TBL Weekly #178: The Crowd, the Fed, and $100 Brent
TBL Pulse Community is live, and Brent is causing trouble again.
Dear Readers,
I take a paradoxical stance today. Growing up, I heard it often. “Be a maverick! Set yourself apart from the crowd. Don’t be a sheep. Be a thought leader. Think critically, and don’t follow.”
While most bitcoiners agree, I believe there is true safety in numbers. During my finance degree, most classes had what are known as iClicker questions, wherein a professor asks a question to the entire class, and students get to vote live on multiple-choice answers. For example, a professor would ask something like: “How many sats make up one bitcoin?”
A: 1B
B: 10M
C: 100M
D: 1T
Students would then vote live on the right answer.
Sometimes professors would mess with us by sharing the live distribution of the answers, and that was always fun to watch.
Once everyone saw where everyone had voted, you’d see students from A, or B, or D quickly change their answers to C because that’s where the biggest bar was.
Some 9 times out of 10, the switch would pay off for these students. There was always that one occasion where being a maverick paid off, but you were almost always safe in the crowd.
A very roundabout way of saying that I am a strong believer in group intelligence, which is why getting live feedback from all of you is so important, and why our TBL Pulse community is live!
(Paradox: I stand alone in wanting to stand with the crowd…?)
We want to hear your daily takes on markets over there. We want to get a Pulse (pun intended) for what you want analysis on, and what is topical for TBL Pros.
On a personal note, this is a big milestone for TBL, and one I am so proud to be a part of. Nik has assembled a great team here:
Let’s review a little bit of what’s currently going on in markets before going into the weekend, shall we?
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Brent
The latest CPI print led to a knee-jerk impulse in markets that inflation was no longer something to be worried about. Given the Memorandum of Understanding (MOU) between the US and Iran, stability in expensive Brent helped tame inflation last month…specifically, in transportation:
These lower inflation readings left SOFR 1-month futures pumping, effectively fading some rate hike expectations by EOY:
But then the MOU ran into some issues, with further tanker blockades taking place in the Red Sea, leaving Brent making a break for $100:
Leaving markets to assign a higher probability to two rate hikes by the EOY (...yet again). Simply put, energy is no longer considered a disinflationary factor.
That said, when looking at the Brent futures curve, the market is currently in backwardation over the next 12 months, meaning that investors expect markets to “chill” in the near future:
Someone in the TBL Community chat made the comment that they see some strong resistance come in at $100 in Brent, and I think the futures curve largely backs up that narrative:
Rates and the Fed
I recently wrote about US rates not caring about oil-related inflation, and instead focusing only on economic growth. This was because, as Brent fell back toward $70, yields were not following suit - here’s a chart from my article two weeks ago:
Well, it looks like these two are once again related (chart from today):
My argument two weeks ago was that AI productivity was the dominant factor; hence, yields were not falling on lower Brent. There are currently two camps on the AI inflation/productivity argument (and Chairman Waller has spoken about both of these throughout this month):
On the one hand, AI-related demand works as an additional source of inflation. Apple is raising prices given surging memory and storage costs.
On the other hand, all this AI investment can lead to an economic boom via productivity that outputs a lot more than it inputs, leading to disinflationary pressures.
We are seeing Unit Labor Costs’ (ULC) growth rate fall to its lowest level in this 2020s decade, showcasing how the latter bullet from above is, in fact, a key driver in today’s economy:
It is also a reason not to sleep on higher yields, even if oil pressures ease. Productive growth is clearly on the table.
The yield on the most Fed-sensitive coupon remains well above EFFR. The latest driver for a higher spread at this point in time is obviously oil reigniting, but, again, it would be remiss to think that oil coming back down will, by default, narrow the spread:
It could…but USTs are also pricing in continued growth…just look at real yields:
I am honestly not on either a hawkish or a dovish camp as far as the Fed goes. Productive growth is non-inflationary by definition, so a hike is not necessarily needed to tame growth-induced inflation. But also, current rates are clearly not restrictive, seeing as growth is ongoing, so a cut is also not necessary today.
All else equal, we sit pretty today at current policy rates.
You can also get access to our charts and data inside our TBL Pulse Dashboard:
Substack This Week
Nik’s letter went out on Tuesday;
Johan’s weekly letter went out on Wednesday;
TBL Pulse Community was launched on Thursday; and,
Nik’s global macro video update went out on Friday.
YouTube This Week
Nik’s global macro update was also published on YouTube this week:
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The TBL Model Portfolio, TBL Liquidity Indicator, and all TBL research outputs reflect Nik Bhatia and team’s analytical positioning for the macro and bitcoin environment. They are published for educational purposes only and are not investment advice, not a solicitation to buy or sell securities, and not a recommendation tailored to any individual’s portfolio. The Bitcoin Layer is not a registered investment advisor and does not manage client money. Please consult a professional financial advisor and conduct independent due diligence before making investment decisions.