Food For Thought – Joining the Dots, 05 Sept 22 (Labor Day)

A collection of topical, punchy and opinionated thoughts on Macro, Politics, Finance and History from an investor and fan of the fledgling Crypto Asset Class. Enjoy!

Rising?Inflation?–?Where is inflation coming from, join the debate???Is it energy price rises resulting from the tragic war in Ukraine and economic sanctions???Is it because of an increase in the price of agricultural commodities, leading to higher food prices???Is it workers demanding higher wages???Is it a reduction in globalisation, increased onshoring and friend-shoring???Could a massive increase in the Money Supply to support the economy during Covid lockdowns have anything to do with it???“The jury is out”!

The strength of the US Dollar in currency markets continues to pose problems outside of the US.

Rising Interest Rates?– It’s all about the narrative.??Fiscal and Monetary policy decisions are political, let’s stop fooling ourselves about Central Bank independence.??After decades of cheap debt, there is simply too much debt in the system for any other approach.

Federal Reserve Chair Jerome Powell says that policy will be sufficiently restrictive to return inflation to 2 percent.??The price of oil has fallen recently.??Agricultural commodity prices have fallen back to February (pre-war in Ukraine) levels and we’re having a good harvest.??But will that be enough to get us where he wants to be?

Have we seen interest rates at or near their peak???I think probably we have.??There may be one more rate rise before we see the data showing sufficient demand destruction for the Fed to pivot.

More Government?– A lot of the issues facing countries around the world are likely to result in more government, more government spending and more fiscal policy.??Russia’s war on Ukraine has resulted in pledges to spend more on defence, particularly in Western Europe.??China’s increasing military capabilities in Asia are likely to provoke a similar response in Japan, Australia, Taiwan and India.

Improving or repairing neglected infrastructure, tackling global warming and climate change and a desire for reshoring/deglobalisation will all require more government spending.??And all this accomplished whilst caring for aging populations – a great deal of challenges lie ahead.

Employment?– Covid 19 has changed the way we work forever.??Michael Saylor has said, prior to Covid, he would have fired employees who wanted to work from home.??Now he saves millions of dollars in travel and accommodation with his employees working over zoom.??This would have been unheard of, only a short while ago.

Even in Venture Capital (VC) where it was the practice to visit investee companies to “kick the tyres”, it is now acceptable to do your due diligence via zoom.

How is the looming recession likely to impact employment in crypto???Undoubtedly, this will make employers nervous.??Brokers will see volumes fall, along with profits.??But there has been so much VC funding invested in crypto projects that employment prospects are likely to stay strong for the crypto asset class.

Energy Security?– Politicians in the western hemisphere have demonstrated a complete inability to establish a policy for energy security.??The closest they have been able to come to a policy is to make a commitment to a date by which we will be carbon neutral, without a plan of how to achieve the aim. We have witnessed many years of under investment in hydrocarbons and nuclear as an energy source has been denigrated.

Finally, we can have a serious discussion!??Let’s begin by recognising that globally (China and India in particular) hydrocarbons will be the base load for many years to come, in parts of the world where the “sun don’t shine, and the wind don’t blow”.??We will still need to find and develop new sources of hydrocarbons if we don’t want to cripple our economies.??You don’t get buy-in to tough environmental policies if families can’t feed, clothe and shelter their children.

Governments in countries throughout the world will have to solve the coming energy crisis this winter if they want to be re-elected.??Vulnerable people will have to make the choice between “eating and heating” – some, unfortunately, won’t make it!

War in Ukraine?– It’s going to be a long-drawn-out war, with an eventual negotiation (involving Europe), resulting in a loss of territory and a poor outcome for Ukraine.??Things are likely to “come to a head” this winter with crippling energy costs in Western Europe.

Economic Sanctions on Russia?- As deplorable as the war in Ukraine is, have we “shot ourselves in the foot” when it comes to sanctions???Severe economic sanctions have been imposed by the US, Canada, Europe, the UK, Japan, South Korea, Taiwan and Australia.??Have they hurt Russia???Have they worked???I think, at least in the short term, the answer must be a resounding No!??

Whilst Russian oil and gas exports have been disrupted, they are receiving significantly higher prices and alternative buyers (at least for their oil).??China and India are happy to step in and buy oil at a discount to the global market price.

We witnessed Joe Biden fist pumping Mohammed bin Salman in Saudi Arabia, a country with an unconscionable human rights record, in his efforts to persuade them to increase oil production rather than tackle bureaucratic constraints to oil production at home in the US, that is, ramping up fracking and oil pipeline construction.??To no avail!

The results of economic sanctions have either been unexpected or poorly thought through.??Sanctions have likely hardened public opinion in Russia against the West, enabling Putin’s narrative of a besieged fortress, as well as pushing Russian business closer to Putin.??In the longer-term, Russia’s ability to purchase higher tec components and machinery will be hampered and younger Russian citizens may leave rather than live in an authoritarian regime.??

I estimate, countries generating forty percent of global GDP are not involved in sanctions against Russia and the resulting market will still provide significant opportunities for Russian exports and imports.??The aim was to hurt Russia, but Europe is paying a very high price.

China, Taiwan & Hong Kong?– Xi Jinping wants to unify ethnic Han Chinese across the Taiwan Strait.??Will American public opinion want to argue with this???What is the future for the US defence of democracy around the world???

And why did Nancy Pelosi go to Taiwan with a Congressional delegation now???My favourite explanation - she’s 82-year-old and retiring soon.??Wow!??She certainly provoked a strong response from the Chinese Communist Party (CCP).

Chris Patten, the last governor of Hong Kong, handed the territory to China on 1st?July 1997 with the understanding that it would be “one country, two systems” for fifty years, so until 2047.??The CCP agreed to preserve the freedoms of the territory until that date.??Thereafter it becomes one country.??Given what we observe of the CCP, is it any wonder we see the erosion of the freedoms of the Hong Kong citizens over time?

Meanwhile the CCP has a growing list of problems to keep it occupied – Covid lockdowns, slowing economic growth, mortgage defaults on an over extended property sector and the impacts of power outages.

Afghanistan?– The US and her allies withdrawing from Afghanistan in such a shambolic manner and losing the war with the Taliban, was a clear signal to Putin and his ambitions in Ukraine.

America had been fighting a war in Afghanistan for 20 years.??Unfortunately, it would have probably taken their presence for another twenty years to effect the necessary change to a functioning democratic society.

One of the saddest things I’ve seen in Afghanistan since the US departure, is the sobbing of a young Afghan girl as she is turned away from school by the Taliban.??I imagine her dreams and ambitions for her future are shattered.??If you want to change a country, change a society – you must educate the girls.

“The_Donald”?– Whilst on the campaign trail Donald Trump said, “America First – get out of Afghanistan!??We’ve wasted billions of dollars fighting foreign regimes, we know nothing about”.??Donald Trump, famously, refused to read briefing papers which I guess is fine if you want to be informed about as much as the average voter and identify with them, but not if you want to be Commander-in-Chief.??As John Connor would say, “Hasta la vista baby”!??Will he be back?

Many will see the actions of the FBI and DoJ in Mar-a-Logo against Donald Trump, as politically motivated.??Such actions could work in Trump’s favour.

Could Ron DeSantis, the Republican governor of Florida thwart Donald Trump’s efforts to gain the Republican nomination???It’s going to be interesting!

Boris Johnson?– Boris “why spoil a good story with the truth” Johnson.??He’s a rogue who won’t confirm the number of children he has, but he’s also a champion political campaigner who wins elections.??We’ll miss him, he made politics fun again (as did Donald Trump)!

Crypto Security?– Some great advice from Corby Pryor of Oorbit.??When it comes to cross-chain interoperability, Bridges are inherently and fundamentally unsecure and structurally vulnerable to attack.??You must secure via some sort of consensus mechanism.??If you have a hot wallet exposed to a Bridge, you are simply “waiting for the accident to happen”.??Hold your crypto on a cold wallet.

ETH Merge?– Here’s the basics.??Simply put, it is just a change to a new consensus layer – from Proof of Work on the Mainnet to Proof of Stake on the Beacon chain.??It won’t be faster in terms of transaction speed, and it won’t be cheaper in terms of gas fees – both of which are significant criticisms of Ether at this time.

We will see a very significant reduction in energy usage to secure the chain, which will help to overcome objections to crypto on ESG grounds.??We will see a reduction in the issuance of ETH to miners, which will be deflationary.??In the future we expect to see scaling upgrades including sharding, which will allow for an increase in the speed of transactions and a subsequent reduction in gas fees.

Is the merge reflected in the price – for now I think so.??There may be some money waiting on the side-lines to see if the merge is successful.??A successful merge should help to bring in investors over time.

Crypto Assets?– I’m working on some ideas for reducing the volatility of crypto investing for institutional non-crypto natives – bringing them on board.??Offering different “buckets” which can be overweight or underweight depending on risk appetite and a view of where we are in the investment cycle.????

Clayton Gillece