💸 Supercore

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Cupid, draw back your bow / And let your arrow go / straight through that Chinese spy balloon or whatever / for me ... Let's get into it.

By Allison Morrow

💸 UNDER PRESSURE

When FTX collapsed in November, it was a seismic event for the crypto industry. Many called it the "Lehman moment."

The comparison holds true in broad strokes: An industry giant came tumbling down, contagion spread, and regulators who'd been reluctant to act suddenly had a clearer target and a wave of public outrage to bolster their cause.

And now, we may be officially entering the Dodd-Frank era of crypto. (Dodd-Frank, of course, being the 2010 legislation Congress passed in response to lax oversight in parts of the banking industry that plunged the world into one of the worst financial crises in history.)

See here: As the crypto market has exploded into a trillion-dollar industry, proponents are grappling with a regulatory infrastructure ill-equipped to handle it (and is, frankly, broadly suspicious of its fundamental pitch as a the future of finance).

In the three months since FTX filed for bankruptcy, state and federal regulators have escalated both their rhetoric and their actions to keep the fast-growing digital asset industry in check — a shift that is, unsurprisingly, not going over great with crypto companies.

On Tuesday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing pointedly titled "Crypto Crash: Why Financial Safeguards are Needed for Digital Assets."

"While crypto contagion didn't infect the broader financial system, we saw glimpses of the damage it could have done if crypto migrated into the banking system," the committee's chairman, Sen. Sherrod Brown, said in his opening remarks. "These crypto catastrophes have exposed what many of us already knew: Digital assets — cryptocurrencies, stablecoins, and investment tokens — are speculative products run by reckless companies that put Americans' hard-earned money at risk."

Stablecoins in the spotlight

The hearing came a day after a regulatory crackdown on one of the world's most popular stablecoins. On Monday, New York regulators ordered blockchain firm Paxos to stop issuing BUSD, aka Binance USD, citing "several unresolved issues" related to Paxos' oversight of its relationship with crypto exchange Binance.

So-called stablecoins are digital tokens that maintain a one-to-one backing with US dollars or other fiat currency. Investors typically buy them to store money and facilitate deals within the cryptocurrency infrastructure, making them a bedrock of the crypto ecosystem.

At the same time, the Securities and Exchange Commission plans to sue Paxos, alleging that BUSD should have been registered under federal securities laws. Paxos "categorically disagrees" with the SEC, it said in a statement Monday, "because BUSD is not a security under the federal securities laws." The firm said it would "engage" with the SEC on the issue and is prepared to "vigorously litigate if necessary."

The BUSD news has clearly unsettled investors. Binance, which partnered with Paxos to launch the stablecoin in 2019, on Monday suffered one of its worst-ever days in terms of withdrawals with $873 million in net outflows, according to data provider Nansen.

Enforcement ramps up

The crackdown on BUSD and Paxos is just the latest instance of regulatory muscle-flexing in recent months — actions that are sowing confusion and frustration among crypto's proponents, many of whom have sought regulatory clarity for years.

"Regulation by enforcement is puzzling for crypto enthusiasts," said Marcus Sotiriou, market analyst at digital asset broker GlobalBlock, in a note. "People are desperately trying to figure out how to offer a product legally whilst getting zero guidance."

The SEC strategy has so far leaned on a whack-a-mole approach to punishing participants rather than crafting uniform regulations, and that's not helping anyone in the nascent crypto space sleep at night.

In January, regulators warned US banks and other market participants about the risks of fraud, volatility, and shoddy risk management in the crypto world. "It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system," they said in a statement — the first-ever joint statement on crypto from the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.

#️⃣ NUMBER OF THE DAY

470

Air India unveiled plans to buy 470 jets from Airbus and Boeing, setting up what is expected to be the largest deal in aviation history.

The White House, which announced the Boeing side of the deal Tuesday, hailed the agreement as a historic moment for the two nations, and one that will create 1 million American jobs across 44 states. The deal would secure 220 planes from Boeing and 250 from its European rival, Airbus.

🏦 'SUPERCORE'

Economists (and journalists) love a good buzzword — a little shorthand to quickly convey an idea that's front-of-mind for everyone in a given field. In 2021, the word du jour was "transitory." In 2022, it was also "transitory" but heavily tinged with sarcasm. Right now, the word economists and Fed policy wonks are obsessed with is "supercore."

And no, it isn't the name of Jay Powell's ab routine (though it could also be that).

The tl;dr version: Supercore inflation refers to the costs of services, minus the cost of housing and energy. The focus here is on prices that are determined mostly by the cost of labor — dining at restaurants, getting your hair done, hiring a contractor.

Those core services that exclude housing "may be the most important category for understanding the future evolution of core inflation," our boy J-Money said recently.

Supercore prices are less volatile than food and energy, and can better indicate the direction of prices in the US economy, my colleague Christine Romans writes.

The problem is that supercore prices have been stubbornly high even as the costs of consumer goods have fallen.

On Tuesday, the most mainstream of the monthly inflation gauges, the Consumer Price Index, showed prices in January fell to 6.4% on a year-over-year basis. There's good news and bad news in that: It was up slightly month-to-month, and higher than economists' projections of 6.2%.

The upshot: Inflation is trending in the right direction, but we're not out of the woods. Stocks initially fell on the stronger-than-expected inflation news, as it means the Fed will likely have to keep interest rates elevated for longer to put a dent in rising prices.

According to calculations by The Wall Street Journal, supercore inflation appears to have held steady in January.

"Supercore inflation is still way too hot, but it has begun to cool off, and all signs point to it and overall inflation getting back to something more comfortable over the coming 12-18 months," said Mark Zandi, Moody's chief economist.

Of course, "supercore" isn't a perfect gauge.

It's all well and good for economists to ignore the prices of food and energy, but those are the very categories that most households cannot ignore.

WHAT ELSE IS GOING ON?

🔌 Ford has halted production of the top-selling electric pickup in America, the F-150 Lightning, because of a possible battery problem.

💻 A federal judge ordered Sam Bankman-Fried back to court this week after learning that the founder of crypto trading platform FTX accessed the internet in a way the government can't track.

🚘 Tesla workers in New York plan to launch a campaign to unionize, setting up a major labor battle for the notoriously anti-union CEO Elon Musk.

🥪 Subway shareholders are exploring a potential sale of the sandwich chain.

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