Birkoa Newsletter 3 (mid June 2022)
Dear Birkoa LPs:
Over the past two weeks, the specter of high inflation and chances of recession have increased more palpably. Not only has the ECB announced its intentions to normalize monetary policy within the Eurozone, the Federal Reserve in the U.S. has reiterated in its stance of tightening. As a matter of fact, the markets are forward pricing in both high inflation and significant tightening within the equities markets to the extent that I think is a bit unwarranted. While we’re not correlated with the equities markets within our non-crypto portfolio, I still believe there’s a significant possibility of an overcorrection within some select stocks. Therefore, for the time being, I’m considering what dip is good enough to get into some of the stronger stocks while still shielding our portfolio from the ebbs and flows of the average market.
This correction in equities has unfortunately, hit our crypto part of the portfolio. But, given our longer-term horizon of 5 years and investing in only select proved out crypto names, we’ll be fine. A lot of exogenous factors ranging from the Terra-Luna collapse to Ethereum 2.0’s development obstacles, most of which have nothing to do with our original crypto investment premise anyway, led to further drawdowns than warranted. While Bitcoin and Ethereum’s local minima have been continually tested, all of these are just opportunities to buy more. If I had any more excess ability to within the confines of our L.P. Agreement, I’d be buying more of these two assets at such cheap prices, since we’re highly confident of their manifold returns in the future. Fidelity CEO Abigail Johnson echoed a similar sentiment on Friday.
Another issue with crypto is until now the inflation hedge narrative hasn’t quite shown itself. It’s still behaving as a risk-on tech equity/NASDAQ asset, which I feel is quite untrue. While there were a few glimmers of that fading a couple of weeks earlier, I’m quite confident it’ll eventually break out of the correlation with tech stocks and eventually pick up as an inflation hedge asset. As I had stated during my first newsletter a month ago, Dollar’s strength was temporary and I expected it to wane in the upcoming weeks. That has happened and this past week’s inflation numbers for the month of May one-upped that of the previous months’s. Generally, it is considered that inflation is running at a 40-year high of 8.1%, which should eventually help Bitcoin’s inflation-hedge utility. Within venture capital, web3 has seen major inflows of late and Andreessen Horowitz only a couple of months ago, rolled out a new $4B crypto fund. Thus, in other words, the utilities of the underlying Ethereum blockchain are only being worked upon more and are not being ceded, which makes its eventual recovery a near certainty. Therefore, while it’d have been nice had this drawdown not happened or I had waited just 2 days more prior to placing in my crypto order, given our longer time horizon, I remain confident of the eventual 10x returns on crypto.
With the bad news out of the way, let’s turn our attention to the non-crypto part of our portfolio. Our commodities and EM heavy portfolio is doing precisely what it was designed to do, and unlike wrong timing on crypto, I was able to get a good price on most assets. Commodities continue to benefit from high inflation and there’s still ways to go so I’ll just hold on to our current portfolio. Gold and Silver haven’t shown much returns yet despite high inflation and are expected to break out soon. With this past week’s Shanghai’s reconvening of Covid lockdowns, some of the commodities and EM stocks gains were pared, including Palladium. Once again, I believe these are transitory. JP Morgan analysts believes oil prices will go “parabolic” from where they are now, with its CEO Jamie Dimon stating he expects oil to reach $175 soon. China-U.S. tensions on the South China Sea over Taiwan have also increased steadily with numerous threats being lobbied from both sides lately. This Taiwan situation is no longer a macro tail-risk, but a distinct possibility, and if it happens, could further elevate our commodities positions immensely. This “macro is king” is a moment that’s precisely what I’ve been suggesting since I founded the firm, and the end of the long-term debt cycle dynamic is playing out almost to a tee per my strategy’s suggestions. This will continue well into this decade, as inflation gives way to recession and then stagflation, while being laced with geopolitical shifts like deglobalization, supply chain reorganizations and balkanization, wars, etc.
When you all received your statements for the first month 2 weeks ago, while the portfolio was net negative due to crypto losses, the non-crypto aspect of it, which is the more mobile part of our portfolio, was up 4.92%. As of this writing, the latter is up 7.45%, with it briefly touching 10% on Thursday morning before Shanghai lockdowns and Chinese bad news sapped some of the gains. In fact, the gains then had fully recouped all of crypto losses. While we’re still net negative owing only to crypto, I expect the non-crypto portfolio to keep marching higher. Overall, 60% of our portfolio positions have an unrealized profit with 20% of the unrealized losses being less than 1%. As for “crypto winter”, we’ll just have to wait for their recovery. I just hope that wait ends very soon!
Sincerely,
Pranjit Kalita
Chief Investment Officer