Market Lab Report - Centralization destroys innovation; the fed cannot control supply-driven inflation

by Dr. Chris Kacher

Centralization destroys innovation

Celera Genomics among many others proved how costly and slow the U.S. government moves when it comes to cutting edge technologies. They mapped the human genome in less than one-tenth of the time and at less then one-tenth the cost of the bumbling U.S. government. Balaji Srinivasan said, "Centralization, specifically the U.S. government, is most responsible for holding back scientific progress. The same cohort of people in the centralized scientific establishment award the research funding to themselves and others on their committees."

Web3 is the revolution of decentralization which hands power back to the individual as each person will own their own data. Centralized systems will co-exist as there are benefits to the efficiencies gained through such systems, but decentralization hands freedom of speech back to the individual who can therefore not be globally censored nor cancelled.

Markets

As we warned, major averages and cryptocurrencies are rolling back over as the Fed is intent on hiking rates to a target range of 350-375 bps based on his Jackson Hole remarks. CME Fed Futures is now pricing in one 75 bps in September one 50 bps in Nov, and a 25 bps hike in Dec, for a range of 375-400 bps by the end of this year, up from 350-375 bps. Given record levels of debt and growing delinquencies, markets will not stand for hikes to such levels, thus may retest lows well before then. The Fed chair has room to hike given the extent of the dead bat bounce, so he may get to 350-375 bps before he has to calm markets by saying he will no longer tighten the balance sheet, ie, put rate hikes on hold, much as he did in Dec-2018 just after the Xmas crash.

While some have said inflation will moderate due to lower commodity and housing prices, supply chain constraints together with recent remarks by OPEC cutting supply drove oil over $100. Inflation will reaccelerate if energy prices continue to rise.



The economy faces supply-driven inflation (vs. demand-driven) which the Fed cannot control. Demand is strong because central banks printed trillions of dollars while supply is weak because nearly every government policy in the U.S., the UK, and EU makes it harder for people to produce. This, as legendary futures trader Ed Seykota famously wrote in his book "Govopoly in the 39th Day", is the hallmark of empires in decline. Seykota said that when the amount of time and money spent on dealing with governmental bureaucracy outweighs productivity, that is the beginning of the end. We are well into the 39th day by his count. They can only try to slow down demand by hiking rates before the economy breaks. Meanwhile, the GDP Price Index is soaring while savings are plummeting, thus consumers cannot withstand higher interest rates together with inflationary pressures as the majority will run out of money.



This will eventually have a direct negative impact on corporate earnings as people spend less. On top of this, the new threat of widespread tax audits is yet another barrier to Americans' productivity, and comes at a time when the economy needs serious help.

So far, this is playing out as it did in France in the late 18th century when the French government was in desperate need of money after spending so much to gain their independence. French citizens were harassed and intimidated. Tax collectors had the authority to conduct surprise inspections looking for hidden wealth and breaking into people's homes.

This Inflation Reduction Act funds the IRS with $80 billion. This is a staggering amount given that the annual budget for the IRS is just $12 billion. The majority of middle class Americans and small businesses will be under scrutiny.

Past unemployment trends

As for unemployment, it is key to note that in past recessions, unemployment tends to reach major lows before it starts to rocket higher.


This time should be no different so expect weekly jobless claims and unemployment to eventually spike higher if all past recessions are any guide.




Weekly jobless claims reports Thursday at 8:30 am EST and the unemployment report is released Friday at 8:30 am EST. Stay tuned.