Market Update + Q&A, May 2021

Market Update + Q&A for May 2021

See below for our May Market Update + Q&A. Summary points below the video.

Market Update & Q&A Video Summary (May 2021):

  • Our volatility risk indicator, which is a measure of the implied move in markets over the next 30 days, has shown a slight uptick, a little bit above the recent average, but overall, this is not a red flag for us. The CDS spreads, which essentially show the price of insurance on a company going bankrupt, have all tightened or come down over the past year which is saying to us that there is not a high probability of default in many publicly traded companies. High yield bonds have moved up since the beginning of April, but it is a very small movement, which doesn’t signal a massive risk warning, just that we need to continue paying attention. Bond spreads have historically been in a very tight range, and that trend is continuing to hold.
  • Our treasury chart, which shows the constant maturity or what different time frames of treasuries are paying out in terms of yield, continue to be on the downward trend that started in the 80s. In 2020, the rates came up and caused some increased volatility in markets, but the long-term trend is still pointing to lower rates, potentially negative interest rates, down the road unless we see a breakout of that channel.
  • Manufacturing has recovered from the dip due to COVID. All in all, US Manufacturing looks good.
  • For consumer health, overall the trend is okay. There are some mixed signals around the consumer. We’re about 10% higher than pre-COVID levels in terms of consumer spending, which could be due to pent up demand or inflation.
  • About 87% of S&P 500 companies have reported positive, or had beat their earnings projections for Q1, which is significantly high. This was mostly expected because of the previous quarter’s low numbers. We’re also experiencing a sector rotation where there has been this massive run-up in tech companies, or high beta companies, and now we’re seeing a lot of rotation out of those companies. This signaled to us to pull back on our positions in this sector.

Questions from Q&A

  1. There’s been some uptick in volatility recently and some broad negative chatter in the news. Could to speak to what some of the volatility and sentiment-driven discussions might be geared toward and how that would affect things?”
  2. “Why haven’t Trump’s tariffs been lifted and do you expect that they will be?”
  3. “Do you believe the Fed is right, given the soaring prices in everything from lumber to labor, that prices will drop once COVID 19 fades away?”
  4. “Are natural resource stocks a good inflation play given their positive correlation to inflation?”
  5. “There are many in the investment community that have predicted the death of the 60/40 structured portfolio. Do you believe, given record low interest rates, a bear market, high multiples, and constant uncertainty, that the 60/40 portfolio will continue to be recommended by some asset managers?”

To set up a meeting, please click here or give us a call.

Best regards,

The Willow Team
+1 413 236 2980

Willow Crypto: An Introduction & Open Q&A Part II

Willow Crypto: An Introduction & Open Q&A Part II

See below for our Willow Crypto: An Introduction + Open Q&A Part II Summary points below the video.

Willow Crypto: An Introduction + Open Q&A Part II Video Summary:

  • The reason why we started looking at this area for investment is because of the similarities it shares with the early internet build out in the mid-1990s and the potential that was unlocked by early innovation. This, to us, is the next iteration of the internet, or web 3.0 as it’s being termed. While termed “cryptocurrencies” too much emphasis is being placed on the “currency” part resulting in many overlooking or misunderstanding the implication of the underlying technology that is being developed here.
  • Web 3.0 is where everything is going to move over the coming decade. Each wave of the Web makes things cheaper, faster and more secure— starting with Netscape and AOL, and then transitioning into social networks, gig economy sites, and now digital currencies and the infrastructure of distributed ledgers. Naturally, this is the direction that business is going to go, opening up a whole new level of productivity, efficiency, and innovation.
  • DeFi, or decentralized finance, is showing the power of ONE use-case that cryptocurrencies unlock. An entirely new permissionless system is being built that challenges the legacy systems of today and redefines trust. It’s allowing end users to lend, loan, collect interest, speculate, save, and insure things in ways that allow for more participation without the need for intermediation (a massive potential cost saving opportunity). This idea is really taking off because it is faster, more secure, and more efficient than legacy systems and all you need is a phone and an internet connection to participate.
  • Another major use case that continues to show strong signs of adoption is the “stablecoin.” A stable coin is typically pegged to a real work currency or unit of value whose main goal is to track the value of the peg at a 1:1 ratio. The idea is instead of having physical dollars in your wallet, you could have a digital representation of that dollar on a blockchain where you and can interact with it.
  • One more innovation of blockchain and distributed ledgers is that they allow for tokenization, where you’re creating a digital representation of any real-world asset. The possibilities here really are endless.
  • A question we get asked frequently is about the environmental impact of cryptocurrencies as a whole. There was a big study done looking at Bitcoin, which is our largest proof of work consensus mechanism using the blockchain (most energy intensive). They found that 77.6% of Bitcoin’s electrical usage is coming from renewable sources, making Bitcoin mining “more renewables driven than almost every other large-scale industry in the world.” If you look at where people are building crypto mines, they are usually by hydroelectric dams. Instead of that energy being wasted on off hours, it goes and gets diverted to power many of these mines. Also, from a use case standpoint, blockchain can make tracking and trading carbon credits way more efficient than any system we have today.
  • One of our driving reasons for investing in digital assets is the return potential. Obviously this is not guaranteed but when we look at adoption and market penetration curves they signal to us that there is still plenty of room to grow.
  • One of the reasons why this asset class a whole might make sense for some people is to hedge against other uncertainties, such as devaluation of the dollar, negative interest rates, and USD reserve status. 
  • Tokenomics looks at the internal economics of a specific blockchain and the currencies and assets that operate on top of it. It examines token supply, demand, issuance, inflationary and deflationary pressures to help value how much a token or network should be worth. 
  • There is a generation shift that is happening from the Baby Boomer generation to Millennials, and with that there will be a massive transfer of wealth. The Millennials will be more likely to adopt cryptocurrency and put some of that transferred wealth into digital assets, being digital natives (growing up in the digital world exclusively). 
  • An interesting metric to follow is the about of Bitcoin held in exchange wallets. This shows the amount of Bitcoin that could easily be traded. What is worth noting is that the supply of Bitcoin on exchanges has been steadily declining. What this means is users are pulling their bitcoin off exchanges and moving it to their own private wallet – lowering the float available to trade. This can have interested price implications if demand continues to grow. 
  • Total locked value is another interesting fundamental to follow. It show how much of people’s crypto they are locking in smart contracts – essentially making it inaccessible for a period of time in hopes of tapping leverage or earning an interest rate (think preliminary fixed income type products). 
  • Ethereum is moving from Eth1.0 to Eth2.0, changing its consensus mechanism from proof of work to proof of stake, which is much more environmentally friendly, faster, and more secure. 
  • A Triple Point Asset is one that acts as a capital asset (ongoing source of value, generates value, e.g. equities/real estate), a consumable/transformable asset (can be consumed or transformed into something else that produces economic yield, e.g. commodities, oil, gold, energy), and a store of value asset (cannot be consumed or generate income but still has value, e.g. currency, art). Certain cryptos now hold the properties of all of these making them triple point assets which have not existed before this technology breakthrough. 
  • Information asymmetry is rampant around digital assets and cryptocurrencies. What this means is there are lots of different people participating in this market from all around with world with wildly different levels of comprehension and unequal access to information. The prevalence of misinformation creates opportunity. 
  • There are many risks in this space. While most of the same risks in the traditional asset space carry over to the crypto world this space carries some unique risk of its own from 24/7 live trading to uncertain regulatory environment and politics to the overall newness of crypto as an asset class. These risks should be well understood before participating in this space.

Questions from Q&A

  1. “What is the environmental impact of cryptocurrency?”
  2. “You’ve already covered how Crypto fits in with the environmental aspect of ESG, but how does it fit in with the social and governance aspects?”
  3. “Compared to ETFs, what is the expense ratio for investing in Crypto? If invested through Willow, is there fee % of the investment or a one-time fee?”
  4. “Are the gains taxed the same as stocks? For example If you “sell” and convert the Crypto gains to USD after 1 year, would you be taxed at a capital gains rate?”
  5. “Are there ETF equivalents for diversified crypto, based on varying levels of risk tolerance? Are there options to invest in Crypto through an IRA/401K?”
  6. “If we already have assets in another wallet, can we transfer them to your management without selling first/capital gains?”
  7. “Is Authy more secure than google authenticator and if so, why?”
  8. “How does mined Crypto get to an exchange?”
  9. “As investors and not miners, how are you able to participate in buying cryptocurrency?”

If you are interested in the Willow Crypto SMA, please click here or give us a call.

Best regards,

The Willow Team
+1 413 236 2980