In this episode of Bankless Shows, Itay Vinik, Co-Founder & Chief Investment Officer at Equi joins Ryan and David from Bankless to discuss Itay's outlook on 2023 and beyond.
Read our notes below to learn more.
How Itay Got Here
Itay started a hedge funds trading volatility and has been exposed to the markets for 15 years.
Itay’s hedge fund focuses on delta-neutral strategies on DeFi.
Exited CeFi lenders when Luna crashed.
Inputs on Terra/LUNA
All DeFi projects are funded by VC money.
Decided to focus on other assets after Luna collapse anticipating contagion effects.
Itay's Sentiment
The goal is to protect capital as even diversification won’t work at the current macro environment.
History of the Macro Environment
The U.S. became the central currency after the Second World War.
In 1971, Nixon dropped the U.S. out of the gold standard and the modern era of high inflation began.
In the 1980s, Volcker raised interest rates to double digits to bring inflation down.
Global Central Bank Policy Rate
Global Central bank Interest rates since then have been near 0 after the global financial crisis of 2008.
Quantitative Easing started after the financial crisis when more money was printed into supply.
Ben Bernanke felt justified in printing money because of the thesis that it will cause a wealth effect (the idea that people will spend more looking at the stock market rising).
U.S. Fed Balance Sheet
Every time the FED stopped printing money, the economy went into crisis.
FED decided to double the balance sheet in 2020 during COVID.
The FED creates money out of thin air and buys U.S.Treasuries giving money to the U.S. government.
Nasdaq-100 Index & Fed Balance Sheet
During COVID, The FED added a lot to its balance sheet and it was very good for risk assets.
Now, a small decline in the balance sheet causes a lot of pain in the markets.
Markets have become more dependent on the liquidity from the FED.
Pandemic Support Programs
The reason for inflation during money printing during COVID was because there was a monetary stimulus to people but nowhere to spend it.
U.S. Personal Savings Rate
It is seen from the above chart that people’s Personal Savings Rates were up after the COVID stimulus but now the Credit Card Debt Outstanding is at an all-time high while savings are at an all-time low.
U.S. M2
M2 money supply has seen a 40% increase in 2020.
Where Are We Now?
FED has realized they have made a mistake and trying to fix it by raising interest rates and taking $100b/month out of circulation (like the burn mechanism in crypto).
FED cannot print money this time as inflation is already high.
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Inflation
Inflation is expected to decelerate and massive layoffs could help bring the inflation down.
Housing
Mortgage rates are going up and buyers cannot buy.
Sellers cannot sell as they are locked into low rates.
The labor market crash might cause a crash in the housing market.
2023
The market believes that 4% interest rates are going to be in place for longer.
The market also believes some sort of FED pivot could happen in June 2023.
Rate cuts have saved the economy three times and rate cuts didn’t save the economy from a recession in the other three instances.
The Last Dance?
Everyone is playing the liquidity trade.
All the assets like S&P, crypto, and precious metals pricing are moving in a similar direction with different volatility.
It is important to manage risks during tightening.
Even Albert Einstein lost money FOMOing during his time.
Possible Outcomes
Soft landing is the hopium case where money printing is back and asset prices rise while risking higher inflation.
Thinks a Hard landing is the most likely scenario, 2008 financial crisis was a hard landing.
A catastrophic landing will be if there are systemic risks like the financial crisis.
Bull Market Mid-2023
Markets could see a bottom in Mid-2023 as the stock market has been in a bear market for a year now and the usual bear markets are 18 months long.
The Dollar
The dollar is being used as the reserve currency for trade worldwide makes it strong.
Itay's Advice & Closing
Increase your productivity, save more, and don’t overleverage.
Market recovery from a recession is the best time to invest.
Check Out These Important Links
TODAY’S EDITION IS BROUGHT TO YOU BY LEDGER STAX WALLET
Using a hardware wallet on the go is difficult and cumbersome - until now.
Ledger’s latest innovation, the Ledger Stax, is a credit card-sized hardware wallet complete with touchscreen and Bluetooth capabilities. Did we mention it’s designed by Tony Ladell, the creator of Apple’s original iPod?
Act now, click the link below and preorder the Ledger Stax.