Plus All the Signs Say Inflation Is Here to Stay
Welcome to your Sunday digest…my weekly breakdown of the things we’re thinking about and talking about in the Global Intelligence world.
First up this week…crypto.
One of the biggest concerns I hear among newcomers to crypto investing is that the government could one day simply ban cryptos like bitcoin and Ethereum.
I understand why people have these worries.
This year, for instance, China has been waging a campaign against crypto…forcing miners to shut down, and prohibiting mainstream financial institutions from conducting digital currency transactions.
The Chinese government is doing this because it’s progressing quickly in the development of its digital yuan—a central bank digital currency (CBDC) that’s based on the same blockchain technology as bitcoin, Ethereum, and other cryptos.
The country’s communist leaders don’t want any rival cryptocurrencies competing against this digital yuan, so it’s moved to shut them down. And this has led to concerns that Western governments may take a similar approach when developing their own CBDCs.
But frankly, that ain’t ever gonna happen.
Right now, crypto and blockchain technologies are being adopted by Western financial and commercial institutions at a rate of knots.
Just this week, we learned that Ernst & Young (EY), one of the world’s largest consulting firms, has partnered with the Polygon Network to scale its blockchain products. Polygon is a solution that aims to provide faster and cheaper transactions on the Ethereum network.
According to the press release from EY, adopting Polygon’s solutions “allows the EY organization to offer enterprise users increased transaction volumes with predictable costs and settlement times and the option to move transactions onto the public Ethereum mainnet.”
EY is one example among countless other corporations that are embracing the crypto/blockchain revolutions and bringing these technologies to their clients.
If the government ever attempted to ban these services, corporations would revolt because it would mean tearing down all the systems that they’ve set up.
Every day, crypto is becoming more deeply integrated into the corporate/financial system. And the more integrated it is, the more permanent it becomes.
Next up, an update from here in Prague.
Summer is ending in the city and fall is taking hold…leading to cooler, more pleasant days and some truly spectacular twilight scenes.
On the right is a photo I captured while out for a stroll earlier this week.
Fall aside, something else is taking hold here in the Czech Republic…something decidedly less pleasant—inflation.
According to local media reports, bread prices are about to go up 10% to 15% because of the rise of various associated costs such as wheat, transport, etc.
Prices going up is hardly news to any of us at this point.
What’s notable, however, is that now bakers over here are talking about another cost going up: employee salaries. That’s important because that’s when inflation becomes sticky.
Prices can ebb and flow, but once wages go up, they don’t usually come back down. (I mean, when’s the last time anyone gave back a salary increase.)
So, when you have rising salaries, you get something called “demand pull” inflation. Basically, that’s when prices increase because too many dollars are chasing the same amount of goods.
Employees with higher salaries spend more money. Producers know their customers have more money to spend, so prices go up to match the increases in income… And when that happens, we end up with inflation that’s decidedly NOT transitory, as the Federal Reserve keeps claiming this current bout of inflation is.
Of course, the mainstream media will probably end up reporting all this incorrectly.
Next year, we might see inflation come down in year-on-year terms, say to 3% from more than 5% today. And the mass media will write headlines screaming, “See it was all transitionary!”
But that will be bogus analysis because the bread that last year cost $1.50 a loaf is now permanently priced at $1.78 ($1.50 times the 15% increase, and then that price times the 3% inflation rate).
So yes, reported inflation will look like it’s going down, but your costs have permanently repriced higher.
Inflation is only transitionary if prices retreat from their new highs. And the wage increases you’re seeing in the U.S. and I’m seeing here in Prague means that’s not going to happen.
Finally this week…Macau.
Located beside Hong Kong, Macau is the gambling mecca for Chinese people.
It’s often compared to Vegas, but it has a decidedly different flavor. It’s oddly sedate. You don’t have the insane energy you find in Vegas. In fact, often you can’t even drink alcohol on the floors of the casinos in Macau.
If Vegas is a theme park for pretty much everyone from kids to great-grandparents, then Macau is a gambling factory…a cold, sterilized place designed to separate adults from their money as quickly and joylessly as possible. (I’m referring here to the casinos. The old parts of Macau, which was a Portuguese colony the same way Hong Kong was a British colony, have a certain charm.)
Sterile and boring as it might be, however, Macau is the center of the gambling universe. In 2019, before the coronavirus started impacting tourism, Macau reported gross gambling revenue of $36.5 billion, compared to just $12 billion for Vegas.
Now, however, Macau’s status as a gambling center could be about to change amid growing concerns that casinos could be the next target of China’s regulatory crackdown.
The Chinese city, which supposedly functions semi-autonomously as a “special administrative region,” has launched a public consultation on amending its gambling laws.
This comes as casino licenses are set to expire next June.
This consultation is fueling concerns that the Chinese government could be about to target the gaming sector, just as it has recently cracked down on the country’s crypto, education, video gaming, and technology sectors.
This situation is still evolving, but if I was a betting man, I’d be preparing to fold any investments in Macau’s casino operators.
That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, please reach out through the contact form on the Global Intelligence website here. I’d love to hear from you.
Enjoy the rest of your Sunday.