5 Things To Know In Investing This Week: The We Don't Have Your Data Issue

At the same time the Bank of Japan caused panic and traders began to unwind the carry trade, something DKI has been talking about since October of 2022, multiple retail trading platforms failed. It might be a good time to hedge your portfolio, or have some assets outside the financial system (or both). Last week, we warned you about the danger of Treasury Secretary Yellen’s increasing auction sizes. That was followed by one of the worst 10-year auctions in years. We get a cautionary piece of inflation data in higher used car prices and hope the Fed isn’t about to make the Arthur Burns mistake of lowering rates just before inflation increases. Finally, we get a good earnings report from authID $AUID complete with new information about a game-changing security protocol that prevents fraudsters from stealing your biometric data.

This week, we’ll address the following topics:

• authID $AUID announces exclusive technology that makes their solution the fastest, easiest to use, and most secure in the biometric verification industry.

• Multiple trading platforms become inaccessible during Monday’s market volatility. Do you have a plan to protect yourself if you can’t trade during a market crash?

• DKI warns about the poor reception for ever-larger Treasury auctions. A week later, we have one of the worst auctions in nearly a decade.

• The Japan carry trade starts to unwind. There is more to go.

• Used vehicle prices tick up. If we get an increase in goods inflation, the Fed will be easing into a higher CPI. That’s the Arthur Burns mistake.

Another strong week by interns Andrew and Alex. They’re handling about 80% of the 5 Things on their own which I think is impressive. I wish I had their understanding of finance and economics when I was their age. Nice job!

Ready for another week of insane volatility? Let’s dive in:

• authID $AUID Reports Second Quarter and Unveils New Technology:

authID reported continued revenue growth and reconfirmed all prior guidance. The company also provided a list of new reseller and partner agreements. Most importantly, they were able to install and scale their best-in-class biometric authentication product at new and growing customer accounts. authID has moved from having fantastic technology to successful implementation in securing customer identity and accounts. That’s all great, but the big announcement was something CEO, Rhon Daguro, previously teased in a webinar with Deep Knowledge Investing; Zero Biometrics.
DKI Takeaway: Zero Biometrics was the big announcement on the call. The biggest risk to biometric security at companies other than authID $AUID is storing the biometric data in a database that could itself be hacked. That’s the disaster scenario. As of now, authID is the only company with public key / private key technology. That means that authID and their customers don’t store client biometrics and a new public key is encrypted to match the private key for each verification. Fraudsters can’t steal biometric data that isn’t being stored and this authID technology confirms the user, not the user’s device eliminating another vector for theft and fraud. There is no other biometric authentication company that has a more secure or faster system. That kind of game-changing security will be a huge asset to $AUID’s sales force as they meet with large banks, and other big companies with advanced security needs.

• Trading Platform Outages

On Monday morning, at a time of market chaos, many investors tried logging into their Charles Schwab account to check their portfolios. A quick internet check revealed that Schwab, along with other trading platforms like Robinhood and Fidelity, had crashed. These companies have faced outages during periods of extreme trading volume in the past, it's crucial that they address and resolve this issue going forward. How can investors have confidence in the markets when they can’t access their accounts during a market meltdown?

This was a 1929 problem potentially repeating itself in 2024.

DKI Takeaway: These brokers have a duty to manage volatile trading days. During the GameStop GME saga, Robinhood restricted trading in the stock, limiting retail investors' ability to trade. The U.S. continues to drift further from a truly free market economy as brokers restrict trading, the government bails out banks, and the Federal Reserve controls interest rates. This week serves as a reminder of a smaller-scale version of the 1929 bank runs, when hundreds of people crowded banks to withdraw their money. In the future, a market crash could bring even worse scenarios, potentially leading to significant losses that occur while you’re prevented from reacting. To reduce the risk when this scenario repeats itself, follow DKI’s positions to hedge against future market risk and limit losses. Events like this are another example of the importance of owning physical assets like Gold or self-custody of Bitcoin. You can learn how to self-custody Bitcoin by reading our X thread. Self-custody can feel scary, but is easier than you think.

• Treasury Auction Tails:

DKI has been warning about weak Treasury auctions, and last week ended with a terrible 10-year example. The 10-year note yielded 3.960%, compared to the expected 3.929%. This "tail," an indicator of low demand, tied for the third worst in seven years. A tail over 3 basis points is large, and foreign bidders only showed up at 66%. These were multiple other indications of weakness. Despite the "flight to safety" and imminent rate cuts, Secretary Yellen keeps flooding the market with supply. This isn’t good for either the stock or bond markets.

Chart from ZeroHedge.

DKI Takeaway: It's also being reported that Warren Buffet's Berkshire Hathaway now holds more T-bills than the Federal Reserve. Santiago Capital cheekily dubbed it "QE with Nebraskan characteristics. "The Oracle of Omaha is betting big on Treasury bills, but if the latest auction is any indication, he may start seeking other places to park his cash before more foreign buyers do the same.

• Japan Carry Trade:

Since the bursting of Japan's asset price bubble in the 1990s, the Bank of Japan (BoJ) has implemented extreme measures to combat deflationary pressures. As the first central bank to introduce Quantitative Easing (QE) in 2001 and later Qualitative and Quantitative Easing (QQE) with various asset classes, the BoJ also implemented Yield Curve Control (YCC) in 2016. By maintaining rates at zero or below, the BoJ opened opportunities for the carry trade.

The exact size of the carry trade is unknown, but recent market disruptions suggest it is substantial. To defend the yen's decline, the BoJ raised rates to 0.25%, marking a 35-basis point hike over four months, the largest increase since 2007. This rate hike impacted investors using the yen as the funding currency for the carry trade, forcing them to cover their positions by liquidating foreign assets. A podcast featuring @Peruvian_Bull and @acrossthespread revealed that both institutional and retail investors partake in the carry trade, with retail investors taking out yen loans to invest overseas via brokerage accounts. As the BoJ raised rates, we witnessed significant market declines.

Bank of Japan raises by just .20% causing markets to go into correction territory.

DKI Takeaway: Recent comments from the BoJ and their efforts to stabilize the market suggest that the current rate levels may be unsustainable. Additionally, anticipated rate cuts from the Federal Reserve in September are likely to narrow the spread for the carry trade, causing further unwinding of positions and pressuring US markets. It is likely the BoJ will keep its finger on the button threatening to hike again and causing deliberate uncertainty for the traders currently short the yen.

• Is Inflation Creeping Back?

In June, the Manheim Used Car Index recorded a rise in used vehicle prices, reaching 201.6. This marks a 2.8% increase compared to the previous month, though it represents a 4.8% decline year-over-year. The Manheim Index is based on an analysis of over 5 million used vehicle transactions annually. This data allows them to generate a monthly index that reflects the current state of used vehicle prices across the market.

A spike in July compared to the continuous decline in 2024

DKI Takeaway: With used vehicle prices on the rise, we could potentially see an increase in the Consumer Price Index (CPI). Used vehicles account for about 2% of the CPI. The Covid-related increase in car prices spiked the CPI in 2022, and the large decline since then has lowered the index and helped fuel the disinflation narrative. If durable goods pricing starts to rise again and services inflation remains sticky, the Federal Reserve may find itself in a difficult position, trying to balance employment and inflation. The next CPI release is on August 14th, Thursday’s initial jobless claims data showed some relief, dropping more than expected from 250,000 to 233,000. While the world now expects a rate cut in September, a resurgence of inflation could complicate matters, making rate cuts less attractive. If the CPI increases, DKI will have to shift from "sooner rather than later" back to "higher for longer".

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