Monday, Feb 27, 2023

"Global rules", strong consumption, a new BTC playbook and more...

“In all affairs it's a healthy thing now and then to hang a question mark on the things you have long taken for granted.” – Bertrand Russell ||

Hello everyone! Welcome to the last Monday in February… I hope you all had a restful weekend, because I have a feeling that March is going to be even more intense. You’re reading the premium daily Crypto is Macro Now newsletter, where I focus on the growing overlap between the crypto and macro ecosystems – I’m glad you’re here. Nothing I say is investment advice! Nevertheless, I hope you find it useful – if so, please consider liking, and sharing with friends and colleagues.

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MARKETS

Some psychology

Friday’s inflation figure confirmed the worst expectations: inflation is picking up again. This is not a surprise – consumption has been resilient in spite of rising rates and hawkish Fedspeak, employment is tight which inevitably means wage growth of some sort, and while pretty much everyone expects at least some degree of an economic slowdown, no-one seems to think it applies to them. What’s more, up until the employment data earlier this month, the market did not seem to be pricing in the possibility of an uptick.

As I’ve discussed here before, that in itself may seem weird. But looking deeper into market psychology, it isn’t really, and so before we dive into the numbers, here’s a brief detour. It’s understandable that people would continue to consume if they could – as humans, we tend to be blinded by the conviction that the current state of affairs will continue, and, you know, YOLO. We all learnt three years ago that our freedom and our ability to spend could be suddenly curtailed, and the uncertainty in the air we breathe today does not exactly inspire confidence that tomorrow will be a better time to enjoy ourselves.  

But investment managers, in theory, are trained to read the data and think about what’s coming. I say “in theory” not because I don’t think investment managers know what they’re doing – I firmly believe they do. But us observers mistakenly assume that all managers are willing to take contrarian positions in order to get better returns than everybody else, and that diversity of interpretation makes the market efficient. The bulk of the money that moves the market, however, is conservative – think pension funds, insurance, endowments, etc. They are generally more concerned with not losing than with making big profits. So, they are more likely to go along with what the majority is thinking, which could largely explain why it can be so hard to turn a popular narrative and why the market’s insistence earlier this year that the Fed was just plain wrong was so widespread. It could also largely explain why share prices are still not taking into account the inevitable profit compression as costs rise more than prices.

Sticky inflation

Back to the numbers: core PCE, the Fed’s preferred inflation gauge, increased by 0.6% in January, the highest since July 2022 and the second month of acceleration. Adjusted for inflation, core PCE jumped 1.1% from the previous month, the highest increase in nearly two years.