Red Hot Chilly Preppers

Red Hot Chilly Preppers

I thought my eyes were deceiving me again and this time I wasn’t even watching a Conservative Party Conference speech from Manchester, or was it Nuremberg? Nope, the trading screens are definitely showing UK Natural Gas prices rocketing by 40% in just one morning session. This is a classic commodity supply-demand squeeze and it is global in impact. Temperatures in the Northern Hemisphere are still mild but one wonders whether long-range winter temperature forecasts are prompting some aggressive prepping?

One thing is for sure, we are about to find out how the global economy copes with the almost forgotten phenomenon of red hot inflation. How apt it was that scientists, using chilli peppers to discover the workings of the human nervous system, won the Nobel Prize for Medicine this week. Swap peppers for popping prices and you have a new lab rat; global supply chains. The supply chain experimental data is instructive:

  • Germany’s factory orders in August fell by 7.7% mainly driven by auto industry cut backs caused by semiconductor shortages.
  • Container freight costs for the China-US route have climbed from $3,000 to $20,000 over the last 24 months.
  • Aluminium prices are at 13 year highs.
  • Crude oil is now trading above $80 per barrel.
  • The Natural Gas oil-equivalent price is now well over $200 per barrel.
  • Bloomberg’s Commodity Spot Index, a basket of 23 energy, metals and agri raw materials contracts, jumped to an all-time high this week and has now surpassed 2008 and 2011 commodity super-cycle peaks.

It is tempting to slip into ‘stagflation’ doom and gloom prognoses but this writer can’t help feeling the Evergrande real estate implosion in China is yet to show its demand destructive teeth. An economy with a 25% GDP dependence on real estate activities, 90 million vacant residences and extreme household wealth/confidence sensitivity to property is generating epic Celtic flashbacks. Of course, the Chinese authorities are acutely aware that intervention to re-balance supply(production) or demand (consumption) will have a significant impact on GDP growth targets. So, get ready for deflection strategies and lots more headlines about PLA fighter jets strafing Taiwan’s airspace – just the 52 jets yesterday. Taiwan’s defence minister says “China could mount a full scale invasion of Taiwan by 2025”. Spicy stuff, but hardly inflationary. However, if you are looking for spicy and inflationary stuff the world of NFTs keeps on giving.

The interesting thing is that some serious heavyweight institutions are now prepping for the emergence of a new super asset class populated by digital currencies, blockchain technologies, smart contracts/ programs and digital tokens(NFTs). On July 23rd we wrote about a game called Axie Infinity developed by a studio company, SkyMavis. At the time we were staggered by the growth of this play-to-earn (NFTs) fantasy game as revenues rocketed from $3 million to $80 million in the May-July period. Well, there’s more. SkyMavis just announced a funding round of $152 million which attracted the globally famous VC, Andreessen Horowitz, and crypto-gurus, FTX.

The valuation of SkyMavis implied by the funding is circa $3 billion but there are other data points which are even more eye-watering. The Axie Infinity tokens (AXS) currently in circulation gained 40% in value this week on the funding news and catapulted AXS tokens into the top 20 cryptocurrencies on the planet. The market capitalization of AXS tokens is now over $9 billion and is the only NFT asset to generate more than $1 billion in trading volumes on crypto exchanges monitored by the Dapp Radar industry report. Trading volume in AXS tokens has actually passed the $2 billion mark and active users of the Axie Infinity platform now number over 1.5 million. Red hot stuff.

More broadly, the Dapp Radar report highlights NFT trading volume in Q3 of over $10 billion with year-on-year growth rates of 38,000 % (yep). Opensea is the biggest NFT marketplace and had one of its biggest trading days last Sunday (the City truly will never sleep) with volume of $136.8 million. Even if you’re not quite ready to swap oil and gas trading for collectible avatars, like Bored Ape Yacht Club and CryptoPunk images, the sheer heat in the digital marketplace suggests something big is afoot. Step forward the most influential financial chef of the lot, the Federal Reserve Board, who this week told the US Congress, “The relevant parts of our law were written long before digital finance was a thing… it would be ideal if this were to be part of a broad consultation and ultimately authorizing legislation from congress.”

Consider yourselves prepped for the Otherside….

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