Happy Friday!
Let’s touch on inflation real quick. A colleague sent me the chart below with three lines:
- Consumer Price Index (CPI), which is a broad measure of inflation (orange line)
- Core CPI, which strips out food and energy (blue line)
- Median CPI (white line), which removes the effects of outliers in the basket of goods used to calculate CPI inflation.
The chart shows that Median CPI is significantly lower than CPI and Core CPI (both are calculated as weighed averages).
It’s important to look at the median in a sample set and how it compares to the average. For example, if 9 out of 10 items in a data set rose by 10% and the 10th rose by 200%, that one outlier would screw up the “average” increase:
[(9 x 0.1) + (1 x 2.0)] / 10 = 29% average increase
That’s why we also look at median on any data set because the impact of outliers is ignored. Here the median is:
(0.1 + 0.1)/2 = 10% median increase
When the median is this much lower than the average, it suggests the presence of one or more outliers. And if you dig into April’s inflation report, you’ll see that used cars, hotels, and rental cars accounted for 50% of the inflation reported (despite these three categories representing 5% of the total basket).
Currently, the median CPI is trending up slightly, which is an indication that broad-based inflation is rising but nowhere near what the headline numbers portray (again these are averages).
This supports our view that secular (long-term) inflation of 2.5% – 3.5%ish is likely. The 7%+ annualized that we’ve seen for the last three months appears to be distorted because of the effect of a few categories (outliers) and year-over-year comps (a year ago was the depths of the lockdowns).
Moving on…
Crypto remains in the news, and frankly I’ve become bored with it all. It goes up, it goes down. Whatever.
I’ve seen estimates that the entire crypto market is around $1.5 trillion in total “market cap.” If that’s the case, then it’s about 1-2% of all global financial assets on average this year. Yet it seems like it garners half of financial news these days.
Admittedly, I’m just as guilty. I’ve written about it a couple times/month since October, so I’m not throwing stones here. Simply pointing out that it’s attention relative to size is annoyingly high.
But not all of the news is positive for bitcoin. In fact, I’d argue that the negative news could have a greater impact because regulators and politicians are probably watching closely. It can’t be good for bitcoin’s legitimacy when:
- Elon Musk can presumably move the price with a single tweet. Now, nobody knows why bitcoin does what it does, but if regulators think one person has this much power, whether he has it or not, that can’t be good.
- Colonial Pipeline paid a $4.4 million ransom to DarkSide – the hacker group that took down one of the largest pipelines in the U.S. earlier this month. Two reasons why this could be bad. First, a corporate ransom was paid to restore critical infrastructure to the country using a completely untraceable financial asset that isn’t controlled by the government. Second, this is the only story I can think of in recent history where bitcoin was actually used to buy something (except for the few weeks where it could buy a Tesla). It’s hard to call bitcoin a currency when it’s clearly not being used to buy stuff all that often.
- The second derivative of bitcoin jokes are now worth billions (that’s a geeky way of saying that parodies of parodies of bitcoin). I wrote about Shiba Inu (SHIB) two weeks ago. It’s a parody of Dogecoin, which is a parody of bitcoin. At the time of writing that, SHIB was worth $26 billion. I don’t have the stomach to look it up anymore, but I’ll just assume it’s not worth zero. If so, my point remains intact.
Let me be clear. I’m not making the call that bitcoin/crypto goes away. What I’m saying is that I can’t see how the regulators are getting more excited about crypto with all these shenanigans dominating the news.
That being said, there’s one government agency that supports any product, service, and/or asset that goes up in value and can be assigned a basis. The IRS is all about crypto, and they are licking their chops.
It’s estimate that there’s roughly $500 billion in embedded gains in crypto (obviously this figure changes by the hour so just go with the concept rather than the number). And the IRS now wants to track any crypto transfer above $10,000.
This story is also interesting because it is fueling a conspiracy theory that appears to be gaining traction. And I love me a good conspiracy theory. It goes something like this…
There’s a lot of crypto being bought on margin. When crypto falls, over-levered traders have to post more collateral. Millennials like owning crypto over stocks, so they sell stocks to move cash to meet crypto margin calls. This selling in equities has amplified spikes in the VIX like the one in the chart below from two weeks ago:
I’d be shocked if margin calls in crypto are fueling accelerated equity market volatility. FOMO investors can band together to drive one or two stocks, but the entire stock market? No shot.
I think it’s what we’ve discussed already – lots of people who don’t want to own stocks right now have to own stocks right now if they want any shot of a “real” return over time (positive return after removing the effects of inflation). Seems more plausible that these nervous nellies are spiking the VIX than crypto traders. But that’s just a guess.
Lastly, the cicadas are back, and it’s likely the first and last time I will ever be thankful for living in California. Because I’ve lived through a cicada cycle in the late 1990s in Nashville while I was in undergrad, and there’s nothing more horrifying than billions of flying cockroaches darkening the sky for over a month. If you’re living in cicada stomping grounds right now, stay strong and don’t go outside.
And most importantly, enjoy the holiday weekend…
Mike on Markets 
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