The Breakdown - Lowest Inflation in 2 Years

Episode Date: July 13, 2023

CPI comes in lower than expected, leading to expectations that the doves in the FOMC will have more influence to halt interest rate hikes in forthcoming meetings. NLW also covers the Bank for International Settlements latest antagonistic crypto report. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Wednesday, July 12th, and today we're talking about inflation, which has hit its lowest point in two years. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod.

Hello, friends, happy Wednesday, happy hump day. Now, you might have noticed that inflation has become a much smaller topic of conversation around the breakdown lately. There was a stretch there where we were really hanging on every report. It was one of the big days each month when we got the previous month's inflation numbers reported back to us. Now, the reason it's gone down in importance generally in the macro sense is a few parts. One, it seemed on a fairly clear downward trajectory.

There's been a lot less of a sense that we were likely to see some big jump up that we weren't anticipating, and as soon as something gets more routine or expected, it stops having the same impact that it might have had before. A second factor is that the closer we get to the end of the Fed cycle, in terms of what they're saying, not just what we're speculating, the more that markets are already looking past that. Remember, the job of markets is to be forward-looking. For a long period there, they couldn't really be forward-looking, because,

Every time that they were, every time that they anticipated a Fed pause or a Fed pivot, some new piece of data would come and slap them back to reality, and so we just continue to circle around the drain where we were. Now, however, while there might be disagreements about whether there's going to be any hikes left or how many, we know that it's not very many compared to how many we've gone through over the last year and a half. And so, again, we find ourselves towards the end of a cycle, meaning that the cycle itself has less of an impact on our daily discourse.

Third, frankly, there have just been other factors that have started to compete in significance with inflation in the Fed when it comes to market action. Most notably has been AI, which is promising major, major productivity transformations the likes of which we might not have seen for decades. And then, of course, for our purposes, in the Bitcoin and Crypto space, there has just been a lot of other stuff that's top of mind as well. We are still in the midst, of course, of 2022 cleanup with bankruptcies and failures and continue to rest.

We just got another one this week. then on top of that, we've got regulatory battles that seem never ending. We've got open letters from senators, new legislation proposed left and right, open letters between aggrieved parties in those bankruptcies that we just discussed a moment ago, emergent narratives with a banking crisis, the reemergence in a major way of institutional players, etc., etc., etc. Now, given all that, I didn't really mentally clock that we were getting an inflation report today, but for the first time in a few months, the data really captured people's attention.

The TLDR is that inflation has hit a two-year low. Year-over-year CPI was 3%, which is the smallest number since mid-20201. Core CPI was 4.8%, which is obviously significantly higher, but still the lowest number again since 2021. Month-over-month gains were 0.2%, and part of what explains the decrease is base effects. In June 2022, a year ago, we saw an extra big run-up in energy prices after Russia invaded Ukraine. Now, some other highlights that are worth calling out. hotels dropped for a second time this year, with hotel stays falling 2% last month, airfare was down 8.1%, which is the second biggest drop since April 2020.

Energy prices did rise slightly, led by gasoline and electricity, used cars fell for the first time in three months, and overall shelter costs accounted for more than 70% of the overall monthly increase. Another thing that some commentators noticed was that core goods minus used vehicles has seen no inflations for three months. Okay, so that's a little bit of the high-level data, But as with everything in markets, CPI is an expectations game and these numbers beat estimates. The median estimate of month-over-month CPI was 0.3% and it came in at 0.2%. Same with core CPI, 0.3% versus 0.2% in reality.

The median estimate of CPI year-over-year was 3.1% and what came in was 3.0%. The median estimate of core CPI was even a little bit higher at 5%, where it came in at 4.8% in actuality. And of course, the market has taken to these numbers like fish to water. Treasury yields came down. The dollar came down. The S&P 500 was up over a percent since opening at the time of preparation of this show. And what's more, expectations about future rate hikes have also shifted in a big way. The probability the market is placing on additional hikes now came down below 50%. Now, of course, the Fed tried to keep the rhetoric hawkish. Richmond Fed President Thomas Barkin said at an event today after the report came out, inflation is too high.

Our targets 2%. If you back off too soon, inflation comes back strong, which then requires the Fed to do even more. Now, this is inevitably the only thing that you're going to expect to hear after an inflation beat to the downside like this. Of course, they can't be whooping and hollering and celebrating. One, because there is still more work to do. And two, because they need to give themselves rhetorical outs to keep hiking if that's what they decide is really needed. Now, that said, analysts have a pretty different take. Basically, what most analysts think is that this is going to bolster the case of the doves on the FOMC and give them a stronger hand in shaping policy going forward.

Bloomberg Economists wrote the favorable CPI report will bolster voices on the FOMC, arguing that July's hike should be the final one. Now, the other thing that these numbers did is increase the amount of soft landing discourse. Joey Politano tweeted, A lot of the early pandemic U.S. fiscal and monetary policies were based on the idea that it would be better to overshoot than undershoot because it would be easier to stop high inflation than to stop high unemployment. and I feel like that view has been somewhat vindicated now. Obviously, still haven't perfectly stuck the

soft landing, but we've made more progress fighting inflation in two years than we did fighting unemployment in the first five years after the financial crisis. So all in all, a really interesting macro morning here. But ultimately, what really matters is what it does in terms of how the Fed thinks. And ultimately, I expect its impact on markets to be relatively muted, given as we started with that we've already kind of moved past the Fed's hiking cycle and inflation as the dominant drivers of markets right now. And from here, the rest of the show is going to be a little bit of a grab bag jumping around, and we're going to start with an update from the world of CBDCs.

The Bank for International Settlements has delivered a stark warning to G20 leaders in a report ahead of this month's summit. They write, crypto's inherent structural flaws make it unsuitable to play a significant role in the monetary system. Color me shocked that the Bank for International Settlements, the central bank, central banker, thinks that crypto is problematic. Now, that said, it really is stepping up its rhetoric a notch as this year's pivotal G20 meetings get underway. Crypto and CBDCs are front and center on the agenda, with the drive for global coordinated policy and a rollout of state-backed digital

currencies to be discussed. The BIS has implemented 12 CBDC proof-of-concept programs over the past three years, and said it has learned valuable lessons from these prototyping pilots. Now, of course, the BIS understandably has far fewer problems with a digital currency, that its member central bank's control than it does with crypto. The report is really funny. You can feel how dismayed they are to see that people are still interested in this thing. They write, institutional investors and households continue to show interest in crypto despite the events of the past year. Meanwhile, moving outside of the realm of the theoretical when it comes to CBDCs, an enterprising blockchain developer says that he has reverse engineered the source code of Brazil's pilot CBDC, and the details are pretty

gnarly. The code would grant the central bank the power to freeze funds, change wallet balances, and transfer balances from one wallet to another. On July 6, the source code for the digital Brazilian Real pilot project was posted to GitHub by the nation's central bank. It explained at the time that the pilot project was only intended to be used in a test environment and that the architecture might be subject to change. Pedro Magales, a blockchain developer, claimed on Twitter that he was then able to reverse engineer the code, which is written in solidity, to make these discoveries. Pedro speculated that these functions. Pedro speculated that these are probably intended to be used to govern secured loans and other financial functions using

smart contracts, but the lack of specificity around how they would be used was to many disconcerting. He wrote, one thing is to agree with an operation and execute a defy operation that involves different blockchains, another completely different thing is an institution having the ability to freeze the balance on its initiative, and that's precisely how they've developed the smart contracts. Pedro added that, quote, these aspects should always be exposed in the smart contracts publicly and discussed with the population, which hasn't been done. yet. Now, the Brazilian Central Bank admitted that these functions existed within the code, pointing out that they, quote, already have similar functionalities in the current environment

of systems, their use being governed by law and regulation. Reinforcing this message, crypto developer Saigar said, before anyone starts bringing out the pitchforks, just know that banks already do this. They just do it on their own backend and servers. At least they're deploying smart contracts. Progress is progress. I think that both takes on this, that one, it is reason to be concerned given how much power it gives the central bank who maintains that currency, but two, that this really just mirrors the existing system we have that's run by banks. Still, that doesn't undermine why people are excited about non-sovereign systems like Bitcoin instead of CBDCs. The whole point is not being able to be deplatformed on a whim. Anyway, with the G20 meetings coming up, I think that

you are going to be hearing a lot more about CBDCs in the weeks to come. Now, back in the world of crypto proper, Grayscale have reached an agreement to settle a lawsuit brought by Fir Tree Part partners last December. The private investment firm had sued for information on Grayscale, stating that they wanted to investigate conflicts of interest and potential mismanagement. According to the agreement, which was announced on Tuesday, Grayscale will provide documentation surrounding its flagship product the Grayscale Bitcoin Trust. Fertree had criticized the product in its complaint, saying that Grayscale investors had been harmed by, quote, shareholder unfriendly actions, and that Grayscale should do more to allow for redemptions

of shares in the trust. Fertry stood by that position in a statement, calling for Grayscale to conduct a tender offer to buy back GBT's shares. A grayscale spokesperson said the firm is, quote, pleased to resolve Fertree Partners' meritless lawsuit. That spokesperson also added, quote, It's widely understood that the conversion of GBTC to an ETF is the best long-term product structure for all investors. At Grayscale, we are 100% committed to that endeavor and look forward to the court's decision on the matter by the fall of 2023. Of course, what they're referring to is the fact that they have a lawsuit on foot against the SEC, arguing that the regulator should allow GPDC to be converted into an ETF.

Rahm Al-Awalia from Lumida wealth writes, Grayscale agreed to furnish records to Firtree. Furtree raised the stakes in a press release today. Furtree describes a tender offer framework and timeline and threatens to, quote, hold accountable DCG for billions of dollars. Adam Cochran wrote, probably going to get a flow of Grayscale slash DCG stuff this week that will be important to watch.

What we want is Grayscale to change hands or a long-term payback plan. What we don't want is it unwind, because based on current docs, that would mean liquidating the trust. Finally, today, after being absolutely dragged by crypto-twitter on Monday, Arkham Intelligence CEO Miguel Morel fought back against critics on Twitter spaces, making the case for his docs to earn wallet-tagging marketplace. He said, quote, publicly available blockchains are probably the worst possible way of keeping one's private information private. You are literally making transactions which you are

broadcasting to a decentralized network of millions of people, all of whom can look on chain in order to see which transactions are being broadcasts. Murrell then made some pretty big claims around how the marketplace would be used and how private information would be protected, stating that, quote, it's not a completely free market. It's not like anybody can, you know, post any piece of information. The main customer of Arkham is traders, its hedge funds. It's people making money off of information about who's buying and selling large positions of a particular token. Now, the marketplace has yet to be launched, so these claims are impossible to test, but Morrell seemed dismissive of the criticism that his product could lead to the mass reveal

of crypto trader's identity information. He said, nobody's going to be posting about somebody's dog. Nobody cares nor is it going to get approved. Now, for many, the tone of this discourse left a little something to be desired. And alongside the Twitter space appearance, Arkham released a brief FAQ where they responded to concerns that they have ties to government intelligence agencies. That FAQ stated, quote, Arkham is not secretly a government project. We are not affiliated with government agencies.

We're a crypto-native team and we care about our community and our industry. Chairman Burr-Bernacki responded saying, Legally, they have to tell you if they're CIA. I'm sure glad they cleared that one off. and then in parentheses for anyone not getting the sarcasm added, they do not have to tell you they are feds. Finally, one more nice little fun one, an example of which direction we are clearly now pointed back in. Billionaire venture capitalist Tim Draper has slightly revised his Bitcoin call, but he's still bullish.

Draper first predicted Bitcoin would reach 250,000 way back in 2018. At first, he called his shot for the end of 2022 before revising his target to June of this year. With that date now past, Draper still believes $250,000 Bitcoin will happen, but it might not be until 2025. In an appearance on Bloomberg on Tuesday, Draper explained what he missed, stating that, I wasn't really expecting for the U.S. bureaucracy to be this aggressive, and I thought that maybe they would be recognizing that they got to compete with the rest of the world. Now, despite the setbacks and the overzealous regulators, Draper has his laser eyes locked on a future where Bitcoin is money. He said, it's a great system, it's great currency, it's a great

way to operate. I can't wait until I can raise a fund all in Bitcoin, invest it all in Bitcoin, have my portfolio companies all pay their employees and suppliers all in Bitcoin, and have taxes all paid in Bitcoin, and have the waterfall all fall into people's Bitcoin wallets. Because then there's no accounting, there's no auditing, there's no bookkeeping. It's all done on the blockchain. It's all honest and it's all straight. It wouldn't be the beginning of a new bull cycle without a price prediction from Tim Draper, so here we are. Anyways, guys, that is going to do it for today's breakdown. I appreciate it. you listening as always, and until next time, be safe and take care of each other. Peace.