What’s it all about?

Everyone knows that inflation is coming. You can’t read a newspaper or look at an email newsletter without being reminded of that. The problem is that it’s difficult converting this knowledge into money. Maybe buy real assets: lumber, perhaps? But then you remember that lumber futures have quadrupled in price over the previous year, which makes buying now a tad risky. (Yes, I know that there is autocorrelation in these things.)

The other tactic is to sell bonds. Inflation goes up, interest rates are composed a of an element compensating for risk, and an element compensating for inflation. So, nominal yields are gonna go up, so bonds are gonna crash, right? Actually, no. The Fed controls the short end. And you can hedge your long-dated bonds with a rolling series of short term positions. If the Fed keeps short rates at zero, then long rates will remain at zero. Or the Fed will just keep buying long-dated bonds until the result is achieved. Will this stop inflation? Hell, no! But it will protect holders of long-dated bonds, and more importantly, keep funding costs low for the government.

TIPS? Yes, these guarantee a fixed real return. But it’s negative, around 80bp. So, OK, you get protected, but it’ll cost ya!

Maybe gold. The ultimate store of value, trusted by humans for thousands of years. In such an inflationary environment, gold prices must be rocketing, right? Actually, not so much. This is why the media deride Peter Schiff so much. He’s only saying explicitly what most serious commentators know: that gold will catch a bid. But he’s not putting in many caveats, and is explicitly saying “buy gold now.”

What else? Well, VIX is a possibility. When we roll over into inflation, the SPX will get hit, and VIX will start to rise again. But, like the other real assets, it has been crushed, so maybe, again, the time is not yet ripe.

The conclusion of all this is: put tight stops on exposure to bubble assets, and maybe hold some small precautionary positions in geared reflation assets. Not investment advice: obviously.

However, Edward Harrison argues that by the Fed (and other central banks) buying up all the yielding assets (longer dated govt. bonds), the interest income to the private sector is squashed, thereby draining demand out of the economy, which is of course deflationary.

This is certainly consistent with what happened in Japan. The collapse in yields lately points to a similar process. Will the impact be limited to a collapse in yields, or will it collapse the price of real assets too? Maybe it’s too soon to say.

Wrap

Another day of calm before the storm? I have no idea, but the day had no real direction:

• equity indexes mainly gained new all time highs,
• bitcoin staged a bounce back (6.3%),
• currencies more broadly were very flat (DX actually 0%),
• commodities were mixed. Oil ground higher, by 30bp, but generally quiet. Lumber continued to collapse: down 6%,
• bonds sagged a bit. Maybe someone read my inflation shroud-waving above (or one of the 10K similar ones),

How much does it cost to set up a crypto bank to lend stable coins?

It turns out to be not very much at all to lend crypto using defi. The key technology is ethereum. It’s a fantastic technology, with amazing utility.

The question is, does that utility turn into value? It seems to me that the answer is “no,” because there is simply no limit to how much can be produced. Nobody made any money out of HTML, or web servers, or TPC-IP. They are wonderful technologies, which transformed the world. But they did not make money for anyone directly.

For sure, people made money in ventures that utilized that technology. Where would Amazon be without TCP-IP? (I know it also depends on a whole host of other clever tech, like public key encryption, that underpins https too.)

Lightning Network

I don’t really know what this is, but I’ve seen it speed up and reduce the cost of bitcoin transactions by a lot. You can read about it here. It seems to use Ethereum smart contracts to conduct transactions ‘off blockchain.’ Yes, I’m waffling, but read the thing yourself. One thing I can understand is that with a private key, I can enter into a binding contract with another party on the same network to agree I owe money (for coffee etc.). I can see that using BTC as collateral for this could remove credit risk. Same goes for any crypto currency, I guess.

Anyway, I installed Zap on my PC, and I’ll have a play with the network. I did look at paying for something with BTC today, but then I discovered that it had to be routed via BitPay, which requires registration etc. and so is no more anonymous than PayPal. I was just renewing a domain name registration, but I thought it was interesting. So few ‘normal’ retailers even take BitPay.

Corporate Taxes are a distraction

https://thesoundingline.com/corporate-tax-revenues-are-irrelevant/

The brutal truth is that hardly any tax revenue is raised by taxing profits. Company boards have a choice about funding their activities with debt (or equity that looks enough like debt that the tax authorities treat it like debt), so in a sense all corporate taxation is voluntary.

The G7 position on corporate taxes is yet more political theatre, designed to make the proles think that governments are on their side.

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