Good morning. The Nasdaq rallied sharply to close yesterday, just entering positive territory after a few days of beating. Someone is buying dips! The spirit of 2021 lives on!

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Unhedged’s guide to inflation anomalies

It would be very disappointing if this week’s December CPI report doesn’t give Wall Street and its associated pundits some sort of excuse for panic. Inflation is the monster that devours financial commentary, and if there are no surprises tomorrow, it’s not clear what all of us will do to keep busy until the weekend.

With that in mind, here’s a brief guide on when you should and shouldn’t hyperventilate.

Everyone was expecting a big number – up 7% from a year earlier, according to a Reuters poll, up from 6.8% in November. But what matters is the former food and energy core data, which is expected to rise to 5.4% from 4.9% last month (monthly change in the core indicator is expected to be at .49%). Breaking the 5% threshold for the first time since 1991 is one of those big round numbers that might not actually represent much of a change, but it still seems to matter.

don’t panic If commodity prices continue to rise rapidly, or even accelerate. Take a deep breath, especially about cars, of which more than 8% of the index. For example, UBS estimates that new and used car prices will rise 1.3% and 2.8%, respectively, since November alone. But as any member of the Transitory team will tell you, the pandemic has brought about a huge shift in demand from services to goods, and supply chain issues for some goods, especially cars. There’s reason to hope that high commodity prices won’t stick around for long. So ugly data on the commodity front seems unlikely to push the Fed into a more hawkish stance.

Moderate panic about housing prices. Rents and landlord-equivalent rents have been rising strongly – rising by more than 0.4% month-on-month in five of the past six months. These prices tend to be sticky, and the impact of coronavirus-related supply issues, such as lumber prices, is minimal. Here’s what Bob Michele, head of fixed income at JPMorgan Asset Management, told me yesterday:

It’s surprising to us how much talk is about supply bottlenecks and how they lead to massive inflation. We’re looking for something else: shelter. We look at November, the third month in a row that primary and landlord equivalent rents rose by more than 0.4%, so more than 5% annually. If this continues, it will change the conversation. .. it will validate the Fed’s newfound hawkishness

So why only moderate panic? Because the CPI indicator of housing costs is a lagging indicator. More timely investigative measures, such as rent indices kept by real estate websites, suggest that the surge in rents, especially new leases, may have passed.We looked at the apartment listing rent index forward, but recently released December data, the index turned negative month-on-month and returned to a seasonal pattern:

The same message is conveyed by the Zillow National Rental Index, which is available in November. Here’s a UBS chart of the index showing how it has returned to normal levels:

Housing prices are sticky, but there’s reason to wonder if they’re spiraling upwards.

high panic It would be appropriate if we see sharp increases in the prices of services, especially outside of healthcare and transportation (which are special). UBS economist Alan Detmeister suggested to me yesterday that much higher prices for “other services” there – from haircuts to lawn care to legal work – would “make people Surprised”. This suggests that the strong wage growth we’ve seen recently is spreading across the economy, in a way that might (in theory) scare everyone into thinking it’s inflation and set off a horrific wage price spiral.

want to get permission panic about everything, no matter what? This is how you convince yourself. Consider that the market now expects the Fed to raise interest rates four times in 2022. This brings us to a federal funds rate of 1%. That’s still a very negative short-term real rate. If the Fed hits its 2% target rate in 2023 – that would still mean negative short-term rates. And, as Michele told me, “it doesn’t limit financing costs”. While he conceded that inflation will fall as we move into 2022, he doesn’t see inflation falling well below the official target of 3 or 4 percent. Why does he have confidence in this? From his team’s conversations with the company:

They are driving the cost increases they are seeing. . . in terms of supply and labor costs. A year ago they were willing to absorb the increased fee, and now they are not.They say aggregate demand is strong enough that they can push prices up and they will

According to this view, the Fed may have to become more hawkish than it is now, which would have serious consequences for the market. Unhedged is yet to come because we just don’t believe demand will remain strong for long and the bond market supports our suspicions. But Michelle’s argument also scares us.

How Useless Is Bitcoin?

Bitcoin fell below $40,000 on Monday. The bears believe that cryptocurrencies are losing their vitality. Conversely, one of the bulls we interviewed, Joel Kruger of LMAX Group, noted that Bitcoin has rallied to $42,000 despite the continued decline in the stock market. Either way, Unhedged doesn’t know.

If Bitcoin is indeed heading for a prolonged or permanent period of price downturn, the popular notion that it is a store of value akin to digital gold could lose credibility. The nagging question about what’s good for cryptocurrencies is going to get louder.

The Financial Times’ resident monetary historian Brendan Greeley amplified these issues in an article. Excellent column for the weekend. He pointed out that BTCS, a Nasdaq-listed crypto company, is offering investors a “dividend” — a terrible combination of “bitcoin dividends.” Here’s an important point about how Bitcoin compares to other cryptocurrencies, according to Greeley:

Behind the dividend is a bet that, if correct, could have far greater consequences. [BTCS CEO Charles] Part of the reason Allen proposes to pay investors in bitcoin is that BTCS has 90 bitcoins on its balance sheet that have value but no production purpose. According to Allen, Bitcoin is an unproductive asset that “just sits there.” It might appreciate. But it doesn’t generate revenue, which has historically been the purpose of public companies. . . .

[BTCS’s $8.8m in] Ethereum has a job. [Its $3.2m in] Bitcoin does not. BTCS has begun staking — putting ethereum and some other cryptocurrencies in a kind of digital escrow, competing for a chance to validate the ledger of transactions. The more coins you put in, the more likely you are to verify the ledger. The reward is the cost of more coins.

BTCS makes money by staking Ethereum, but can’t find a better way than returning Bitcoin to investors.

In principle, this distinction is not binary. If BTCS were so inclined, it could convert its $3.2 million in bitcoins into “wrapped” bitcoins on the ethereum blockchain — a synthetic alternative asset — and put it there, earn yield and Earnings are converted back to regular Bitcoin.

In practice, this can incur high fees and, worse, Miff regulators.But even though earning from Bitcoin is tricky right now, it may become easier with the arrival of technologists like Square’s CEO Jack Dorsey Put your resources into Bitcoin-native decentralized finance. In other words, Bitcoin is not necessarily useless.

But even under the best of circumstances, Bitcoin may fall short of Ethereum or its newer rivals. Bitcoin is not really useful. It is built to be trustless, decentralized, censorship resistant, etc.Years of Bitcoin block size war Demonstrate that its community prioritizes power over usefulness. Trying to compete with other cryptocurrencies in usability can be a losing battle.

This is part of the reason why the future currency story of Bitcoin’s value gave way to the digital gold story. The latter only requires a price increase to appear. It’s far less ambitious.

Newer cryptocurrencies benefit from learning from Bitcoin’s misery, and therefore opt for different design tradeoffs.many, like nightshade, opting for utility over pure decentralization. Bitcoiners complain that such a coin is DINO: decentralized in name only. If that’s the price of mass adoption, we feel it’s pretty cheap. (Wu Yisen)

a good book

If business news seems particularly dull lately, The Economist has a lively piece All about the ongoing wave of consumer technology innovation in healthcare.