The Breakdown - The Highest Inflation Since 1982

Starting point is 00:00:00 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 Friday, December 10th, and you better believe we're talking about the CPI print that just happened. And what the highest inflation in 39 years might mean for the economy. might mean for Federal Reserve policy, the economy as a whole, the stock market, and of course for Bitcoin. Now, if you're new here, welcome, and if you're not, forgive the broken record. The thing the market has been paying attention to more than anything else for the last few months

Starting point is 00:00:54 is, of course, inflation. And specifically, what inflation will mean for Fed policy? The beginning of the year started off with the language of the transitory, where Jerome Powell and others insisted that while we were seeing growing inflation, it was just about supply demand mismatches coming off of the COVID-19 pandemic and would work itself out over the next few months. By last month, though, that tune was changing. The big headline was a 6.2% inflation print, which was the highest in about 31 years. Now, this led to a few things. President Biden finally actually re-nominated Powell and figured out what he was going to do with chief competitor, Lail Brainerd. And when he nominated both of those officers to the Fed, it was clear that it was a chance to reframe and reclaim the narrative.

Starting point is 00:01:41 There was a clear tone shift away from the language of transitory. Instead, everyone involved affirmed that inflation was a real problem for people's lives, and they had the tools to combat it. This, of course, was being shaped by political calculus, that inflation and economic instability could, in fact, slaughter the Democrats if it persisted through the midterms next year. Before we dive into how people were preparing for this month, it's worth asking why officials were so convinced that things were going to be quote-unquote transitory. And basically their belief was that there was a supply demand mismatch coming out of COVID that would be leveled out as supply chains and everything got back up and running.

Starting point is 00:02:20 In other words, they believed that people were just catching up on all the spending and activity that they didn't do during lockdowns, and so wanted more than normal of the things that they would otherwise have consumed and done. At the same time, the systems that allow them to consume and do those things had also been shut down and couldn't just be spun back up on a dime. Ergo, supply demand mismatch. There were some things they didn't anticipate, however, notably the major difficulty in getting people to go back to work, and the problems that a labor shortage on top of everything else would mean in terms of how this inflation was playing out. It's still possible, of course, that some of this levels out in the way that they anticipated, that some of this inflation is transitory, but they can't.

Starting point is 00:03:00 can't afford to wait and risk it, both from an economic standpoint, but also from a political standpoint with the midterms looming. So, summing up, last month, we had the biggest inflation print in 31 years, a shift away from the language of transitory, and a suggestion that the Fed was going to begin accelerating their tapering efforts. So coming into this month's CPI numbers, what were we expecting? The most notable thing here was that the Biden administration went out of its way to play down the numbers a day in advance. Bloomberg yesterday, published Biden team seeks to downplay inflation data ahead of release. White House Economic Advisor Brian Dees basically went out and said that the report was, quote unquote, backward looking,

Starting point is 00:03:41 and that it wouldn't capture recent price movements. He pointed to declines in gasoline and natural gas prices, as well as declines in shipping costs and commodities. Quote, these declines are delivering, most importantly, some benefit to consumers on a go-forward basis that won't be reflected in that data. End quote. And if you weren't clear on that narrative, the next paragraph from the Bloomberg piece, quote, his comments ahead of the report underscore concern within the administration that consumer costs are weighing heavily on the president's approval rating and pose a significant political risk for Democrats in next year's midterm elections, end quote. Biden's approval rating is currently around 40 percent, and three in ten Americans say that

Starting point is 00:04:20 everyday bills or inflation is the biggest concern facing their family. This is a rough spot for a politician to be in. To take just this press conference that we were just talking about with Brian Dees, he's either getting super wonky pointing out base effects of year-over-year measurement and why consideration of spending during the pandemic has to be considered, or worse, he's basically arguing that people's impressions of their own situation is wrong. He discussed how household income for a typical family is higher, thanks to new tax credits and increasing wages,

Starting point is 00:04:51 but tell that to the people seeing gas rise or milk up or who aren't a quote-unquote typical family. The point is that the administration, was pushing hard to soften the blow. What about what was going on in markets? Well, one of the notable things that I think is worth pointing out has been corporate selling. Tons of people have been writing about this, noticing about it. Chamath Palahapatia discussed it on the all-in pod, even saying that he had sold something like $600 to $700 million worth of stock.

Starting point is 00:05:17 Yesterday, the Wall Street Journal wrote about it. Elon Musk and other leaders sell stock at historic levels as market soars, tax changes loom. Insiders like the Waltons, Mark Zuckerberg, and Google's co-founders, have sold 63.5 billion through November, up 50% from 2020. So far this year, 48 top executives have collected more than $200 million each from stock sales, nearly four times the average number of insiders from 2016 through 2020, according to a Wall Street Journal analysis of data from the research firm Insider Score. So the question here is how much is this about expected tax increases

Starting point is 00:05:51 versus how much of this is a more general market assessment? If you don't think your shares are going to go up much more, you sell them. Especially because if you sell into an even worse environment, it can provide more of a self-fulfilling prophecy. Whatever the case, according to Daniel Taylor, who's an accounting professor at Wharton, quote, what you're seeing is unprecedented. 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 NLW. Let's go back to CPI and what actually happened this morning. Well, like I said, last month was the biggest year-over-year gain in 31 years. Now we're up to 39 years. U.S. consumer prices have climbed

Starting point is 00:06:48 at the fastest annual rate since 1982, 6.8% year-over-year and 0.8% since October. Gasoline, shelter, food and vehicles were among the biggest contributors. Food at home, for example, was up 6.4%, which is the most since December 2008. Many economists are now resolving to this narrative around labor shortages as one of the key factors. But whatever the case, wages are not going up as fast as consumer prices. The inflation-adjusted average hourly wage is down 1.9% in November year-over-year, which is the lowest number in six months. There's also an increasing sense that this time is different and not in a good way.

Starting point is 00:07:28 The Wall Street Journal again yesterday published, this inflation defies the old models. And here's a quote. Neither supply or demand by itself is increasing prices. It's an unusual combination of both. Explanations come in two schools. The demand school blames President Biden and the Federal Reserve for administering too much stimulus. The supply school blames pandemic-related bottlenecks and supply chains. In fact, it's becoming clear that neither demand nor supply by itself is to blame. Rather, this inflation was made possible only by strong demand interacting with restricted supply. So we have very little precedent for something like this. World War II is sort of the only time we've seen it.

Starting point is 00:08:05 And the problem is it makes it much harder to solve. When it's coming from both the demand and the supply side, the efficacy of monetary policy is reduced pretty significantly. On top of that, a type of inflation that could be self-correcting, this distortion of supply and demand, could turn into a type of inflation that's much harder to fix. In other words, this transitory inflation leading to a cycle of increasing wage expectations and increasing prices in an endless feedback loop. Ben Hunt-Epsilon theory tweets, Inflation is now common knowledge, which creates an inflation reality regardless of any other economic fundamentals.

Starting point is 00:08:38 Every company will now raise prices. Every worker will now push for higher wages. Whatever your inflation estimates are, they're too low. The last line of that Wall Street Journal piece is, meanwhile, higher inflation could become self-perpetuating through price and wage-setting behavior. Then the solution to this unfamiliar inflation becomes painfully familiar,

Starting point is 00:08:57 higher interest rates, and perhaps a recession. And this is ultimately what's at stake for the Fed. Don't fix it and you get this inflationary increase, these huge political problems, raise rates and you potentially risk plunging us into a recession. Lisa Abramowitz from Bloomberg tweets, We examine the impact of three Fed hikes in 2022 starting in March earlier than the markets currently expect. Our modeling suggests real GDP growth would slow to a stall speed of around 1.5%

Starting point is 00:09:24 annualized in half two of 2022 versus our 2.7% baseline forecast. Travis Kling explores the Fed's challenge as well. He tweets, now that the CPI print is out of the way, all eyes on the Fed meeting next week and how hawkish of a stance Powell takes up to and including potentially accelerating tapering. It's a tough one to call because of how much politics plays a part in the Fed's decision-making process. It is a factual statement that the Fed has become heavily politicized. Janet Yellen is basically Jay's boss. You can hate that or love it, but it is what it is. Dems have midterms in November, and polls have been looking, uh, not great for Dems.

Starting point is 00:09:59 So undoubtedly, Dems are trying to put together a playbook to not lose control of both houses next year. A key question, which I don't know the answer to, is how inflation is being viewed in that playbook. Do Dems view it as more politically expedient to put a lid on inflation via accelerated tapering and rate hikes but at the expense of asset prices and likely GDP growth? Or do they want to let it run hot and have SPX hitting all-time highs next fall? Tough to say, but it matters. He also in a separate tweet said, the market is currently pricing in 3.5 rate hikes in 2022. I'll definitely take the under on that,

Starting point is 00:10:33 primarily because that would be such a stunningly boneheaded move by the Fed that it's almost unimaginable. If they do, the QE they'll do to fix it will make 2020 look like austerity. Many rightly observed what's clear at this point that the real game wasn't the CPI numbers, it's what the Fed does next. Pentoshi tweeted at this point, I think CPI data is moot. Markets have priced it in unless it's to the extreme end. Biden and New news already posturing early, volatility tomorrow morning. The real event is the FOMC meeting next week and if they will speed up taper and rates. By the way, Pentoshi also sort of nailed the market's reaction. He tweeted yesterday, I think if 6.2 to 6.4%, market likely shrugs it off. 6.7% plus market

Starting point is 00:11:14 sells off. There's also a lot of discussion around Bitcoin here. Brad Houston tweeted, Bitcoin crashing before a big CPI number is not a great endorsement for it as an inflation hedge. Investorsgate explains, though, quote, markets are forward-looking. High inflation usually means a tightening of monetary policy is needed, which is deflationary and drives money to risk off assets. Bitcoin is still seen as a risk-on asset in the eyes of most institutions. Finally, Alex Kruger acknowledges just a development in the overall macro scene for Bitcoin. Truly miss the days one could trade Bitcoin without having to worry about macro data. CPI print tomorrow expect significant volatility on the release.

Starting point is 00:11:51 We have two core questions interacting here. that's for the economy as a whole and one that's for Bitcoin specifically. For the economy as a whole, it's the rock and the hard place that the Fed finds itself in. Continue to let things go as they are and watch inflation rise. Push inflation and rate hikes faster and risk of recession. For Bitcoin, it's not so much a question. It's more just demographic composition of the holding base. For long-term holders, Bitcoin is a risk-off asset. It is the most risk-off asset that exists. But for many short-term holders, including potentially this new wave of institutions that have come in, Bitcoin represents, at least in the short term, a risk-on asset, which in the context of raised rates is going

Starting point is 00:12:29 to suffer like any other tech stock. I will say that I think it's important to note that for many of these institutions, it actually exists as its own sort of thing that is both risk-on and risk-off at the same time. Risk-off in the long-term, but very much risk-on in the short term just based on the makeup of other holders. In any case, like Pantoshi said, the next big thing that we'll be watching is the open markets meeting next week, and I'll, of course, be there to give you the best take that I possibly can. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - The Highest Inflation Since 1982

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