Birkoa Newsletter 1 (mid-May 2022)

Dear Birkoa LPs:

Two weeks ago on May 1, Birkoa went live and what an eventful past couple of weeks it has already been! I thought I'd touch base with all LPs with a few key updates.

The fund is now fully invested and our portfolio is allocated among crypto, commodities, precious metals, energy equities and China equities. Our thesis of an inflation-driven commodities supercycle is turning to be accurate and we seem to be headed towards stagflation, which is fast becoming the base case in a lot of analyses. As you well know, we called for stagflation back in 2020 itself due to the system we follow. Goldman Sachs today published a report revising down its forecast for U.S. growth in 2022 due to "supply constraints and consumer caution". The worst of supply-side shocks aren't even here yet.

In this increasingly U.S. stagflationary environment, we expect our positioning to do well. The crypto sell-off of the past week was a bit of a nervous time although we are long-term holders in the asset. We believe that the correlation with risk-on equities would soon cease, in which case the crypto market fluctuations within Bitcoin and Ether will temper down. That being said, I'm heartened by the bounce we've seen in crypto since this past Friday, and the fact that there now seems to be a dependable floor on Bitcoin and Ether's asset prices during every drawdown due to an increasing number of institutional dip buyers. I monitored the trade flow in crypto during last week's selloff and didn't see any alarming activities by institutional or longer-term holders. The illiquidity-led volatility within these relatively nascent markets will continue to persist until the market becomes more mature, but that doesn't do anything to our long-term thesis so long as we can stomach these episodes in the short-term. The key is to not panic.

This past weekend, Saudi Aramco reported a record quarter aided by higher fuel prices, the effects of which we expect would also be repeated by the energy stocks we've invested in. Generally, both crude oil as a commodity and upstream/downstream stocks benefit whenever there is an oil shock, which is also a good inflationary hedge.

China has been artificially shut down owing to recent virus resurgence, due to which we believe Palladium prices have seen a sell-off despite Russian export ban on Palladium (Russia is the largest Palladium producer). We think Palladium along with Chinese stocks will see a reversal once the inevitable reopening of China occurs, bringing with it the end of present Chinese negative demand shock. 

Finally, the past 2 weeks also saw the Dollar Index (DXY) reach the highest level in 2 decades. That too is temporary we feel, precipitated by the Fed tightening at a higher rate than other major Central Banks, like the ECB or the BOJ. The U.S. trade deficit alone makes it unsustainable, and Christine Lagarde of the ECB this past week committed to start raising rates for the Eurozone. Resumption of dollar weakening will be beneficial to crypto.

Now that the positions have been taken, our trading activity will be minimal for the foreseeable future. I tried to make sure we got in at good prices for our positions in alignment with our thesis. While crypto left a little bit to be desired, the rest in general proved to be alright.

Sincerely,

Pranjit Kalita
Chief Investment Officer