Market Update + Q&A, September 2021

Market Update + Q&A for September 2021

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

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

  • Our volatility risk indicator, which is a measure of the implied move in markets over the next 30 days, is trending generally in the right direction, meaning that overall, it’s saying there is less risk within next 30 days. There have been spikes happening lately, especially in the short term, which is something we’re keeping an eye on.
  • The CDS spreads, which essentially show the price of insurance on a company going bankrupt, continue to be benign. Bond spreads are showing a slight elevation and marginally higher yields. Typically, you’re going to see this type of movement happen in advance of any other movements on the risk spectrum. It could be saying that there is some risk down the road, but, because this is high yield is moving the most after being so low for so long, this is not yet too alarming.
  • Our Willow Manufacturing Health Index has come down over the past month or two but it is still generally healthy. Most likely a lot of the supply chain issues are starting to show up, and this is where we’ll start to see some of that. We are going to continue paying attention to this as continued deterioration here could spell trouble ahead. There is the misconception that there is a labor shortage but really, it’s a wage shortage – companies aren’t paying people more to work because their future outlooks are muted and don’t justify increased wages, even if it means slower service.
  • Consumer health might be starting to fall off due to government payouts slowing, or the slight shift in the velocity of growth in the housing market. It doesn’t signal to us to get out of markets entirely, but we want to pay really close attention to the data here.

What keeps us up a night? 

  • Power consolidating to the top: We’re seeing more and more consolidation of power at larger conglomerates, like Amazon for example while at the same time, government is also grasping for more power. This is concerning to us because historically wealth concentration and the formation of oligopolistic industry has always led to civil unrest.
  • Supply chain disruption: For decades we’ve used a system called JIT or just in time manufacturing which allowed companies to keep really low inventory, knowing that they could get things from overseas relatively quickly. This system works great as long as there isn’t some exogenous shock or some big disruption or geopolitical issue, such as COVID, shut downs, and global political contention. We’re now seeing a lot of supply disruption because a many of the components that we need for our manufacturing sector are sourced from overseas. Supply disruption also leads to an inflationary environment. This is why when we do our ESG work, supply chains are something that we really try to take a look at and examine because our goal is to find those companies that are building resiliencies into their supply chain, so when these kinds of disruptions happen, they’re not as impacted.
  • Inflation/stagflation: Prices are going up on everything from food, taxes, and rent to insurance premiums and education. These things that are happening are going to chew away at the wealth of the average and above-average person. Supply constraints, tightening labor supply, and an unwillingness by corporations to pay more all lead to a constrained economy where prices continue rise while growth slows.
  • Civil unrest: Many dichotomies that have forming are digging their heels in even further and it’s quite concerning. All of this is exacerbated by a complicit media more concerned about advertising dollars than social cohesion. And all of this is reenforced and the flames fanned through the different social media outlets, giving stage to extreme viewpoints while also guiding mainstream social opinions. It’s a mess and the lack of leadership to do anything about it is concerning. Civil unrest leads to uncertainty and markets hate uncertainty.

Questions from Q&A

  1. “Should you consider portfolio hedging when the market frets that the historic bull market may soon run out of steam?”
  2. “What happens if the debt ceiling isn’t raised and what will be the impact on our funds?”
  3. “Why not in a down-turn sell cash-secured puts that expire in a month or less with the strike prices that are just below the stock price?”
  4. “If indicators go bad then how do you know what to invest in?”
  5. “With the wildfires out west possibly affecting future food prices, are there investments to hedge this trend?”
  6. “What does it mean to go to cash?”
  7. “Do you believe in selective SPACs, or special purpose acquisition companies, that provide low-risk return to redemption?”
  8. “How are recent legal questions about Bitcoin, etc., influencing your present investment thinking?”

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

Best regards,

The Willow Team
+1 413 236 2980

Digital Asset Update + Open Q&A | August 2021

Digital Asset Update + Open Q&A | August 2021

See below for our Digital Asset Update + Open Q&A | August 2021 Summary points below the video.

Digital Asset Update + Open Q&A | August 2021 Video Summary:

  • We’re starting to see more and more institutional and global adoption of digital assets. In general, more companies are leaning into this whole space and starting to explore at a much greater level than even a few years ago. For example, the second largest US mortgage lender is now going to accept payments in Bitcoin. Globally, Hong Kong and Singapore and many other areas are starting to explore different ways to tokenize bonds and a variety of other assets on these kinds of platforms that tie back to government use cases.
  • Over 55% of the top 100 banks in the world all have some exposure to digital assets. What we see happening is that these financial institutions are working towards figuring out the DeFi, or decentralized finance, space. Currently, the total value locked (TVL) in DeFi, how much actual money is locked in contracts on things like the Ethereum network, is around $86 billion. Last September, it was around 5 billion, which is demonstrating strong and continued growth in this space. Stablecoins, which are a digital representation of something like the US dollar, are also something we keep an eye on in the DeFi space. In May, almost $800 billion in Stablecoins were transferred, which also shows impressive and continued growth. What we see happening is that there may be a shift from traditional financial rails to crypto rails (or a hybrid in the interim) which would provide much more transparency than today’s very opaque system, along with speed and security.
  • Two innovations that have been built off of blockchain technology are NFTs and DAOs. NFTs, non fungible tokens, are a digital representation of something unique. Something is fungible if it can easily be replaced or has no characteristics that make it unique (e.g. one dollar is one dollar regardless of where of who has it). NFTs are presenting some fascinating use cases in the art world, where you could tokenize a piece of art and sell it off in fractions. It can be used in combating counterfeiting. It can also be used for things like tickets to sporting events and licenses and certificates. While we are potentially in a bubble of people buying and selling gifs and memes at extreme prices, there has been a lot of growth in this space over the past few months and we believe NFTs will have real-world use case that have just started. Think back to the days of trading cards, where rare baseball cards would fetch a high premium, we feel the comparison here is appropriate especially as a digitally native generation ages these kinds of ideas don’t seem so farfetched. NFTs in gaming, where players own the actual assets they find or win in games is also exploding in use. Gaming is one of the things that really solidified the early internet and helped result in its explosion of use, same could be happening here.
  • A DAO is a decentralized autonomous organization. Another way to think of it is just a digital organization or an organization that is essentially run by code that are being built on top of a blockchain. We are still in the early stages here but DAOs offer a new and unique way for people to organize around a cause and feel this space is worth paying attention to as it develops.
  • In regards to regulation of the digital asset space, we believe that there will be all types of confusion by regulators and many lawsuits similar to the early days of the internet where things like encryption were illegal. We fully expect to see the same thing happen here over the next few years until regulations gets sorted into something that makes sense that allows for innovation to thrive. Messing this up could have massive implications on the US’s ability to lead in this space so it is important our regulators are properly informed and get this right.
  • Right now, our Willow Crypto strategy has broad exposure to digital assets like Ethereum and Bitcoin, exposure to the DeFi space, and exposure to the data infrastructure economy with things like Chainlink that provide core infrastructure services that make this whole space more useful. We are looking to expand our strategy to include more components of the ecosystem, broaden L1 exposure, and explore the exciting growth of the metaverse. Ultimately, we see us continuing down that road and expanding each of these sub-strategies under our flagship Willow Crypto strategy.

Questions from Q&A

  1. “In these crazy times how do we invest? How do we navigate and still be safe, what percent in the market, what percent in currencies, and what percent in cash?”
  2. “Will the dollar be losing value continually and what will affect that?”
  3. “Is the SEC guy with Fireblocks basically a highly paid lobbyist? Does his joining that firm necessarily show his integrity or is it motivated by profit?”
  4. “It sounds like many of the recent, large global hacks have been facilitated by crypto, including one that has resulted in a refund. Please address the significance of this.”
  5. “How do you invest in DeFi Metaverse, etc? I’m glad you can, however, it’s a mystery as to how.”
  6. “Is the fall of Afghanistan a potentially destabilizing market even for the future of crypto, or is it one that will likely gather more market strength?”
  7. “Should investors be concerned about all the noise coming out of Washington and about regulation on the sector?”
  8. “We’ve used gold underlying the dollar and it is no longer true. What underlies the value of crypto? Is it just artificial and created?”
  9. “Why did you select Gemini versus other custodian providers?”
  10. “Is your goal to not be scared by the wolves and sustained client fears that cryptocurrency’s volatility is aligned with you indicated investment timeline?”
  11. “Is it possible to cross-reference to firms like Fidelity in terms of that they offer?”

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