The Fed, Lithium, Merge

The Fed

As expected, the Fed raised rates yesterday by .75% to bring the Fed Funds rate to its highest since 2007. As of now, futures markets expect another .75% hike in November to bring the rate to 4% and a peak of 4.75% by March 2023. Commodity prices continue to fall, which will help bring down inflation numbers. Many of those commodity prices will be negative by March, except for housing and shelter, which is slow moving and makes up 40% of the CPI weight. Not much else can happen in financial markets until the Fed stops or slows its rate hikes. These hikes are designed to slow the economy to reduce inflation, which has an immediate and direct negative impact on daily market liquidity and prices. The uncertainty and negativity accompanying this time make investing more challenging. It’s difficult to visualize what a sunny day feels like while standing in the middle of a rain storm. Similarly, this bear market won’t last forever, and we won’t be in a rate hiking environment forever.

Lithium in Maine

Roughly one year ago, one of the world’s largest Lithium deposits was discovered in Maine. However, in 2017 Maine passed “the toughest anti-mining law in the country.” Since that discovery, lithium has increased 400% in price as demand has grown exponentially and production of electric vehicles has skyrocketed. Due to Maine’s pro-environment anti-mining laws, this lithium deposit cannot be accessed to help ease our lithium supply constraints. We seem to be making it unnecessarily difficult to reach our energy and environmental goals. I think that’s considered par for the course in politics, but watching these contradictions unfold in real time is unfortunate. (Credit to Doomberg for highlighting this.)

The Ethereum Merge is Complete

The Ethereum merge was completed last week after a tense waiting period. The most significant impact so far appears to be related to their environmental impact. The energy cost to use the Ethereum network is now a negligible .01 TWh/yr, down from 112 TWh/yr. For context, .01TWh/y equals the energy consumption of around five midsize office buildings. Given that PayPal has office buildings and data centers, it’s estimated that PayPal now uses 25 times more energy than Ethereum.

In my view, the best current Ethereum use case remains the ability to send any amount of US dollars (via USDC) to anyone anywhere in the world with immediate settlement for about $.45 cents per transaction. Some hoped the merge would reduce network (gas) prices, but that appears unlikely now.

Digital Twins – Simulations

We’ve written several times about using digital twins to run digital simulations to train robotics for real-world applications. Nuclear reactors, jet engines and warehouse robotics leverage digital twin simulations to optimize performance. These simulations are typically supported by companies like Unity, NVidia and Unreal Engine, which started as gaming engines. Recently there was a story about Tesla creating a simulation environment with Unreal Engine to train their model for Full Self Driving (FSD). In this case, Tesla is creating a full simulation of San Francisco to test their self-driving car software. Theoretically Tesla should be able to use this system to find a solution for every possible driving scenario. Cities with inclement weather remain the most difficult self driving challenge, especially when you compare it to the wide open, dry and sunny roads in places like Arizona. Eventually FSD will be solved and the companies with the best driving algorithms should have a natural monopoly.

Thank you

There is an overwhelming amount of content available online today and it only seems to be increasing. Clickbait headlines driven by advertising dollars have made it much more difficult to find clean and clear answers to basic questions even within high quality journals. We write these articles to clarify relevant trends and provide context. Thank you for taking the time to read them.