Client Portals

Inflation, Pivots, XPrize4 min read

Aug 10, 2022 - Max Osbon ( 6 mins to read)

Inflation

Last week we wrote about five key economic dates to keep a close eye on. The first, yesterday’s CPI inflation print, did not disappoint. Year over year, CPI inflation ticked down from 9.1% to 8.5%, and the monthly inflation was flat. About a month ago, we wrote about commodity market prices like oil, copper, wheat and corn falling roughly 30% from their highs. It takes time for market prices to make their way to end consumers and eventually into the official CPI record. The Fed bases its rate decisions on official inflation metrics, not market prices, so the official numbers matter.

International freight shipping is now also about -50% lower than the Covid highs. For context, international shipping rates 10x’d during Covid. It’s still extremely high but heading in the right direction and positive for markets. It takes three weeks to ship a container from China to the US, so lower shipping costs will take time to show up in consumer prices and government statistics.

We have a PCE inflation release followed by the next rate rise decision on September 21st. As of now, the Fed will likely raise the short-term borrowing rate from .75% to 3.25%. The 10-year treasury is sitting at 2.75% today. That means the market is giving you the option to earn 3.25% annually without locking up your capital or 2.75% to lock up your money for ten years. Obviously, this doesn’t make sense, and it’s what the industry calls an inverted yield curve. Yield curve inversions are closely associated with recessions. While the CPI inflation number ticking down is positive, the Fed will not stop raising rates until inflation is much lower. It’s unlikely that markets can go much higher until inflation is under control and the Fed stops raising rates. Pivot narratives are important here.

Pivot Narratives

  • Commodity markets could continue to fall. Scarcity is often followed by oversupply as the natural reaction is to overproduce to avoid another shortage. If commodity markets continue to fall, we can expect inflation to fall eventually, and the Fed can stop raising rates or even cut rates. Markets are forward-looking, so you can expect more rallies if commodity markets continue to fall. In other words, the market won’t wait for the official inflation stats.
  • Disruptive companies continue to impress. Leading innovative companies with high revenue growth got most of the attention and market performance in 2020 and 2021. The first six months of 2022 have dramatically reset valuations for these fast-growing businesses focusing on next-generation innovation and disruption. Eventually, we could see the growth and innovation narrative come back online as the best innovative growth companies continue to perform. Many believe technology and innovation are deflationary forces.
  • More Government Spending. While the Fed is actively trying to reign in the economy to slow inflation, the government is still managing to find ways to propose and approve additional stimulus like the semiconductor manufacturing act and the oddly named inflation reduction act. If we see more government spending or stimulus coming around the corner, that feeds into markets and could bring back the money printing narrative. Keep an eye out for more stimulus packages.

Global Tourism

Of the many data-driven ways to track the covid recovery, global tourism stands out as one of the last major holdouts. TSA checkpoint travel numbers in the US are back to 90% of the previous highs. It feels very open in the US, but international tourism remains below 50% recovery. Europe is the only region where most countries have no Covid travel restrictions. Tourism in Asia and the Pacific is still 90% below normal. For example, Japan had 2.8m visitors in June 2019 and 120k visitors in June 2022, for a sustained drop of -95%. Tracking global tourism is a decent proxy if you want to see when Covid can be officially declared over.

Xprize

The 4-year $10m XPrize for Teleportation will be announced in November. The goal is to produce a robotic mobile avatar with multi-sensory communication. Multi-sensory primarily refers to adding the ability to touch and interact. Communicating touch can be done through pressure sensors like bladder pads that can pass instructions to the avatar and provide real-time haptic feedback to the user.

Latency becomes a big issue in this case because if you squeeze something far away and get a delayed pressure reading in your glove, you could accidentally crush it. The latency in terms of speed of light between SF and NYC is just .01 seconds. The latency to the moon is 1.3 seconds, and for Mars, it’s between 5 and 20 minutes. One solution to the latency issue is to use prediction models using AI as a backup when the signal is lost.

This week, I wanted to point this out because these events compound over time. Talented people are constantly innovating, and breakthroughs happen regularly. The daily news narrative paints a picture of chaos, but innovation is still marching along under the surface of politics and drama.

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