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

Join us today at 4pm for a Twitter Spaces about Crypto & AI featuring a fund manager & NFT trader. Link to join.

PSA: We will be at Consensus next week - reach out and let’s get together.

This week, we can’t help but reflect on the contributions of SEC Chair Arthur Levitt. Chair Levitt embraced technology by encouraging decimalization and encouraging the growth of electronic trading networks. He leveled the playing field for small investors with Reg FD. In these actions, and many more, Chair Levitt took on the big bank incumbents that resisted technology and change.

On a personal note, we are deeply grateful for his mentorship and support as an investor in Lumida. Thank you, Arthur, for your invaluable contributions and guidance.

Insights of the Week

• Digital Assets

  • Congress oversight of SEC: SEC Chair Gary Gensler's silence on whether ETH is a security or commodity is worth a thousand words. As we wrote in our WSJ Op-ed with former SEC Chair Arthur Levitt, we believe the existing “regulation by enforcement” framework harms investors and consumers.

  • Here's a new framework for regulating digital assets that we've outlined.

  • Head scratching moments:

    • Gensler refusing to answer if ETH is a security, but claims there is regulatory clarity: Link to Clip

    • Gensler has taught blockchain but never owned or using crypto: Link to Clip

  • Digital Assets seasonality remains very strong this month, but signs of excessive optimism emerging

    • Certain indicators we track - Bitcoin options activity, Fear/Greed Index, etc. - indicate we are entering a new phase of excessive optimism.

    • These periods can continue for several weeks or months especially when Bitcoin has strong momentum.

    • It’s a good reminder not to chase big green candles. If the past is prologue, we may see a local top as we approach Bitcoin Miami next month.

    • We are eagerly watching for approval of the DCG-Genesis-Gemini Joint Plan. DCG owes $575 MM to Genesis in May. The Joint Plan would provide much needed forbearance to DCG. We expect DCG will come back into the headlines in the coming weeks - it doesn’t make sense that we haven’t seen a Joint Plan this late in the game.

• Banking

  • Takes on Bank Earnings: Citi, BAML, and JPM recently reported earnings, shedding light on the economy, consumer health, and credit creation. TLDR: Consumer spending remains strong (8% YOY growth) but is slowing especially at the lower-income levels. A recession is expected this year (BAML, Citi). Modernizing wealth management is a key focus area for banks (JPM, Citi). Read our thread for more.

  • Not all banks are created equal. 2022 was a broad re-rating of valuations. In 2023 we are seeing the market make finer distinctions underneath the surface. We recommend focusing on quality banks with fortress balance sheets, cheap deposits, and strong liquidity.

  • For investors looking for yield, bank preferred securities from quality banks offer tax-efficient income in the 5 to 7% range as they are taxed as dividends not ordinary income. Reach out to us if you're interested in learning more.

  • The March banking crisis is subsiding. Draws on the Fed Discount Window and BTFP are elevated but declining. Western Alliance surged 15% on its earnings due to $2 Bn in deposit inflows. There are still intermediate term issues around the regional banks, but the immediate crisis is behind us.

• Macro

  • Consumer is strong, but job openings are slowing: Delta reports strong demand and points to robust 20% growth in Amex card spending. United plans on growing its capacity 18% - also citing strong demand. That said, data from hiring site Indeed.com (see thread) shows the labor market is softening.

  • Initial claims are on the verge of breaking out to recent highs. As we shared last week, when initial claims spike credit spreads follow. Keep an eye on this metric.

  • Housing stabilization: We saw an uptick in the leading indicators due to falling mortgage rates, from 7% to 6.5%, as we called out last week. We said this was a temporary bounce - a similar bump took place near the end of the Fed hiking cycle in 2006 to 2007. New data shows home sales falling 2.4% in March, their largest annual decline in 11 years. We expect the leading indicators to resume their downward trend.

  • Jobless Claims: Jobless claims have trended higher with the number of Americans receiving unemployment benefits up 22.1% YoY in the week through April 8th. Recall last week we said to keep an eye on jobless claims.

  • Fed Watch: Cleveland Fed President Mester noted she was seeing “some moderation in the tight labor market”, though “inflation is still too high and proving to be stubborn”.

  • BTFP / Fed: Usage of Fed liquidity facilities is stabilizing

We're starting to see a divergence in what we call The Two-Tier Economy.

Lower-income consumers are getting squeezed due to a combination of inflation and higher rates. The excess savings for this cohort is largely burned off and we already see increases in credit card delinquencies increasing.

Higher-income earners are faring better. The HNW segment has $1 trillion in excess savings according to the Fed. Companies that service HNW are also doing well.

Take for instance the contrast between Louis Vuitton and discount goods retailer Dollar General:

To borrow a phrase from our friend Howard Lindzon at Social Leverage, it's a tale of the rich man, the angry man, and the degenerate man economy.

Chart of the Week: What is Consensus?

Note that defensive sectors such as Consumer Staples, Healthcare, and Utilities are overbought. Some of these sectors, like Healthcare, have a PE ratio of 32 - the top decile of historical valuations. We believe that the defensive positioning in Healthcare is crowded. We don’t expect much resiliency as investors expect.

Financials were out-of-favor in mid-March and are running higher on the heels of good earnings. On twitter, we pointed out that Financials had a ‘throw the baby out with the bathwater’ moment.

Ironically, we believe there is better safety and risk-adjusted returns in select high-quality bank preferreds that have ample liquidity. Reach out for some of our best ideas.

Lumida Research Spotlight

In case you missed it, 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

• Bank Earnings: The banks have their pulse on money velocity, credit, and the health of the consumer. Here are the verbatim excerpts from the big banks quarterly calls.

• Netflix Earnings: Subscriber growth is slowing 

• Delta Earnings: demand is strong amid shifting travel patterns.

• MBS on chain: a bigger opportunity than treasuries on chain, in our view.

• Banks doing carry trades with BTFP?: we found at least one bank borrowing $4.5 Bn from the Fed and reinvesting that to earn carry

Meme of the Week

Kudos

Congrats to Lumida friend Aya Kantorovich on raising a $6m seed round.

Hack VC led the round for infrastructure company Fractal with participation from 6th Man Ventures and Golden Tree, among others.

Prior to starting Fractal, Aya was the head of institutional coverage at FalxonX. Best of luck on the new venture!

Upcoming Events

We are scheduling meetings for Consensus. Reach out at [email protected] if you’d like to connect!

• Consensus: April 26-28th in Austin

  • Ram will be on a panel about the future of Digital Finance

• Bitcoin Miami: May 18-20th

  • Ram will be on a panel about Investing

• SALT iConnections New York May 18-20th

Quote of the Week

"The roots of education are bitter, but the fruit is sweet." - Aristotle

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