The Debate Over Whether Omicron Will Make Inflation Worse

Omicron, the supply chain and inflation

Jay Powell, the Fed chair, said yesterday that he was retiring the word “transitory,” which he has used for months to describe how long a period of high inflation would last. Stubbornly high inflation could push the central bank to speed up its plan to withdraw financial support from the economy, he said. Today, the O.E.C.D. took a similar tack, warning in its latest economic forecast that the Omicron variant of the coronavirus could worsen supply bottlenecks and push up inflation.

Assessing how a potential surge in cases of the new variant would affect economic growth, supply chains and inflation is roiling the market, which has been seesawing in recent days. Stocks tanked yesterday after Powell’s comments but are bouncing back today as sentiment shifts between competing interpretations of how things will play out.

Investors appear to be betting that Omicron will slow the economy but also ease inflation. The yield on the 10-year Treasury bond, which tends to track inflation, has fallen since the announcement of the new variant. The logic is that Omicron could slow economic activity, dampen energy prices and cause businesses and consumers to delay purchases, which gives time for factories, overwhelmed ports and trucking firms to work through backlogs. “If it slows down demand, it will give overloaded logistics networks a chance to catch up,” Willy Shih, an international trade expert at Harvard Business School, told DealBook. “Remember, there is still a lot of inventory in the pipeline coming at us.”

But new data suggests that the Delta variant made supply problems worse, not better. Shipping times, which had been falling since March, shot up in early July, as Delta was causing a surge in cases, according to a shipping index that the logistics company Flexport Research is releasing for the first time today. As of last week, it took an average of 105 days to ship goods to the U.S. from China, up from 84 in early July and 50 prepandemic. “Every time you interrupt the flow,” said Phil Levy, Flexport’s chief economist, “you add to the backup.”

As waves of coronavirus cases come and go, what people buy keeps changing, too. ManMohan Sodhi, a supply chain expert at Bayes Business School in London, warns of the “bullwhip effect,” in which small changes in demand cause huge changes to what goods are produced. “Keep in mind that many goods you are buying today were likely ordered back in June or even earlier, and it is this lead time that keeps demand and supply out of whack,” he told DealBook. “Without Omicron, we would have expected supply chain issues to ease up early in the New Year after the Christmas shopping and travel, but with Omicron, this will take recovery, and having less inflation, well into 2022.”

More coronavirus news:

• An F.D.A. advisory panel narrowly endorsed Merck’s Covid pill.

• A federal judge blocked President Biden’s vaccine mandate for health workers.

• The White House is reportedly weighing stricter coronavirus testing for all travelers to the U.S.

• AstraZeneca and BioNTech disagreed with Moderna’s speculation about reduced effectiveness of current vaccines against Omicron.

• A South African drug company is near a license to sell Johnson & Johnson’s vaccine across Africa.

HERE’S WHAT’S HAPPENING

President Biden weighs naming Richard Cordray as the Fed’s top bank overseer. Nominating Cordray, who was the first director of the Consumer Financial Protection Bureau and is an ally of Senator Elizabeth Warren, would please progressive lawmakers. But Republicans suggested that they’re likely to oppose his nomination, The Wall Street Journal reports.

Salesforce names a new co-C.E.O. The tech giant promoted Bret Taylor, who joined when Salesforce bought his company in 2016, to serve alongside Marc Benioff. (It’s a big week for Taylor: He was also named chairman of Twitter’s board on Monday.) Salesforce previously had multiple C.E.O.s, with Keith Block also holding that title from 2018 until last year.

CNN suspends Chris Cuomo indefinitely. The network acted after new revelations about steps the prime-time anchor took to help his brother, Andrew Cuomo, the former governor of New York, amid a cascade of sexual harassment accusations. The move comes as CNN executives met with their future boss, David Zaslav of Discovery.

Elon Musk warns SpaceX’s staff of dire consequences to a production crisis. In an email to employees last week, Musk said the company faced a “genuine risk of bankruptcy” if it can’t launch a spaceship every two weeks next year. SpaceX has struggled to produce Raptor rocket engines, a situation Musk called a “disaster.”

Manhattan’s deputy U.S. attorney is headed to private practice. Ilan Graff will join the law firm Fried Frank as a partner, after spending nearly a decade prosecuting securities fraud and national security cases and advising recent U.S. attorneys. Damian Williams, the newest head of the Southern District of New York, told DealBook that Graff was “the personification of the longstanding guiding principles of the S.D.N.Y.”

Meta’s crypto head does an about-face

Meta, the parent company of Facebook, continues to encounter resistance from lawmakers, regulators and others to its cryptocurrency plans, which David Marcus has led for the past few years. Yesterday, Marcus announced that he was leaving the company at year’s end. “My entrepreneurial DNA has been nudging me for too many mornings in a row to continue ignoring it,” he said.

Did the “roadblocks” get him down? In an August blog post, Marcus argued that while working on a digital wallet, Novi, which is designed to use stablecoins — a kind of cryptocurrency pegged to the value of a stable asset like the dollar — he came across “many roadblocks.” In his view, and that of many digital asset enthusiasts, the blockchain technology underlying cryptocurrency can revolutionize outdated payment systems and bring more people into the financial system.

Crypto is not the issue; Facebook is. Marcus said resistance — beginning with the company’s plans to create its own stablecoin — was not based on Facebook’s ideas but on opposition to the company itself, reiterating his belief that Facebook deserves “a fair shot.” The stablecoin plans were scaled back amid heavy regulatory scrutiny.

The company’s size and track record worries watchdogs. Shortly after it started the Novi wallet in October, a group of Senate Democrats wrote a letter to Facebook saying that the company “cannot be trusted to manage cryptocurrency.” And last week, the nonprofit group Open Markets Institute sent a letter to regulatory agencies documenting what it said were risks to privacy, consumer protection and other issues stemming from Novi’s pilot program, which is focused on remittances from the U.S. to Guatemala.

“David Marcus’ departure just six weeks after announcing the pilot shows the gravity of the legal, operational and political challenges inherent in Facebook’s cryptocurrency pilot,” Alexis Goldstein, the institute’s director of financial policy, told DealBook.

Seen and heard

► “They behave like a strict parent.”

— Ray Dalio, the founder of Bridgewater Associates, to CNBC on how Chinese officials describe their “top-down” approach to governing.

► “New York has to be aware that there are good choices, and it’s got to make sure it keeps itself superattractive.”

— David Solomon, the C.E.O. of Goldman Sachs, warning that potential tax hikes in New York City could drive away more wealthy residents and reduce revenue.

► “If someone wants to buy a block of real estate in SoHo today, it’s priceless, it’s not on the market. That same experience is going to happen in the metaverse.”

— Michael Gord, one of a growing number of investors buying up virtual real estate in the so-called metaverse.

Betting on the next big thing

Venture capitalists have bet big on crypto start-ups in 2021, investing more than $27 billion globally as of late November, more than the previous 10 years combined, according to PitchBook. These investors believe that blockchain, the open-source database technology underlying crypto, will lead to the evolution of the internet and eventually help displace the tech giants and gatekeepers of today.

Many investments are made by the venture capital arms of crypto companies themselves, whose continued growth depends on the industry expanding. Coinbase Ventures, the cryptocurrency exchange’s investment arm, is backing companies building infrastructure, such as the blockchain network Solana; businesses offering alternative financial services like the crypto lending and borrowing firm BlockFi; projects in decentralized finance, or DeFi, where automated transactions are handled by code; and entities working on the metaverse’s digital economy, where users buy and sell digital goods for their virtual lives, like nonfungible tokens, or NFTs.

“We see a world where the best start-ups of tomorrow are all built on Web3 blockchain infrastructure,” said Shan Aggarwal, who runs Coinbase Ventures, referring to the industry term for a decentralized internet. “That’s the future we’re building.”

Crypto’s big backers are interconnected, which makes them invested in one another’s success. For example, the biggest deal last quarter was a funding round worth some $1 billion raised by FTX, a crypto exchange. Paradigm, which is run by Fred Ehrsam, the Coinbase co-founder, former president and current board member, was one of the investors. FTX’s founder, Sam Bankman-Fried, is also the founder of Alameda Research Ventures, which in August led a funding round for the stablecoin company TrustToken with BlockTower Capital and Andreessen Horowitz, an early Coinbase investor.

“It’s a mixed bag,” said Charles Hoskinson, founder of the Cardano blockchain network, which has not raised venture capital funding. V.C.s offer start-ups many crucial services, but some question whether their heavy involvement in crypto undermines the language of democratization so central to the industry’s ethos. “They’re always going to get their pound of flesh before everybody else,” Hoskinson said.

THE SPEED READ

Deals

• The activist investor Jana Partners urged Zendesk to call off its takeover of SurveyMonkey’s parent company. (WSJ)

• The new chairman of the British telecom BT Group is preparing for a potential hostile takeover bid. (Bloomberg)

• The investment firm Stripes uses a computer algorithm to decide where to put its money. (Bloomberg)

• “Nuclear-Fusion Start-up Lands $1.8 Billion as Investors Chase Star Power” (WSJ)

Policy

• Airbnb reportedly offers rentals on land in China’s Xinjiang region owned by an entity that the U.S. government has imposed sanctions on. (Axios)

• A federal pandemic aid program gave nearly $3.7 billion to ineligible businesses because of a lack of proper diligence, a government audit found. (NYT)

• Afghanistan’s G.D.P. is expected to contract by 20 percent within a year of the Taliban’s takeover, one of the worst economic catastrophes on record. (FT)

• “Inside the Dems’ Dark Money Machine” (Puck)

Best of the rest

• In the second day of Ghislaine Maxwell’s trial, an accuser claimed that the Jeffrey Epstein associate abused her at age 14. (NYT)

• Microsoft shareholders voted to compel the company to publish a report on the effectiveness of its efforts to combat sexual harassment in the workplace. (CNBC)

• How a Microsoft Excel expert makes a fortune with lively tutorial videos on TikTok. (Decoder)

• Just how much is Waystar Royco, the media empire at the center of “Succession,” actually worth? (FT)

• However you pronounce “Omicron,” you’re probably not wrong. (NYT)

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