Hope you’re all enjoying the weekend! And Happy Father’s Day to the Dads out there. Enjoy the content and updated predictions below, and be sure to sign up for the new CrowdCent beta products (info below!):
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“Calm is contagious.” - Navy Seals
Translation: It is very easy to overreact to things, and then that overreaction often leads to a vicious cycle of bad decisions upon bad decisions - making a small problem much worse. Remaining calm - understanding the big picture, but focused on the present moment - helps. Today a lot of things are changing quite quickly - it always helps to step back and understand the big picture + dominant trend line. And on a day-to-day basis, focus on doing all the small things that you control right to help accelerate / build / capitalize on those broader trends.. that will start a virtuous cycle, and habits are hard to break.
Recap: Lyn provides an in-depth view into her background and investment process, and also provides some useful up-to-date commentary on many of her recommendations.
Comment: We love 'first principles' thinkers, and Lyn falls in that bucket. We agree with many of her thoughts - from inflation stickiness (but rate of change slowing), to the significant opportunity for new supply chain expansion (electrification - semiconductors, rare earth minerals, battery materials). Worth a listen..
Recap: Mark Cuban provides a great tutorial on the DeFi system and yield farming - how these models are essentially an 'easy' way to bootstrap new projects to ultimately build a brand new financial ecosystem (a prohibitively 'expensive' endeavor otherwise).
Comment: An originally 'unlikely' source, Mark Cuban has proved himself. We were originally skeptical - thought he may just be another macro tourist with a superficial view. But he dove into the deep end - learning Solidity and now explaining complex DeFi topics in relatively simple terms. Net net, Mark is a very useful resource in learning about the still budding crypto (really blockchain) revolution.
Machine Learning with the SumZero Data Feed [Whitepaper]
Recap: Want to learn how machine learning can be used to generate actionable insights from investment communities? AKA, help you pick stocks. Check out this whitepaper Jason put together. CrowdCent (ML/NLP + financial expertise) has partnered with SumZero (community with 10K+ investment writeups) to help turn data into actionable insights -- from investable baskets of best ideas (chosen by the model), to a dashboard for users (idea feedback, probability of outperformance, etc.). More to come..
Comment: CrowdCent is building out several new products, many of which you can test out today (email us for access: firstname.lastname@example.org):
CrowdCent + SumZero Baskets & Dashboard - check out the whitepaper above. Feel free to email us at email@example.com for early access..
CrowdCent Analyzer - Want to get feedback on an investment idea? See what a trained machine learning model thinks of your idea (the probability of outperformance; i.e. is it likely to be a good stock investment)? Email us (firstname.lastname@example.org) and/or check out the free private beta here.
You simply submit the idea (no public posting necessary), and receive a full model-generated analysis!
CrowdCent Thoughts & Predictions
In keeping with the 6-month updates, see below for a tracking update from CC’s predictions on 6/7/2020 - original here (6/7/2020), 6mo update here (1/3/2021). For more frequent updates and the most up-to-date thoughts, be sure to create a free CrowdCent account and join the Telegram!
We are near the end of a ~40 year US Treasury bull market: 16% 10yr UST rate in 1980 to ~0.50% today. Wouldn’t be surprised to see negative rates before inflation takes hold. Not bearish, just not much to play for.
Tracker: USGG10YR Index (US 10-year Government Yield)
Simplified Bet: US interest rates (10yr+) are going higher over the coming years
Performance: Up 250% trough to peak; up 71% date to date
Comments: After dropping from ~2.00% to 50bps in early March 2020, US rates (using 10yr, in this case) have gone from ~50bps in July/August 2020 to a local peak of ~1.75% at the end of March 2021. As expected, rates have moved higher in the 1H21 as both growth and inflation in the US have been accelerating. Into the 2H21, we expect the rate of change of both growth and inflation will slow and nominal rates will be rangebound but biased lower. In response to the drop in nominal rates and flattening curve, we expect the US government will pass a large fiscal package -- which will likely reignite the ‘reflation’ trade a bit later this year, but more meaningfully in 2H22. Net net, we still expect the next decade will come with higher interest rates driven by the fiscal side of the equation (direct injections into M2), but expect the shorter term ‘trade’ will pause/head lower over the coming 3-9 months (path dependent, pending Fed + Fiscal response).
Related to the above, we are in the 8th or 9th inning of a ~40 year private equity boom - primarily trading assets back & forth and benefiting from lower rates, not creating value
Tracker: Working on tracker; potentially a basket of private equity company stocks as % of the market (PSP US Equity / SPY US Equity)
Simplified Bet: Private equity growth, as an asset class, will start to slow down as interest rates hit the lower bound
Performance: 3.39% of SPY to 3.75% of SPY (negative performance as weighting has increased)
Comments: PSP is up ~41.9% since 6/7, while SPY is up 28.4%, outperforming by ~13.6%. The “free money” tide has lifted all boats over this time frame, and the steepening of the yield curve has benefitted financial (banks, PE, etc.) stocks. We continue to hold this view over a multi-year time horizon, but are still searching for a better tracker (i.e. PE performance relative to other asset classes).
As the yield curve in the US continues to compress, expect to see a blow off top in growth assets in the near term (not our characterization, but referring to the assets with significant value in the terminal value)
Tracker: QQQ US Equity (Nasdaq 100 ETF)
Simplified Bet: Growth stocks will rise near term
Performance: Up 41.8%
Comments: This largely played out as expected, with a blow-off type top in late August 2020, followed by a grind into year end (but underperforming more cyclical / reflationary sectors). Since the surge in late August, leadership has shifted away from software (high terminal value stocks) toward semiconductors (more cyclical stocks) within the tech space. We expect the cyclical/reflationary tilt to continue for the 1H21; QQQ likely continues to appreciate but at a slower rate vs. industrials, materials, etc… Kept the commentary for reference, as looking back that is what has played out in the 1H21 -- IWM over QQQ, cyclicals over secular, semiconductors over software. Into the 2H21, we expect the reverse -- secular over cyclicals, and software over semiconductors -- as the yield curve goes from steepening to modestly compressing.
After decades of no inflation, we will start to see real world inflation (not just financial asset inflation, which central banks have driven for 20+ years) in 2021+ driven by localization + government printing + commodities
Tracker: USGGBE05 Index (US 5-year inflation expectations)
Simplified Bet: Real world inflation is going to go up over the coming years
Performance: Up 185.6% trough to peak, up 145.4% date to date
Comments: Breakeven rates (5yr) have gone from 97bps (6/7) to 2.38% today - more than doubling. We see real world inflation happening all around - from grocery prices, to lumber, to housing, to used cars. Anything with limited supply that has been in demand by consumers/businesses over the past several months. Expect this to get ‘worse’ (higher inflation) into 1H21, as more capital (trillions of printed fiat by the government) chases fewer goods… Similarly kept the previous commentary as it rang true in the 1H21; into the 2H21 we expect the rate of change of growth and inflation will decelerate/slow. This is likely to drive breakevens lower until a Fed and/or a more likely Fiscal response. Net net, we expect inflation levels (absolute) to be sticky; however, the pace of increases will meaningfully slow in the 2H21 and more so in 1H22. A large fiscal package likely drives a reacceleration more meaningfully in 2H22.
The Federal Reserve likely then moves to yield curve control
Tracker: Binary qualitative bet (either happens or doesn’t)
Simplified Bet: Expect the Fed to lock short term rates (2yr and less) to 0 or lower, and medium term rates (5yr+) to specific pegs
Comments: Too early for this explicitly, but we certainly have seen it in things like the 30-year fixed rate mortgage which has continued to trend lower (bottomed at 2.8%, now 3.2%) despite a rise in long term (10/30yr) interest rates. The Fed is clearly doing something (operation twist-like) in the background to steepen the curve.. Into the 2H21, we expect the curve flattens a bit (as growth/inflation RoC slow) -- any explicit yield curve control has been pushed out for a bit (and may only happen if things get ‘crazy’ post another fiscal package).
The eventual steepening of the curve drives a reversal in the traditionally labeled value vs. growth buckets
Tracker: BNKKRYMH Index (10year UST - 3mo bill) and RU1VGT Index (Russell 1000 Value/Growth)
Simplified Bet: Yield curve steepening benefits stocks with less value in the terminal value, and more value in the visible (nearer term) cash flow stream
Performance: Yield curve has steepened by 147% trough to peak, 104% date to date; Russell value has outperformed Russell growth by ~21% trough to peak, but underperformed by ~8% date to date.
Comments: The yield curve has gone from significantly negative (negative 40bps+ in September 2019) to now positive/steep (210bps at peak; 143bps today). Traditional ‘value’ type sectors (financials, industrials, materials, etc.) have significantly outperformed growth since early September; this index tracker does not fully capture this. This brings us back to our broader problem with the “value factor” being misconstrued with “value investing.” Net net, we think the reflationary outperformance of value>growth industries has hit a local peak, and growth is likely to do better into the 2H21.
2021+ will see a 5+ year bull market in emerging markets, particularly SE Asia (India, Indonesia, Vietnam, etc.). Driven by weaker USD, positive demographics, and supply chain localization
Tracker: EEM US Equity (Emerging Markets ETF), ASEA US Equity or FSEAX US Equity (Southeast Asia ETFs)
Simplified Bet: Emerging markets, particularly SE Asia, should provide outsized returns over the coming years
Performance: EEM (up 34.1%), ASEA (up 12.9%), FSEAX (up 39%)
Comments: We believe the RoW (notably emerging markets) outperformance of US equities has just begun, and will be a major theme over the next decade. EEM and FSEAX performance aligns, and appear to be better proxies for this expression over ASEA. This theme may take a pause into the 2H21 with some likely USD strength near term -- then it likely resumes post a fiscal package.
Expect to see general de-globalization - for example, localization of critical/sensitive supply chains (Vietnam/SE Asia big beneficiaries), along with an acceleration in industrial automation + robotics
Tracker: (Update) - ARKQ US Equity (Autonomous Technology & Robotics ETF)
Simplified Bet: Expect supply chain localization and rising automation
Performance: Up 72.3%
Comments: We are using ARKQ as a proxy for this trend, though really this should mainly be a theme in the back of your mind when thinking about broader investments. As part of this theme, we expect the next decade will be focused on building supply chain resilience (vs. previous just-in-time fragility) - particularly for geopolitically sensitive areas tied to the ‘new’ energy ecosystem. Notably, semiconductors, rare earth minerals, and battery materials -- it’s not a coincidence that Biden recently announced an executive order to review and rebuild these chains locally/with trusted partners.
In the next 5 years, we will see the USD replaced by something else as the world reserve currency (best guess: digital basket). Likely after a world war of sorts; Cold War 2.0 (over Technology, 5G, Semiconductors, etc.) - wouldn't be surprised to see multiple competing world reserve currencies
Tracker: Short UUP US Equity (US Dollar - bullish) or Long UDN US Equity (US Dollar - bearish)... and then binary qualitative bet on digital currency basket
Simplified Bet: the US dollar will lose its world reserve currency status in the coming years
Performance: UUP (down 7.7%; positive performance for short); UDN (up 5.08%; positive performance for long)
Comments: We believe the US dollar bear market has just begun, and so far both trackers confirm this trend. The supply of USD is growing dramatically (printing trillions of dollars)... Kept the commentary for reference; into the 2H21 we likely see a bit of USD relative strength until a fiscal package and/or Fed response happens.
Bitcoin and Ethereum double over the next 2 years
Tracker: XBTUSD Curncy (Bitcoin) and XETUSD Curncy (Ethereum)
Simplified Bet: Positive on digital currencies / blockchain over the coming years
Performance: XBTUSD (up 560% trough to peak; up 261% date to date), XETUSD (up 1628% trough to peak; up 805% date to date)
Comments: As we called out in Telegram and CrowdCent conversations in late April/early May (as noted at the top, for real-time thoughts - join the free site + Telegram), we believe Bitcoin (~64K) and Ethereum (~4.2K) peaked for this cycle. The rate of change of global liquidity peaked in ~April 2021, which coincides with the peak in most cryptoassets. We expect both will bottom in the next 3-9 months (again, pending Fed + Fiscal response) -- Bitcoin likely between 10.5-21.0K and ETH around ~1.0K -- and then continue their upward trajectory in 2H22 and beyond (to new all time highs).
The rise in populism has been brewing for years, partially due to the structure of the financial system (useful and timely article) - expect this leads to an acceleration of the decentralization of authority … Neil Howe’s 4th Turning prediction is amazingly accurate thus far
Tracker: Qualitative at this point; working on trackable index
Simplified Bet: Decentralized finance is at a positive inflection point
Comments: This appears to be happening with the rise of DeFi as one outcropping. BLM protests, stimulus protests (e.g. vandalizing senators homes), the raiding of the Capitol, among other things all point to this tracking - very typical of fourth turning.
In summary, the 2H20-1H21 played out largely as expected -- yield curve steepening, inflation up, rates up, dollar down, value outperformance, cyclical outperformance. Into the 2H21, we expect the reverse across the board until a Fed and/or more likely Fiscal response to counter the ‘naturally’ occurring deflationary forces (demographics, debt, technology).
Any suggestions for CC Curation improvement, website, etc. - send an email to email@example.com
Look forward to more updates soon - the future is here...
Jason & Ryan