Hats off to Alabama, they were truly the tide that rolled over everything this year. Two Heisman Trophy candidates and a national championship. They again proved they seem to be in a league all by themselves.
Might be a bit long this week but worth reading. I start off with a major change in banking followed up by the economic indicators of importance, including an updated assessment of the risk of coming inflation.
This past week marked a major first that went largely un-noticed but will have major ramifications for our banking industry. Anchorage Digital Bank received approval as a national trust charter. Anchorage Digital Bank had been operating as a state trust in South Dakota. This change will allow Anchorage to provide custody services to banks providing them access to crypto currency assets. The firm will not be a bank per say, as they will not accept deposits or provide loans. That will come in time, it is now a matter of how to determine the assessment of a crypto currency based balance sheet. That is getting a bit ahead of ourselves here. For now, Anchorage will be on par with all national banks, in regard to regulatory oversight. This means banks will be able to use the services Anchorage provides knowing that the firm is stable and safe. By moving to a national charter, banks can be assured of a single standard of performance, unlike other firms that offer like services based on state regulations. State regulations are typically much easier to meet while being different from every state.
Anchorage is required to have $7 million in tier one capital. It also must have $3 million set aside in liquidity. This will give assurance to banks that wish to partner with Anchorage. Essentially local banks that have wealth management offerings for clients could use Anchorage for custody services for their customers who wish to add crypto currency to their holdings. Until now that required the customer to set up an account with Coinbase, Anchorage, or other like firms that built a platform to trade in crypto currency. Now the funds can be maintained under the customer’s account at the bank with Anchorage used for the custodial services. As customers desire to diversify their portfolios to include crypto currency as an investment, this type of relationship will become more important to small banks that would not otherwise be able to build their own investment platform.
Anchorage is the first of what is anticipated to be many entrants into this field. While money center banks are already providing some of these services they are blocking out smaller competitors. On another front, this would also help smaller banks enter into international trade transactions. In the past this was often handled with letters of credit. More recently, when Bitcoin and Ethereum maintained a more stable price level, there was a small but growing level of trade that used crypto currency. To avoid currency transaction fees and exchange rate movements, buyers and sellers agreed to a specific dollar amount in a crypto currency. The funds were transferred often through Coinbase for payment. This avoided wire fees, exchange rates, and other transaction fees charged by the banks. By establishing a relationship with Anchorage even a local bank can now access crypto currency to assist their clients that desire or have to pay in a non-hard currency.
A world-wide shortage of computer chips is causing shut downs at Ford, GM and Fiat Chrysler. Subaru has already recast their budget by several thousand vehicles in 2021 due to the chip shortage. Automakers are only the first ones to feel the pinch, others are sure to follow. Virtually everything made today, all the way from small toys to autos to appliances have chips in them. In autos, everything from the engine, steering, brakes, even the seats have chips in them. Without the chips the production line stops. One major demand source that is upsetting the industry is consumer electronics. With more workers over the past seven months now home based, the demand for new computers and other electronics have soared soaking up the available chips. There is no end in sight for the shortage as many chip producers are already at capacity, while other suppliers are crippled by missing employees due to Covid. If you are in the market for a new vehicle or for that matter anything with chips in them, it could be a long wait.
The inflation rate in December was .4%, annualized that would equate to a 5% annual inflation rate. Current estimates for 2021 peg the inflation rate around 3%. This could be a low estimate considering possible commodity shortages, anticipated pent up demand as well as the magnitude of the new administration’s proposed stimulus program. We have been in a very unusual period with inflation under 2% for an extended time. We could be back to a more normal historical inflation rate, possibly similar to the 1970s where inflation wound up from 8% to 12% annually. The 1970’s were marked by an inflated money supply due to the Vietnam War hangover, lower productivity and supply shocks, similar to conditions we are facing now.
We ended 2020 with a mix of optimistic numbers with a couple of clouds on the horizon. December industrial production, capacity utilization, and auto sales were all up nicely. Retail sales on the other hand were dismal, reflecting a subdued Christmas season. It was not in the gift area per say that hurt, but without year end parties to attend, clothing and other purchases related to gatherings cut consumer spending. January is starting off a bit slow with the first of the manufacturing reports showing a dip in the level of growth. This could be due to the resurgence of Covid or it could be a hunkering down as people wait for new stimulus funds, or supplies of what they want to be replenished. As indicated above, if you want to purchase that new game console and it cannot be produced, that cuts a number of ways; lower retail sales leading to lower manufacturing levels. Time will tell.
Have a great week.