Week 11: Buy Strike, Automation and Cybersecurity, Nuclear Shipping Containers

March 16, 2022 - Max Osbon (3 mins to read)

Briefing: The Fed hiked rates by .25% yesterday for the first hike since 2018. | Despite volatile price swings, we’re still very much in an innovation boom. | In a big step forward for clean energy, Radiant has secured financing to create portable nuclear fission reactors.

The Fed Makes Its First Move

Yesterday, the Fed meeting resulted in a .25% hike to the Fed Funds rate, the first raise since 2018. For context, it took eight years after the ’08/’09 financial crisis for the Fed to begin raising rates. At each step from 2016 to 2019, the Fed was slower to move than they first indicated. President Trump pushed for a rate cut just before Covid hit, from 2.5% to 1.5%, citing the need for growth and stimulus. As of last week, markets expected to see seven rate hikes this year, which is relatively aggressive. As of today, markets expect to see six rate hikes. Recent history and several continued global challenges indicate that the Fed will be cautious in raising rates, and we may see further reductions in rate rise expectations. This is good news for risk-on assets like the equity markets and growth equity in particular.

Investors may be on a “buyer’s strike” in the face of many global risk factors: Fed tightening, a surge in Covid numbers in Hong Kong, a potential global recession, Ukraine/Russia, inflation and dramatic commodity price surges. Risk factors are compressed, meaning today is likely a great moment to buy into markets. We prefer to buy on the way up rather than on the way down. We are still waiting for the bear market trend to break to the upside to resume allocations. The trend is not quite there yet, but it is certainly close.

In the meantime, inflation hurts the lower-income population much more than the middle and upper class. One term for this is biflation (bifurcated inflation), or when the basics (like gasoline) get more expensive while discretionary items (like Peletons) drop in price. We’re seeing signs of this. Wealthy families have enormous flexibility to hedge against inflation, including borrowing money that can lose value as inflation continues.

It’s also worth noting that buybacks are on track to break record highs. It’s more tax-efficient for investors to receive capital via buybacks. While the S&P 500 shows a dividend yield of 1.5%, the total yield, including buybacks, is closer to 3%. Fears are high, but the economy is reasonably strong, and balance sheets are healthy.

Automation and cybersecurity matter a great deal

Don’t let the recent price volatility distract you from the bigger picture. We are still in an innovation boom, with the pace of innovation continuing to accelerate. There are compound effects involved as AI has the potential to improve our current automation capabilities dramatically. Venture capitalists invested $10B into AI-related chip technology last year, tripling the previous year. Automation is needed to grow GDP in the face of a declining workforce and stagnating population. Cybersecurity is key to maintaining continuous operations in a digital world, so it will likely remain a compelling investment theme for many years.

Portable Nuclear Power

Fred Wilson of Union Square Ventures recently posted an article on their latest investment in Radiant, a startup aiming to produce portable container-ship-sized nuclear fission reactors. These units are expected to power up to 1,000 homes for five years before needing to be refueled. Fred’s thesis centers on the benefits of decentralization, where large networks of small reactors will be more resilient, cost-effective, and reliable. These containers can be dropped into remote locations or disaster zones to provide critical power when and where needed. Advances in digital twins (simulated digital environments) have made this product far better at optimization and risk management.

The team previously spent 12 years at SpaceX, which indicates that their portable reactor could be first in line to provide power on the surface of Mars.

Weekly Insights

delivered to your inbox


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.

Weekly Articles by Osbon Capital Management: