This week crypto policy and economic policy are center stage amid a perfect storm of difficult issues, and a new kind of inflation problem. We need to adapt - like pollinators do - and inspire ourselves and our kids with the examples of successful problem solving of the past.
First Comprehensive Crypto Legislation
This week Senators Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.) introduced the Responsible Financial Innovation Act (RFI) intended to define a regulatory framework for crypto. The proposed legislation was covered widely (The Hill, Barron's, WSJ, Coindesk and more) and warily: a Politico piece suggests this is all just an effort to avoid financial regulation.
NLW has a good summary of the crypto industry's cautiously positive response to the bill. My take:
- The bill represents a good first attempt to provide needed clarity and guidance that current regulations and agencies do not. Those who depict the bill as simply regulation avoidance have apparently not been attentive to the interagency turf war between the SEC and CFTC (which this bill resolves) and the festering regulatory confusion that crypto innovators have had to deal with for several years now.
- The Bill has sensible tax treatment that opens the door for use of digital currencies as legal tender (current IRS position holds that crypto is an asset like a house, which means you incur a taxable event if you use crypto to make a purchase).
- Finally I'm happy to see the bipartisan sponsorship of the bill. I will be curious to see what kind of momentum this bill has, given that this is an election year.
- There are a range of more complex instruments that are technically possible in crypto and potentially have very beneficial applications for more equitable finance, simpler and more affordable healthcare, risk management and more. But these will require the crypto industry to invest time educating lawmakers and regulators with understanding of fairly complex functions and their implications - many of which are still in their early stages. I think it will be critical to enable "innovation sandboxes" where test and learn approaches can be undertaken without subjecting customers, corporations and the broader community to undue risks.
I hope that Congress continues to take a more directive approach to guiding the implementation of this important framework, and referees the entrenched agency/industry pairs who may feel threatened by crypto. Keep in mind you’re regulating something that - thanks to blockchain's architecture - has far more accurate tracking and transparency than anything used by central banks and the Fed. Yes, the same ones who sold the public and the markets on the idea of "transitory inflation", then backtracked, and now have a runaway problem on their hands.
This segues into the next segment about the inflation / recession dynamic and why the inflation problem we're facing this time around is different.
The World Bank warned this week that a global recession is unavoidable and raised the possiblity of "stagflation." Energy shortages, war, lockdowns in China create recession risk for this year or next and all eyes are on the June 15 GDP (see the GDPNow tracker for latest chart). Still, others say the fears are overblown and point to signs of resilience.
What to expect
The macro factors in play today frame up what to expect in the kind of recession that could play out over 2022-23:
- Food and fuel supply will be an issue more acute for some populations than others.
- Fuel will (continue to) be an inflation factor for any retail foods/goods that require transport.
- As prices for food, gas and daily needs go noticeably higher, many consumers will reduce their spending and travel.
Prices will stay high until supply increases...but supply can't increase until:
- larger systemic problems are resolved: war, lockdowns in China based manufacturing hubs, supply chain issues, and changes in the labor pool.
- key shifts underway in the global economy and the tech sector have progressed to a point where the new is able to compensate for the failings of the old.
These two points give words to the vague fear being felt right now: we may be facing a different kind of inflation problem (that interest rates can't resolve) and it may take time to play out.
A different kind of inflation problem
Raising interest rates is a tool that has been used and honed in scenarios where constricting the money supply would resolve the primary problem of "excess money." Today's situation however is different due to 3 sets of issues:
- The perfect storm of pandemic, supply chain, war, culminating in a critical energy shortage.
- The shift from globalization economic arrangements to regional economic arrangements and supply chains.
- The shift from centralized tech platforms to decentralized tech platforms.
Given the issues facing us today, the question is whether raising the interest rates will do much good at all. The traditional solution for the rebuilding/remaking situations listed above would be to make money easier to obtain, not harder, and focus it on building more resilient manufacturing and supply chains to meet human needs.
In other words, if this were a "normal" era we'd say its time to invest, not cut. Let's look at the 3 sets of issues that make this inflation problem different.
The perfect storm that led to the energy shortage
In this recent interview podcast, Lyn Alden shares a helpful breakdown of the perfect storm of macro factors in play - best segment starts about 11 minutes in:
- We created an energy glut via shale, alternative fuels.
- At the same time legitimate ESG concerns put a damper on energy investing outside of green energy. Green energy made great strides but did not attain the ability to take over significant (enough) portions of the world's energy needs.
- The pandemic shutdown temporarily masked the severity of the situation.
- Post pandemic reopening, the Ukraine war, the lack of upkeep in trad-fuels, supply chain challenges all combine to create a critical energy shortage. This shortage exacerbates inflation - the inflation driven by the pandemic stimulus, as well as the unacknowledged inflation that existed before the pandemic. (see Flawed Inflation Tracking S3T Feb 27).
The shift from global to regional economics
The 2nd reason this inflation problem is different is that the supply demand dynamic here is different.
Demand is not exceeding supply because consumers have "excess money" and just want too much stuff. Demand is being driven by non-negotiable needs of consumers. To be more specific:
- Demand is exceeding supply because the globalized corporations and banks of the world are failing to deliver.
- The globalized world order that promised to deliver all personal needs at Walmart prices is currently "experiencing service interruptions."
Why is this an important point? Because demand in this case is not simply a factor that "people just have too much money" or "too many frivolous desires." People can't get enough of the basics they need, because the global system that was supposed to deliver their needs is collapsing. A new set of regional alliances are forming but this will take time. Again, as counterintuitive and inconvenient as this may sound its time to invest not cut.
In this context, raising interest rates feels like turning your radio up because your car lost its brakes.
Centralized tech to decentralized tech
The 3rd reason this inflation problem is different relates to a shift underway in tech. The tech sector is shifting from centralized to decentralized platforms and this shift is underway in part because centralized platform companies descredited themselves: exploiting data and workers while ignoring fundamentals of the companies they were growing.
Tiger, the hedge fund that went all in on leading tech stocks has seen its value cut in half. Some investors say this is a healthy shakeout not a collapse because unlike the dotcom meltdown, today's tech companies have significant customer bases and revenues.
But this more than just a shakeout of a few less healthy companies. This may be more like a reset of the entire playing field (NLW calls it the great repricing).
Lured by the outside gains of tech unicorns over the past decade, VC‘s wrote large checks for anything that smelled like a unicorn. Fundamentals (like profitability, sustainable business mode, etc) didn't matter because the new dogma was
- unicorns are just different,
- there's plenty of capital
- you don't want to miss out
Amid today's macro conditions, these “fundamentals don’t matter” checkwriters are getting burned badly and are in capital preservation mode - for their non-crypto and crypto holdings alike. This of course is impacting prices of everything from tech stocks to bitcoin.
Fundamentals do matter. And something about the way fundamentals work is changing. They'll work differently in the near future.
Many - not all - of the unicorns of the past 10 years used exploitative centralized platforms that are now being questioned. The rise of decentralized web3 technologies is offering an alternative to these centralized exploitative platforms.
Side note: a lot of talent was ingested into the tech sector over the past several years - and crypto in the past year. That is now reversing: a significant amount of talent is being dumped back out on onto the streets. This could depress consumer spending and demand for non-basic goods.
Crypto and web3 companies will struggle - whether they were offering scams or building important new capabilities - they'll both be impacted.
Summary: What to watch
Look below the noise and watch for signs of the underlying fundamental shifts taking place. Those may be delayed but not ultimately stopped by the current economic churn.
The post-globalized world order made up of regional alliances will continue to evolve. This will likely be a boost for regional manufacturing and the further advancement of 3d printing and micro manufacturing.
The shift toward decentralized tech platforms will continue, albeit at the pace that capital availability and regulatory clarity and engagement allows.
As I've noted before, this is a time for patient investing in and building out the next generation capabilities. Until those better capabilities come on line, it will be tough. This is a time to be alert and ready to adapt.
Kids and Climate
Kelsey Piper, a writer who warns about the risks of climate change, has a new piece out where she reflects on how we are communicating with our kids about climate concerns. She encourages us to frame climate change as a challenge, not as a hopeless situation where nothing can be done. She offers excellent ideas for informing and directing kids toward paths of learning and constructive action and advises parents to use other innovation successes as examples, like ending the use of leaded gas, or eradicating smallpox. Its a timely reminder that we need to inform and inspire our up and coming generations without dis-empowering or sending the message that nothing can be done.
How bees adapt their individual and social immunity
We have a few St John's Wort bushes which are usually in full bloom this time of year. The yellow pin cushion flowers attract all kinds of pollinators, especially on bright sunny mornings.
This week we had the opportunity to observe something a little different. We kept noticing something that looked perhaps like a wasp - shown the the left photo above. It would jump on bumblebees and honey bees. They would tumble down into the foliage. Sometimes I'd see the bee fly away. Then a few moments later this wasp like creature would appear on another bud or leaf, waiting for its next victim. When bee got too close, it would pounce on that bee and repeat the cycle.
The iNaturalist app identified this as Physocephala tibialis, a species in the family of so called "thick-headed" parasitic flies. These flies attack bees and attach eggs in the bee's abdomens. The blurry photo on the right captures one such attack. As the larva hatch they overwinter inside the bees. As the larva grow toward adulthood, the bees weaken, behave erratically (for example grave digging behavior) and eventually die. The large head of these thick headed flies is used to help break out of the body of the bee.
Not the typical pleasant thoughts we associate with nature. For me a key takeaway is: Bees and other pollinators, the ones who sustain our food supply, have plenty to worry about in the wild even without the negative impacts of pesticides and human activities. So let's try to take care of them as best we can. This guide offers good tips on protecting pollinators.
BUT there is also brighter side: We are learning that bees are able to adapt their individual and collective immunity and defense mechanisms. Figure 1 in this paper, shows an excellent visual of these mechanisms including social behaviors that bees do to protect themselves and their groups.
Follow up on Gun Violence
I was struck by the urgency of the following post and wanted to share it, as a follow up to my notes on gun violence and mental wellness a few weeks back. The researchers in this article believe that we have misunderstood the intent of mass shooters:
- We (myself included) assume that they act because they first and foremost want to harm others, and end their own lives only as an afterthought or unforeseen action.
- In reality these researchers say, these actors are seeking to create a significant (and violent) ending of their own lives.
In other words mass shootings should be understood first as suicide attempts and second as mass casualty attempts, not the other way around.
Thank you again for reading and forwarding to a friend or colleague. Hope you are all S3T for success this week! Feel free to forward this to a friend and continue the conversation on the S3T Discord, Twitter or LinkedIn.
Opinions mine. Not financial advice. I may hold assets discussed.