Birkoa Newsletter 2 (end-May 2022)

Dear Birkoa LPs:

I wanted to write to you again after the previous newsletter from two weeks ago. 

The past two weeks have been good for our general thesis with some important moves being made on both the crypto and non-crypto sides of Birkoa's portfolio. The macroeconomics that factor into our strategy have begun playing a larger and larger role in the economy and global markets as this year has progressed, with inflation continuing to remain the primary global concern. China's lockdowns and the war in Ukraine continues to drive global supply-side imbalances while driving up the price of energy.

The Dollar has relaxed some of its strength since the last time I communicated, which I said was temporary owing to what's being conceived as being a coordinated global inflation. Crypto has made a comeback and I'm encouraged by its resilience. The worst of exogenous reasons that led to the sudden pullback in crypto just 2 days after I had initially bought seem to be over, and it's well off its lows. While the crypto portfolio still has a little more to go to break even, I'm beginning to see its divergence from being correlated to risk-on equities, something I had indicated should happen soon. The Dollar weakening as expected also helps our case with commodities in general. I'm not worried about crypto due to our 5-year horizon, but that doesn't mean I don't spend a lot of time ensuring any drawdowns suffered are not warranted fundamentally. All indications point to a bullish crypto future.

With China's beginning to relax some of its COVID restrictions, I expect our non-crypto portfolio, which as of right now is doing quite well, to keep marching higher. Specifically, Palladium could go considerably higher along with Chinese stocks. Alibaba's performance report last week for the past quarter gave a good boost to our portfolio positions within these allocations, and I believe there is further more to go. Energy markets and commodities have higher heights to scale in this rally, although they may be choppy at times. I truly believe the worst of supply-side imbalances aren't here yet, and the majority of today's inflation is still demand-led Monetary Inflation, as suggested by Ray Dalio and Greg Jensen, Co-CIOs at Bridgewater, last week at Davos.  

With stagflation being the base case for this decade, I continue to be optimistic of further gains to our non-crypto portfolio and to recoup the crypto losses very soon. I believe I have at least a few more months to hold for the earliest exits. Just last night the European Union announced a ban on Russian oil imports, which has once again pushed up the price of oil and elevated inflation concerns.
(NOTE: Some of you who I've been communicating with the longest might remember the parallels I've drawn for this decade to the 1970s - there was an Arab Oil Embargo then, there is a Russian one today. There was a major war-led oil shock then with the Yom-Kippur War, similar thing today. The important thing while looking at parallel moments in history to derive a point of view is to look at the underlying details and whether they rhyme - here, once again, there is an oil shock and inflation. And to make matters worse this time round, the world is more interconnected today and supply-side imbalances once they kick in will make inflation much harder to tame.)   

I have also begun to consider the question of how much has a recession been priced in already within the U.S. equities markets. Right now almost everyone agrees there will be a recession in the U.S. - the only question is whether it will be in 2023 or 2024. To the extent that the markets have priced in a garden variety recession for early next year, we might be closer to the market bottom than we think (the S&P came tantalizingly close to bear-market territory last Monday). Looking at flows of institutional money and corporate executives, a lot of dip buying has taken place in the U.S. equities markets since the drawdown 2 weeks ago. That being said, I continue to remain bearish on the stock market and stagflation is base case for the economy this decade. The inflation numbers coming out of Europe today indicate painful times ahead for the global economy.

In summary, after a long period in investment management, macro is king again as evidenced by the aforementioned events. Calling this kind of environment and positioning portfolios anticipating them is precisely what Birkoa strategy is all about. I'm glad that more people can see that now in a more obvious way than before.

I'm excited about what will have happened by the time of my next communication! 

Sincerely,

Pranjit Kalita
Chief Investment Officer