Podcast Summary: The Truth About Inflation with Lyn Alden - WBD343

Podcast Information:

• Title: The Peter McCormack Show
• Host: Peter McCormack
• Guest: Lyn Alden
• Episode: The Truth About Inflation with Lyn Alden - WBD343
• Release Date: May 3, 2021
• Description: Peter McCormack engages with Lyn Alden to dissect the complexities of inflation, exploring its measurement, underlying causes, and implications for various markets, including Bitcoin.

Introduction to Inflation Metrics [00:01 - 09:40]

Lyn Alden begins the conversation by critiquing the Consumer Price Index (CPI), stating,

"CPI is a really crappy statistic for the most part. Housing has gone up faster than a CPI." ([00:01])

She highlights that essential expenses such as housing, food, healthcare, and tuition have outpaced CPI measurements, suggesting that CPI may underrepresent the actual inflation experienced by households.

Peter McCormack adds context by discussing the extensive money printing over the past year and its role in Bitcoin's positioning as a hedge against inflation. He emphasizes the nuanced relationship between money supply and inflation rates.

Understanding Base Effects and Inflation Measurement [05:55 - 19:43]

Lyn Alden delves into the concept of base effects, explaining how comparing current inflation to a low base from the pandemic's initial shutdowns can artificially inflate year-over-year CPI figures:

"We're entering, ... inflation by most metrics dipped very low because you had the initial shutdowns." ([05:55])

She points out that many commodity prices are not at their long-term highs and attributes some of the recent price increases to supply chain bottlenecks rather than sustained inflationary pressures.

Lyn further elaborates on the Producer Price Index (PPI) as a precursor to consumer inflation:

"The producer price index was around 7% year over year, which points to CPI likely touching over 3%, potentially touching over 4%." ([19:43])

She asserts that while CPI has limitations, other metrics like PPI and raw commodity prices offer a more comprehensive view of inflationary trends.

Impact of Fiscal Stimulus on Inflation [14:05 - 23:21]

The discussion shifts to the role of fiscal stimulus in driving inflation. Lyn Alden explains that government aid programs have kept personal incomes afloat, thereby sustaining consumer spending:

"If you didn't have the fiscal stimulus, ... the prices would not have been able to go up as much." ([15:21])

She acknowledges that while supply chain issues contribute to specific price hikes (e.g., semiconductors, lumber), the increase in the broad money supply has also played a significant role in overall price levels.

Sector-Specific Inflation and CPI Limitations [20:56 - 26:42]

Peter McCormack raises concerns about whether CPI adequately captures the inflation experienced in critical sectors like housing, where prices have surged beyond the CPI's scope. Lyn Alden agrees, noting that:

"Over the past decade, ... housing has gone up faster than a CPI." ([20:58])

She advocates for multiple measures of inflation to better reflect diverse economic realities, emphasizing that asset price inflation (e.g., real estate) is often excluded from CPI calculations.

Government Policies and Economic Indicators [26:03 - 43:55]

Peter McCormack shifts the conversation to the U.S. administration's economic policies under Biden. Lyn Alden assesses the administration's approach as reminiscent of FDR's:

"They seem to be trying to channel the FDR concept of ... government going big on aid and fiscal spending." ([33:11])

She discusses the bipartisan recognition of the need for infrastructure spending, highlighting the challenges in defining and passing comprehensive infrastructure bills in a tightly divided Senate.

Tax Proposals:

• Corporate Tax Rate Increase: From 21% to 28%.
• Long-Term Capital Gains Tax: Potential rise to around 40%, though Lyn believes a more modest increase to 25-30% is likely due to political constraints.

"My base case assumption would be that they'll probably get a small increase through." ([44:29])

Impact of Tax Policies: Lyn Alden critiques the effectiveness of past tax cuts, referencing the Trump-era corporate tax reduction:

"Most of that is going to go to share buybacks and dividends." ([38:24])

She argues that while low corporate taxes can enhance competitiveness, they often result in minimal economic reinvestment and instead boost shareholder value without significantly increasing job growth.

Migration Trends and Economic Mobility [45:49 - 48:40]

Peter McCormack inquires about migration patterns in the U.S., especially the movement from major cities to states like Florida, Texas, and Wyoming. Lyn Alden observes:

"There has been a migration towards some of these more suburban or ... lower tax states." ([46:32])

However, she notes that economic models often overestimate the rationality behind such moves, citing factors like family ties and job immobility. She emphasizes that while digitization facilitates mobility for some, many individuals remain geographically anchored due to personal and professional constraints.

Bitcoin and Inflation Dynamics [48:54 - 65:29]

The conversation transitions to Bitcoin, focusing on its role in inflationary environments and corporate treasury strategies.

Concerns About Market Manipulation: Lyn Alden draws parallels between gold and Bitcoin regarding paper markets and potential manipulation:

"It's easier to settle, ... the paper market is a smaller percentage of Bitcoin's market capitalization than is the case for gold." ([48:40])

She cautions that while Bitcoin currently has a smaller paper market compared to gold, vigilance is necessary as the integration of Bitcoin into financial systems grows.

Bitcoin Price Dynamics: Lyn discusses Bitcoin's price behavior, emphasizing the importance of monitoring liquidation events and leverage:

"We have to keep watching this ... how bullish are we." ([52:12])

She explains the significance of metrics like the "profit ratio," which measures whether sellers are selling at a loss. A drop below one typically signifies bear market conditions:

"If that starts going below one, it means that a decent amount of people are now selling at a loss." ([54:18])

Corporate Use of Bitcoin: Lyn Alden contrasts companies like MicroStrategy, which allocate significant portions of their treasury to Bitcoin, with Tesla's more conservative approach:

"Tesla only put a fraction of their cash balance in any way." ([59:40])

She suggests that most corporations will likely adopt a similar strategy to Tesla, allocating a small percentage to Bitcoin as a hedge against inflation while maintaining the majority of their assets in traditional forms.

Grayscale Bitcoin Trust (GBTC) Premium: Lyn analyzes the GBTC premium, which stands at a significant discount:

"You're buying something, you know, 80 cents that it costs a dollar." ([61:10])

She notes that while discounts present arbitrage opportunities, investors must consider factors like counterparty risk and the potential for GBTC to convert to an ETF, which could eliminate the discount.

Conclusion and Final Thoughts [65:29 - 66:06]

In concluding the episode, Peter McCormack reflects on the insightful discussion with Lyn Alden, emphasizing the intricate relationships between inflation, government policies, and Bitcoin. He reiterates the importance of staying informed and vigilant in monitoring economic indicators and their impact on cryptocurrency markets.

Notable Quotes:

• Lyn Alden: "CPI is a really crappy statistic for the most part. Housing has gone up faster than a CPI." ([00:01])
• Peter McCormack: "I have a read on how he's doing? Have you got a read on the economic policies from his... What have you been thinking about over the last month?" ([05:17])
• Lyn Alden: "We've pumped a lot of money into the economy. Some economies are not really pumping a lot more." ([15:17])
• Peter McCormack: "Is there potentially too much leverage? Are there too many people trading with too much leverage?" ([52:12])
• Lyn Alden: "If that starts going below one, it means that a decent amount of people are now selling at a loss." ([54:18])

This episode provides a comprehensive examination of inflation's multifaceted nature, its measurement challenges, and its broader economic implications. Lyn Alden's expertise offers listeners a nuanced perspective, bridging traditional economic analysis with contemporary financial instruments like Bitcoin.