Fed, $1B, Private Markets

Fed + Inflation

Interest and inflation are still the dominant market factors, and yesterday, the Fed decided to keep rates at 5.5%. Inflation has trended down, but the Fed has paid a hefty price to raise rates and does not want to cut too early. As of today, the futures market expects no cut in March but a 99% chance of at least three cuts by the end of 2024. Like I’ve said a few times recently, the exact numbers matter less than the trends. Inflation is down, GDP is healthy, debt issuance is normal, and rates will decrease over time.

This is less relevant to general markets, but I am concerned about Argentina. Inflation in Argentina is now running at 200%. To illustrate this, imagine your eggs costing $5 last year, $15 this year and $45 next year. Interest rates are now 100%, compared to the US’s 5.5%. Argentinians are attempting to hold US dollars to hedge against local inflation, but it’s not that simple. This is not the first time this has happened to Argentina’s economy. It’s something to be aware of related to civil unrest.

$1B single-person company

Sam Altman recently stated in an interview that he anticipates there will soon be a $1B valuation single-person company. There are few barriers to using AI tools at the programmer level. OpenAI’s API is simple to integrate and inexpensive to test. Scaling AI tools gets expensive only when they’re not implemented profitably. Open-source models are rapidly improving as well. The cynical take here is that Sam is hyping up his field. The reality is that AI capabilities are extremely impressive and often surprise to the upside. That’s certainly been my experience. Rough estimates say there are about 27 million programmers globally. To support Sam’s claim, I would not bet against the odds that just one out of those 27 million will be clever enough to pull this off. Also that 27 million figure continues to grow as the path to coding literacy accelerates. I asked Dall-E to show a person with one billion arms for this week’s image.

Private Markets and Big Banks

The investment industry likes to call anything that’s not a publicly traded investment an “alt” or alternative investment. It’s important to avoid using this term because it distracts from the true underlying nature of these investments. Equity and debt have fundamentally different investment characteristics regardless of their public or private registration status. If you plan to invest in a private market asset, whether private equity, a private real estate deal or a private credit fund, know that each comes with unique risks and returns.

There is often a perceived safety when working with a major bank like Goldman or UBS due to their size, but you should know that every one of these major banks adds unnecessary fees when investing in private assets. These fees are unique to the big banks due to their broker-dealer status.

The standard for big banks is to charge between 2.5% to 8% as an upfront placement fee. This fee is typically not disclosed or is brushed off as the industry standard. But it’s not the standard. The massive size of the big banks might imply safety, but that does not necessarily translate to better efficiency or quality for the investor. Most, if not all, of the major banks’ private investment offerings are off-the-shelf offerings generally available to everyone. Additionally, funds that are smaller in size or opt to not participate in placement fees are excluded from their menus regardless of quality.

We don’t charge placement fees for private investments because it skews the incentive. At their core, advisory services at big banks are more like brokers and placement agents, because that’s how they are paid. This is a big part of why Osbon Capital started: to get away from the brokerage model’s misalignments. We are focused on managing risk and returns and not earning placement fees, so we are able to review all types of private vehicles. If you happen to be considering an allocation to any private fund through a major bank, know that you do not have to pay any placement fees. If your advisor doesn’t agree, we can invest in the same funds or explore options not available on their menu that we prefer.

Putting Vision Pro in financial context

Apple’s new Vision Pro headset’s price tag of $3500 may seem like a lot initially until you put it into context. For example, here is an article about how many hotel rooms are now over $1000 per night. This is less of a comment about inflation and more of a comment about the expansion of the luxury class. Aman Hotels, Bang and Olufson, the new Raffles hotel in Boston, courtside seats, first-class tickets or private aviation are all extremely popular ultra-luxury products that cost the same or far more than Apple’s headset. Look at LVMH’s stock price for an indication of how well costly luxury items are selling. It’s not uncommon for people to spend more than they can afford.