Inflation and Aftershocks

Notes on Inflation

Next week brings the Sept 21st Fed rate hike, which is expected to be 75bps. Former Secretary of the Treasury Larry Summers has been outspoken about the reasons for a 100bps hike, namely that we need to be more aggressive because inflation changes are reacting too slowly, if at all. Either way, this next hike brings the Fed funds rate to 3.25%, the highest level since 2008. The Fed will not stop hiking rates until inflation comes down.

The CPI numbers from this week were far worse than expected. With the exception of gas and energy assets, few categories saw prices decrease. Lower gas prices is good for the collective psychology. Lower energy prices will eventually help other category prices go down, but that takes time.

The 1 year treasury is a hair under 4%, meaning you can earn 4% on your cash, guaranteed risk free, over 12 months. This rate was a just above 0% 12 months ago. These dramatic rate increases impact mortgage rates which should bring real estate prices down, but that seems highly unlikely at this point because there is still very low inventory.

Real estate purchasing power decreased dramatically due to rising mortgage rates. The same payments that paid for a $500k home in Dec 2021 now pays for a $320k home. Meanwhile prices have not adjusted downwards, so many would-be buyers are now forced to rent. This supply and demand dynamic keeps rents high. Shelter is 40% of the CPI reading and, unfortunately, rents aren’t likely to change much until we see unemployment and layoffs increase further. Despite most commodity prices falling rapidly, that 40% shelter CPI weighting is going to slow down our collective inflation target progress.

The good news is that even though equity markets reacted poorly, we are not back to the June lows. As always, progress marches on underneath the surface and there is plenty of room to grow in many industries. It will take more time for the Fed to get inflation under control and eventually this will not be the only factor driving markets. It’s important to be ready with a plan to take advantage of upcoming opportunities.

The Merge is today (Thursday) + KKR

Today, Ethereum will merge from proof of work to proof of stake. This merge reduces the eletricity required to power the network by 99%. Ethereum is a ~$200B software program supporting $200B+ in other crypto software projects. The merge is a major event that should go smoothly, but it’s not without tension given the magnitude of the financial assets involved.

KKR is releasing part of their latest Health Tech growth fund on the Avalanche blockchain at $100k minimum per unit. It’s an interesting experiment and it’s attracted a lot of attention. It’s not clear that this needs to be on the blockchain at this time or in this form, but it’s good to see KKR take the lead in this experiment.

Eventually all assets will be tokenized, but they might not live on public blockchains like Avalanche. What was most interesting about the process of signing up for this deal is they require detailed KYC to participate. In the future, I can see blockchain wallets being pre-qualified as valid accredited or qualified purchasers much like a global entry card is used for travel. That would dramatically speed up the processing time for participation in any and all private investment vehicles. This is something that public crypto wallets would be useful for in the near term.