Happy Memorial Day Weekend! In today’s Lumida Ledger, we’ll cover:

• Macro: inflation, housing, PMI, consumer spending, Fed & Rates

• Market Liquidity Declining on M2 and $1 Tn+ In Treasury Issuance

• Potential Impact of the Debt Ceiling on the U.S economy

• Our market predictions

• Public market valuations & NVIDIA Earnings

• Implications of Apple's warming attitude towards decentralized applications

• Prometheum as the first SEC-approved qualified custodian for digital asset securities

• DCG / Genesis / Gemini state of affairs

• The rise of Staked ETH

• Insights and learnings from Consensus and Bitcoin Miami

But first, we believe one of the best ways to stay sharp is to surround yourself with people you can learn from.

We enjoyed exchanging ideas with Marc Weill (Two Sigma Ventures), Emily Parker (CoinDesk) and Alexander Knopp (Phaedrus Ventures).

As Milton Friedman famously said, "Inflation is the one form of taxation that can be imposed without legislation."

Quite a few market participants are coming around to our ‘higher for longer’ thesis.

The CEO of PayPal says inflation remains “stubbornly high across the world”.

We discussed this, the state of market liquidity, learnings from Consensus and Bitcoin Miami, and the path forward for DCG/Genesis/Gemini on Real vision with Ash Bennington.

Key macro indicators we track like PMI and Homebuilders are showing early signs of improvement or bottoming. These are both predictive leading indicators on the direction of the US economy. Bear markets durably bottom when these figures turn up. The big question for housing is “Is this a headfake, or a new trend?”

Here’s what the CEO of Restoration Hardware had to say: This "...maybe the worst home environment at the high end that I've ever seen in my career. I've never seen luxury housing down at the levels we've seen from recent reports, and we're at 20-year high interest rates."

Market Liquidity Declining on M2 and $1 Tn+ In Treasury Issuance

Last week we noted how crypto market liquidity is receding and linked this to the unfortunate demise of Silvergage SEN and Signature’s SIGNET.

Liquidity is also declining across the real economy. We’re seeing M2 money supply declining at the fastest rate since the 1930s. Something we don’t believe is priced into markets is the aftermath of the Debt Ceiling.

The Treasury needs to finance a Federal Deficit of about $1.5 Tn per year now. The Treasury’s coffers are nearly depleted. The Treasury has to play ‘catch up’. The Treasury will need to issue $200 Bn immediately and then about $1 Tn in aggregate between now and end of year.

The 10-year started April at about 3.4% (a good level for risk assets) and is now close to 3.8% (4%+ we don’t like for risk assets). Now, there should be ample demand for Treasury assets - we don’t believe that will be the issue. But, digesting that flow will mean institutional investors are acquiring debt rather than risk assets. And institutions will demand a higher rate. That should also mean higher rates for credit and mortgages (bouncing around 6.5% now).

The news this past week that consumer spending and inflation clocked in higher than expected also supports our thesis that the easy wins in inflation are behind us. Both of these facts mean that inflation and longer-term rates are likely to stay higher for longer.

We also saw a Gallup poll showing that only 38% of Americans have confidence in the Fed. Therefore, we believe the Fed has a single mandate: “restore credibility”. That means the Fed will keep the overnight funding rate higher for longer as well.

Markets have come around to our non-consensus view.

Markets are pricing in a 64% chance of a 25 bps rate hike next month. By year end, markets are schizophrenic about the direction of rates. But the media rate forecast is 5%. That sounds a lot more plausible vs. the Fed pivot narrative.

(Trader’s Take Note: In this market, it’s lot easier to fade Fed pivot talk rates than get chopped in a range-bound equity market).

What’s the Net Net from these cross-currents?

• Over the next 3 years, expect valuations to come down in public markets due to higher rates.

• Expect to hear the word “stagflation”

• Expect volatility in the 2H (driven by uncertainty in Fed policy, consumer’s excess savings depletion, markets figuring out is housing has a soft or hard landing)

• We recommend seeking alternative investments that benefit from dislocation or tighter credit conditions (e.g., distressed real estate, bidding on loan pools auctioned off by the FDIC at 75 cents on the dollar, Cannabis lending, etc.).

Markets are still adjusting to higher real rates. There are plenty of compelling alternative investments that generate equity like returns for credit like risk. No need to be a hero.

On the bright side, Corporate earnings revisions have turned up for the first time in several quarters across multiple sectors.

Index valuations are the product of P/E multiples and earnings per share - the first component is under pressure and the second component is growing.

There’s no better place to see this than in Nvidia’s earnings and Semiconductor’s as the ‘Rise of AI’ narrative grows roots in public markets.

NVIDIA added a whopping $200B in market cap after its earnings call. Read below for a recap.

Apple Warms to Crypto

Turning to crypto, we see Apple showing a warmer attitude toward decentralized applications in their App Store. Projects like Axie Infinity and STEPN were able to launch in the app store, offering glimpses into how blockchain can interplay with existing tech giants and work to solve the user acquisition problem.

This matters because Apple is a source of distribution to billions of consumers.

It also means Apple doesn’t view Stepn as offering unregistered securities for sale to the public 🙂 

For builders, if you’re building a dApp, you can tap the reach of web2 apps. Still, it’s not easy to get listed on the App Store (or Google Play Store), while enabling real-time crypto transactions. Also, Apple charges a hefty 30% take rate.

There’s an irony in that the central purpose of web3 is permissionless decentralization.

Still it’s encouraging to see firms get points on the board and touch more real-world users.

Prometheum - The First SEC Approved Qualified Custodian

A big development this week is Prometheum.

Prometheum received an unprecedented approval from FINRA to operate as a special purpose broker-dealer (SPBD) for digital asset securities. This development is a game changer in the US regulatory landscape.

This SPBD license sets Prometheum apart from crypto businesses like Coinbase, which operates as a Money Services Business under FinCEN and as a licensed money transmitter in different states, but doesn't hold a federal securities license.

Prometheum’s position is that most tokens are securities aligns with SEC Chair Gary Gensler's stance. This is a significant departure from the viewpoint of many other crypto businesses, including Coinbase and our view, that argue not all tokens are securities and that current regulatory rules are not flexible enough to accommodate the nuances of the crypto industry.

But don’t expect Prometheum to list tokens and compete with Coinbase anytime soon. We believe Prometheum will be restricted to offering registered securities.

Prometheum has a big opportunity around tokenization of real-world assets which Coinbase is not focused on, and may require registration.

Prometheum aims to offer regulated trading of digital asset securities, providing a compliant platform for both issuers and investors. This could also unlock additional institutional capital to the sector. That’s a positive development.

We should also note the compliance framework Prometheum adopted was introduced under prior SEC Chair Jay Clayton. Prometheum was founded in 2017. Perhaps Chair Gensler is feeling some pressure?

Staked ETH Hits Record Levels

We are also tracking the rise of Staked ETH, which experienced a significant surge post the April 12th upgrade.

DCG - Genesis - Gemini Saga

We’re seeing market turbulence from DCG's default on a $630 million payment to Gemini. The GBTC and ETHE spreads now stand at 43% and 55%.

Gemini submitted its claim to the bankruptcy docket and noted $1.1 Bn in collateral. As we have said on numerous podcasts, the interests of Gemini Earn and direct creditors to Genesis are different.

Gemini Earn has a credible path to possibly full recovery. The fate of Genesis direct creditors however requires (i) DCG contribution and (ii) FTX Claims.

The back half of our Real Vision podcast unpacks this issue at length.

Learnings from Consensus and Bitcoin Miami

Speaking to investors and founders at Consensus and Bitcoin Miami allowed us to regain enthusiasm in the future of digital assets. The players left standing will capture the share. We remain excited about innovation in tokenization, re-staking (Eigenlayer) and ZK rollups.

Institutional interest remains strong despite falling asset prices. Institutions like Wellington and KKR are testing subnets on AVAX and Matic.

Private market valuations, particularly within the infrastructure, remain high, making it a challenging time for LPs. On the other hand, venture capital's focus on Asia is growing. User adoption in Asia is rising while it falls in the US.

Until next week, let's continue to seek non-consensus and correct, making the most of these interesting times.

Meme of the Week

Quote of the Week

"Inflation is the one form of taxation that can be imposed without legislation." - Milton Friedman

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