The latest inflation data will be out by the time you’re reading this. That data informs how the Fed will treat further rate rises. The Fed recently stated their preference for raising rates too far and fixing the ensuing damage with stimulus. In the meantime, I think we’ve all got the message that the Fed wants to slow the economy. There’s not a single sector that doesn’t feel an incoming slowdown.
Markets at this stage will rally at any whiff of a Fed pivot. At some point the Fed will lower rates, and for now that’s expected to be in December 2023. Markets are forward looking and at some point this inflation saga will be behind us.
Layoffs are an important indicator to watch. We mentioned last week that if Elon Musk can successfully operate twitter with -50% to -75% fewer staff that private equity and venture capital as well as some public companies will look to use the same playbook.
Meta just laid off 11,000 workers, but their headcount after layoffs is still up 35% since the start of the pandemic. Pre-pandemic comparisons are important because Meta would not have increased headcount by 60% without Covid stimulus.
December’s inflation numbers may send some misleading negative signals. Many commodity prices dipped from November to December in 2021, which makes the y/y inflation prints next month look higher. For example, oil is up +6% from November 2021, +28% from December 2021 and just +8% from January 2022. The most dramatic number gets the headline.
The overall immediate trends have not changed: inflation is slowly falling and rate hikes are slowing to a stop over the next few months. The next hike is December 14th and is split between .5% and .75%.
FTX – Crypto & The Blockchain
This week one of the largest and most respected crypto exchanges, FTX, essentially vaporized overnight. The founder SBF (Sam Bankman-Fried) had the fastest ever rise in wealth from zero to $30 billion over four years to what appears to be bankruptcy and -$600 million in debt. FTX had many notable institutional backers who collectively invested billions to fund the future of the business and used it to custody billions of crypto assets. They were on track to redefine the business model of exchanges. It’s too early to assess the extent of the damage with any confidence but their downfall was essentially the same as every catastrophic business failure – excessive use of leverage where it shouldn’t be used. Lehman brothers failed under the same leverage related issues, as did Long Term Capital Management and many others.
We used FTX as one of the custodians for our crypto fund because they were considered one of the best exchanges in the business. Fortunately we withdrew all FTX funds two months ago because they were not paying interest on cash deposits and treasury rates were getting too high to ignore. I feel awful for those who were impacted by this because the failure of FTX was considered unthinkable. This is now the second major bullet we dodged this year, the first being avoiding the crash altogether as we’ve held the fund almost entirely in cash since the start in November 2021. The future of blockchain technology is by no means over, but it is still very much in its wild west stage.
We generated this week’s image by googling an image of Icarus flying too close to the sun and telling Dall-E 2 to replace Icarus with a bitcoin logo. The entire process took about five minutes. I’m interested to see how these AI tools evolve from static images and into videos, like Google’s latest InfiniteNature.
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