What are likely to be hot topics at your holiday gatherings? Probably at least one of these: crypto, inflation, and tech layoffs. Not sure what to say? Don't worry, Titan's got your back.
Not a day goes by without another headline about FTX and crypto. To recap, FTX was a crypto exchange, founded in 2019 by Sam Bankman-Fried. It shot to international prominence. Then it all collapsed in a matter of days. It turns out Bankman-Fried was lending FTX customer funds to his trading firm, Alameda Research, to generate yield, and using its own token, FTT, as collateral. When market participants caught wind of the scheme, panic ensued. In essence, it was a liquidity crisis, an old-fashioned bank run, and FTX was left holding the line with anywhere from $10B-$50B in liabilities. With the scandal unfolding and the price of crypto dropping precipitously, people will be asking around the table, is this the end of crypto?
In today’s crypto market, borrowers, lenders, and investors facilitate a complex and mutually dependent ecosystem, but their interconnectedness can also break it. Like a virus, one sick firm can infect an otherwise healthy market. But to some extent, contagion in financial markets is inevitable.
It’s important to note though, that most of the crypto destruction and contagion this year has been centered in the CeFi (centralized finance) space and has less to do with the underlying crypto technology and more with the entities that broker transactions across the crypto market. In the case of FTX, its collapse is not about the validity of crypto itself, but is due to fraud and mismanagement.
What differentiates the crypto market from others is how young and unregulated it is. As crypto continues to mature, we believe that it is necessary that exchanges, lenders, and other market participants institute stringent guardrails to prevent one renegade firm from wreaking havoc on the entire ecosystem.
Despite the fallout this year, we believe that use cases will only increase for the asset class and as DeFi (decentralized finance) technology becomes more mainstream and adopted, crypto may yield a risk premium for long-term investors. Patient investors may be compensated for bearing the risk.
The cost of a turkey could be up by 73% this year! You can bet whoever is preparing the Thanksgiving feast will bring up how much more expensive everything is!
As shoppers we intuitively know what to do about inflation - bite the bullet and accept the higher costs, buy less, or buy different things. But what about as investors?
Investors worry about inflation because it erodes the real value of investments, as well as the value of income generated from those investments.
What can you do to protect investments? Inflation hedging is a strategy for investing in assets that have a higher probability of keeping up with the rate of inflation, perhaps even generating returns exceeding inflation.
Common inflation hedges
Stocks: Although past performance is no guarantee of future results, In the past century, the stock market has had average annual returns of about 10%, making it a long-term investment that has beaten inflation. During inflationary periods, investors might buy non-cyclical stocks–companies that generally succeed through good and bad times in the economy’s cycle. Stocks of staple consumer goods, food processors, utilities, and health care and pharmaceuticals are some examples. Inelastic goods and services, or products without acceptable substitutes, are generally good hedges against inflation as consumers are less price sensitive.
International diversification: A greater allocation to foreign stocks and bonds may help cushion against the effects of inflation, as some countries such as Australia and South Korea have economic cycles that don’t correlate with the U.S. economy. Some emerging markets may also offer hedging opportunities.
Real estate: For many investors, real estate can offer low correlation to equity markets, consistent cash flow, and potential historical appreciation. While the asset class has generally been reserved for the select-few, it is our view that investors should and can benefit from investments in real estate. Given today’s macro climate, we believe that the asset class has the ability to act as an inflation hedge and benefit from secular tailwinds from the supply chain.
Please review Apollo Diversified Real Estate Fund’s prospectus in its entirety before making any investment decision.
Commodities: Agricultural, energy and industrial metals tend to track inflation, as they are used in products and services that make up the Consumer Price Index (CPI), which factors into the inflation calculation. Gold is often regarded as the inflation hedge of choice among commodities.
Inflation-indexed bonds: These bonds are designed to rise in value with consumer inflation, such as the CPI in the U.S. The interest rate is typically lower than for conventional bonds, while the bonds’ principal value is adjusted higher to compensate investors. The best example is Treasury Inflation-Protected Securities (TIPS), which are sold by the U.S. government.
Direct lending: These are loans to private, middle-market companies, known as private-credit investing. Private credit seeks to provide investors with predictable income, and stability as it reduces volatility from public markets, and potentially offers risk-adjusted returns. we believe that private credit is uniquely positioned to benefit from today’s economic climate with higher yields, lower default rates, and floating rate credit that increases as interest rates rise.
Please review Carlyle’s Tactical Private Credit Fund’s prospectus in its entirety before making an investment decision
Big tech has been letting go of a lot of talent over the last few weeks. There are of course the major headlines, like Elon Musk firing almost half of Twitter and Mark Zuckerberg letting go of 13% of Meta’s workforce.
The Twitter firings may be unique to Musk’s burn-it-down-first brand of restructuring and Meta’s are unique to Zuckerberg’s particular bet on the Metaverse not panning out. However, more generally, tech companies are suffering a COVID-times hangover.
Many tech companies saw an increase in traffic and revenue during the height of the pandemic, as people were stuck at home, seeking out information and entertainment. The industry responded by hiring and expanding at a rapid pace. And now as consumers are moving back into the real world, the tide is turning.
We view the mega-cap tech players within our Flagship fund, aka "The Generals", as bellwethers for the broader economy given their global reach with consumers and businesses alike and the large percentage of the S&P 500 earnings that they make up. In short, these companies foresee slower discretionary spending from the consumer and sluggish enterprise spending over the coming quarters.
These trends showed up in our research, and Titan elected to trim Alphabet and Microsoft earlier this year.
As for jobs, it’s important to note that layoffs are only a problem if workers can’t get re-hired. Data suggests that this is not the case in the tech sector, which is keeping up with growth, adding 175,000 jobs alone this year. This indicates that talent will be spread around to smaller, earlier-stage tech companies, supporting the health of the sector.
As of publishing this newsletter, Twitter is a holding in the ARK Venture Fund.
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