The Hoot #12

Scatt's Seeds for Thought:

🌱 Tokenization & How it's Going to Change the World 🌏

🌱 Hot Word of 2023: India 🇮🇳

🌱 Too Big to Fail 🏦

🌱 Biggest Sovereign Wealth Funds 💰

Meme of The Week

Year-to-date Market Performance:

• The S&P 500 is up 0.58%

• The Dow is down 3.73%

• The Nasdaq Comp. is up 6.42%

• Bitcoin is up 29.29%

• Ethereum is up 30.25%

• The Fortune Strategy is up 17.50% (up 15.51% since inception)

• A SEA OF RED ACROSS THE BOARD THIS WEEK 💔

• Fed Chair Jerome Powell testified to the House last week in his semiannual monetary policy report to congress. This was a very closely watched event, with traders and investors attempting to gauge any future rate hikes. Markets fluctuated, and closed in the red.

• The Financials sector is having one of the worst starts to a year with Silvergate and Silicone Valley Bank both liquidating after suffering respective bank runs (bank stocks wiped out $61 bn in 1 day this week❗️). We also got news last night that Silvergate Bank (another BIG bank facilitating crypto inflow) was seized by the feds citing systematic risk. This weighed heavily on the markets.

• Unemployment rate as of February came in at 3.6% versus an expected figure of 3.4%. Remember, bad news is good news right now!

• February's Employment report (how many jobs were added during the month) came in at 311,000 against an expected number of 225,000. Although topping estimates, this is slightly more digestible than January's 517,000 figure. I doubt the Fed will see it that way.

• Economic Data Next Week: CPI, PPI, Retail Sales & Housing Starts.

Tokenization & How it's Going to Change the World 🌏

In the digital asset world, we have cryptocurrencies (the native assets of a blockchain), and we have tokens which, as a general rule, are representations of an asset or particular utility. Within the context of this, we have a process called TOKENIZATION: the process of converting something of value into a digital token that's usable on the blockchain. They come in 2 ✌🏼 different forms: they can represent tangible assets (like real estate, or gold); or intangible assets like ownership rights or licensing. Some benefits are:

• Increased Liquidity 💦: Once assets are tokenized, they're made available to a much larger audience removing the so called 'liquidity premium' associated with certain investments like real estate 🏡 (it's hard to quickly buy or sell a house). Tokenized assets also accommodate FRACTIONAL OWNERSHIP of the underlying asset contributing to overall liquidity (more buyers, more volume, more liquidity).

• Cheaper & Quicker Transactions 💨: Tokens allow investors and traders to completely bypass traditional intermediaries and 'middlemen'. This streamlines the whole process by reducing overall transaction costs AND the processing time. Tokens can also be bought or sold 24/7 ⏰.

• Transparency 🔍: Users can easily trace transactions and historical ownership records 📄 in a way that is cryptographically verifiable (AKA secure). Transactions are automatically recorded on the blockchain, and the transparency and immutability of the blockchain then helps guarantee the authenticity of its transaction history. This allows tokens to achieve a level of reliability that other asset classes can't 🔒.

Think of everything from a bond offering (like Siemens recently did) to voting in your local or federal election, to buying a stock, to safely storing (or transferring) the deed to your house, tokenization completely revolutionizes and challenges the traditional system. In the context of the blockchain, tokenization has INCREDIBLE future use cases that stretch 'to infinity & beyond' 💫.

Hot Word of 2023: India 🇮🇳

Dating back to the 1950's when the United Nations started keeping records, China 🇨🇳 has boasted the largest population in the world. That was until around the middle of January this year when analysts believe India 🇮🇳 overtook China as the most populous country on earth, home to approx. 1.417 billion people. India is also expected to become a $30 trillion economy by 2050 (a 10-fold jump from its current size). Companies are realizing this and adjusting accordingly 👀.

To mention a few:

• Air India recently put in a RECORD order of 470 Boeing & Airbus aircrafts worth tens of billions of dollars. This is Boeing's 2nd LARGEST sale OF ALL TIME 🤯.

• Amazon launched a second cloud region in India and pledged to invest north of $4.4 billion into the country by 2030❗️.

• Apple is planning to open a 22,000 square foot Apple store 🏬 in Mumbai in late 2023. They're also boosting production which could, by 2027, represent the plant that assembles up to 50% of Apple's iPhones (according to 1 analyst). Foxconn (Apple's manuf. partner) is also eyeing HUGE expansion plans in the country 🏗️.

India is growing rapidly and companies don't want to miss out 💸.

Too Big to Fail 🏦

One of my favorite sayings is "Things that have never happened before, happen all the time". Man, is that not relevant for the events witnessed in this last week. 3 bank seizures in the space of a FEW days ❗️ First it was Silvergate (which we spoke about last week), then Silicon Valley Bank (SBV), and then Signature Bank as of yesterday. But HOW? I thought banks were a safe way to store my money? Well, there's a few things you gotta understand about the situation.

The interest banks PAY on deposits are USUALLY tied to short-term US treasuries, and the interest they EARN is USUALLY tied to long-term US treasuries. But when interest rates are near zero (which was the case for almost 10 years), nobody really notices the extra 0.25%, HOWEVER the Fed has been raising rates for a while now and that pushed short term treasury yields to hit 5% last week. So as a result of SBV having a huge portfolio of long-dated treasuries, they had a MASSIVE asset-liability mismatch. A big client attempted a big withdrawal, and the bank had to sell some of its portfolio at a $2bn LOSS to facilitate the transaction 🤯. Someone picked up on it, rumors spread, panic settled in, and all of a sudden $42bn was withdrawn from the bank in 1 day (more than $1m/second for 10 hrs straight) 🥴

But aren't the deposits insured, so the government will just pay them back in the end? Yes, BUT the FDIC only insures accounts up to $250,000. And get this, MORE than 95%  of SBV's deposits (which totalled MORE than $175bn) were uninsured 🥲. They also handled more than 50% of ALL venture capital money in the US ❗️That represents a pretty lethal cocktail... one which could quite literally have a CATASTROPHIC impact on the US financial system.

Thankfully, the Fed decided late yesterday to step in and basically insure all the deposits (and setup a special-purpose vehicle to stop this kind of thing in future) 😅. Although we avoided complete disaster, let's continue to keep an eye on this one! Will be interesting to see how this all plays out over the next few weeks. In an effort to stop the contagion spread by SBV's fallout, regulators seized Signature Bank as they were previously reeling from big crypto-related losses and might've run into a similar issue 😬. Again, the Fed will also honor all deposits at Signature too.

Biggest Sovereign Wealth Funds 💰

A sovereign wealth fund (SWF) is a state-owned investment fund that is comprised of money generated by the government, usually originating from its surplus reserves. The purpose of these funds is to 'stabilize national budgets, create savings for their citizens, and promote economic development' (in other words, make money). These funds invest in various assets on a global scale including stocks, bonds, real estate, commodities, or alternative investments such as private equity or hedge funds.

• China Investment Corporation: $1.35 TRILLION 🇨🇳

• Norway Government Pension Fund: $1.14 TRILLION 🇳🇴

• Abu Dhabi Investment Authority: $790 billion 

• Kuwait Investment Authority: $750 billion 🇰🇼

• Singapore GIC Private Limited: $690 billion 🇸🇬

• Saudi Arabia's Public Investment Fund: $607 billion 🇸🇦

• Hong Kong Monetary Authority: $589 billion 🇭🇰

• Singapore Temasek Holdings: $497 billion 🇸🇬

• Qatar Investment Authority: $475 billion 🇶🇦

• China's National Council for Social Security Fund: $447 billion 🇨🇳

Take note of the list, and keep an eye out on those up and coming middle east funds 👀

That wraps up #12.

See you next week for another update. 🦉

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.