Is inflation worth worrying about?

This week, the Producer Price Index (PPI) in the US saw a significant jump, surprising analysts with a 0.6% increase in February, the largest since last summer. The Core PPI, excluding food, energy, and trade, also rose by 0.4%. Yearly rates for PPI and Core PPI climbed to 1.6% and 2.8%, respectively, showing an upward trend in wholesale prices. What is more important than the actual levels of inflation is the longer-term trend. Since early 2023, inflation has steadily declined, however it has stabilized at the current levels over the last several months.

• The overall level of inflation is less relevant than the medium-term trend
• The trend over the last 3-6 months has been that inflation has stopped going down
• Market participants are continuing to focus on how this influences the number of rate cuts this year
• We think it only really matters if the data is significant enough for the Fed to change their stance in future actions being cuts to interest rates
• We also think it is important to follow the yields on long-term (10-30yr) US treasuries
• If those yields continue to rise, this could be more impactful to the economy than how much the Fed cuts this year
• Higher long-term yields are very negative for the economy, given the impact on the US fiscal situation

The $10 trillion problem

Recent research by Apollo indicates that the US government will need to issue roughly $10 trillion of debt this year alone. This is broken down between $8.9 trillion of US debt that matures this year and a deficit of $1.4 trillion. This amounts to about 30% of all of the US debt outstanding today. The big question is, at what yields will the US government be able to finance this kind of debt burden?

• The US is running the largest fiscal deficit in history, except during prior wars
• They are also in need of refinancing a staggering amount of debt at much higher rates than previously issued
• This is a negative self re-enforcing spiral which has the effect of hampering growth prospects
• If the US were to go the way of Japan in the 1990s, the Fed would have to step in to buy debt from the US Treasury
• As we have noted before, Japan has been stuck in what they describe as the lost decades

Crypto vol

If you are following the cryptocurrency markets, Bitcoin recently made all time highs, and this week breached those yet again to reach over $73,000. As per usual, the rest of the crypto market followed, with ETH trading at about $4,000 and other smart contract platforms like Solana and Avalanche also reaching recent new highs. To close the week, we saw the market trade down significantly, with Bitcoin trading in the $67,000 context and ETH in the $3,700s. Solana and Avalanche both also traded down from the highs.

• The cryptocurrency market is highly volatile, both to the up and downside
• We have discussed the role of the Bitcoin ETFs driving the price of Bitcoin before
• With Bitcoin rising, it brings along the rest of the market
• The thing we would like to highlight is that some of the other popular chains, like ETH, SOL, and AVAX, have some similarities to what we are experiencing today with Nvidia
• What we mean by this is ETH, SOL, and AVAX are smart contract platforms that developers can build applications on top off
• The more developers using these chains, the more demand there is for the tokens, and the more the price goes higher
• This is similar to companies that are trying to develop generative AI tools and need to buy Nvidia chips to do so
• The more companies developing AI tools, the more demand there is for Nvidia chips
• The more demand, the better the business fundamentals of Nvidia, and the higher the stock price
• You can debate the usefulness of the applications on blockchains, just as you can debate the usefulness of AI applications
• In crypto, there is still a whole lot of pure speculation going on
• People need to be mindful of this but also understand the difference between crypto assets that are being used for development versus pure speculation

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