that, however, a little bit of housekeeping. There are two ways to listen to the breakdown. You can find the breakdown on the Coin Desk Crypto Podcast Network feed. That feed has both the breakdown as well as other great shows from CoinDesk. However, if you just want the breakdown, you can get that on the breakdown-only feed.

Starting point is 00:00:54 The Coin-Desk feed comes out in the afternoon, and the breakdown-only feed comes out in the evening. Wherever you are listening to the show, if you're enjoying it, please go subscribe to it, give it a rating, give it a review. Finally, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. So, yesterday we got the inflation numbers from April. And if you've been following along with the breakdown, you know that that almost always warrants its own show. The only reason we didn't do that show yesterday is that Luna was in this crazy death spiral moment. It had crashed from $16 the night before down to under a dollar, for a time, and at the time I was recording yesterday was around $2 or $3.

Starting point is 00:01:38 UST had lost its peg entirely, and the market was just coming to grips with what this might mean. By way of a quick update on that, things have gone even farther, and Luna has effectively, programmatically hyperinflated to nothing. It is trading currently around a cent. It has been delisted from numerous exchanges. The blockchain has been stopped. It is in a way that most of the zombie chains from 2017 never were gone. Now, of course, who knows what will happen in the days and weeks to come, but it is a remarkable thing to behold. But anyway, we're going to continue to have a lot more time to discuss that, and today we are talking about the inflation print. And let's talk first about why it matters. So the context. As you know, it wasn't long after the COVID crash

Starting point is 00:02:27 happened that the focus in markets turned to inflation. While some traders were just taking advantage of the incredible rallies and asset prices, driven by liquidity pumping in from central banks around the world, others were starting to debate the potential outcomes of all of that new money flooding into the system. On the one hand, were folks who pointed back to the example of the global financial crisis in 2008. So many people then had thought that quantitative easing, this new phenomenon in monetary policy, was inevitably going to produce runaway inflation. But then it didn't. Or at least it didn't. Or at least it didn't. produce consumer inflation in the way that people expected. Asset price inflation, as we're learning,

Starting point is 00:03:08 might have been a different story. But still, by and large, there were many people who came out of that experience saying, I was wrong. All of that quote-unquote money printing didn't actually increase prices in the system, at least when it came to consumer goods and services. So that was one take coming out of COVID. On the other hand, were those who said, yeah, but this is different. It's different because monetary policy has been matched by fiscal policy, putting money directly in consumer hands in a totally different way. It's different in part because of scale. The amount of QE and liquidity injections was totally different from 2020 looking back at 2008. And in part, it was different just because it was different. The global financial crisis didn't

Starting point is 00:03:51 involve a total coordinated global shutdown of all business activity. Now, obviously, there were some key outspoken voices on the second side. I'm thinking, of course, most notably of Paul Tudor Jones in his great monetary inflation thesis, but there were plenty of folks out there saying this inflation that is coming is inevitable. Whatever the case, come 2021, we're out of the first phase of COVID, markets are opening back up, and there are clearly some market dislocations, right? Consumer demand is extremely high, people had been locked in their houses for months after all, and supply chains are behind, having been shut down that entire time. Given just the laws of supply and demand, of course there was going to be some price increase around

Starting point is 00:04:32 the things that people most wanted. And that was more or less the core of the inflation is transitory argument from Jerome Powell and the Fed. And indeed, that was the key narrative battle of last year's macroeconomics. It was Powell saying this is transitory because these are totally understandable, if unprecedented market dislocations and a supply demand mismatch. While others were saying, it really isn't transitory. And even if it is transitory, it's transitory on a time scale that you're not prepared for and you need to be more aggressive. Fast forward and we know that Powell and the Fed lost that particular argument. By the end of the year, they were shifting their tune on that pretty aggressively. When Powell was renominated, he came in with a message of inflation is a problem and we

Starting point is 00:05:11 have the tools to solve it. Looking for ways to step up your crypto game? Then go with Nexo. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields? Up to 17% paid out daily. ideal for you hardcore hoddlers. You don't even need to sell. Instead, borrow instant cash against your assets. Get the most out of your crypto with NXO at nexo.io. That's N-E-X-O.i-O.

Starting point is 00:05:44 This episode is brought to you by NIR, a climate-neutral, high-speed, and low transaction fee, layer-one blockchain platform. NIR is a blockchain for a world we imagined. Through simple, secure, and scalable technology, NIR empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Reimagined your world today at NIR.org. The breakdown is sponsored by FTXUS.

Starting point is 00:06:21 FTXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. Around the turn of the year, we saw the whole sales shift of the Fed from a paradigm of dovish quantitative easing to hawkish quantitative tightening. It was in January that markets really took a rip down when minutes from the December FOMC meeting showed that in addition to raising rates, the Fed was planning to actually move to

Starting point is 00:07:12 balance sheet reduction much faster than anyone thought. Now, obviously, we've seen what has happened in the five months since then. Markets have gotten extremely pessimistic. Risk assets have gone down enormously. We're talking like crypto enormously. And from a policy standpoint, all of this culminated in the 50-Basas-point hike at the last FOMC meeting a few weeks ago. Now, it was clear at the time that the next big key macro moment would be when the April inflation numbers came out. However, in that intervening period, the conversation has taken a turn. We've moved from just a pure play concern about the impact of inflation on regular people's lives, on the economy, to a larger discussion about whether the bigger concern is actually likely

Starting point is 00:07:56 to be the fallout of the feds trying to race to catch up with themselves on inflation. There is a growing sense among many in these markets that there is no room for a softish landing, as Powell said their aim was last meeting. In other words, there is no possibility of tamping down this inflation without getting a recession. So that's where the stakes were headed into this report. It was all an expectations game. If inflation came in much hotter than expected, it could have a bunch of different impacts, including increasing expectations that the Fed would get even more hawkish, putting 75 basis point hikes back. on the table. If it came in much lower than expected, it could give markets hope that the Fed would be

Starting point is 00:08:36 able to be more dovish, giving them some more breathing room. Meanwhile, of course, if it was in the middle, everything would be open to interpretation. People might focus more on the specifics, like, did energy go up or down? What about housing? So what did we see? Inflation was up in April 8.3% on an annualized basis year over year, and 0.3% on a month-over-month basis. That is below March's 8.5% year-over-year inflation, but importantly above the median 8.1% inflation expectations going into the report. The core consumer price index, which excludes food and energy, was up 6.2% annualized and 0.6% month over month, again, both of which were higher than expectations. Some of the major contributors to this was that shelter was up 0.5% month over month, with owner's equivalent rent

Starting point is 00:09:26 up the most since 2006. Food was up 9.4% annualized and 0.9% month over month, which is the largest annual increase since 1981. Airfare was up 18.6% annualized, new vehicles, 1.1%. Household energy consisting of electricity and natural gas was up 13.7% annualized, which was the largest increase since 2008. Gasoline was down 6.1% month over month. Wages failed to keep up with inflation again. average hourly earnings adjusted for inflation were down 2.6% annualized in April. So, of course, this is that middle area trending low. Things came in a little bit worse than expected, but we still seem to have reached a peak or a plateau. That means, of course, that it's now a narrative battle to determine what comes next and how we should look at these numbers.

Starting point is 00:10:16 Jonathan Levin from Bloomberg writes, the latest U.S. inflation report should be a reality check for Wall Street, but many investors are still wearing rose-colored glasses. The 8.3% increase in the Consumer Price Index in April marked a slight slowdown from March, bolstering the view that the worst inflation in 40 years has peaked and is beginning its descent. But the figures confirm that inflation is spreading from goods to service-related prices and indicate a long journey back to what the Federal Reserve may regard as stable prices. In terms of that notion that Wall Street is wearing rose-colored glasses, I'm not so sure. The Dow Jones Industrial average was down 6.5% over the last five days,

Starting point is 00:10:51 which is its worst performance since June of 2020. The S&P 500 went down 1.7% almost immediately. The NASDAQ was down 3.2%. Now, I think more important than the short-term market ramifications of this are the political elements of it. Currently, nearly 60% of Americans disapprove of President Biden's handling of the economy. It is his major Achilles' heel leading his party into the midterms. Perhaps that's why he held another inflation-related press conference,

Starting point is 00:11:20 his second one in the last couple months. Biden said that inflation was, quote, unacceptably high, and that bringing it down is my top economic priority. He focused on the Federal Reserve as the vehicle for doing so. He said that anything that's going to actually lower prices, quote, starts with the Federal Reserve. While I will never interfere with the Fed's independence, I believe we have to build a strong economy and a strong labor market. And I agree with what Chairman Powell said last week that the number one threat to that strength is inflation. Now, I'm not totally sure how this is going to read with American consumers. People who keep track of the careful dynamics between the Fed and the White House might see this as Biden putting pressure on the Fed to

Starting point is 00:11:58 push harder and focus on the price stability side of their mandate. But might the American people see it as Biden passing the buck to someone else? Certainly the markets seem to think that Powell's going to get the message. Wifi Alpha of FinTwin-Anon said the Fed is going to absolutely trash the markets now. Political risk is greater than market risk. We hear 75 basis point hike rumors again. Now, one thing that's super notable to me is despite the fact that inflation is slightly down, I have not seen any pundits willing to call inflation peaked. It's quite clear that no one has confidence in what comes next, and frankly, that humility is sort of refreshing. Still, if you go read FinTwit right now, if they're not talking about Luna and UST and

Starting point is 00:12:37 crypto and all that, what they're talking about is the larger question that has superseded inflation, it's recession, its wealth destruction. Cullen Roche wrote, $35 trillion in global market value erased since the beginning of the year. That's 14% of all global wealth, includes the $1 trillion losses in crypto. For reference, 2008 was a 19% decline, not including non-financial assets such as housing. Hugh Hendry, who's been on the show and who is a character and former hedge funder said, this is the most epic reversal ever. The access from the Fed expanding the balance sheet by $2 trillion after it was apparent that they were in a V recovery, the tapping of credit cards to new access. People, we partied like it was 1999.

Starting point is 00:13:18 Now it's the graveyard. Markets will soon price recession. The Kobayesi letter wrote, Today's CPI report and 100 plus point SPX drop reflects markets realizing an unfortunate reality. If we are not already in a recession, the Fed is going to send us into one. With 8.5% inflation, we are throwing 8 plus rate hikes in a market already on fire.

Starting point is 00:13:40 You're witnessing history. So that's where we are. That's where inflation is. The key thing is that we have seemingly peaked or plateaued, plateaued, but of course, a plateau is inherently a liminal moment that could go in either direction. And what markets are focused on now is not just the threat of growing inflation, but the problem of what comes after. Now, one story that's worth highlighting within the broader market as we wrap up here is

Starting point is 00:14:05 Coinbase. And there are two things going on. First, we had a pretty tremendous Not Your Keys, Not Your Coins moment, where as part of disclosures, Coinbase made, they seem to indicate that in the case of a bankruptcy, users wouldn't necessarily own their own crypto. Brian Armstrong did a long thread about how they were updating their terms to make sure that users had the same protections as other types of creditors during a bankruptcy proceeding to ensure that that wasn't actually the case. And as much as I think it is a good learning moment for people in the crypto industry, I don't believe it was Coinbase saying

Starting point is 00:14:38 they're going to take your money in the case of a bankruptcy. Worse, though, was the unbelievably irresponsible headlines around this, which are as stupid as they are and as dangerous they are also kind of reflective of how the market is viewing Coinbase right now. The Fortune headline read Coinbase earnings were bad. Where still, the crypto exchange is now warning that bankruptcy could wipe out user funds. As Niraj from Coin Center pointed out, irresponsible headline lets the readers fill in the blanks and assume Coinbase warned its own bankruptcy is imminent, which it did not do. Indeed, to me, Coinbase's stock price right now is an example of just how irrational to the other side the market has gotten. Coinbase was trading at $130.

Starting point is 00:15:18 last week, and it got as low as $44 today. It's trading out a PDE ratio between three and four. Now, there are some reasons that this makes sense in the context of people thinking that there are fee wars coming for Coinbase and seeing them underperform revenue expectations based on little retail activity in crypto the past quarter. But it's still such a disproportionately low number that I think relative to other things in the market that I think clearly reflects just how out of vogue tech stocks to say nothing of crypto stocks really are right now. Either way, this all is a good reminder that the pain right now is not just in the crypto markets. I do believe that we've entered a new phase in the inflation conversation, where we're starting to debate what's worse, inflation or recession.

Starting point is 00:16:05 But that's kind of out of the pan and into the fire type of place to be. Hang on to your butts, I guess. For now, I want to say thanks again to my sponsors nexo.io, near an FtX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse,

Starting point is 00:16:42 and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBS. F, Z, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.

The Breakdown - Inflation Plateaus, but Now Markets Fear Recession

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.