Welcome to the Lumida Ledger: your guiding light for macro, crypto and regulatory updates.

This week we met up with our friends at Social Leverage and 6th Man Ventures that were in town for NFT NYC. Here’s a thread on what we heard at NFT NYC.

Insights of the Week

Headlines:

• Digital Assets

  • April is historically the strongest month for Risk Assets as we noted last week. Bitcoin surpassed $30,000 and Ethereum broke $2,000 post Shapella upgrade. The S&P is ~4,100 and the 10-year is ~3.5%.

• Banking

  • Many of the big banks reported and the results exceeded expectations.

  • JP Morgan’s profits soar 50%. That drove the stock to its biggest gains since 2020 and its second best earnings reaction day in at least 20 years.

  • Credit quality didn’t deteriorate much on the quarter, and there are plenty of reserves relative to recent history.

  • Although we like to focus on strategic allocation, we couldn’t help but pick-up JPM and other quality banks during the ‘banking crisis’.

  • We believe quality banks had a ‘baby thrown out with the bathwater’ moment. Quality banks are those with fortress balance sheets, cheap deposits, strong liquidity, low exposure and competitive advantage. We published our view on Twitter in the middle of the ‘banking crisis’ that we thought there was a panic and picked up JPM ahead of earnings. That said, certain regional banks do indeed have challenges.

• Macro

  • Fed officials now expect a recession and that should mean rate hikes are coming to an end. The Fed, as usual, is catching up a little too late - a recession was our base case in the Lumida Outlook.

    • We note this may be the “first telegraphed recession” so a lot of “bad news” is priced in. The key is identifying “what is consensus”?

  • Markets continue to exhibit a pattern of higher highs and lows. The technicals are strong and market pessimism is high (contrarian bullish). Set against this is deteriorating macro data:

    • Inflation decreased to 5%. We all want to see lower inflation…except it also means the Fed’s goal of slowing the economy is working.

    • Citi reported a ‘notable softening’ in consumer spending over the course of the quarter.

    • Small business sentiment continued to decline in March with the NFIB’s Optimism Index falling from 90.9 to 90.1. These levels are in the bottom-decile historically associated with recession.

    • Job openings (JOLTS) are breaking below 10 MM and are in a clear downtrend.

  • We expect the S&P corporate earnings will decline in the quarter ahead. Markets are expecting a Fed pivot as soon as July setting up a showdown markets and a hawkish Fed dot plot.

Context matters. There are several unique features this cycle:

 The US Consumer is strong, and less sensitive to rate hikes.

• Consumers have strong balance sheets and record deposits. Bank deposits, despite the recent drawdown, are $4 Tn higher than pre-Covid.

  • Citibank earnings shows that lower-income consumers have largely burned off the excess savings; however, higher income cohorts still have record level bank balances.

• Consumers have locked-in ~3% fixed-rate mortgages. Many consumers are less rate sensitive. Corporates also have kicked out maturities by and large as well. Consequently, these two key sectors are less sensitive to Fed rate hikes.

• The stimulus hit before the recession. We’re still working off the $2 Tn Cares Act. Consumers had record cash balances. That meant a record low savings rate and double-digit spending growth. Excess savings have not yet burned off, but we expect it will sometime in the 2nd half.

• Inflation has spilled from goods into wages (leisure and hospitality especially). One person’s spending is another person’s income. This isn’t the 70s - but wage inflation is observable in service sectors.

Together these factors mean the Fed is forced to keep rates higher.

The Fed can choose to lower rates, but inflation would resume. Between these two trade-offs, our read is that the Fed is choosing to focus on restoring its credibility.

If our thesis is correct, that should lead to a disappointment (read: market correction) in the second half. 

How to benefit from dislocation?

We are excited about the opportunities to benefit from the multi-year dislocation ahead in the Commercial Real Estate space. There’s just not enough bank capital available to refinance the $450 to $500 Bn in CRE debt coming due each year for the next four years. That means banks will foreclose on CRE properties just like they foreclosed on single family homes post-GFC.

Buyers of distressed assets created significant wealth and these real assets will also serve as a cash-flowing inflation hedge. Highly specialized CRE managers that have on-the-ground knowhow, knowledge of local zoning regs, and managed well thru 2008 are poised to benefit. Stay tuned for more.

How to know when the party's over? We don’t have a crystal ball - but on the economy, we recommend keeping an eye out on Initial Jobless Claims, as shown below. When claims spike, credit spreads follow, in our view.

Take a look at our Macro Chart Book for more insight and perspective. Here is an excerpt.

Remember, when it comes to investing, seek non-consensus and correct.

At Lumida, we strive to "Invest Beyond the Ordinary" and build a wealth strategy that stands the test of time.

Chart of the Week

We believe the improvement in the Leading Indicators Index contributed to the recent bounce in risk assets, combined with receding fears of a banking crisis, and strong seasonality for risk assets.

The bounce in LEI was driven by an uptick in housing starts. That, in turn, was the result of mortgage rates falling from 7% to 6.5% as markets look towards the end of the Fed Rate Hike cycle.

Lumida Research Spotlight

This week we released our Macro Chartbook outlining our views on the following:

• State of the Consumer

• State of the Banks, Fed & Credit Growth

• Macro & leading economic indicators

Twitter

• Which Assets Are Performing YTD?: Assets that were down the most in 2022 rallied the most to start out 2023. Meaning that long duration, high P/E, high market cap, high momentum and high short interest rallied the most -eg. tech, crypto.

• The Death of US Economic Dominance is Greatly Exaggerated. We show US Global GDP vs. the G7. Overall, US share of global GDP is strong. We remain skeptics on the rise of China’s Yuan. Many of the statistics we’ve seen are based on Purchasing Power Parity (a measure of consumer quality of life) rather than raw economic output.

• What’s going on in Commercial Real Estate?: we discussed real estate and CRE with former Knight Capital Group CEO and former NASDAQ board member Kenny Pasternak. We see real estate as a diversifier to crypto. It’s the barbell approach to investing: growth (crypto) and yield (real estate). It may be interesting to you if you’re long crypto and want a tax advantaged inflation hedge, we may have strategies.

• The links between AI and Crypto: We see AI and crypto intertwining in novel ways. AI centralizes control while crypto decentralizes control. We’re hosting a twitter space on this topic next week.

• Historical Perspective on USD Dominance: We found a Wall Street Magazine article from 1959 which outlined many of the same concerns & topics we hear today: weakening dollar dominance, shifting global trade patterns, and run on the dollar/pivot to gold. The more things change, the more they stay the same.

Meme of the Week

Upcoming Events

Find us at the following events. Reach out to us at [email protected] if you’d like to connect!

• Consensus April 26-28th in Austin

• Bitcoin Miami May 18-20th

• SALT iConnections New York May 18-20th

Quote of the Week

"Know what you own, and know why you own it" - Peter Lynch

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