Birkoa Newsletter 38 (**minor correction in Green)

Dear Birkoa LPs, prospective LPs and our well-wishers:

At the end of August, I thought it’d be a good idea to write my next newsletter where I update you on how the portfolio is doing as well as where the macroeconomic environment is headed towards. I will divide up this newsletter between the salient points of what I want to discuss and a bit more detailed version of the same, broken down between the macro of it all and the market reaction. I will break it down per asset category we own.

Let’s provide a quick recap of the month of August first.

Quick Recap of the past month :-

At a very high level, as all of you are aware, we had a very profitable June-July, where we yielded 28% net of fees with bets in AI and energy taking quick effect much before expected. However, the reason I didn’t write a newsletter at the end of July despite the 20%+ upswing that month was because I didn’t want to be seen as “taking a victory lap” or extolling the fund’s performance in any way. As you will see, my nature is to always be focused like a laser on the process and not on the results. While I was glad that such large returns were happening quicker than anticipated, in my mind I was thinking there’s so much more left to go. 

A secondary reason was that I was implicitly aware that a pullback was imminent. Generally, after such a major upswing, small and temporary pullbacks are common, expected and in fact, healthy. A lot of people are involved in profit-taking and on top of that, the month of August has historically been known for thin-trading and low volumes. Which is why I didn’t want to make a very big deal of the large profits earlier in the summer, and instead wanted to see where the macro environment as well as the portfolio ended up at the end of August. This is why now is an opportune moment to write.

I’m glad to say that things are looking quite up not only in our most prolific assets, but also the worst performing asset - China. Furthermore, our downswing in August was kept to a minimum, and in fact, we’ve already retraced a portion of said losses since the end of the month. I believe that macroeconomically speaking, the world is moving as per what our strategy entails and markets will follow now off the dips. Therefore, we spent the month of August buying into those dips, which would serve us well in the near-future. Everyone almost sells low and buys high; we do the exact opposite so long as our foundational thesis per position remains intact - eventually, that’ll be the difference between a return of 30% and 40% overall, for instance.

Now, we will go over the per-position salient points :-

1. China was going down initially in mid-August, but on the back of monetary stimulus by the Chinese Central Bank (PBOC) and policy support from its government, they have mostly taken a turn for the better of late. This applies to both Chinese tech and property sectors, both of which we own. One particular sector doing well is the EV sector, buoyed by continued government stimulus and credits.
   

2. U.S. AI has mostly taken a turn for the better since dipping to their local bottoms around the 3rd week of August. Semiconductors have done quite well, and NVIDIA has greatly been a boon for the entire tech sector at large.
   

3. Commodities have consistently done well, off of both supply side and geopolitical risks (e.g.: oil) and high possibilities of only a shallow recession in the U.S. + China bottoming out (e.g.: lithium, nickel, mining, steel, Brazilian industrial exporters, etc. - all of which we own). We are quite effectively diversified in the commodities space, and this was the most profitable portion of our portion in August and into September.
   

4. Our positions within the crypto ecosystem, most notably Coinbase, have drifted lower from their absolute peaks at the end of July. But, it’s a combination of profit taking and thin trading which we think has bottomed out. The prices have stabilized and we utilized the downswing to buy more of the sector. Furthermore, recent results of court battles have come out in favor of the crypto ecosystem, for instance: approval of a Bitcoin Spot ETF.
   

5. Regional banking sector has mostly remained under the water, but we think it is temporary. Some of the positions are over 20% off their highs at the end of July/mid-July on rate hike fears, strong labor market, etc. However, the results of some economic data released at the end of August might help quell the fear of further rate hikes which would help lower yields on Treasuries, largely seen as the reason behind capital flight within regional banks. We’re committed to seeing through this sector until our intended price targets are hit, which is why we have continued to hold and in fact, incrementally added on to them throughout August as they dipped. This sector, the volatility bouts aside, has been extremely profitable to us and there’s no reason to believe that wouldn’t continue.
   

6. The Japanese Yen has continued to weaken against the Dollar with monetary policy expected to further hold steady this devaluation until the 155 mark (now it’s around 147). Generally, weaker monetary strength means good for stocks valued in that currency, and since we are borrowing Yen to trade in Nikkei exchange, that means we’re relatively gaining in Dollars every time the Yen weakens (we had gotten in to the trade when Yen was substantially stronger about 3 months ago). We’re playing it both ways from the currency angle as well as our underlying positions themselves within the Japanese tech + semiconductor sectors. Furthermore, the ARM IPO which is expected to be a success this month might provide a boost to our investment in Softbank, which is ARM’s owner as of today. Japan’s semiconductor companies, which we own, are expected to benefit from this U.S.-China semiconductor war; finally, the rise in growth within the Japanese economy after 33 years is expected to help its consumer electronics industry, another sector we own. 

Now, we will go over the macroeconomics and how they’re shifting/moving per our Long-Term Debt Cycle framework :- 

1. China is undergoing a stage within its monetary policy cycle that is similar to what the U.S. went through post-2008, when it faced a deflationary crisis. As I’ve noted several times prior, the whole reason we’re in China is because of it being in the opposite spectrum monetary policy-wise relative to the U.S. and other Western countries like Europe. We’re seeing glimmers of monetary easing in China take hold, more so within the last couple of weeks than before, where the Chinese central bank has stepped up efforts to provide more support to the property sector, as well as indicated its intention to spur up consumer spending that’ll help our positions within Chinese tech. In other words, China is finally easing while the U.S. is in its tightening cycle. We correctly anticipated it and the markets are beginning to reward elements of the Chinese market in hopes of continued government support, although the efforts thus far fall short of “the bazooka” that the market has been hoping for. Nonetheless, we’re seeing a pickup in trading volume and flows into Chinese stocks since the last week of August.
   

2. In the U.S., on the heels of cooling inflating print in successive months and the weakest jobs and wage growth number in almost 2 years, I believe the end of the Fed tightening cycle is near. Which means the August cooling off in risky assets like AI stocks might have reason to be cheerful. One of the things complicating the day-to-day outlook is bond yields moving up higher still, usually as a result of being too worried about Fed’s “higher for longer interest rate” narrative, which leads to a rise in the value of the Dollar. Generally, rising yields in the U.S. thereby leading to a stronger Dollar leads everything else to fall in tandem. Seeing this play out last year from the perspective of past experience, I know it is unsustainable and is only a matter of time before other assets break out or the Dollar halts its march, or both. Moreover, since the U.S., unlike China, is at the end of its Long-Term Debt Cycle, and reserve currency status usually is the last one to fall, the devaluation of the U.S. Dollar is close by. And that process will only help our assets in the medium-to-longer term.
   

3. Another interesting thing geopolitically that ties to the end of the U.S. being at the  end of its Long-Term Debt Cycle is the latest string of developments in BRICS +11 - a trade consortium headed by China, Saudi Arabia and India to form a pact different from the U.S.-led world order. I have always stated in the past that this change in trade globally is a consequence of the end of the paradigm shift signifying an end of an empire, in this case, the U.S.-led global trade hegemony. This is why we’re seeing increasingly emboldened and unilateral moves by Saudi Arabia (recently joined by Russia) when it comes to limiting oil supply despite U.S. objections, and a surge in prices of other commodities from soft (agricultural products) to hard commodities (steel, copper, lithium, nickel, palladium, etc). Anticipating all this, we were positioned in a diversified manner within the commodities space, which we expect to profit handsomely given the changes currently underway.
   
   If you remember, I always held my conviction that oil would again move up towards $100/barrel. Even when it was at $65. Just like it is coming true for precisely the same reasons I had anticipated, we’re likely to be proven correct in our bets within other commodities as well.
   

4. As the U.S. ends its tightening cycle, and Dollar falls along with falling bond yields, that’d only prove to be bullish for Dollar-alternatives and storeholders of wealth like crypto, gold, and other precious metals. In our case, we are only interested in crypto, which we own tangentially via our stake within the blockchain ecosystem. While we’re off of their highs at the end of July, I have no doubt we will retrace those highs and are already well off the recent lows. This position is also ultimately a play on the fall of the Dollar, but with limited volatility of holding actual crypto tokens themselves.
   

5. Semiconductors and chips are effectively commodities at this point of the supply side-driven geopolitical game as I’ve been noting ever since I began this fund last year. We all can see and read about the U.S.-China chip export restrictions and retaliation measures within this space. A big part of our bet on Japanese chip makers and peripherally in ARM via its owner Softbank is an expression of this thesis in play; so is our bet on other chip equipment makers in Europe like ASML and the U.S. with recent bets in LAM Research (wafer manufacturer), Applied Materials (materials engineering for ICs). Chips are going to be increasingly commoditized with increasing geopolitical and trade tensions between the world’s increasingly divergent trading blocs, which continues to bode well for our positioning. This is the end of the Long-Term Debt Cycle for the U.S. in action right in front of our eyes!
   

6. Japan’s central bank is currently the only central bank in the world among developed economies which can ease, because Japan is still in a deflationary environment going back to 1989. In terms of the big cycle, it’s somewhere in-between China and the U.S. Which means that inflation is good for the Japanese economy and some amount of growth is expected, which has culminated in the world-beating Nikkei rally this year thus far. The Bank of Japan has signaled they’re going to let their current easy conditions continue for a little bit, which means that while the Yen weakens further, we might see further upside to our Japanese positions. 

P.S.: This past week alone, we’ve seen major movements in oil (Saudis and Russians extending oil cuts until end of 2023) as well as the Chinese property sector popping on Chinese stimulus hopes (see Sunac Holdings in China stock performance this week that’s effectively doubled our worth in them in less than 3 days) begin to take shape for the reasons I mention above (this newsletter was mostly written prior to Monday September 4). These are a microcosm of the large secular shifts up we’re expecting for various segments of our portfolio, and prime instances of why I’ve been utilizing the August pullback to tee us up for the future for much bigger gains. This is the correct utility of new capital and I anticipate similar situations teeing themselves up across other areas of our portfolio within the upcoming days and weeks, thereby making it a prime moment to deploy additional cash.

Sincerely,

Pranjit K. Kalita
CIO, Birkoa