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

• What the Jobs Report Means for Inflation & Rates

• Sectors that Benefit from Higher Real Rates

• Betting on Crypto Market Dislocation + Render Token

• DCG, Cowen Digital & Grayscale Trust

• Comparing NVIDIA to Cisco During the DotCom Boom + Highlights from Demo Day

One of our core beliefs is the power of diverse expertise. By surrounding yourself with people who have deep domain expertise, you stay sharp, informed, and ahead of the curve.

We enjoyed discussing the importance of decentralization with Kavita Gupta (Consenys, Delta Blockchain Fund), Ash Bennington (Real Vision) and Christian Limon (QED Investors) at one of Ram’s favorite Lebanese restaurants in NYC (ilili).

What the Jobs Report Means for Inflation & Rates

The monthly jobs report released this Friday shows 14 months of growth exceeding expectations.

There are two main takeaways: (1) the US economy has an internal momentum to it that professional economists are unable to capture; (2) while the rate of job growth is declining, it remains above pre-pandemic averages.

This leaves the Fed in a bind; they may feel pressure to raise rates. After the jobs report, former Treasury Secretary Larry Summers indicated the Fed should be open to a 50 bps rate increase in July if they pause in June.

Here is a chart showing Non-Farm Payrolls trends.

The big takeaways:

• The big trend is down. This is the point the macro crowd — Bridgewater, Druckenmiller, and Jamie Dimon — is making. Slowdown is consensus amongst the professional money manager group.

• The last few months show re-acceleration. This is the ‘no landing crowd’.

• Job creation continues to exceed pre-pandemic levels. This means the US economy has a strong internal momentum to it that cannot be ignored. Inflation will run higher for longer.

The Fed is forced to keep rates higher for longer to preserve their credibility. The movie “The Big Short” about the collapse of the 2008 housing market was an Emperor Has No Clothes moment. Similarly, today we believe markets have not recognized a key feature of this cycle.

Why are economists under-estimating job growth 14 months in a row? As we’ve said before, we believe it is excess savings. The US economy was pumped with $2 Tn+ in stimulus just two years ago. Stimulus is abating but still working its way through the system.

Animal spirits are undoubtedly another driver. "Animal Spirits" is the idea that people’s psychology drives behavior - not pure rational calculus. Consumers want to stretch their legs after years of lockdowns. Restaurants, Leisure & Travel are bustling (and also where we saw high service wage inflation).

Today, the market’s expectations of 10-year average inflation expectations are around 2.3%. While equity markets tend to be fairly efficient, rates markets are often wrong. (Remember those charts where markets attempt to guess the direction of rates and nearly always get it wrong?)

The rates markets also thought inflation was transitory as you can see in the chart below.

Sectors that Benefit from Higher Real Rates

Interest rates are Newton’s 4th law. They govern what types of assets or sectors are in or out of favor. Below is a chart that demonstrates how, over the last 26 years, different sectors respond to interest rates.

Let’s look at the two extremes. On the one hand, lenders such as banks can make more money on new loans as rates rise. On the other hand, real estate operators face higher “cap rates” which lowers the value of their assets.

Interestingly, two sectors we believe are poised to perform well over a multi-year timeframe are noted. In financials, we believe there are several boring, large cap, high quality banks that are mispriced due to banking sector fears. Similarly, we believe the energy sector offers attractive value and a 3% dividend yields and earnings growth.

Both sectors can also pass through pricing efficiently to their customers making them ideally suited inflation hedges.

Betting on Crypto Market Dislocation + Render Token

This week, we had a ‘Credit Opportunities’ lunch with some of the brightest minds in credit markets.

We continue to see a variety of ‘dislocation’ bets in crypto markets. One of these is betting on Coinbase bonds, which we highlighted in Q4. Another bet is on identifying mispriced claims from the genesis of the FTX bankruptcy. Another is betting that Grayscale spreads will narrow, or identifying distressed miners that need liquidity, or selling calls to lower cost-basis.

We believe some of these dislocation trades offer good value and a way to participate in the upside while offering a margin of safety. Why pay full price when you can get a better deal on off-market terms?

As we’ve said before, we like trend following strategies in the current environment. CoinDesk Indices is displaying a notable divergence. Ethereum is in a ‘significant upswing’ for the last 6 days. Bitcoin is in a downtrend over roughly the same period.

We believe the ‘Bitcoin as Digital Gold’ narrative was a good one. Ordinals and NFTs on Bitcoin are muddying the story.

Another highlight? Render Token - a decentralized GPU protocol - is one of the top performers in recent weeks. If you thought Nvidia was hot, Render’s price performance has lapped it many times over - up 10x since the beginning of the year. (We caution investors on chasing and buying at peak. Past performance is no guarantee of future results.)

Remember Matic? Matic has real traction. Matic was the ‘zeitgeist’ 6 months ago. The price went to $1.50+ and is now down 50%.

Another crypto theme we are looking at is crypto gaming and Worldcoin. Check out the the thread below if you’d like to learn more.

The main learning here is that betting on gaming is incredibly hard. We like to play easy games. tl;dr we won’t be trying to pick crypto gaming VCs.

DCG, Cowen Digital & Grayscale Trust

Cowen Digital is closing down, post merger with TD Bank. Cowen Digital was operational for a year, and was an important part of crypto prime brokerage for the ecosystem. This makes Cross River, the bank that powers Coinbase, Stripe Crypto, and other key institutions a ‘systematically important financial institution’ for crypto.

Meanwhile, DCG shuts down TradeBlock. DCG blames the 'broader economy' and SEC for shutting down TradeBlock.

The reality: DCG may be forced to cut expenses everywhere, attempting to sell anything not bolted to the floor.

We have heard through the rumor mill that (i) DCG has no 30-day cure period to pay back its $620 MM in loans, and recent filings indicate (ii) creditors to Genesis are working out a deal without DCG.

We’ve been calling out DCG’s issues for quite a while. In fact, we predicted DCG’s missed payment in our appearance on Bankless. You can check out the clip at the 32nd min mark.

GBTC is now trading at a 43% discount to NAV.  

In the coming weeks, we will share our view here.

We believe there are moves to make for several of the Grayscale products.

Comparing Nvidia to Cisco During DotCom

AI has all the trappings of a narrative poised to create a bubble. Genuine technological gains, large TAM, and a technology that has captured the imagination of the public.

How close are we to peak bubble? This analysis seeks to compare Nvidia to Cisco - another one-time darling infrastructure provider that was all the rage during the boom cycle. The main conclusion here is that Nvidia is not quite valued like Cisco during the heyday. And Nvidia has a stronger fundamentals story than Cisco, and less competition.

Recall that Nvidia is a ‘chip designer’ not the manufacturer. The two big questions are (i) can chip manufacturers like Taiwan Semiconductor keep up and (ii) how many years before competition enters the race.

Big Tech companies are getting into the fight.

Nvidia is one of the mostly highly covered securities on planet Earth now, so you need to find an edge by looking around corners. A smarter more cost-effective way to bet on the rise of AI might be to bet on Nvidia’s supplier Taiwan Semiconductor and other AI-adjacent sectors.

Note: every new data center consumes 10 to 100 megawatts of energy. That’s enough energy to power tens of thousands of homes. We believe energy is an AI-adjacent sector.

Lastly on Nvidia, we recommend taking a look at the highlight reel from this thread. We thought each of these clips were pretty mindblowing.

There’s no question that the future is accelerating. We may not be getting autonomous driving vehicles, but consumer entertainment and productivity applications are going to transform in the coming years.

Next week, we’ll discuss the liquidity drain on the financial system as the Treasury is forced to refill its coffers.

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

"I cannot teach anybody anything, I can only make them think." - Socrates

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