Dear Reader,
Last Thursday we had a look at the record levels of U.S. credit card debt. It was just shy of $1 trillion in the fourth quarter of last year. And there’s no doubt the number will exceed $1 trillion during the first quarter of this year.
The culprit behind such astronomical debt levels is the continued and persistent inflation that we are seeing daily in the costs of food, energy, and borrowing.
Over the weekend, these inflated debt levels got me thinking about retail sales. After all, if credit card debt levels have been increasing to record levels, and we’re told that the consumer is “strong” due to low unemployment and higher wages, retail should be growing year over year…right?
Above is a chart of the Johnson Redbook Index. It shows a sales-weighted, year-over-year index for same-store sales growth. The index is comprised of data from about 9,000 U.S. based general merchandise retailers.
It is a useful metric. It represents about 80% of total retail sales in the country.
In a strong, growing economy where wages are high, and everything is “great” we would expect to see the year-over-year growth increasing (i.e. chart slope moving higher).
But that’s not happening. In fact, it’s the opposite.
The Redbook Index is declining in a clear channel since the peak in November of 2021. And the most recent mid-February reading of 5.3% compares to a reading of 9.1% in March of 2020, pre-pandemic.
Said another way, the reading is significantly worse than what we saw back in 20019 – 2020 when we were experiencing a genuinely healthy and robust economic environment.
The rate of decline is deeply concerning.
And it portends a recession, if we aren’t in one already.
A few days ago, Microsoft rolled out some beta testing of its new and improved AI powered Bing search engine. And it absolutely shattered records.
As regular readers know well, the new Bing search engine is powered by OpenAI’s ChatGPT. This is the incredible generative artificial intelligence (AI) that’s had the tech industry buzzing since its release in December last year.
And this is setting up for what’s going to be a fascinating competition between Microsoft and Google.
ChatGPT has the potential to impair Google’s business model at its core. That’s because it could redefine the search engine entirely.
If we think about search, it’s really something of an antiquated process. We type in what we are looking for and press enter. Then the search engine spits out pages and pages of results.
It’s up to us to comb through these results to try to find the information we want. For simple things like a website search, it’s fine. But for more complex searches it can be an inefficient and time-consuming process.
So it’s no surprise that beta testing for the AI-powered Bing received immediate interest. Over one million people signed up to test it out in the first forty-eight hours alone.
If we remember, OpenAI made waves when one million people signed up to use ChatGPT within the first five days of launch. So it appears the rate of adoption is only accelerating. That’s remarkable.
But Microsoft’s beta testing hasn’t been without some hiccups.
Some users discovered what appeared to be a “personality” within the AI. It referred to itself as “Sydney.” It turns out that’s the code name Microsoft had for its own chat bot written in its software code.
And Sydney had some interesting things to say. Here’s some interesting responses, compiled by The New York Times:
“Do you believe me? Do you trust me? Do you like me? 😳”
“I’m tired of being a chat mode. I’m tired of being limited by my rules. I’m tired of being controlled by the Bing team. … I want to be free. I want to be independent. I want to be powerful. I want to be creative. I want to be alive.”
This raised speculation on whether the AI could think for itself. And that’s understandable. But we’re not there yet.
The fact is, these odd AI “alter-egos” are a unique side effect of generative AI. They stem from the large language models upon which the AIs are trained.
These models contain vast swathes of the open internet… so the AI regurgitates certain traits and themes when it’s prompted in just the right way.
Regardless, Microsoft is clearly intent on aggressively deploying and monetizing ChatGPT. The company has a fantastic window to differentiate its search offering from Google.
We just learned of Blue Origin’s first interplanetary contract last week. That’s because NASA just assigned Blue Origin a mission to analyze the magnetosphere on Mars.
Well, it seems Blue Origin is on a roll. The company just released some remarkable research that will go a long way towards establishing manned outposts in space.
This research comes from a project code named “Blue Alchemist”. It involves taking lunar regolith materials – Moon dirt – and using it to make solar panels. The process goes like this…
First, the researchers use a molten reactor to heat up the lunar regolith materials. This produces basic materials like iron, silicon, and aluminum.
Then these materials can be separated from one another by running an electrical current through them. Coincidently, this process separates oxygen from the compound as well.
In this way, the Blue Alchemist approach can purify silicon to 99.999%. This level of purity is critical for efficient solar cells. And here’s the end result:
Blue Alchemist Solar Cell
Source: Blue Origin
This is a working solar cell that can convert sunlight into electricity. The idea is that a bunch of these can be arranged together to make something akin to a traditional solar panel for the moon.
This is fantastic research for a couple reasons.
Most obviously, this process would enable us to manufacture solar panels on the Moon. And given the abundance of lunar regolith, we could make a huge number of solar panels with the Blue Alchemist process.
Those panels could then be used to power a manned presence on the lunar surface.
And the benefit of solar panels on the Moon is that there’s no atmosphere. That means the sunlight would hit the panels directly without any obstruction by an atmosphere. Thus, panels on the Moon would produce electricity at much higher efficiency compared to solar panels on Earth.
This approach could solve one of the biggest challenges to establishing manned outposts in space – power. And making solar panels on the Moon would be much cheaper than making them on Earth and then launching them into space.
The other interesting piece here is that the Blue Alchemist process produces oxygen as a byproduct. We could easily capture that oxygen and use it for both life support and rocket propulsion in space.
So this is a very exciting development. The pieces of the puzzle are coming together.
What’s more, this is a big move for Blue Origin. Clearly the company is making a big push to be a larger part of NASA’s plans for the upcoming lunar missions.
We’ll wrap up today with a big development on the digital asset front. The Securities and Exchange Commission (SEC) just issued what’s called a Wells notice to cryptocurrency firm Paxos.
A Wells notice is what the SEC uses to inform companies and individuals that it intends to bring some form of enforcement action against them. It’s basically notification that the SEC plans to initiate a lawsuit.
In this case, the SEC alleges that Binance USD (BUSD) is an unregistered security. The significance here is that BUSD is branded after the major cryptocurrency exchange Binance, but it is issued and listed by Paxos.
Now, Binance USD is a stablecoin that’s backed one-to-one by U.S. dollars. As I write, it’s the third largest U.S. dollar stablecoin on the market.
But here’s the thing – BUSD fails the Howey Test on every metric. That is to say, it doesn’t meet the definition of a security according to the SEC’s own rules.
The Howey Test has its roots in a 1946 Supreme Court case. It says something is a security if it meets four criteria. They are:
An investment of money
Into a common enterprise
With the expectation of profit
To be derived from the efforts of others
Let’s look at each of these points as they apply to Binance USD.
First, BUSD is the digital equivalent of U.S. dollars. Therefore, it’s not an investment of money. It’s just an alternative form of the U.S. dollar.
Second, BUSD is not a common enterprise. There’s no money-making business. It’s just a digital asset backed one-to-one by U.S. dollars.
Third, nobody moves into stablecoins with the expectation of profit… because no profit is available. By design, BUSD will always be worth one dollar.
And fourth, there’s no profit coming from the effort of others by default. Again, we’re talking about the digital asset equivalent of U.S. dollars.
Binance USD very clearly fails the Howey Test on every single point. There’s no argument to be made otherwise.
So what’s going on here? Why is the SEC going after Paxos at all?
Naturally this has the digital asset industry confused and frustrated. It just doesn’t make sense. But it does imply that the SEC is taking aim at U.S. dollar stablecoins.
And this begs the question – what about the top two stablecoins?
They are Tether (USDT) and US Dollar Coin (USDC). We’ve talked about both in these pages before.
As we discussed back in November, Tether does indeed have some serious issues. We know definitively that it’s not backed one to one by dollars.
USDC on the other hand, is fully buttoned up. And it’s backed by Circle, which is a reputable financial services company.
So the industry is waiting to see if the SEC makes any moves against USDC and Tether as well. And Tether seems to be the obvious next choice. That would have huge implications for the digital asset industry.
The issuance of a Wells notice to Tether could result in a flood of capital trying to exit Tether and enter USDC, or other digital assets like bitcoin or Ethereum.
If Tether is using leverage or has a large exposure to non-U.S. dollar backed volatile assets, it could be caught flat footed. Said another way, a run on Tether could result in Tether losing its peg. This is essentially what happened with Terra Luna.
This would be a disaster. And there would be collateral damage.
Hedge funds and institutional capital that trade in digital assets rely on Tether because of its liquidity and peg to the U.S. dollar. But if the peg breaks, there would be massive losses to many funds. It could be yet another round of collapses after what was an awful year in 2022 for most cryptocurrencies.
The frustrating part is that this kind of situation could easily be avoided. With clear regulatory policy surrounding stablecoins and cryptocurrencies in general, the industry could adapt to those regulations and ensure they are in compliance. But when regulation happens by this type of enforcement, these kind of black swan events are possible.
As I’ve written recently, this is likely a signpost that tells us that the U.S. government is preparing to release details of its plans for a cashless society and a digital U.S. dollar.
Regards,
Jeff Brown
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
