Opportunity, Forward Looking, AI

Max Osbon | May 25, 2022

(7 mins to read)

Opportunities Increasing
All eyes are on the Fed and inflation metrics as investors try to find a place where they can confidently store and invest capital. The next CPI (inflation) print is on June 10th, representing the month of May. Public markets price every weekday, so this level of patience and interim uncertainty is difficult for investors. The Fed says it plans to make evidence-based decisions and that evidence will take a while to arrive.

In the meantime, private equity and venture capital firms have a mandate to invest through all market conditions. For the first time in a while, private investors see reasonable and attractive entry valuations. Many veteran investors have recently commented that deals have emerged in public and private markets.

When Covid shocked supply chains worldwide, the Fed printed money to stimulate a global economy suspended in lockdowns. Decreased supply paired with increased demand and stimulus was the double whammy to create inflation. There isn’t much the Fed can do about supply chain issues, but it can reduce demand through rate rises and quantitative tightening.

These Fed actions result in the economy getting weaker almost immediately, and companies with weak balance sheets can suffer greatly. For example, 3D printing leader Desktop Metal now trades at a ~$500m valuation, apx 30% less than they raised over the past 6+ years and 60% lower than their series E valuation from 2019. The future of their business is in question if a Fed-induced recession ends their sales funnel while they are running out of cash. There are many examples of companies like this trading at distressed asset values. At this point, markets are combining multiple compression with fears of slowing growth.

Compressed valuations and falling prices are an inevitable part of investing over time. Plan for these eventual moments by ensuring you have a strong personal balance sheet to weather storms.

Markets are forward-looking

The Congressional Budget Office released a report detailing GDP and inflation expectations this week. They expect inflation to drop to 4.7% by this year, followed by 2.7% next year.

Economic forecasts are famously unreliable, but the trend is encouraging and better than the alternative. Markets are forward-looking so if the market agrees with this forecast, we will start seeing positive changes in prices shortly.

The bond market, which is known for being sensitive to risk, has shown strength recently, the most since its peak in Aug 2021. If we see the bond market rally continue, that’s positive news for everyone.

NFT hotel rooms

WSJ and Matt Levine recently wrote about NFT-based hotel reservations. It’s a great concept because it would allow users to buy/sell/trade their reservations. Currently, there is no way to “sell” a reservation you no longer want or can’t use, especially when it’s non-refundable. NFTs are the correct use case because each reservation is a unique asset. Interestingly the company they are referring to, Pinktada, does not use an NFT or blockchain platform. It’s a good idea, but it’s just for the press for now. We will see more real-world assets come onto the blockchain for reasons outlined in the WSJ and Matt Levine articles. This news coverage is a good reminder to research these crypto projects. Everything is moving so fast that news organizations will have a hard time keeping up with accuracy.

Bored Ape stolen – self custody security is a real issue

Commercial rights related to NFTs are decided on a case-by-case basis. Actor Seth Greene had planned a TV show around his Bored Ape because he also had the commercial rights to the image. Unfortunately, his Bored Ape was stolen via a fishing scam. He no longer has rights to the character and is canceling the TV show. Punk6529 has written extensively on how to secure your NFTs, but realistically this advice is too advanced for 99% of users. There is mounting evidence that this security is too advanced, resulting in unfortunate cases like this.

Crypto will not be able to advance when simple fishing scams can lead to six-figure theft. Imagine clicking on a random link and losing your hotel reservations, half your bank account, or the deed to your house. Someone has to figure out ways to balance self custody with more practical security features. I believe this is possible, but until it happens, we will not move past the early adopter phase.

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