Irrational Exuberance 2: The Way of Inflation

Plus: The “good” crypto exchange gets a black eye ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

January 5, 2023

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TOGETHER WITH

Good morning.

What’s that old saying – a birdsong a day keeps the doctor away?

Instead of pills or inhalers, medical experts in Derbyshire, Scotland, are supporting a pilot program that asks patients to get off their couches and into nature. The advantages include reduced stress, less fatigue, and diminished depression. The program is riding the success of similar initiatives in the Shetland Isles and Edinburgh, where 75% of participants reported benefits.

So put the phone down for a bit, stop comparing yourself to others on Instagram, and take a walk. Your body and brain will thank you.

Morning Brief

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The Fed would like Wall Street to get off its lawn.

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Coinbase can be trusted…sort of.

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Aux armes boulangers!

Policy

The Fed Would Prefer to Manage Inflation Without Wall Street’s “Help”

Give Wall Street an inch and it’ll take a mile.

Members of The Federal Reserve’s Federal Open Market Committee have voiced concerns that investor willingness to plow back into equities at even a hint that rate hikes are over is making their job tougher, according to the minutes of their December meeting released on Wednesday.

Curb Your Enthusiasm

After being treated to the longest and lowest interest rate environment in modern financial history, investors became addicted to cheap money. The S&P 500 expanded by more than 2,500% between 2009 and 2021 as the Fed kept rates as close to zero as mathematically possible. Once the Fed started jacking up rates last year, there was a bad case of withdrawal and the S&P 500 shrunk nearly 20%.

In the fight against rising prices, Fed Chair Jay Powell and his team have been aggressive with rate hikes. But while the rising cost of money has blown up equity pricing, the IPO market, and SPACs, traders still get a tingle when the Fed appears to indicate that it will take its collective foot off the interest rate accelerator, and that sensation spreads right to their buy finger when they start to see internal research that inflation has peaked. That complicates things for central bankers who are looking at different data and are now concerned that they will have to contend with over-exuberant equity and bond trading desks pushing prices higher before the Fed has fully got its hands around inflation:

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While Wall Street uses a variety of things to gauge where inflation stands, the Fed remains quite committed to the core personal consumption expenditures price index —or Core CPE if you’re in the cool crowd— which currently stands at 4.7% and is projected to fall to 3.5% by the end of the new year and possibly 2.5% at the end of 2024. That all sounds great, but a surging stock and/or bond market might throw a wrench in that progress.

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To combat a potential Wall Street harshing of the Fed’s inflationary mellow, Powell would have to make future rate hikes more dramatic, making mortgages and other loans significantly more expensive for regular Americans. That’s how real recessions are born.

Not everyone is worried: Powell’s nightmares are the stuff of dreams for anyone on Wall Street who is fully playing along with the Fed’s tenor of more-than-cautious forward guidance. One hedge fund made a 163% return in 2022 betting that the Fed would make everything worse before it could start making it better. “You have your variations, your rallies day-to-day, month-to-month,” Neal Berger of Eagle View Capital Management told Bloomberg of his Contrarian Macro Fund. “But big picture, everything is going down. Price action is ultimately the bible.”

–Thornton McEnery

Crypto

Coinbase Fined $100 Million by NY Regulators

Coinbase touts itself as “the most trusted crypto exchange,” but nowadays that’s a little like being the most relatable Kardashian.

No one is saying that Coinbase is another FTX, but on Wednesday the company reached a $100 million settlement with New York regulators over questionable practices.

Transparency

Crypto has always been more volatile and riskier than playing the stock game, especially since it lacks a unifying framework for regulation. That volatility hit a nadir in 2022 when crypto exchange FTX imploded because CEO Sam Bankman-Fried allegedly dumped billions worth of customer funds into his failing trading firm Alameda Research. Caught in FTX’s fallout, other crypto groups like BlockFi, Three Arrows Capital, and Celsius Network also filed for bankruptcy last year.

Coinbase, the self-professed good guys of crypto, recently started running ads with the hopes of rebuilding investor confidence by highlighting how much government scrutiny it is now under thanks to being based in the US and not more freewheeling locales like the Bahamas, for instance. Based on New York State Department of Financial Services findings, Coinbase had more than 100,000 alerts of suspicious customer transactions by late 2021. In one instance, the exchange’s lax procedures let a digital thief steal $150 million from an unnamed company the blockchain bandit claimed to work for:

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The exchange agreed to pay a $50 million fine after regulators found the company was letting customers open accounts without sufficient background checks, which could pave the way for money laundering schemes and terrorist funding operations.

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Coinbase will also have to spend $50 million to beef up its compliance program – a system to prevent drug traffickers, child pornographers, and other potential criminals from opening accounts.

“We have been very outspoken about illicit financing concerns in the space,” Adrienne Harris, state superintendent of financial services, told The New York Times. ”It is why our framework holds crypto companies to the same standard as for banks.”

What’s in Store for 2023? After the great crypto meltdown of 2022, experts and lawmakers believe the digital currencies will bounce back only under far greater checks and balances, starting this year. Sen. Elizabeth Warren has suggested that crypto oversight could be handled solely by the Securities and Exchange Commission, and Katherine Dowling of Bitwise Asset Management told TechCrunch: “This is not the death of crypto.”

-Griffin Kelly

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Energy

French Energy Firms Agree to Negotiate with Bakeries

(Photo Credit: Rachel/Flickr)

French Finance Minister Bruno LeMaire is borrowing a page from Marie Antoinette and letting them eat cake.

Energy suppliers in France have agreed to allow the country’s 33,000 or so bakeries to negotiate their energy bills on a case-by-case basis. The move appears to be an olive branch, as it was announced just as government officials spoke out against energy companies for not providing adequate assistance to French businesses in the throes of an energy crisis.

High Pain Threshold

Russia’s war in Ukraine led to sky-high energy prices in Europe as the continent tried to wean itself off Russian oil and gas. The war also spiked the price of wheat, concocting a perfect storm for European bakers — so much so that bakeries in Germany staged a protest last month by switching off all their lights. France however was swift to introduce energy subsidies and managed to largely duck European bread-flation; while most Europeans saw the price of a loaf go up around 20%, French bread prices crept up by “only” 8.2%.

France’s fierce protection of its bakeries is not entirely surprising (the French baguette won UNESCO heritage status last year) but the government has been notably aggressive. As LeMaire rides in to shield the boulangers, Europe more generally is seeing some glimmers of economic hope:

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This week, European gas prices fell to their lowest point since the Russian invasion of Ukraine began, softened in part by a bizarre January heat wave that has left some Alpine ski resorts short on snow.

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Inflation in Europe also appears to be easing off, with consumer prices from France, Germany, and Spain growing less alarmingly fast than expected.

LeMaire publicly accused energy companies of breaking promises they made in October to assist small businesses hit hard by the energy crisis, saying: “either the energy suppliers correct their behavior, or we will take the necessary measures.” You can almost hear him sharpening the guillotine…

Going not-so-nuclear: While France has done well in shielding its precious croissants and pains au chocolat, its domestic electricity production dropped 15% due to its nuclear industry shutting down reactors for repair. It turned to Germany to fill the gap, importing twice as much energy from the Bundesländer as in the previous year. Atomkraft? Ja, danke.

-Isobel Asher Hamilton

Extra Upside

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Nobody lives there anymore, it’s too crowded: Manhattan realtors fear a frozen market.

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Digital tattoos, fitness training for dogs, and smart bird feeders: Check out the news gadgets from CES 2023.

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New Year, New Gut: Feeling a bit ‘off’ lately? Most don’t know this, but your overall gut health affects your body weight, energy level, metabolism, and mood. That’s why dietitians are so interested in a probiotic strain called Akkermansia muciniphila – it’s shown to repair the gut lining and boost overall gut functioning. Problem is, you can’t get it from your food. Luckily, Ph.D. scientists at Pendulum developed and patented this keystone strain as a daily probiotic. Don’t put off your gut health any longer. Use code UPSIDE to get 20% off your first month of a Pendulum.

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