#89 - Canadian Budget Thoughts, BlockFi and the Final Bezos Letter
"To all of you: be kind, be original, create more than you consume, and never, never, never let the universe smooth you into your surroundings. It remains Day 1."
In this week's episode of Reformed Millennials, Broc and Joel kick it off with a quick market update then they transition to a discussion about Jeff Bezos’s final letter to shareholders, the future of finance and blockchain tech and they finish it off with some great podcasts to listen to.
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👉 For specific investment questions or advice contact Joel @ Gold Investment Management.
The data keeps coming in.... And we're seeing more and more things that we weren't seeing before. Leadership groups like Utilities, REITs and Gold Miners isn't something we've seen in a while.
How about divergences in the Nasdaq?
The Composite couldn't even make a new high, and the percentage of stocks in the Nasdaq making new highs was just a fraction compared to Q1.
The Divergences continue to add up and rotation into positive cash flowing business marches on. How about Regional Banks making new 2-month lows relative to Real Estate Investment Trusts:
The defensive areas are taking over leadership.
The added bonus, is that all of this as the S&P500 hits its price objective along with the S&P Industrials Index!
Canadian Budget Recap - From MNP
Listen in for RM’s thoughts .
Jeff Bezos’ Final Letter As CEO
Jeff Bezos wrote his final letter to shareholders before stepping down as CEO. Three themes to pull out:
Mr. Bezos talks about the amount of value Amazon adds to the US economy (written with DC in mind). Beyond the shareholders, how did employees, customers, and sellers benefit from the rise of Amazon? Employees: "In 2020, employees earned $80 billion, plus another $11 billion to include benefits and various payroll taxes, for a total of $91 billion." Third-party sellers: "...in 2020, third-party seller profits from selling on Amazon were between $25 billion and $39 billion, and to be conservative here I’ll go with $25 billion." Customers: Customers save ~75 hours/year by shopping on AMZN. At $10/hour, that's $630/yr. At ~200 mn Prime member, AMZN created $126 Bn value for its customers.
Mr. Bezos reacts to Amazon winning a unionisation vote last week not as a victory but as a signal that Amazon has to do better. Amazon has to become a better place to work. This is classic Bezos kaizen: look for the root cause rather than arguing about symptoms. Of course, if Amazon can make it harder and more expensive to run warehouses, that's less margin but also a competitive advantage.
The best arguments in favor of capitalism is this opportunity for Mary and Larry to participate in the wealth creation machine by an inventive, ambitious, and motivated strangers. It's not just family office and hedge funds. Let's not forget the "Mary and Larry". Link
🌊Is BlockFi the Future of Finance🌊
Banks make money in three main ways:
(bold most important to understand for BlockFi)
Net Interest Margin. Customers deposit money. Banks lend that money out to other people and businesses at a certain rate, pay depositors a lower rate, and keep the difference.
Interchange. When you use a credit or debit card at a store, the store pays your bank and its bank, typically as a percentage of the transaction and a small fixed amount.
Fees. Banks charge customers money when they overdraft, take money out of an ATM, and for all sorts of other things.
Right now, the Annual Percentage Yield (APY) on a standard bank account is 0.01%. Let’s assume they can lend money to a homebuyer on a 5 year fixed rate mortgage at 2.29%. Bank of America’s Net Interest Margin is 2.29% - 0.01% = 2.28%.
Banks would love to pay high-interest rates on deposits. Banks compete with all of the different things you can do with your money -- buy a house, stocks, or crypto, pay off loans, travel. The higher the interest rate, the more likely you are to keep your money sitting there. More money sitting there means the banks can lend more means higher income for the banks. Given the low rates they earn from borrowers, they just can’t.
There’s nearly $1.2 trillion in wealth tied up in a currency that people don’t feel comfortable spending.
BlockFi is able to offer competitive rates while protecting its downside by holding onto your bitcoin (or ETH, Litecoin, or PAXG) as collateral. Loans start at a 50% Loan to Value (LTV), meaning that you need to put up bitcoin that are worth twice as much as you’re borrowing.
Everything is a trade-off. (Custody)
DeFi protocols typically have lower fees and are more open and transparent. Many people believe in “not your keys, not your coins,” the idea that if you keep your coins in a centralized account, you don’t really control them. (Balaji made this point in an excellent Tim Ferriss Show interview.) Plus, one person’s comfort in having people on the other side is another’s discomfort in having people on the other side.
For BlockFi’s target customers and institutional partners, though, the trade-off can be worth it. BlockFi has a 0% loss ratio on loans.
The biggest risk with BlockFi is that its accounts are not FDIC insured. If BlockFi gets totally wiped out, your money is gone. There’s a trade-off: for accepting more risk, you earn higher interest.
Watch this video with the company’s Chief Risk Officer Rene van Kesteren, a former Managing Director in Equity Structured Finance at Bank of America Merrill Lynch, to understand how they think about it - here
According to crypto research and media firm The Block, BlockFi was running a 10% average weighted APR on its retail loans in early 2021. That leaves plenty of room for 8.6% APY on stablecoins, especially when blended with lower rates on other assets.
THE MAIN ARBITRAGE IS SOMETHING CALLED A BASIS TRADE.
A basis trade is the purchase of an underlying asset and the sale of a related derivative, like a future contract.
You make money on a basis trade as the price of the underlying asset and the derivative converge.
In this case, bitcoin futures, which trade on traditional commodities exchanges like the Chicago Mercantile Exchange (CME) trade at a significant premium to the “spot” price of bitcoin, which is the price that you’d pay if you went into the market right now and bought bitcoin.
Bitcoin, of course, costs practically nothing to hold, and yet June BTC futures are trading at a 46.4% premium to spot on Deribit.
Example in practice:
A hedge fund can buy bitcoins today at $63k and sell an equal amount of futures contracts for $67.5k, sit there while time passes, and collect the difference.
BlockFi is able to pay 8.6% on stablecoin deposits. (They automatically turn your USD into stablecoins when you deposit money via ACH). BlockFi lends out stablecoin deposits to hedge funds to lever up on the basis trade. If hedge funds are able to pay BlockFi 15% because they’re making 40%, BlockFi can afford to pay depositors 8.6%.
🐕Doge Coin, Coinbase, and Blockchain Tech…🐕
Nobody knows what they mean BUT its provocative!
COIN insiders sell!
Invest Like The Best Highlights Blockchain With Chris Dixon
Chris’s overall thesis for investing in the cryptocurrency space, the opportunities and limitations of blockchain applications, and why this is the most interesting area for investing and building over the next 10 years.
As we always say in this newsletter, we are attempting to predict future waves. And one of the best at this is Chris Dixon. We often find ourselves waiting to see what Chris Dixon and Fred Wilson are doing and then fast follow.
There are so many insights from the attached podcast that will help you understand the upside of blockchains. Our favorite way to frame this new tech of blockchain is view them as ‘additive’ to the internet or a “third layer”. They are not replacing it. Just like the PC wasn’t replaced by the iPhone, the internet and centralized companies will remain the base layer and complete tasks as needed.
🌊Best Links of The Week🔮
China still squeezing Ma China continues to put pressure on Jack Ma and Alibaba. Last week it fined Alibaba for abusing its market dominance in ecommerce, and this week we hear of moves to force it to divest, sell, or 'transfer' Ant Financial, the Alipay fintech affiliate whose IPO was blocked last year. As always, part genuine antitrust and regulation, part politics, part tall poppy syndrome, part 🤷🏻♂️.
Coinbase goes public 🎰- Coinbase went public via direct listing this week, and now has a market cap of about $70bn. See more above. There are lots of opinions about its long-term business model, but it's also effectively an index on adoption of at least some models of cryptocurrencies, and so this is a watershed.
Nvidia moves into CPUs - People have been talking about using ARM-based chips in the datacenter for a while (lower power use and less heat) and now Nvidia is challenging Intel with an ARM server CPU.
Instagram Kids - Facebook is working on a curated and filtered version of Instagram to be used by people aged under 13.
Uber Eats is a $50bn business - Uber is rebounding, saying it had $30bn run rate on rides in March, an all-time high. But, it also said Uber Eats is now at a $52bn gross booking run rate 🤯. (For context, total US restaurant spending in 2019 was $670bn.)
Balaji's idea of incentivizing people by paying them to complete tasks that are in their best interests - www.1729.com
This blog is presented as a general educational, informational, and entertainment resource. While the author of this blog, Joel Shackleton, is registered as an Associate Advising Representative with Gold Investment Management Ltd., a firm registered as a portfolio manager and located in Edmonton, Alberta, this blog does not provide, and should not be construed as providing, individualized investment advice, nor as containing any recommendation to buy or sell any specific securities or otherwise make any other form of investment or investment decision. Joel Shackleton and Gold Investment Management Ltd. specifically disclaim any reader of this blog from relying on any of its contents as investment advice or as an investment recommendation. The views and opinions expressed herein are the personal views and opinions of the author only and do not necessarily reflect the views or opinions of Gold Investment Management Ltd. or any of its other registered individuals or employees. For a comprehensive legal disclaimer please visit GIM’s website at https://gold-im.com/legal/