The Driving Forces Behind Deflation
With new data released, it looks like we're heading for deflation!
✨ Crypto Made Simple ✨: Self Custody — Part 1
Since the FTX collapse, lots of people have been taking their crypto off of centralized exchanges. According to Glassnode, the total amount of BTC held by exchanges has dropped by more than 220,000 since November 5.
It’s no wonder that people don’t trust exchanges as much now that FTX, one of the largest exchanges in the world, seemingly misused customer deposits and was propped up by irresponsible loans.
So, instead of leaving their crypto in the hands of exchanges, more and more people are taking full responsibility for it.
There are a few ways to do this, but today, I’ll go over a couple options of hardware wallets that you can use to store your crypto.
Keeping Your Crypto Safe 🔒
First, there’s a reason I didn’t say “hardware wallets that you can store your crypto on.”
If there’s anything you should know about hardware wallets, it’s that your coins aren’t stored on the actual device. Rather, the coins are stored in your own personal address.
You can think of this as a safety deposit box in the blockchain. The device is just your gateway to that safety deposit box.
The two hardware wallet companies I’m most familiar with are Ledger and Trezor.
I’ve used Ledger’s Nano S and Nano X, as well as Trezor’s Model T and Model One. These are all devices that you can connect to your PC with a USB cable, and the Nano X can also connect wirelessly via Bluetooth.
Like anything else, there are pros and cons to weigh when you consider doing this yourself…
The obvious pro is that you don’t need to rely on exchanges being honest or not getting hacked in order to ensure that your money is safe.
Likewise, the biggest downside is that you have a lot more responsibilities.
Most importantly, you’ll need to be able to access your address’s “private key” — which we’ll go over in more detail on Thursday — and you’ll also need to know at least one other PIN or password as well.
Another con is that whenever you buy on an exchange, you’ll need to go through the steps of plugging in your hardware wallet, entering your PINs/passwords, and transferring crypto off the exchange onto your device.
However, there are surely situations where it’s worth going through these extra steps.
On Thursday, we’ll go over what private keys are and why they’re extremely important to access your crypto.
Uber: An Overlooked Giant 🚗
Just like ABNB 0.00%↑ Airbnb Inc., which we looked at last week, Uber Technologies Inc. (NYSE: UBER) is another play on the gig economy.
This is one area which I believe is incredibly overlooked when it comes to industries that can best withstand a recession.
For a quick update, watch the video below:
In fact, I believe UBER 0.00%↑ is one of the most underrated stocks in the entire market.
The FUD (fear, uncertainty, and doubt) around UBER 0.00%↑ was intense ever since it announced it was going public. However, I think within the next year or two, people will realize that this company is an absolute powerhouse.
One of the most common criticisms of UBER 0.00%↑ is the “unprofitable tech” argument. But when you see that, remember this: No other company (that I’m aware of, at least) has scaled as fast as Uber with so many regulatory hurdles.
That costs a ton of money.
What We Should Be Looking At 👀
Recently, the biggest reason it’s been unprofitable is because of an accounting method that makes it post unrealized losses from investments as an expense on its income statement.
Meanwhile, its operating expenses continue to improve. In Q3, operating expenses were 36.53% of sales, compared to 51.68% a year prior.
It also continues to see massive growth in several parts of its business, which not many companies can say these days.
During its Q3 earnings call, UBER 0.00%↑’s CEO said that October was on track to be the best month ever in terms of “gross bookings,” which is the total amount spent by customers for the company’s three segments: mobility (ride sharing), delivery, and freight.
One of its largest developments in 2022 has been yet another source of revenue: advertising. It recently unveiled its “Journey Ads” business, and its goal is to scale its ad revenue to $1 billion in 2024.
Even though it really only started its ads business this year, it’s already on a $350 million per year run rate, so it’s been a huge success right off the bat.
This year, it’s on track to generate about $115 billion in gross bookings. Competitors typically make about 2% of gross bookings in ad revenue.
So, even if gross bookings stay flat in 2023, it shouldn’t have any problem making its $1 billion ad goal a year early.
More Good News! 🤩
Another exciting development in the pipeline for UBER 0.00%↑ is its self-driving technology.
In Q3, it solidified its commitment to being a leader by forming 10-year partnerships with two self-driving tech companies: Nuro and Motional.
Over the coming months, Nuro will use its vehicles on UBER 0.00%↑’s Mobility and Delivery platforms, and Motional will also “drive” for Uber via its partnership with Hyundai.
This would make its cash flows even more impressive.
Unlike most companies, UBER 0.00%↑ does more with its cash flows than just pay them out as dividends and use them to buy back shares. It’s constantly putting that cash to work to grow its company, which is exactly what we want in a disruptor.
Over the first three quarters of 2022, UBER 0.00%↑ brought in $693 million in free cash flow, and it’s now sitting on nearly $4.9 billion in cash.
It does have quite a bit of debt, totaling about $9.44 billion. However, only $182 million of that is due in the next year. Beyond that, nothing is due until April 2025.
If UBER 0.00%↑ continues to improve its margins and bring in more cash — which I believe it will — it’ll have no trouble paying that debt off when it comes due.
Performance Update
Performance:
Disruptors Index: -5.71%
S&P 500: -1.97%
Nasdaq: -2.38%
Russell 2000: -3.85%
ARKK: -7.47%
Top 3 Performers:
DocuSign Inc. (Nasdaq: DOCU) +16.03%
Proto Labs Inc. (NYSE: PRLB) +1.04%
Bitcoin (BTC) +0.56%
Bottom 3 Performers:
Guardant Health Inc. (Nasdaq: GH) -14.57%
Livent Corporation (NYSE: LTHM) -14.54%
Tesla Inc. (Nasdaq: TSLA) -13.88%
It was another rough week for growth with the disruptor index down 5.71%.
The farther out on the risk curve you go, the uglier it gets, with the S&P 500 (least risky on the list) down -1.97%, and ARKK (riskiest on the list) down -7.47%.
The only stock in our index with a big gain was DOCU 0.00%↑, which rallied hard after its earnings report. I went over that report in detail here, so I would encourage you to read that if you haven’t already.
Trending Toward Deflation 📉
Over the past few months, I’ve mostly been focusing on the reasons to expect inflation to remain relatively high for a while. However, now we’re finally starting to see that change.
We’re mostly going to focus on the Producers Price Index (PPI) report this week, which came out last Friday. PPI is the best gauge of inflation for companies, and it typically moves in line with CPI data.
If companies are spending more on input prices (PPI), it should be passed along in the form of higher prices to consumers (CPI). PPI also provides a look into overall inflation at various stages of the supply chain, which CPI doesn’t have.
The most recent monthly PPI data came out last Friday. Based on the report, if the current trends persist, we could see deflation in energy and goods in Q1 of next year.
First, we’ll go over energy. The reading of the PPI energy index for November was 153.812. You have to go all the way back to February to find a lower reading (as you can see below):
That means we’re only three to four months away from seeing deflation if energy costs stay around the same prices.
And even if they move a little higher, the year-over-year changes will get smaller because the prices were moving up so quickly a year ago.
That’s going to cause downward pressure in PPI, as well as CPI.
As for goods, the November reading was the lowest since June, and it was just barely over May (as you can see in the chart below):
So, goods inflation for producers is essentially flat over the past six months. Like energy, the entire move up occurred in the first half of 2022 and peaked in June, with Q1 being the biggest percentage increase.
Another thing I want to quickly point out is that we’re now seeing steady deflation in goods along all parts of the supply chain.
The PPI data splits up the supply chain into five parts. “Stage 1” is the earliest and “Final Demand” is the latest.
Looking at the data, it’s clear that deflation is making its way up the supply chain but hasn’t fully hit final demand yet. Here’s the data for November for each stage:
Stage 1: -1.2% (four of the past five months have been negative).
Stage 2: -3.4% (four of the past five months have been negative).
Stage 3: -0.9% (five of the past five months have been negative).
Stage 4: -0.3% (three of the past five months have been negative).
Final Demand: 0.1% (two of the past five months have been negative).
Overall, the rise of goods and services in Q1 2022 was so steep that overall PPI still came in at 7.4% year over year. That’s still much higher than usual, but the trend has been decisively downward since it peaked at 11.5% in March.
As we get closer to the high year-over-year comps, that trend should continue.
The Bottom Line
While deflation seems imminent in goods and energy, however, it’s less certain when we’ll see it in services.
Services are the largest part of PPI, as well as CPI, so the headline number reflects it more than it reflects energy or goods — another reason the PPI is still so high.
Like energy and goods, services PPI inflation was the most rampant in Q1. In fact, it actually slowed down the most in Q2, and has been relatively low since. The main issue is that it keeps inching up.
Here’s a look at all three sector’s increases by quarter:
While energy and goods are down in the second half, services stay resilient, leading to consistent monthly increases in the overall PPI number.
I also want to add a quick note on November’s CPI, which came out at the time of writing…
Overall, year-over-year CPI was 7.1%, and core CPI was 6%. However, monthly CPI was only up 0.1%, and core CPI was only up 0.2%, which was the lowest monthly increase so far in 2022.
This report had more month-over-month deflation than any report we’ve seen this year.
Energy is at its lowest point since February (just like PPI), but it’s still up 13.1% year over year since it went up so much between November 2021 and March 2022.
As the data flattens out, energy will be even more of a contributing factor to CPI going down — assuming energy prices stay around their current levels.
Commodities, which track goods-based inflation (except for food and energy), was down -0.5% month over month.
This is also a big factor in overall CPI, accounting for over 21% of the total index.
The stickiest parts of CPI continue to be food (13.74% of total index), which was up 0.5% month over month — 10.6% year over year — and shelter (32.7% of total index), up 0.6% month over month — and 7.1% year over year.
Both of these don’t really show any sign of slowing down, but we still have energy and goods working in our favor. And as we saw in the PPI data, the deflation gets even stronger as you go up the supply chain.
Over the next few months, we should continue to have energy and goods pulling inflation down, with shelter and food working in the opposite direction.
For more detailed updates on stocks and crypto that we believe have potential to surge in the next bull market, check out our services here.
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