Almost Daily Grant’s: Self Help Declared

Time for another chapter in the crypto kleptocracy chronicles: Bad actors helped themselves to the equivalent of $116 million in digital wampum on the Mango decentralized exchange on Tuesday. The hackers utilized a so-called price feed exploit, bidding up the price of the tokens to as high as $0.91 from $0.03 over a ten minute stretch before using unrealized profits from that move as collateral to borrow and withdraw the aforementioned sum.

 

The exchange confirmed via Twitter that a hacker “was able to drain funds from Mango.” Noting that “we are taking steps to have third parties freeze funds in flight,” the victims added that “this incident has effectively resulted in a total draining of all equity available.” 

 

Yesterday, the hackers returned to Mango’s governance forum with an offer to return the stolen funds to a Mango address, in return for a a “bug bounty” in the form of $70 million worth of USD Coin cryptos. As is de rigueur in the decentralized digital Wild West, the bandits supplemented that proposition with some bold behavior. Cointelegraph puts it this way: “adding insult to injury, the hacker[s] has voted for this proposal using millions of tokens stolen from the exploit.”

 

That incident puts a bow on what has already been a month to remember. Data firm Chainalysis relays this morning that total losses from crypto thefts stands at $718 million so far in October, marking the worst monthly showing on record with more than two weeks remaining until Halloween. Coloring that striking fact, crypto’s aggregate market value remains at less than $900 billion, compared to $2.9 trillion a short eleven months ago. 

Back to the drawing board, economists. Today’s Consumer Price Index print, which showed an 8.2% annual advance in September, marks the seventh time in nine occasions this year that the data came in hotter than expected. Similarly, the 0.4% sequential advance outpaced the 0.2% consensus for the sixth such “beat” in 2022. Only once has each of those readings lagged their respective consensus guesstimate this year. 

 

A primary culprit of that persistent upside surprise: sticky price pressures in the shelter component.  That broad category consists of the owners’ equivalent rent (OER) metric, which attempts to measure the change in a homeowner’s estimated proceeds from renting his or her dwelling and represents 23.7% of the CPI. Rent of primary residence, which measures contracted rents, accounts for a further 7.6%, bringing the combined total to a near-one-third weighting of the index.  

 

Each of those data series vaulted higher by 0.8% on a sequential basis in September (the fastest pace since 1990 per Bloomberg’s lights) and 6.7% year-over-year. In other words, shelter alone accounts for more than two percentage points of headline CPI growth, topping the Federal Reserve’s self-imposed annual inflation target even without factoring the other 68% of the index components.  As rental contracts typically last one year and the CPI captures prices on currently occupied dwellings, it takes roughly five quarters for a trend reversal in measured home or new rental prices to appear in the data, a June 2021 analysis from Freddie Mac economist Eric Brescia found (see the edition of Grant’s Interest Rate Observer dated Sept. 17, 2021 for an early look at this dynamic).  

 

Although the housing market on which that data is derived has displayed unmistakable signs of rolling over (witness the consecutive 1.05% and 0.98% respective sequential decline in U.S. home prices in July and August according to data provider Black Knight, the largest single-month declines since January 2009), the epic pandemic-era bacchanal continues to reverberate. For a sense of scale, the S&P CoreLogic Case-Shiller U.S. National Home Price Index accelerated by 15.8% year-on-year in July, the slowest growth pace since April 2021 but nevertheless topping the peak of the titanic mid-aughts housing bubble by 1.3 percentage points. 

 

As that financial crisis-era experience illustrates, the aftermath of those good times can linger in the data long after the revelers have stumbled home. Thus, the S&P CoreLogic Case-Shiller 20-City Composite Index rose by 105% from January 2000 to April 2006, while OER rose only 20.3% over that period.  Tellingly, the Case Shiller gauge declined by 33.9% over the following six years, yet OER registered an 11.7% increase during that stretch.

Reserve Bank Credit ticked lower by a modest $3 billion this week on the heels of the previous $44 billion roll-off, leaving interest bearing assets on the Fed balance sheet at $8.72 trillion. That’s $200 billion below the March 2022 high-water mark. 

Hot CPI, hot stock market.  The S&P 500 erased sharp early losses with a vengeance, storming higher from yesterday’s year-to-date closing lows to settle near 3% in the green, though the Nasdaq 100 lagged a bit with a 2.4% advance. Treasurys, on the other hand, were pummeled in bear-flattening fashion, as the two-year note skyrocketed 19 basis points to 4.47% while the long bond rose to 3.97% from 3.9% yesterday. WTI crude rallied to near $90 a barrel, gold ticked lower to $1,673 per ounce and the VIX pulled back below 32.  

 

– Philip Grant