Edition #131
Supply Bottlenecks Point to Higher Inflation, Stocks Recover, Bitcoin's Leverage Flush
Economy:
As supply constraints continue to be an important dynamic that impacts general consumer trends & inflation, I continue to believe that monitoring supply chain data is an important aspect of building a well-rounded view of the economic situation. In Edition #104 of this newsletter, I had discussed non-traditional measures of inflation & focused quite a bit on the port crisis in Los Angeles and Long Beach, CA. In that newsletter, I had aggregated my own data to analyze the Port of Los Angeles & the average days at anchor for the various container ships coming into that port. At the time, the data looked like this:
I was curious to update this data and see where we are today, in light of renewed focus for the holiday season. Here are the results:
When I first shared this data on October 7th, the average days at anchor from 10/6/21 was 16 days. At the end of November, this figure had risen over 25 on three separate occasions, hitting a peak of 31 days on November 23rd. Unequivocally, the data has simply trended higher, although we can certainly see the days at anchor is beginning to rollover. The important question on my mind is if the rollover will sustain or is it simply a speed bump before we continue to accelerate higher?
I don’t know for certain, but other data available continues to confirm that the situation is largely getting worse.
According to this data, there were 96 ships waiting offshore and 31 ships at terminal berths at the Port of LA and Port of LB on Friday, December 3rd, which is an all-time high. In combination with the data I provided above, this data from Freight Waves confirms that even more ships are waiting even longer than before.
With the November CPI data being released on Friday, December 10th, I have zero doubts that we’ll see another 12-month inflation rate that exceeds 6.0%, possibly even higher than 7.0%. At the present moment, the median estimate for the November figure is 6.7%. Again, I wouldn’t be surprised to see the data come in higher than that.
Stock Market:
On 12/2, in the midst of the market correction, I posted the following on Twitter to discuss the Nasdaq.
I was highlighting the fact that I expected to see former resistance become support once we retested that level. The price structure I have on this chart has all been updated in real-time and also allowed me to predict the bottom in early October (green oval). Here’s an update with how the Nasdaq has performed since that post:
As we can see, the white level (former resistance and ATH’s from September 2021) perfectly acted as support in this retest. Since the intraday lows from the day of the retest, price has gained +5.4% in just three trading sessions. The market is beginning to shrug off fears regarding the omicron variant, as the uncertainty around the health implications and vaccine effectiveness are becoming clearer. It’s possible that the inflation data on Friday could cause a significant market reaction, but I remain optimistic as we enter the final three weeks of the year.
On October 7th, in Edition #104, I wrote my expectations for U.S. stocks through the remainder of the year, saying:
I’m going to go out on a limb here and say that the S&P and the Nasdaq gain at least an additional 8-10% from these current levels through the end of 2021. At the present moment here are the current prices of each index as of market-close on 10/6:
S&P 500 ($SPX): $4,363.55
Nasdaq-100 ($NDX): $14,766.75
Keep in mind that stocks were rolling over significantly when I published this prediction, experiencing a maximum drawdown of -8.3% for the Nasdaq. Market fear was high during that time and most investors were panicked. The newsletter that I sent out this prediction was only two days after the bottom. Since that post, the S&P 500 has gained +7.7% and the Nasdaq has gained +11%. As we close off the year, I think it’s possible to see each index gain an additional 2-5% through the end of the year.
Cryptocurrency:
In the midst of the market pullback we’ve experienced over the last 5+ days, I wanted to frame the leverage flush in a unique light. First of all, this was a good thing. We don’t want speculators driving the market, taking over-leveraged positions to gamble on the price of Bitcoin (or any asset for that matter). When the market began turning lower last Friday, then continued on Saturday, lenders began making margin calls on leveraged traders to liquidate their positions and pay off their debts. This liquidation produced $2.1Bn in realized losses according to a Bitcoin blockchain research company, Into The Block. In response to seeing their post of this data, I said the following:
A monetary network had $2.1Bn in realized losses & there weren’t any bailouts, interventions, or taxpayer funds needed to save the market. The worst thing that happened was that speculators got punished. Each block continued to get validated.
While market participants often get distracted and only focus on price, I’ve tried to take a different perspective on this platform, focusing much more on adoption curves, theoretical discussion, and the underlying value of the digital asset. There’s a great saying in economics that “price is what you pay, value is what you get”. In my opinion, the value of the Bitcoin network, as a monetary system, is in the tens of trillions of dollars. Compared to the current market cap of $1.05Tn, I am practically unfazed by a market pullback from $58k to $42k. Sometimes I even joke that the price of Bitcoin is “only” $0.05M, as a way to frame the current price in a way that seems more aligned with what I think the future price of Bitcoin will be — in the millions.
At the end of the day, Bitcoin is competing with every form of fiat currency in the world, and therefore primarily against the USD (unless the United States government or Federal Reserve begins to buy Bitcoin outright). Considering that the USD has lost 92% of its purchasing power since 1947, where the purchasing power of $1 in 1947 is currently worth $0.08 today, Bitcoin is offering a clear alternative solution as a monetary network.
With the U.S. government announcing the end of the gold standard in 1971, the debasement of our nation’s currency has only continued to accelerate. The USD enables a system where government can issue unlimited debt, run limitless deficits, and spend massive amounts of money on new programs. It also enables the Federal Reserve to create money out of thin air, monetize the government debt, and artificially inject liquidity into the financial system. These two institutions have been unchecked, but Bitcoin’s programmatic/fixed monetary supply, unchangeable open-source code, and permissionless system is allowing people to choose an alternative way to protect their capital, time and monetary energy. When price crashed -20% in a day, there weren’t bailouts, the system didn’t fail, and everyone had full access to their Bitcoin. Speculators got punished, were forced to pay their lenders, and that is all. In terms of a sound monetary network, it doesn’t get much better than that. Tick tock, block by block.
Talk soon,
Caleb Franzen