THE FED JUST GOT AN EXCUSE NOT TO HIKE

Interest rates are the reason we pay attention to inflation reports around here.

When rates come down → borrowing gets cheaper → households and businesses take out more loans → more money moves through the economy → and some of that money ends up in risk assets (like crypto).

When rates go up, the whole sequence runs in reverse.

The Federal Reserve has now held its rate at 3.50% to 3.75% for five meetings in a row. And at the last one, on July 29, three of its members voted to push rates higher.

Good news is, yesterday's inflation report from the Bureau of Labor Statistics made that argument a lot harder for those dissenting voices to win.

Prices across the full basket of goods and services rose 3.4% over the past year, still well above the Fed's 2% target. But energy is doing most of that work, up 14.7% over twelve months, with gasoline up 24.6%.

That is a supply problem: Brent crude (the global oil benchmark) is still ~$83 a barrel while the standoff over the Strait of Hormuz drags on.

Raising interest rates does not produce more oil/lower energy prices.

What the Fed has more influence over is core inflation, which is the same basket of goods, with food and energy taken out. Those two swing on weather and war rather than on how much money is moving around.

Core prices rose 0.2% in July and 2.5% over the past year. That is the slowest pace since March 2021.

And on top of that, year-over-year wholesale inflation (PPI) came in at 4.7% this morning, below the 4.9% that was expected.

Point being: when it comes to rising inflation, energy is doing almost all of the work right now.

So why's the part the Fed can influence actually behaving itself? Because almost nobody is getting a raise.

Check out the second-quarter productivity figures:

• Output: up 2.5% from a year earlier.
• Hours worked: up 0.2%.
• Unit labor costs (what a company pays in wages to produce one more unit of stuff): up 1.4% over four quarters.
• Labor's share of output (the slice of everything the economy produces that gets paid out as wages): 52.9%, the lowest since records began in 1947.

Point being: companies are producing more without paying more to produce it.

There is no spiral of rising wages feeding rising prices for the Fed to break.

But if all that extra output isn't going into paychecks… where is it going?

All that extra output is going into profits.

Companies in the S&P 500 are tracking 32% earnings growth for the second quarter once you set Alphabet and Amazon aside. (Both booked one-off accounting gains that flatter the overall figure.)

That's the seventh quarter in a row of double-digit growth.

Spending held up too. Economists track a measure called real final sales to private domestic purchasers: consumer spending plus business investment, with the noisier trade and inventory swings removed.

It grew 3.9% in the second quarter, up from 1.7% in the first.

The Milk Road Show: Matt Hougan: Crypto Is Down 50%… Wall Street Is ALL-IN

America's aging population is muddying a headline signal of labor market health.

• The clearest sign yet: The share of people working or looking for work has fallen sharply, with the nation's shifting demographics helping drive the decline.

Why it matters: The plunge in participation might normally be an ominous signal at a time when hiring has already slowed.

• But sweeping shifts in demographics — as well as immigration and technology — make it harder to tell whether familiar economic signals reflect structural change or the normal ups and downs of the business cycle.

By the numbers: The labor force participation rate — the share of the population working or looking for work — fell to 61.4% in July from 61.8% in May and 62.2% a year earlier.

• Excluding the pandemic-era plunge, that's the lowest level since 1976.

Zoom in: Roughly two-thirds of the 0.8 percentage-point decline in labor force participation over the past year — 0.55 point — reflects a shift in the population toward older Americans. Participation is just under 60% among 60-to-64-year-olds, but less than 20% among those 65 and older, meaning that the national rate gets pulled lower as more Americans age into the older cohort.

The intrigue: The decline in participation has not been met with a corresponding increase in would-be workers sitting on the sidelines. The number of people outside the labor force who say they want a job has been falling in recent months, hitting 5.9 million in July compared with the 6.2 million who said the same in May.

Zoom out: The demographic shift is slow-moving, but this year it showed up abruptly in the jobs data when the government updated its population estimates. The St. Louis Fed estimates that the one-time adjustment accounts for 43% of the decline in participation between December and June, while ongoing aging accounts for another 16%.

The bottom line: The U.S. is undergoing a demographic transition big enough to shift the interpretation of a key economic gauge. As the massive baby boomer generation moves deeper into retirement age, the headline participation rate is likely to face persistent downward pressure even if Americans at any given age remain just as likely to work.

Initial jobless claims ticked up last week by 9,000, to 209,000, though the data indicates that layoffs across the economy remain historically low.

The big picture: Inflation has been stubbornly high for half a decade. But July, at least, brought some relief. With a lively debate underway at the Federal Reserve over whether to raise interest rates, the latest run of data — a soft jobs report Friday and benign readings on inflation this week — allows for patience.

By the numbers: The Producer Price Index was flat in July; excluding food and energy, it was up 0.2%. Both numbers were a tick below analysts' forecasts.

• Over the last 12 months, PPI is now clocking a 4.7% rise, or 4.2% for core.
• It followed a similarly soft July Consumer Price Index reading earlier this week.
• June PPI, however, was revised upward, to a 0.1% decline (previously a 0.3% decline), adding an asterisk to the overall solid news.

What they're saying: "The soft PPI reading for July points to reduced inflationary pressure for businesses in coming months," Nationwide senior economist Ben Ayers wrote.

Former Disney CEO Bob Iger and venture capitalist Josh Kushner are set to acquire the Los Angeles Lakers for a record-setting $12.5 billion. If approved by the NBA's board of governors, Iger will help steer the fate of the team. The Lakers are being sold by Guggenheim Partners cofounder Mark Walter, who bought the team less than a year ago for $10 billion. Walter also owns baseball's Los Angeles Dodgers, but recent headlines have focused on a US regulatory probe into whether his companies moved $16 billion in loans between them without adequate disclosure. Walter denies any wrongdoing, saying the transactions were straightforward and done in good faith.

The two largest publicly listed bitcoin treasury companies are sitting on combined paper losses of nearly $10 billion. Strategy carries $8.2 billion in unrealized losses on its 576,000 BTC; Tokyo-listed Metaplanet holds $1.5 billion in losses on 43,000 BTC. Both funded those purchases largely with debt. Yesterday's CPI reading looked tame on the surface — but energy prices temporarily masked stickier underlying pressures in food and services, and the dollar barely moved, offering bitcoin little support. BTC remains choppy just below $64,000 while the S&P 500 makes record highs. A $1 million options trade is nonetheless betting BTC clears $65,500 by Saturday. PPI data lands today.

Crypto trading hit a 32-month low in July, reflecting significantly reduced market activity and retail participation in digital assets.

The divergence between risk assets has never been more glaring this week. Equities are aggressively ripping higher while digital assets suffer from total retail apathy. Leveraged ETFs are currently driving global market flows, forcing major indices relentlessly upward. The broader bull market stays aggressively alive, heavily supported by rapidly shifting interest rate expectations. Institutional capital continues to aggressively bid up artificial intelligence infrastructure. Global allocators are actively repositioning their portfolios to capture this sustained macroeconomic momentum. Meanwhile, baseline crypto market analysis paints a much darker picture of extreme retail exhaustion and network capitulation. Digital assets are currently trading like forgotten relics while legacy markets break new high-water marks.

Markets are splitting hard this morning. Equities are aggressively ripping higher, driven by relentless demand for semiconductor stocks and the broader AI trade. Meanwhile, baseline crypto market analysis reveals severe digital asset exhaustion. Bitcoin is trapped in a proper consolidation, with Bollinger Bands compressing to their narrowest levels since October 2023. The macroeconomic backdrop is shifting rapidly as global allocators reposition. Oil prices remain volatile despite escalating geopolitical risk. A dovish shift in Fed policy expectations has pushed the odds of a September rate pause to 64%. Leveraged ETFs are capitalizing on this repricing, actively forcing major benchmark indices upward. While traditional macro trading thrives, the digital asset sector waits for a definitive catalyst. Miners are abandoning hash rate infrastructure for massive artificial intelligence compute deals. This structural rotation leaves baseline on-chain data and the broader altcoins market heavily mute.

Stocks climbed yesterday after last month's inflation reading came in cool, with AI stocks getting a boost from upbeat earnings reports from infrastructure companies Supermicro, CoreWeave, and Nebius Group.

CoreWeave's losses doubled, its spending soared, and it devoured almost $6 billion more in cash than it generated last quarter. Investors loved it.

Why it matters: Some see CoreWeave, a so-called neocloud that builds data centers and sells AI computing power, as the canary in the coal mine of the AI trade.

After the report, that canary was tweeting and flying high. Shares of the neocloud soared 19% after it reported second-quarter results.

CoreWeave's numbers were broadly consistent with what we've been hearing from hyperscalers and others. Sales and backlog showed rising demand for AI compute, as revenue more than doubled, to $2.58 billion. Remaining performance obligations, a measure of sales backlog, jumped 245% to $103.7 billion.

Yes, but: The company's losses are getting deeper for every dollar of sales it collects. Its adjusted net loss worsened to $567 million from $130 million during the same quarter last year. CoreWeave's adjusted net loss margin declined to -22% from -11%. And the company's free cash flow was negative $5.74 billion, a sharp deterioration from negative $2.70 billion the previous year.

Gold prices rose to their highest level in more than two months yesterday — hitting $4,465 an ounce.

Why it matters: The precious metal has reversed a slump that began shortly after the start of the war with Iran. It's a sign that inflation expectations are easing.

Flashback: Investors expected inflation and real yields to rise when the war started, which made gold — a non-yielding asset — less appealing, and undermined the notion that it behaves as a safe asset in turbulent times.

State of play: But after the most recent meeting of Federal Reserve policymakers, at the end of July, investors got a dovish surprise — and gold began its ascent. Yesterday's relatively benign CPI report offered more assurance.

Follow the money: There might be an even simpler explanation for gold's leg up: China reported buying nearly 20 metric tons of gold in July, its largest purchase since October 2023.

Asset managers are growing increasingly determined to bring options-based strategies, traditionally tools of institutional and accredited investors, to the masses. Goldman Sachs is emerging as one of the more aggressive forces in the trend. The investment bank announced that it will acquire NEOS Investments, which focuses on active, derivative income ETFs, in a deal worth up to $2.3 billion. The purchase will add 19 active income ETFs and $30 billion in assets to Goldman's lineup of options funds. The announcement comes only a few months after Goldman completed its acquisition of Innovator ETFs, the creators of the first buffer exchange-traded fund. With NEOS, Goldman will oversee just over 220 options ETFs.

Options ETFs have proliferated in recent years for several reasons. The US is experiencing a massive retirement wave, with more than 50 million American adults having exited the workforce. Many older clients are looking to generate income while preserving assets.

The ETFs also tend to carry higher fees than passive funds, giving asset managers competing with mega-issuers an opportunity.

According to Morningstar Direct data:

• Derivative income ETFs have brought in nearly $41 billion in assets so far this year.
• Meanwhile, defined outcome funds have gained roughly $6 billion in the same time.

Major acquisitions of options-based issuers are still in the early innings, with Goldman leading the charge. However, in May, WisdomTree completed its acquisition of Atlantic House, a London-based active manager specializing in defined outcome and derivatives-driven investment strategies.

SpaceX (+9.7%) jumped on reported comments from CEO Elon Musk at an all-hands meeting, including a reference to a previously unknown figure tied to mobile partnerships for its crucial Starlink satellite business.

Venture capitalist Josh Kushner and former Disney CEO Bob Iger announced they've agreed to buy the Los Angeles Lakers at a $12.5 billion valuation. That's a 25% jump from where the team was valued just 10 months ago in Mark Walter's deal to buy it — still the most ever paid for a pro sports club. Kushner would serve as the controlling owner, with their sports-focused investment platform Thrive Eternal expected to invest but limited by NBA rules to holding no more than a 20% stake. The deal still needs league approval.

CoreWeave shares surged after a second-quarter earnings report. Sales more than doubled, to $2.58 billion. Remaining performance obligations — a measure of sales backlog — jumped 245%, to $103.7 billion. The company's adjusted net loss worsened to $567 million from $130 million during the same quarter last year. The stock jumped 19% after earnings, likely aided by a large short position embedded in CoreWeave with more than 20% of its float in the hands of shorts, whose repurchases can cause a sudden run-up in share prices known as a short squeeze.

Jeremy Siegel, author of the foundational text of investing advice "Stocks for the Long Run," cobbled together two centuries of data and found that over 220 years, US equities have averaged a compounding real return of 6.9% per year. That means US equities have doubled investors' purchasing power every 10 years — for two centuries. $1 million invested in the US stock market in 1802, with dividends reinvested, would have grown to $54 trillion by 2021. On a long enough time horizon, history suggests stocks might even be perfectly safe: if you hold stocks for at least 30 years, you have a 100% chance of outperforming risk-free T-bills. However, the question remains whether past performance is a guide to future performance. In the 19th century, stocks were so distrusted that a company's dividend yield was typically higher than its bond yield. In 1920, the S&P 500 traded at a multiple of just 5x earnings and paid a dividend yield of 6%. Vanguard's advisors note that "Stocks have had a 10% average annual return over the long run with a lot of ups and downs along the way" and that "investors shouldn't expect future long-term returns to differ significantly from the markets' long-term historical averages."