Client Portals

Week 48: Constitution Update, Don’t Fight The Fed, Metaverse Growth4 min read

Dec 1, 2021 - Max Osbon ( 6 mins to read)

Briefing: The ConstitutionDAO did not win the Sotheby’s US Constitution bid, but found a way to win anyway. | Don’t fight the Fed is an investment heuristic worth listening to. | The Metaverse continues on its growth trajectory.

ConstitutionDAO Update

Since week 46, you probably saw the result that ConstitutionDao did not win their bid to buy a physical copy of the US Constitution via Sotheby’s. The winner was Ken Griffin, the single most powerful person in the financial industry and a bit of an anti-crypto villain.

Initial ConstitutionDao investors received a governance token called $PEOPLE built on the Ethereum network. Of the $47m raised over seven days, $27m in $PEOPLE was redeemed after the auction for the original investment minus gas fees. The remaining $PEOPLE holders woke up to a surprise a few days later to find that the value of their token had increased 10x. Apparently, the crypto collector community saw the $PEOPLE token as a representation of a historically significant moment. For fun, if you want to watch this market, you can track the number of holders here, the depth of the market liquidity here, and the raw transaction data here.

Today the $PEOPLE token market cap is valued at around $340m, making it a win for the original backers who held on, regardless of the loss of the actual auction. It’s safe to say that no one saw that coming. This is another example of the surprising upside in the crypto/web3.0 world. There are many ConsitutionDAO copycats after the fact with equally charitable and honest goals. For example, OpenAccessDao is looking to acquire rights to scientific journals to make them accessible to all.

Don’t fight the Fed.

“Don’t fight the Fed” is a tried and true investment heuristic. Why is this the case? The Fed is an active participant in public markets and one with bottomless pockets. Since markets are based on immutable supply and demand laws, a deep-pocketed investor with nearly unlimited funds can and does move a market.

Following the ’09 Great Financial Crisis, the Federal Reserve Bank quickly doubled its balance sheet from less than $1T to over $2T. That extra $1T went to purchasing distressed assets on the open market, which sat on the Fed’s balance sheet. Over the following six years, the Fed grew its balance sheet to $4.5T via the Quantitative Easing program. Once COVID hit, the Fed doubled its balance sheet again to $8.6T to support markets.

The Fed has kept the rate to borrow money near 0% for most of the past decade. The Fed did raise rates on a regular cadence from 2016 to 2019 until COVID hit when they immediately dropped the rate back to 0% to support the economy.

The unstoppable bull market in all assets since March 2020 started with the Fed’s decision to support markets and has continued under robust supervision. Today the Fed has reached its markers of financial health: inflation above 2% (check) and unemployment at or below 4% (close), the tapering is starting. Jerome Powell has already slowed Fed support by tapering repurchases of Treasury and mortgage securities. The Fed will continue slowing support by June of ‘22.

Don’t fight the Fed. Slowing financial support will understandably upset all markets, but that’s not the same as ending support entirely.

The significant challenges for the Fed are the more prominent trends at play:

  • We live in a complex world where pandemics, climate change, the need for infrastructure upgrades, politics, and disruptive forces appear suddenly and regularly.
  • Disruptive technology is accelerating. FTX generates over $1B+/yr in revenue with just 200 employees, which brings up the question of whether JPM or Fidelity will need to reduce headcount to remain competitive in the future. Official unemployment might be 4.5%, but the full employment ratio has decreased for over 20 years. This may be leading to permanent government support in the form of UBI.
  • Population growth has slowed dramatically. The working-age population has been in decline since 2018. The US will have to increase immigration if they want to see its population continue to grow.

When faced with the next inevitable challenge, like Omicron, the Fed will have to choose whether or not to support markets — most assume they will have no choice but to step in. The Fed has signaled their intention to taper their support of markets, but they do not intend to end that support altogether. By the way, none of this is meant to be scary or to stir up concern. There is always a path forward, and there are many reasons to be optimistic, which we often discuss in our articles.

The Metaverse is growing

Barbados has acquired digital land in Decentraland (built on the Ethereum network) to host the first virtual embassy. The NFL struck a deal with Roblox to open an NFL shop to sell virtual helmets and jerseys to the users. A great way to serve the next generation of NFL fans. NVidia has taken on the challenge of leveraging AI to build millions of simulated planets with real-time physics engines via their Omniverse project. NVidia’s CEO Jensen Huang says that in this sense, data centers will become more like alternative universe engines.

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