Wednesday, April 17, 2024

priming the "pump", oil infrastructure, who’s buying the ETFs, Korean crypto

“Too much of what is called 'education' is little more than an expensive isolation from reality.” – Thomas Sowell  ||

Hi everyone, I hope you’re all doing well! A relatively short newsletter today, you’ll be pleased to hear. To all of you in Dubai this week, I wish you lots of patience, luck and dry socks.

If you find this newsletter useful, would you mind sharing it with your friends and colleagues? ❤

IN THIS NEWSLETTER:

• Priming the “pump”

• Oil supply chains

• Who’s buying the ETFs?

• Korean crypto interest

If you’re not a subscriber to the premium daily, I hope you’ll consider becoming one! You’ll get ~daily insight into the growing overlap between the crypto and macro landscapes, as well as some useful links, and (usually!) access to an audio read of the content. And there’s a free trial!

WHAT I’M WATCHING:

Priming the “pump”

When traditional theories no longer seem to work, the window of opportunity opens for new ones. This includes radical ideas such as decentralized finance and self-sovereign custody, with fewer and fewer people continuing to insist they are unworkable.

It also extends to the heart of economic orthodoxy, which says that inflation can be fought with interest rate hikes. This is, after all, the water we have been swimming in, sometimes drowning but generally, collectively, staying afloat. Only now we’re told that perhaps this basic principle is wrong.

Maybe high interest rates encourage inflation.

As recently as a year ago, President Erdogan of Turkey vowed to continue fighting his country’s eyewatering price increases by dropping rates. Economists around the world fell off their chairs laughing. Turkish citizens didn’t laugh so much as they coped with inflation that had been dropping but was still around 40%.

After reelection in May of last year, Erdogan caved to economic and international pressure and started hiking rates, only to see inflation start to climb again, reaching almost 70% in March.

Now a handful of western economists are wondering if perhaps Erdogan wasn’t on to something after all. Some – from houses such as JPMorgan, Greenlight Capital and others – are suggesting that high rates are inflationary. After all, higher rates put more money in people’s hands. And, let’s face it, the steepest hiking cycle since the 1980s has done virtually nothing to slow down consumption.

You know, maybe?

But it could be that there is something else going on here, something that resembles an economic “psyops”. It’s possible, just possible, that we are being manipulated.

We know that there is no traditional justification for US rate cuts in the short term. Employment is strong, retail sales are beating expectations, Q1 GDP is expected to be not much lower than Q4 and inflation is proving stubborn. Even Fed Chair Powell, yes, he who less than four months ago told us that cuts were imminent, is now suggesting that they may hold rates high for “longer than previously anticipated”.

Indeed, if the Federal Reserve were to cut rates at the May or even the June FOMC meetings, we could see market panic due to 1) fears inflation will roar back and 2) a loss of respect for the US central bank.

Unless, of course, we were gradually coming around to the idea that rate cuts would bring down inflation. If this new school of thought became more widespread, the Fed could cut rates and not lose credibility.

I know, suggesting the US central bank is trying to manipulate us is a stretch – after all, Powell and many other Fed officials are telling us rate cuts aren’t imminent. Rather, the unorthodox rumblings are coming from Wall Street.

But let’s stick with the psyops theme for a moment. What if these claims are part of a concerted effort to give the Fed cover to cut rates, without upsetting economists?

I am not saying there is a conspiracy theory afoot. I am pointing out that we will probably hear more about the need to cut rates to bring down inflation in coming months. We’ll know things have got particularly crazy when that no longer sounds crazy.