Welcome back to the Lumida Ledger. Here’s a preview of what we cover this week:

• Macro: Is a Credit Event Coming?

• Markets: What do higher rates mean for valuations?

• Company Earnings: Earnings Highlights - MSFT, Schwab, BYND & More 

• AI:  CoreWeave Secondary; Amazon’s $4 Bn AI Investment, Microsoft OpenAI Bet

• Digital Assets: Rihanna on Creator Economy; JPM Digital Assets Service Denial, ETFs Delayed & More

We enjoyed our conversation with Ciara Wilson at a private family office forum. We discussed the rise of the 'creator economy,' a transformative shift where individuals, like athletes, are now building their own powerful brands.

As seen with personalities such as Wilson, these athlete brands are no longer just about on-field prowess, but about creating holistic, multi-dimensional personas that resonate both on and off the field.

As the landscape continues to evolve, we're excited to be a part of this journey, celebrating and collaborating with these inspiring changemakers.

Lumida Legacy Podcast Launch

We are excited to debut our new Lumida Legacy Podcast.

The Lumida Legacy Podcast explores building and leaving a legacy, achieving longevity and improving health, and preparing for the inevitable and unforeseen.

We'll explore topics ranging from exercise and nutrition to estate planning and insurance.

We’ll interview experts who advise high and ultra-high net worth clients so you can learn how to apply expert strategies and tactics to your own longevity.

In our first episode, we interview Matthew McClintock about how UHNW families plan intergenerational legacies.

If you want to learn how the ultra-wealth manage their estate - you’ll find tactics and strategies you are not getting from a traditional estate planner.

Thank You

This thread went viral. We are truly grateful for all the reverse inquiry that came in.

If you recently joined the waitlist please be patient. We want to ensure we deliver the best possible service and care to each client one at a time.

We interviewed Kyle Samani from Multicoin. We discussed what constitutes a thesis-driven approach to investing in digital assets, the future of blockchain technology, and DeFi adoption. This week we will release the full episode. Stay tuned!

_Macro

There’s a lot of discussion on an impending ‘credit event’.

Here’s our analysis of this topic.

1. A Big Bank Default?

When most people think ‘credit event’ - a surprise default like Lehman Brothers in 2008 comes to mind. That’s not happening in the GSIB (mega bank) market. There is no source of systematic risk there.

(That’s why we bought GSIB banks during the “banking crisis”)

2. How about Corporate Credit?

Many corporates took advantage of low rates and termed out debt wisely to 2025 and 2026 (unlike the US Treasury).

However, Defaults will go up - perhaps to a 4% annual level, which is manageable and closer to historical pre-2008 averages.

But these are known and priced.

You can see the maturities and cashflows for every corporate debt issuer on a Bloomberg Terminal. 

These firms are not hiding like the boogeyman in the night waiting to default.

Names like Bed Bath and Beyond, JCPenney, American Airlines, Chesapeake Energy and others all have real corporate credit risk. Some may default.

But that’s not a big deal.

If Consumers don’t spend, they could default. Delta has gone bankrupt multiple times - and there has never been an interruption in service.

So do retailers like Circuit City, Tower Records, and Sears. Retailers and airlines are not systematic.

Yes, corporate defaults will go up, but it’s part of the cycle.

3. Consumer delinquencies

These are on the rise, especially on the lower-end of the market. You can see that in the DQs of Discover, various FinTech lenders, and Master Trusts (Revolving credit card receivables). But levels are still far below historical averages. And the low-end of the consumer does not drive the economy. No big bang ‘event’ there.

4. What about China?

We’ve already had a credit event (Evergrande).

Evergrande is a big firm. It’s shaken the confidence of Chinese consumers and investors.

That credit event already happened. Further, there’s no systematic risk to the United States or the world.

5. The ABS Markets.

The debt securitization markets are still largely frozen for all but the highest quality repeat issuers.

ABS New Issue Volume

Lenders that rely on the term ABS markets (think firms like Upstart) are signing punitive credit facility agreements with HFs and Private Credit lenders.

The shareholders of those firms are losing money as the cost of financing exceeds the return on the loan.

But that’s not a default or ‘credit event’ either.

It’s a high cost of financing that hurts the equity shareholders.

So where are the Credit Events? Surely we should expect these in the wake of the fastest path of rate hikes since 1981.

They are in the Private Credit Markets primarily.

There are many small credit events in the Commercial real estate & multi-family private credit space.

Here’s where the losses are.

Business development corps (BDCs) and hedge funds that issued mezzanine debt are losing money. Many BDCs are publicly traded. (We expect several of those stocks will feel real pain.)

Developers that took out short-term construction finance loans at low-rates are upside down.

Even the big boys are losing money. LPs in Brookfield’s top of the market fund will lose money.

Blackstone is losing money on some busted deals

The banks are doing OK, mostly because the typical loan-to-value is 30 to 50%. Some regionals over-extended and went to LTV of 65% - and we know which banks those are.

Banks primarily have interest rate risk, not credit risk.

So there are many small events, largely in private markets, there is no big bang event like 2008.

And that’s good for public equities.

Don’t get scared out of holding equities. Instead, be thoughtful about your exposures and the valuations you are paying relative to earnings growth.

If you’re reading this newsletter, you’re on the right path!

_Markets

The 10-Year broke 4.6%+ this past week.

I almost fell out of my chair when I saw the JP Morgan Private Bank strategy stating that clients need only two assets: a global equity fund and a global bond fund.

(Click this tweet to see the actual report.)

Higher for longer rates pressures both equity and bond prices. When rates go higher that’s the same thing as saying bond prices are dropping. Higher rates also pressure the earnings multiple.

This chart shows how the diversification benefit from owning bonds drops dramatically during rising rates.

Instead of owning bonds, investors should focus on owning private credit. The yields on owning secured investment grade private credit assets are in the 12% to 18% range.

You can invest via Blackstone or even better specialized emerging managers that have real skills in this $1.5 Tn asset class.

Here’s one of the slides Lumida Wealth shares with its clients on the broad landscape in Private Credit.

Lumida has a number of investing strategies but very few of them make headlines.

So, unfortunately, we do not talk about them nearly as much as we discuss Commercial Real Estate or Digital Assets, which are seemingly always in the news…

We’ll try to be more deliberate on these other asset classes so you have a greater appreciation for why we prefer endowment-style, cross-asset class investing.

This is the exact opposite approach of broker-dealers like JP Morgan, Merrill Lynch, UBS, and Morgan Stanley that push their own products and have copious conflicts of interest.

The Average 30-year fixed rate mortgage is sitting at levels we have not since December 2000.

The market is echoing last year’s themes but less intensely: USD up, rates up, energy up, tech down.

Like last year, we expect we are close to a peak in mortgage rates…so buying MBS looks attractive.

As readers may recognize, our current working ‘market compass’ has 3 components: USD, Semiconductors, and Rates.

Semis, a proxy for AI narrative, has turned up despite an awful Micron earnings report due to forward looking news from OpenAI and Meta.

That’s good news. Let’s give it another week to see how markets digest high 10-year rates.

Tactically, looks like markets are getting closer and closer to making the ‘turn in the road’ from fear to greed.

Tactical Asset Allocation

Here are some tactical charts for context.

We are soon exiting a period of poor market seasonality. Reminder: we put on a tactical underweight on August 1st. That was an excellent call in retrospect. We expect we’ll be risk-on soon enough but with certain factor tilts.

This shows that strong starts to the year have momentum that continues through year-end. That’s especially true during this year of the Presidential Election cycle.

The seasonality is awful the next week or so - we’re going to hang tight through that period.

Also, the Nasdaq has had its longest downturn since 2022.

Is that bearish?

No, as you can see that’s not the case.

We’re delighted to see semiconductor names trade down. We’ve been building a list of names that are indexed to GPU adoption with firms that have a unique competitive advantage.

Stay tuned for more. Also, you may want to look at our Nuclear Renaissance model portfolio from last week’s newsletter. Those names have added valuable diversification during this market downdraft?

Strategic Asset Allocation

How do higher rates impact PE multiples?

Here are two charts to make this point.

We are less concerned about high short-term rates and more concerned about high long-term rates.

Why?

Equities are long-duration securities. They compete with long-duration bonds as a home for investor capital.

Here’s another chart:

Higher rates are also coupled with fiscal policy uncertainty from Congress and the behavior of the Federal Reserve.

Times like these are ideal for Alternative Assets. Our highest ‘risk adjusted’ return opportunity - meaning greatest return per unit of drawdown risk - remains Distressed Commercial Real Estate.

Higher rates and the inability of banks to refinance makes the prices of quality assets drop.

We believe that the returns on distressed commercial real estate will significantly exceed the forward returns on the S&P 500.

If you are a qualified client, we’re happy to share our analysis, write-ups, and historical performance of our preferred manager, which supports this thesis. This fund is a Drawdown style fund so it is closing in the next few weeks.

_{AI - Anthropic Deal & CoreWeave Secondary}

Amazon made a $4 Bn investment in Anthropic.

This is a ‘roundtrip’ deal - similar to Nvidia’s deal w/ Inflection, whereby the latter took the cash to buy Nvidia H100s.

Anthropic will turn around and spend on AWS. This $4 Bn deal is like AWS credits for equity on steroids. Check this tweet for more.

The “AI Wars” are intensifying the Application Layer.

Microsoft’s OpenAI announced ‘multimodal’ the day before Meta Connect.

Then Meta said, “We are not trying to sell devices at a premium” - a dig at Apple Vision Pro.

This is the modern day equivalent of railroad Barons laying their tracks on or close to competitor’s lanes.

We continue to believe in focusing on the Silicon Layer. The providers of picks-and-shovels stand to do well and have less competition.

Here’s one idea we like: CoreWeave.

CoreWeave counts on OpenAI as a client. They are doing a Pre-IPO round before they intend to go public next year.

There’s quite a few articles and podcasts on Coreweave if you hit Google. There was also a great Odd Lots interview a few months ago.

We are skeptical of the Instacart IPO, which we shared previously.

But we like this because it’s a focus on the Silicon Layer, the firm’s revenues are growing dramatically ($Bn+ pipeline). And CoreWeave’s investors include Nvidia and its customers include OpenAI.

And, crucially - the valuation is not nosebleed AI.

In fact, it’s substantially below the price of public comps such as datacenter firm Equinix, which has a price-to-sales ratio of 10x.

We passed on Anthropic at $1 Bn because it was off thesis - this, however, is lining up nicely.

We believe this could be a 2 to 4x under a reasonable set of assumptions within 2 years, and perhaps more.

This deal is one illustration of the Lumida approach: We have a top-down thesis, we look for a good expression, and we are tax and valuation sensitive.

This is also an off-market, hard to access deal. Thank you, Lumida network.

Your typical Advisor will buy into Coreweave’s stock post-IPO, just when we want to be recycling our proceeds into the next deal.

Here’s the Odd Lots Interview with CoreWeave’s strategy officer, and also a Bloomberg interview CoreWeave Using GPU Cloud in Generative AI Race: Tech Disruptors.

If you are a Lumida client, you may receive a heads up in the coming days.

If you are not a client, but are interested in learning more, reach out this week.

The CoreWeave deal is one illustration of why legacy wealth management is broken.

Some of the VCs are starting to catch on. LightSpeed invested $31 MM in Farther’s Series B at a $131 MM valuation.

Legacy wealth management is conflict-ridden, broken, and all the best analysts have gone to the buy-side.

You can get a nice US Open ticket but you wind up paying for it in terms of poor service, performance, and allocations to hot deals that go to the select clients.

JP Morgan published a ‘Strategic Investing’ memo starting with ‘How Many Assets Do You Need?’ We’ll share their answers then our take.

Play along and compare answers.

_{Company Earnings & Analysis}

We continue to see ‘boomer brands’ slow down in their growth rate.

Justin and Ram talked about this in the first Lumida ‘What’s On Your Mind?’ interview. It’s a show we do spontaneously around lunch a few days of the week.

You can take a look at the most recent one here:

Nike ($NKE) revenue declined 2% YOY in North America. Here’s a tweet with a more detailed breakdown.

Also, here’s a summary of our brands we see in decline vs. new brands on the rise.

_{Digital Assets}

These comments from Franklin Templeton’s Jenny Johnson made my heart sing. It captures all of our ideas around tokenization in one short video clip.

Give it a look and send this thread to your crypto skeptic friends.

Better yet, give it a retweet and let’s change the minds of the naysayers.

We spoke at Mainnet last week. Here’s a thread summarizing what we learned.

It was a great event - hard not to get excited about the future.

Messari CEO and Lumida investor Ryan Selkis did a fantastic job curating a world-class set of speakers on policy and regulatory topics.

Ram spoke about the Grayscale ETFs and the legacy of Chair Gensler.

Also, we first wrote about Base in our newsletter several weeks ago.

Fun Fact: Base is now doing $200k in profit per week.

We continue to like the Grayscale Discount to NAV trades.

We are going to miss the trusts when these discounts go away after ETF conversion.

Conceptually, the discount is a margin of safety where the annual fee is the price of insurance.

Work with us: we are are looking for a junior offshore analyst to help us build more analytically-informed content. Send referrals here.

Meme of the Week

Quote of the Week

“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.” - Ray Dalio

If you enjoy the Lumida Ledger, please forward share with a friend or subscribe.

If you’re interested in learning more about Lumida’s wealth management services, please join our waitlist.

Disclaimer: Lumida Wealth Management LLC (‘Lumida”) is located in New York, NY, and is an SEC registered investment adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Lumida only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Any direct communication by Lumida with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

The information in this material has been obtained from sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated in this material are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable, Lumida, Inc. and Lumida Wealth Management LLC (collectively Lumida) make no representations or warranties whatsoever the completeness or accuracy of the material provided, except with respect to any disclosures relative to Lumida. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this material. Any data discrepancies in this material could be the result of different calculations and/or adjustments. Lumida accepts no liability whatsoever for any loss arising from any use of this material or its contents, and neither Lumida nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof, apart from the liabilities and responsibilities that may be imposed on them by the relevant regulatory authority in the jurisdiction in question, or the regulatory regime thereunder. Opinions,forecasts or projections contained in this material represent Lumida’s current opinions or judgment as of the day of the material only and are therefore subject to change without notice. Periodic updates may be provided on companies/industries based on company-specific developments or announcements, market conditions or any other publicly available information. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections, which represent only one possible outcome. Furthermore, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified, and future actual results or events could differ materially. The value of, or income from, any investments referred to in this material may fluctuate and/orbe affected by changes in exchange rates. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated. Past performance is not indicative of future results. Accordingly, investors may receive back less than originally invested. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipients of this material must make their own independent decisions regarding any securities or financial instruments mentioned herein and should seek advice from such independent financial, legal, tax or other adviser as they deem necessary. Lumida may trade as a principal on the basis of its views and research, and it may also engage in transactions for its own account or for its clients’ accounts in a manner inconsistent with the views taken in this material, and Lumida is under no obligation to ensure that such other communication is brought to the attention of any recipient of this material. Others within Lumida may take views that are inconsistent with those taken in this material. Employees of Lumida not involved in the preparation of this material may have investments in the financial instruments or securities (or derivatives of such financial instruments or securities) mentioned in this material and may trade them in ways different from those discussed in this material. This material is not an advertisement for or marketing of any issuer, its products or services, or its securities in any jurisdiction.New