Matthew: Hello everybody, and welcome once again to a weekly edition of Under the Macroscope. My name is Matthew Pearce, and I’m in conversation with Skybound Capital’s Chief Strategist based in the London office, Jabir Sardharwalla.
Our podcast is available on Apple, Spotify, Google Podcast app for Android. We do encourage you to download it so that you get it regularly — share it with friends. Thank you to all of you who have done that already and are giving us wonderful feedback. We hope to keep the topics nice and relevant and fresh and interesting. We always do appreciate Jabir’s views.
To kick off this week, we’re going to go slightly in reverse to last week’s podcast where Bitcoin and the various pros and cons, in fact not only Bitcoin but cryptocurrencies in general, were discussed between you and Ross Muller. It’s a story developed in many ways in the last week since we last had the podcast, particularly around some very public announcements by Tesla and Mastercard. As always, you’ve looked beyond the big barking headlines and found that the devil is rather more in the detail.
Jabir: Yes, thank you, Matt. That’s absolutely right. When I saw that headline about Tesla, I had to do a quick sanity check to really figure out what was going on. It’s interesting, when you dig into the details of their statement, first of all, what did they say about buying cars with Bitcoin? If you don’t mind, I’m just going to read out to you that specific statement. They say, “We invested an aggregate of $1.5 billion in Bitcoin.
Moreover, we expect to begin accepting Bitcoin as a payment for our products in the near future, subject to applicable laws and initially on a limited basis.” Now that’s pretty vague. That’s pretty vague. That’s the first point to make.
By that way, that $1.5 billion — that represents about 8% of their cash reserves.
When you dig deeper, it gets even more interesting. They go onto say they’ve done this “to further diversify and maximize returns on our cash that’s not required to maintain adequate operating liquidity.”
Basically, is this the unencumbered portion of their cash, which they’re essentially using to speculate with? It’s almost like that seems to be their priority right now, because like so many organizations, they are noticing that they’re earning absolutely next to nothing on their cash reserves. U.S. corporates have nearly $3 trillion worth of cash on their balance sheet. It’s a staggering sum — all earning close to zero. So, people are now looking at different ways.
From the perspective of corporate treasurers, you’re not going to see anybody rush in anytime soon to suddenly start doing and modifying their cash management policies around crypto, specifically Bitcoin, because it’s way too volatile. They need stability. For them, it’s all about we’ll accept some return as opposed to no return or even a loss. Liquidity and all of that, is absolutely vital to them.
If you then hone in Mastercard, because that was the one that really stunned me. It’s almost sort of Donald Trump-esque fake news type headline-grabbing stuff. When I saw that news about Mastercard, I dug deeper into what the statement was all about. Again, I’m going to quote to you. It says, “It’s planning to support cryptos on its net worth but only those that comply with requirements, such as stability, privacy and compliance around money laundering rules.” That’s a very formidable statement. This is not new territory. There is context to this statement. What it says is that you can’t be decentralized and unregulated. You can’t have the best of both worlds.
Case in point, Facebook. If you remember, they launched their Libra currency. It’s now rebranded to D.M. What they tried to do there was they wanted to be open and decentralized, just like Bitcoin. Still, at the same time, they wanted to be fully compliant with regulations governing financial networks. I’m sorry, but you can’t have the best of both worlds.
Consequently, Mastercard pulled out. There is important context here, which the headlines don’t portray. It’s really important to understand this.
They haven’t spelt out which cryptos they would accept, but I don’t think it’s going to be Bitcoin. I don’t think it’s going to be many of the 4,500 or so on the list. The rumour mill is suggesting it might be USDC; that’s the U.S. dollar coin. Why? Because their parent company is Circle and Circle is totally willing to comply with regulations. That’s a possibility.
Matthew: It’s certainly a story that is going to evolve. As you’d expect, it sparks a lot of debate, which can be quite unhelpful and divisive because people are very either protagonist or antagonist on this topic, as with many things in our world. There seems to be very little middle ground.
Jabir: That’s absolutely right. There is indeed very little ground. When I look at this whole story around cryptos, I think what it has done, and the Mastercard story, especially, is say that we will fully support anything, the move to a digital currency, provided it is regulated, and they will work with governments. This is the key thing. They are a fundamental platform here.
It was interesting that Visa also came out around about the same time with a statement saying that if we can get proper rules around this whole thing, they are willing to have it on their platform.
So, essentially, if we’re going to pay tribute to cryptos, for one thing, it is this: that they have set the catalyst. They are the catalyst towards a move to a regulated digital currency world. But right now, what’s happening is that you’ve got a divide between the more tech driven-type characters, who have this ability with their huge financial clout to move markets, and others who are sitting on the sidelines saying, “We’re not going to touch that because we’ve really got to pay attention to volatility and stability and so on.”
Matthew: Well, it’s a fascinating topic, and it will evolve at a pace. I suspect for the next few weeks we might be touching on this topic.
Before we wrap up this week part of your week in review that you send out on email every Sunday evening or Monday, we’ve picked a couple of topics and one that is very close to you. As long as I’ve known you, you’ve kept a very beady eye on inflation. You’ve got your views on global inflation, but specifically this week, you have some concerns around emerging market inflation and specifically food inflation.
Jabir: That’s absolutely correct. I feel that the world has forgotten just how much more important food inflation is as the inflation basket in the world of emerging markets versus the world of developed markets. For instance, food inflation is approximately 50% of emerging market inflation. 50%. You have to remember staples like rice, absolutely vital. Oil, cooking oil. You contrast that with the world of developed markets, it’s broadly between 10–15%. In the U.S., it’s 10%. You see it. It’s very visible. More and more people I talk to see shopping baskets getting smaller and smaller, whether you’re buying chocolate or cereal or anything like that. The plate of food that you get when you’re in a restaurant, for instance, when they were last open. It just feels smaller. That is subtle inflation. There comes a point where it can’t get much smaller.
If you look at general inflation in emerging markets, the core is currently running around 3%. Energy is running at a negative-4%. Food is running at over 5%. If it wasn’t for energy, which by the way, has now really started to climb again. You’re going to see a significantly higher gain in inflation.
Now, what is inflation a function of? Well, first of all, it’s currency. It’s the exchange rate. What we’ve had until recently is a decline in emerging markets currencies versus the dollar. It is reversing. The question really is how much further it will go.
I dispute that the dollar will continue to weaken for a protracted period. I don’t think that’s going to happen. I think there’s room for further weakness but not much more. Also, a lot of the E.M. world is dependent on exports. If their currencies get too strong, they’re going to struggle. That’s the first one.
The second is that we’ve had a significant surge in commodity prices. To give you an example, in Latin America last year food prices went up 14%. 14%! I mean, if you’re trying to go out there to do your shopping, you’re suffering. Specifically in areas like rice, for instance, a staple diet across the globe. That jumped as much as 76%. 76%! Soya oil jumped 100%, it doubled in price. These are staples that form emerging market inflation, food inflation baskets.
With that in mind, it just leaves me a bit concerned that unless there are mitigating factors that can bring it down, and I do appreciate that weather plays a big part in this. You can’t control that. That’s very much out of our means, but if you get a period of bad weather that’s only going to compound the problem.
Just one last thought. Just over ten years ago, we had the Arab Spring. That was December 2010, and it lasted for two years. It started in Tunisia. A lot of people have come to think that it was all about Egypt. It wasn’t. It spread to Egypt and a lot of the Middle East. But it started in Tunisia. Because of the economic hardship that people were facing and what some are saying was actually down to food because when you get to the point that you can’t feed your family, what do you do? It led to that tragic situation where a Tunisian gentleman ran out in the street, doused himself with petrol and set himself alight. After that, there was a big uprising. I’m not suggesting that we’re going to have that again, but you can see how these situations, these flareups and the dilemma central banks have now because here they are saying, “Okay, we’re going to let inflation run”. At the same time to who are they fiduciary trustees? Is it the population, or is it the markets? That’s my passing thought here.
Matthew: As fascinating topics, in some senses deeply concerning, but certainly things that need to have an eye kept on them moving forward. I always enjoy hearing your macro view, as we do on Under the Macroscope. Every week Jabir does his week in review, a wrap up of what is influencing markets and economies around the world. Do go to our website, www.skyboundcapital.com. You can download past podcasts and subscribe there as well to the Under the Macroscope podcast. Until next time have a great week, everyone.