Intro & Market Overview
To kick things off to better understand the world today, I want to start with recent comments by John Paulson. John made his fortune shorting subprime mortgages during the 2008 housing bubble.
Here we highlight comments on gold because it is one of the world’s most traded and highly sought-after commodities. Gold does share traits with Bitcoin, and BTC should trade similarly to gold over the next 10 years.
Can you help us understand what’s happening to gold now? Will it keep dropping?
“One thing about gold is that it’s down this year, more or less 8%. It’s down a lot less than stocks or bonds. So it has proven to be a source of protecting wealth. The issue is gold’s a hedge against inflation, but while the current inflation rate is high, long-term inflation expectations are still very low. It’s like 2.5%. And they haven’t really changed while the Fed has been raising interest rates. So as the 10-year yield has gone from 2% to, let’s say, 3.6%, inflation expectations still are around 2.5%. So before real rates were negative, now they become positive. So because real rates have become positive, that’s really put a cap on gold.
I think what needs to happen for gold to become more responsive is if the Fed ultimately raises rates, the economy weakens, and they pause. And then they see they can’t control inflation. Then it’s not going to come down to 2%, at best. Maybe they get it down to 4%, 5% or 6%, and then the economy weakens, they have to ease again. And then inflation comes back. At that point long-term inflation expectations will rise. People will not believe the Fed can control it. And then I think gold rises to higher levels.” – Jim Paulson (Bloomberg at the Union League of Philadelphia’s Business Leadership Forum on Tuesday)
Key Points Summary
- This year, oil is higher, the U.S. dollar is higher, and interest rates are higher – this combination never bodes well for stocks, bonds, or in our case crypto. Just ask Stanley Druckenmiller (Soros Quantum Fund, Duquesne).
- We’re watching for oil prices to recede (they are), we’re watching for inflation to at least stabilize (it is), were watching for Fed guidance on rates (they have done so, expect 1% raise the rest of the year).
- The next several years will likely bode well for stock pickers and the exact services that Cabot provides. Why? There is a good chance that many index funds and mutual funds are flat and display relatively dismal performance. Most “safe haven” bond index funds are down drastically this year because they can’t react fast enough to interest rate sensitivity.
- In this market environment, the setup is for individual stocks and cryptocurrencies to rally tremendously – but only companies with very strong fundamentals that can demonstrate the ability to meet earnings expectations at a time when the consensus is for earnings to decline.
China Impacting Global Markets
Global currencies are declining in value as investors flee for safe havens like U.S. treasuries. This is leading to a strong dollar and a weaker pound, yuan, yen, etc.
The Chinese economy is doing very poorly because their continued response to covid has been placing emphasis on lockdowns and citizen control. Chinese real estate is now exiting a period of building at an unsustainable rate and the country is feeling the pressures. As a result, the Chinese government has taken an unprecedented step towards QE and has ordered state-run banks to buy stocks to offset selling pressure.
Furthermore, the China Construction Bank is setting up a $4.2 billion dollar fund to purchase real estate properties from developers considering the depleting Chinese housing market.
Portfolio Update
Protect capital – we are balancing preserving capital with prudent investment decisions.
Do not invest in the present, instead imagine the world in 18-24 months. Let’s break this down using the example of a chemical company today.
Chemical Company A
- Has had four consecutive years of great earnings in a period of healthy macro-economic activity.
- Management had decided to go out an undertake capital spending to expand and grow.
- The company now has excess capacity during a period when the macro environment isn’t as great, and they end up losing money.
- Investors are fearful and sell the stock.
This is what is happening today, investors are heavily discounting the present, causing a significant drawdown in asset prices. We are not investing in cyclical chemical companies here at Cabot SX Crypto Advisor.
We are focused on B2B software companies! These exist within the world of crypto and we have highlighted three best-in-class investment opportunities. In our view, these companies are much more likely to succeed for years to come because they are not consumer focused. This means their success is in large part predicated on the success of other businesses, which are more durable and less likely to result in revenue drawdowns.
These business models heavily favor subscription revenue and consumption-based pricing. We have stayed away from owning the crypto exchanges due to cyclicality in trading volumes.
For our crypto portfolio we have buy ratings on:
- Ethereum (ETH) – in the past 90 days ETH is up 21%
- Ethereum Name Service (ENS) – in the past 90 days ENS is up 68%
- Polygon (MATIC) – in the past 90 days Polygon is up 57%
Equity Portfolio
| Ticker | Initial Weight | Price | Price at Rec | Performance | Rating |
| Proshares Strategy Bitcoin ETF (BITO) | 2.50% | 11.82 | 25.93 | -54.42% | BUY A QUARTER |
| Arista Networks (ANET) | 2.50% | 109.09 | 105.00 | 3.90% | BUY A QUARTER |
| Nvidia (NVDA) | 2.50% | 122.28 | 188.20 | -35.03% | BUY A QUARTER |
| Okta Inc. (OKTA) | 2.50% | 52.84 | 95 | -44.38% | BUY A HALF |
| Block Inc. (SQ) | — | 54.14 | — | — | WATCH |
| Concord Acquisition (CND) | — | 10.05 | — | — | WATCH |
| CrowdStrike (CRWD) | — | 159.35 | — | — | WATCH |
| Galaxy Digital (GLXY.TO) | — | 5.96(CAD) | — | — | WATCH |
| Proshares Short Bitcoin ETF (BITI) | — | 38.93 | — | — | WATCH |
| Unity (U) | — | 32.60 | — | — | WATCH |
Crypto Portfolio
| Ticker | Initial Weight | Price | Price at Rec | Performance | Rating |
| ETH | 18.0% | 1,330.38 | 3,444.22 | -61.37% | BUY A HALF |
| ENS | 7.00% | 14.82 | 10.22 | 45.01% | BUY A HALF |
| MATIC | 7.00% | 0.75 | 0.678 | 11.05% | BUY A HALF |
| APE | — | 5.49 | — | — | WATCH |
| SOL | — | 33.74 | — | — | WATCH |
| HNT | — | 4.67 | — | — | WATCH |
| STEPN | — | 0.6326 | — | — | WATCH |
| AVAX | — | 17.46 | — | — | WATCH |
| LINK | — | 7.85 | — | — | WATCH |