On Monday we sent a note to all clients regarding current markets. Markets in 2022 have fallen fast. If you’re feeling down about your portfolio, you’re not alone. The Venture Capital Index tracking the portfolios of leading VCs is down over 55% in the last six months. The most successful modern hedge fund, Tiger Global, has lost 2/3rds of the gains accumulated over the past two decades. Markets spend 80% of their time near all-time highs. It’s difficult to see the edges of a bull market appearing when you’re in the middle of a bear market.
The Fed is actively working to fight inflation by attempting to slow the economy through interest rate increases and balance sheet reductions known as quantitative tightening. We’ve already had one-quarter of negative GDP growth, which means we’re halfway through a technical recession. For obvious reasons, market returns do not like recessions. This market sell-off is driven primarily by policy actions that can be stopped or reversed at any moment, especially once official inflation numbers calm down.
Markets are moving faster than ever, and patience is required. Six months from now can present a radically different world. An optimistic spirit is the best way to move forward.
Liabilities Driven Investing
Having enough cash on hand for all scenarios is one of the most important risk management tools. Using appropriate leverage is crucial whether you borrow against a low basis stock, investment portfolio, or real estate. When you practice liabilities driven investing, you ensure that you always have enough to cover expenses in all types of circumstances, including bear markets. This is worth repeating because this mistake is made frequently at all levels, from small retail traders to the highest profile public company CEOs. Managing your liquidity allows you to know with certainty how much you can afford to allocate to higher potential investments.
Renewables & Energy
California recently hit an important milestone in its clean energy transition. On April 29th, the entire state was able to run 100% from renewable energy sources for 15 minutes. Most of the clean energy in CA is provided by solar. This helps prove that size is not an impossible constraint in the path to renewable energy as CA has 40 million residents and a GDP that would make it the 5th largest country in the world. Solar capacity in the US would be even higher, but large orders have recently been canceled due to local solar company Auxin Solar’s anti-competitive petition to extend Trump-era tariffs on solar imports from China. 80% of the solar panels installed last year were produced internationally.
Terra Luna UST Collapse
Markets move faster than ever. That’s especially true in crypto. We first wrote about TerraLuna in December: “The real question is whether the $UST stablecoin will survive an inevitable future liquidity crunch.” In light of recent events, the answer is no.
Over the last few days, the TerraLuna ecosystem broke down dramatically, erasing $46 billion in value overnight. Last month Luna was in the top 5 market caps in crypto. For context, 12 years ago, the Lehman Brothers blowup erased $60 billion in market value. This is one of the largest overnight blowups in financial history. The failure of this system was not all that surprising, but the scope and speed are unmatched.
TerraLuna offered users a guaranteed 19.5% annually to hold(stake) their tokens which attempt to stay at a 1:1 value to the US dollar. 85%+ users started using it just four months ago, so that was enough time to earn roughly 5% or less before the collapse. Forced currency pegs never last, and “guaranteed” rates as high as 19.5% will always be riskier than they lead you to believe. By comparison, junk bonds yield 6.5% currently. Higher yields will always come with higher credit risk. We’ve seen this play out a few times in crypto, including the collapse of the Ohm price in January from $1200+ to $15 today after promoting 4,500% yields. Always be suspicious of any yields higher than 10-12%. Nothing is guaranteed, and all yields are a function of time(duration) and risk.
In January, TerraLuna raised $1B by selling Luna tokens in a private market sale to investors with a four-year lockup at $30 to help support their 1:1 USD peg should there ever be an issue. The Luna token then fell from $119 to below $1 for a greater than 99% loss. The $1.00 peg fell as low as $0.30 as people scrambled to get out. More than a few people and even a few crypto startups were using this system to store substantial amounts of their savings.
This system isn’t completely dead, as there is still $14B in value locked inside. The Luna token could drop to $0.01 as the ecosystem continues to find its footing. It’s hard to see how it would survive past this point, even under the most optimistic scenarios.
USDC by Circle is the only stablecoin backed 1:1 by actual USD, and it’s likely to be the dominant stablecoin offering as we advance. The games played by Luna and the collapse of their currency peg will be getting the attention of regulators. In this case, there is not much the SEC can do since TerraLuna is not a US-based entity. The SEC served the founder in December for building an application that allows users in Thailand to trade synthetic US equities.
At $46B of losses, the scope and size of these experiments is considerable. Crypto regulations are challenging given the global distribution of the internet and the limits of local jurisdictions.
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.