You have said that Fed policy. Jay Powell was the primary culprit.
The pay Paul Sweeney of rate hikes from such a low base.
But for us, the risk of a systemic credit event still key has been avoided.
Well, I think they're addressing the liquidity issue, but not really the
solvency issue from our point of view. A couple of things have happened here
that have never happened really in history.
And so the banks didn't expect it. The first was interest rates up 19 fold
in less than a year and never happened. Under Volcker, which was to fall 10 to
20 percent and the low base does matter. Many people dismissed it saying, oh,
just such a low base. No expectations were low base.
So that was a first. And we've never seen that magnitude of
an earthquake, I would say. Then the second thing that no one
expected, again, because it hasn't happened in such a long time,
was deposits leaving the system for Silicon Valley Bank.
It was venture capital facing a funding drought.
And so they had to draw down their deposits.
But then for others, you've got money market funds attracting paying much
higher than deposits, attracting flows. So that combination, yes, was was
lethal. And so now they have the backstop in.
Now, what do we have? We have the Mark Gurman.
They're going to be paying up. If they if they're depending on the
facility, they'll pay roughly four point three, seven percent right now.
Is that rate? Oh, I.
Oh, yes, plus 10. And and that's much higher than many of
them have been paying for deposits. No one whale in the case of Silicon
Valley Bank. They're average held to maturity.
Security on the asset side of their balance sheet was only one point six.
So they're going to see net interest losses now instead of having marked
market hit equity. These losses are going to hit earnings
Covid as the cause. Let's go to the effect.
Since the collapse of Silicon Valley Bank, the market has changed.
It's fed expectations for a less hawkish or a more dovish fed.
You cite the Fed as the cause. How nimble are being?
How much are you recalculating your view going forward?
Well, as we said before, Covid, as we were descending into that and we are
seeing now innovation solves problems. And you showed a few charts at the
beginning that suggest that some of the innovators out there aren't solving
problems. I mean, I think the most dramatic
example of all of it to us was the behavior of Bitcoin last week.
It absolutely took off. It was a flight to safety vehicle.
And so it is really proof of concept that innovation solves problems.
There are in bitcoin, fully decentralized, fully transparent,
auditable, which is addressing all of the banking problems right now.
And so a flight to safety, a little bit of an insurance policy.
There is no central point of failure in bitcoin.
Caroline Hyde has 20 30 cores on Bitcoin, the most bullish case around
one point five made on Bitcoin. The most bearish, around 250000 on
bitcoin. Somewhere in the middle we have around
six hundred eighty two thousand two hundred.
That is the sort of base case that interesting at a time when no one is
making that kind of long term projection.
Yeah. And Kathy, we know you're a long time
investor with long term calls, but what on earth gets us to that bull case of
almost one and a half million dollars per Bitcoin?
If a bank crisis doesn't? Oh, well, one of the things that happens
in a crisis is a liquidity dries up so that that tends to hurt assets.
And the fact that Bitcoin moved in a very different way from the equity
markets in particular was quite instructive.
You'll find that the building blocks of those price targets in our big ideas
2023. So aren't big ideas 2023 and they're for
the best case, I would suggest quite conservative.
We've dialed some of them down since last year.
I know that corporate treasuries pulled away from bitcoin because?
Because the regulators were pulling them away from from bitcoin on their balance
sheet. So we've pulled.
There, but we do believe that the behavior of the price through this
crisis is going to attract more institutions, for example.
We've done a report targeting institutional investors and and and
allocate the allocation that they should make.
If they if they care about this new asset class diversifying their
portfolios and I believe it's somewhere between two and a half and six and a
half percent. So not crazy.
These are the sorts of allocations they would have made to emerging new
categories of assets like real estate in the 70s, emerging markets and small cap
in the 80s and 90s. And Kathy, I mean, Ed, let's discuss
some of the ways that Kathy and Ark have invested and got exposure to crypto, of
course, as the companies such as Coinbase.
There's also G BTC, the grayscale Bitcoin trust and regulation is in the
eye of the storm there as well. And I mean, talk us through what the
S.E.C. sees from phishing us towards.
Yeah. CAC made an interesting point there,
right, about institution investors. Caffey, if I remember correctly back in
2021, a big part of your thesis on the run up in Bitcoin was that more U.S.
corporates would add it to their balance sheet and K in place of cash.
That doesn't appear to have happened to the level that you'd hoped.
Is that because the US is just not a regulatory friendly environment for this
to happen? Yes.
You know, in the beginning of the crisis, it seemed like regulators wanted
to blame crypto instead of the significant rise in interest rates and
the deposit out closed. Now we're seeing it as a solution to the
problem. But the regulators are still are still
reticent. Something interesting happened today, or
maybe it was yesterday. Governor DeSantis basically said that he
was going to allow allowed. I don't know if you said this exactly,
but at the conclusion of his saying we're going to set Florida apart from
the rest of the nation, was this ability to touch companies that touch crypto.
After all, these are cash deposits in fear deposits.
They're not crypto. And this can be done on a state by state
basis. So I think you'll see Florida, like it
has done in many other ways, distinguish itself from the rest of the pack.
Kathy, Katie Greifeld, my good friend and a just terrific reporter on ETF
Beats, has been talking about grayscale in the opening arguments in the case
with the S.E.C.. In that discussion, how much are you
considering adding to your position around trust?
How are you reading how that grayscale situation is playing out?
So it seems as though the judge is having some trouble understanding how
the FCC could prove a Bitcoin futures ETF, which is swaps based and therefore
has counterparty risk but will not allow a spot bitcoin ETF.
It really makes no sense. So they'll either have to basically shut
down the Bitcoin Futures ETF it seems to me, or allow a bitcoin ETF.
So I think grayscale is doing bitcoin a great service and its arguments have
been very sound. We asked our audience, Kathy, what they
make of the behavior in bitcoin. This was what they had to say in terms
of how the asset class behaves. Is it a must have in a banking crisis?
Few respondents said yes. No, it's too volatile, was the main
response. Caroline, interesting your take on that.
What this all comes down to is how we're playing the interest rate environment,
right? How we're reading the Fed, how we're
reading across different asset classes. Yeah.
And to that point, Kathy, you have said just earlier in the conversation the
rate of change in the Fed, the 19 fold increase in interest rates that have so
upended, you say in many ways what's happening in the financial markets and
financial conditions. But we did see signaling from the Fed.
They did tell us they were going to be hiking rates and hiking rates fast.
Why then didn't you move your portfolio around more?
Well, the premise of the question is that we're an asset allocator.
We are not. We invest exclusively in disruptive
innovation, nothing else. What we did do was we concentrated our
flagship strategy. So Eric NIKKEI and and our other
strategies. Eric.
Q Eric W Eric F and we moved in the flagships case from 58 nations in
February of twenty one when we peaked down to 27 28 names.
We have a scoring system and the scoring system is based on variables we believe
are very important to innovation. And so we concentrated the portfolio.
Many people in the traditional asset management world, when they go through a
risk off period, they will diversify their portfolios by moving closer to
their benchmarks. What they're doing is typically selling
our kinds of names. And so that is why they're putting
extreme pressure on them will create losses by selling stocks.
And that gives us a tax loss asset, which we have.
It's over two billion dollars right now against which we can take future gains
and then concentrate towards our highest conviction names.
We have a paper on our site which shows the benefits of this concentration
strategy during risk off and diversification strategy during risk on.
But of course, when it's risk off, you've underperformed.
And actually even on a five year basis, I know people will say, look, you're
always looking in a long period, five year outlook kind of perspective.
But look back from here over the last five years and yes, it's been a
turbulent time. It's been an interest rate hike time,
but you've underperformed the S&P 500. What do you say to those that have a
shorter timeframe in terms of investing? Are looking to retire in the next five
to 10 years. Should they be with you?
Or do we have to be long term equity investors that have a much longer runway
to get? Have exposure to our investments?
So we're the closest thing to a venture strategy to a venture capital fund in
the public equity markets, and a venture fund has a long term investment horizon.
If an investor cannot have that long term an investment horizon, then they
should allocate perhaps a small all amount to our strategy, say one or two
percent. Which, by the way, from what we can
tell, most advisers have us at that 1 to 3 percent range.
Now, why would you put any if the risk was the volatility that you see on this
chart? It is because our companies are going to
disrupt the traditional world order. And if we're right, then the large cap
benchmark and even some of the mid caps, mid-cap funds are going to be disrupted.
We will be a hedge. Now, your I will say submit to you that
last year was the most unusual year of my investment career and not only mine,
but bond investors. So bond investors had the worst year in
it in 200 and some odd years. When interest rates go up 19 fold in
less than a year, it's going to kill long duration assets, bonds or long
duration assets they've never seen a year like that.
Arc is a long duration asset. But if we're right and these companies
are going to disrupt the traditional world order, then we want to be on the
right side of change. And the market will come our way away
from those benchmarks, which represent the traditional world order to our
strategies for a global TV and radio audience.
Speaking with Coffee Weed CEO of ARC Investment Management, Kathy in June on
stage up summit, you cited retail inventory levels and you told me if you
remember, that inflation would unravel. Did you get that one wrong?
No. If you look at if you look at upstream
what's going on, commodity prices are coming down quite dramatically.
Some by 70, 80 percent. And I would also say the retail coal was
very right. I think I think you'll agree on that.
The discounting we think is going to continue to work its way through the
system from the commodity price level to downstream near the consumer.
And you can see this, Tesla's cutting prices, many people say always because
of competition. No, it's because their commodity prices
are coming down. And and airlines even talking about
deflation and their the cost associated with innovation is coming down because
it follows a learning curve. So I think the innovation that our
companies is delivering are going to be one part of their deflation commodity
prices another. And I will also tell you the yield
curve. Last the week before last was down
inverted by as much more than 100 basis points.
That also is a deflationary signal, as is what's now going on in the banking
system. I think the banking system is fearing
deflation. Well, Kathy, I know we've been talking
about sort of a de facto tightening of financial conditions in the wake of
Silicon Valley Bank. You move last year to give investors
exposure to venture funds, private funds in that partnership with Titan.
Has that proved to be bad timing? How impacted is that, Ben?
From SFE being we've only got a couple of minutes left.
Sure. Well, we're fledglings still.
It takes a long time. We have, as you say, with Titan, a
social distribution strap strategy. We have other rappers as well.
I much preferred to start a strategy during tough times.
And actually now we can be a solution if we get inflows.
People looking for venture for they can get into our venture fund for only five
hundred dollars. So again, the democratization of
investing and this idea public closest to a venture capital fund in the public
markets to be able to actually do a venture fund at a time that the venture
community needs us. If you look at Silicon Valley Bank, that
situation has robbed a lot of venture capitalists of funding.
Has it any of us have innovation? Kathy, do you think?
I would say that regulations threaten to do that and certainly in the crypto
space. Absolutely.
But I also think the seizing up is not just a US phenomenon.
It looks like it's more of a global phenomenon.
Judging what has just happened in Europe.
So it's not as much that it is regulation, the likes of which we're
seeing are large chain technology. The US's position, innovation.
Kathy, very quickly, did you have any exposures, SBB?
None whatsoever. Well, I see it as our business.
No. And our companies very limited exposure.
I was so sick. I just wanted to inquire of sea level.
Although, Rex, I just wanted to clarify that for our audience.
Kathy, I'm sorry to jump in, but we got to go.
Kathy would see balk, invest. We're really grateful for your time here
across Bloomberg Television and radio. Thank you.