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

Warren Buffet once quipped, "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." With such sage advice, one might wonder why we don't all just don our Hawaiian shirts, sip Cherry Coke, and become billionaires.

Regional banks are back in the headlines after PacWest Bancorp (PACW) lost nearly 10% of its deposits on rumors the bank was evaluating its options to include asset sales. With the rise of social media, rumors about a bank spread and a few clicks later deposits are gone.

So how can we solve the issues in the banking sector? Enable private capital - tech firms, PE, and VC firms - to have controlling interests in banks.

When Warren Buffett invested in the banks in 2008, he acquired a minority non-control position. It was optics more than substance.

Meanwhile, Apple is buying back $90 Bn worth of stock due to lack of productive investment opportunities. Berkshire is sitting on a war chest. Silicon Valley and private equity has plenty of dry powder. So what’s holding us back from a more vibrant, safe and sound banking system? Regulation from 1956. We don’t believe enough people are talking about this. That’s why we wrote this op-ed in American Banker. Fresh capital and technology can revitalize a banking sector that is aged and brittle.

As promised, we are sharing our Banking Comorbidities Deck (pw: Bankless) that we previewed in our appearance on the Bankless Podcast.

In Omaha last weekend, tens of thousands gathered to hear Buffett and Charlie Munger opine. Although we disagree with their view on the promise of digital assets, we can still draw lessons from their mental models. We recommend our video or thread which is a deeper cut on exactly how Berkshire approaches value creation.

These ideas go beyond moats, value investing, and buying wonderful businesses at a fair price. There are a set of levers - capital allocation, tax, cashflow generation - that work together harmoniously. One way to look at it — Berkshire is doing levered long carry trades with permanent capital and cheap funding. If you love investing as much as we do, you can read or listen to our full breakdown.

Macro

At the macro level, markets are grappling with strong coincident data (payrolls, consumer spending, etc.) and soft forward looking data. As we’ve noted before, keep an eye out on unemployment claims which appear to be breaking out to new levels. When unemployment claims go up, credit spreads widen.

Job openings are declining, indicating softening. Yet the unemployment rate remains at levels not seen since 1969 - when we also had a Fed Funds and Inflation rate in the ~5% range.

For a deeper review of all things macro, check out the Macro chartbook our CIO team uses.

Recent data shows bank credit growth came to a near standstill in the aftermath of the SVB crisis. We see the same standstill in public securitization markets where access to credit is nearly frozen.

Consider Upstart - whose share price jumped 30%+ on news that they secured a private credit facility to finance the origination of loans. Now is a great time for credit funds to provide liquidity to firms that desperately need it - and cannot obtain that liquidity from banks or public markets. We believe alternative investments such as private direct lending can generate equity like returns for credit like risk in this environment.

The trajectory of the economy will turn on whether this pause in credit growth is temporary or if it is a 'Wile E. Coyote' moment. With slowing credit growth and a contracting money supply, coupled with rising unemployment and the burn-off of excess savings, the brakes on growth do appear to be catching.

At the same time, the economy and markets are different animals. Markets have experienced a significant amount of technical damage. We have the most telegraphed recession of the modern era. Markets do show a pattern of higher lows. And the best time to invest is when investors have panicked.

Earnings season has gone well. Overall results have been solid, with healthy beat rates for both EPS and sales while more companies have been raising than lowering guidance.

What We are Looking At

How are we approaching the current setup? We are focusing on high conviction ideas in a world of high uncertainty. We are also prioritizing investments that are likely to benefit from rising real rates and dislocation. That means alternative investments: Distressed commercial real estate, trend following strategies in digital assets, direct lending strategies, and niche uncorrelated strategies.

Crypto Congestion

Within the crypto sector, the transaction fees are too high. BRC-20 tokens are slowing down the Bitcoin network. The congestion and high transaction fees have led Binance to suspend withdrawals twice at the start of the week, before enabling the Bitcoin Lightning Network to help tackle the issue. The Ethereum Beacon chain also had issues for a period of time.

Ethereum L1s gas fees are high. High transaction costs are negatively correlated with asset prices. Note Nov/Dec 2021 was the peak in asset prices and markets bottomed around Nov/Dec 2022.

The intuition is that high transaction costs present a narrative violation for digital assets as a payments utility. The devs need to focus and address the scalability issues pronto. Institutions cannot leg in if the settlement layer has inconsistent uptime.

We entered the month of May with a cautious posture. DCG missed $600 MM in debt payments due this week (which we predicted). We also note that the Coindesk Indices indicator went to “neutral” from long this past Thursday.

Nevertheless, as contrarians, we look for lower prices as reasonable entry points for investors with a 3-year time horizon. We started to accumulate ETH at $1,750 this Friday. Note markets are thinly traded and volume is low. Should we experience a capitulation or washout we would seek to accumulate should we be lucky enough to see ETH get to the $1,300 or $1,400 level.

Stepping back, we believe the path forward is a multi-chain world with a variety of blockchain specialized to address specific problems (e.g., payments, NFTs, etc.). We believe specialization wins in the long run.

There’s also the elephant in the room that we believe needs to be addressed head on: Is it better for Bitcoin to focus on its role as a digital currency? Or should Bitcoin fully embrace censorship resistance - and allow for any number of meme coins - which hurt payments efficiency and the principles of sound money?

There are now 14,000 meme coins on the Bitcoin network. There are hard questions that pit competing values against each other. Today, we’re getting the worst of both worlds. We’ll be at the Bitcoin Conference next week and are eager to hear the views of other participants on the best path forward. Reach out to Ram or Dimitri if you’d like to connect.

Meme of the Week

Upcoming Events

• Bitcoin Miami: May 18-20th

  • Ram will be on two panels:

    • Banking, Interest Rates & Bitcoin: Thursday at 9:40 am with Caitlin Long (Custodia Bank), Mark Connors (3iQ Corp) & Miles Paschini (FV Bank) moderated by Dylan LeClair (Bitcoin Magazine)

    • What Happened - DCG: Thursday at 1:30 pm with Ryan Selkis (Messari) and Brian Estes (Off the Chain Capital), moderated by David Bailey (BTC Inc.)

  • Ram & Dimitri will be at the Van Eck Conference on Wednesday. Reach out if you’d like to connect there to exchange ideas

Quote of the Week

"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." - Warren Buffett

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