Cuts, AI Wallet

September 18, 2024

Yesterday the Fed cut the overnight rate by 50bps from 5.5% to 5%. This sets a pace and precedence for the last two meetings of 2024, Nov 7th and Dec 18th. Two more 50bp cuts would bring short term rates down to 4%. Two 25bp cuts would bring us to 4.5%.

Mega cap tech has had the upper hand over the high inflation and high interest rate regime thanks to their profitability and ownership over the AI theme (and/or most innovation themes). When the vaccine was released during Covid, non-tech non-work from home themes rallied as that was the first sign of break. Lower inflation and lower interest rates is like the Covid vaccine, it helps ease the challenges of weaker business models (weaker compared to Google or Apple). Longer duration assets like real estate or clean energy infrastructure benefit from rate cuts.

I think the rate that most readers care about is the 30 yr mortgage rate which is down from a high of 7.8% in Sept ‘23 to 6.2% today. Below 6% or mid-5s will make people feel like we have a more normal financial life in the US. We still have a housing shortage issue that rates will not help.

Rate cuts will help somewhat with government spending, of which $1.2Trillion is interest rate expense. If interest expense falls by $200B or $400B thanks to rate cuts, the deficit will still be well north of $1T (currently $1.9T). A lower return in cash/short term treasuries should motivate investors to invest in financial assets whether that’s equities, debt or real estate.

 

AI Wallet

Coinbase published a note last week that they processed the first AI to AI crypto transaction using a USDC stable coin wallet. They didn’t provide many details, but a little imagination shows us where this is heading. Credit cards charge a fee on every transaction because they assume the risk of something going wrong. If someone steals my credit card, I’m not liable. This is an under appreciated feature that benefits the consumer greatly, and it comes at the cost of 2% to the recipient, or 8% for high risk businesses.

A USD crypto transaction (via USDC stable coin) is irreversible. If someone steals your money, you either have to ask for it back and hope they comply, or hack them back. Coming back to this in a moment. ChatGPT is useful as a “thinking” agent, but it can’t actually do much for you that would help you with your regular tasks, like making sure bills are paid. You can’t tell it to pay your internet bill, which I pay via credit card. In fact, my card needs to be updated on Xfinity and this week I can’t even get the page to load properly to update it because the website is so poorly designed.

Any entity, person or business, can open a crypto wallet for free to accept USDC. Xfinity could have a wallet for my account. In that case I could tell an AI to transfer USDC to Xfinity to pay my bill. There’s nothing preventing this system from existing today. All of the pieces exist, they just haven’t been integrated, which would take little to no effort. I would have no recourse if something went wrong, but that’s fine because at least it gives me another choice. Recourse on small transactions is not all that important anyways.

AI will never be able to interact with my credit card, but AI can interact with USDC today, which has always been billed as “programmable money.” The system I’m describing is in its earliest infancy, like the first emails. Adoption rates take a long time. Every business should set up a free USDC wallet so they can accept rent or customer payments fee free, as an option. It’s not “better”, it’s just an alternative option.

The implications are fun to think about. All USDC transactions are transparent and fully traceable, so AML (anti-money-laundering) would be improved. A programmable AI controlled dollar would be convenient for people because, again, you could just tell it to pay all of your bills and save the headache of dealing with managing logins and other elements that introduce friction and take excess time and effort.

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