Update on inflation

This week, we received a mixed update on the inflation picture. First, the Consumer Price Index (CPI), which measures consumer prices, came in lower than expected. Notably, it was down month-over-month for the first time. Year over year, CPI came in at 3%, less than expected, and Core CPI (excluding food and energy) came in at 3.3%, also less than expected. Then, on Friday, we got the Producer Price Index (PPI) figures, which were actually higher than expected. Year over year, PPI came in at 2.6%, higher than expected, and Core PPI came in at 3%, also higher.

• More important than the latest data point is the trend, which is lower
• Inflation had fallen in 2023, rose in Q1 of 2024, and resumed its downward trend last quarter
• This is positive for hopes of a rate cut sooner rather than later
• However, inflation is a rate of change calculation; a positive number still means that prices are rising
• It is important to remember that prices are still 20-25% higher than they were pre-Covid
• We also believe we are in a structurally higher inflation environment, supported by several large macro trends
• Fiscal spending has been excessive both under Trump and Biden (partially as a response to Covid)
• Excessive fiscal spending is stimulative to the economy and inflation
• De-globalization is also a trend that has been present under both Trump and Biden
• Moving production closer to home and enacting protectionist policies like tariffs are both inflationary
• If we are living in a structurally inflationary environment, it will also mean interest rates will have to remain elevated versus the last decade and a half

Latest AI narrative

There is a new narrative around Artificial Intelligence (AI). A number of reports have emerged, including a substantial one from Goldman Sachs in collaboration with a professor at MIT. These reports argue that the anticipated return on investment in AI might materialize differently than expected. To provide some context, the latest generative AI technology entered the scene in November 2022 when OpenAI released ChatGPT to the public. This marked the advent of new, large language models (LLMs) that could understand and respond with natural language while performing various tasks. Since then, the technology has evolved significantly, with newer models becoming more sophisticated and better at their tasks. This evolution has driven nearly every company to develop an AI strategy. However, implementing these strategies requires substantial investment, which is estimated to be $1 trillion over the next several years. The critics contend that there will not be enough return for such a huge capital investment.

• This reminds us of a popular Bill Gates quote: “We overestimate what we can do in 1 year, but underestimate what we can do in 10 years”
• It also reminds us of the Internet 1.0 bubble, when telecom companies built way too much infrastructure in the early days, this was eventually used, but it took longer than anticipated
• The latest generative AI technology is still very new
• As the tech gets better, adoption broadens, and new supply of compute comes online, it will get cheaper
• Having used the technology ourselves, we are big believers that it will drive productivity across various industries and job functions (both blue and white-collar)
• Use cases are still emerging, and we have not likely scratched the surface yet
• In the long term, we believe these new models can drive a ton of productivity and innovation and will be very beneficial to our economy

What is behind Bitcoin’s price move

Bitcoin has traded off significantly over the last several weeks, trading as low as ~$53,000, down from a recent high of over ~$73,000. This is particularly striking because it comes at a time when the tech-heavy NASDAQ is trading at all-time highs. Bitcoin has, in the recent past, been highly correlated to the NASDAQ. What seems to be happening is a very large liquidation event that is creating more than average selling pressure.

• Mt. Gox was one of the original Bitcoin exchanges based in Japan
• It collapsed due to a security breach in 2014 and was put into bankruptcy
• It is estimated that the governments put in charge of its liquidation have been able to recover roughly 200,000 Bitcoins (worth over $10bn today)
• While this liquidation has been ongoing for a decade, it was reported Germany began distributing about 10,000 Bitcoins from the estate over the last week
• Given this amounts to ~$500mmm, if the recipients were to sell it would create pressure on the price
• It is likely market participants got ahead of this liquidation which is what caused the price to trade down dramatically

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