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Consensus Insights, AI & Macro

Consensus Insights, AI & Macro

Justin Guilder
April 30, 2023

Welcome to the Lumida Ledger: your guiding light for macro, crypto and regulatory updates.

We were on the ground at Consensus this week. Some of the top themes were real world asset tokenization, institutional adoption, zero knowledge proofs and sovereign use of public blockchains. Here is a quick video interview of VCs and entrepreneurs. See our takes from Consensus in the insights section below.

In a recent "This Week in Startups" episode, Jason Calcanis chatted with Vinny Lingham and Sunny Madra about Ram's perspective on AI's impact on the managerial class. Spoiler alert: AI is a boon for capital owners. Here's how we see it unfolding:

1. Human Leverage (engineers becomes 10x engineers)

2. Operating Leverage (need less engineers)

3. Management Leverage (need less management)

Source: This Week in Startups

"The Breakdown'' podcast hosted by Nathaniel Whittemore (formerly CoinDesk, now independent), zeroes in on AI and crypto-driven power shifts. In a recent episode, Whittemore mentioned Ram's insight on Coinbase's offshore derivatives exchange aiming to fill FTX's void and snatch market share from Binance. Tune in at the 8:20 mark for more.

We hosted an AI & Crypto Twitter Spaces with a fund manager, NFT investor, and VC investing in AI. The panelists discussed how crypto & AI are related, generative art & NFTs, winners and losers from AI from an investment perspective, and the existential questions around AI and humanity. See here for the replay.

Insights of the Week

Digital Assets
- Insights from Consensus:
  - Real world assets are the focus: Last year was about custody, this year is about real world asset tokenization on chain.
  - The institutions are here at roughly the same pace as last year, in our view.
  - Sovereigns may need public blockchains: we hear sovereigns are recognizing the need for interoperable blockchains to collaborate effectively with other nations. With each country using its own chain, cross-bridge security and compatibility issues arise. As a result, some analysts are considering EVM compatibility and public chains as potential solutions. While not the prevailing view, this emerging line of reasoning offers a constructive perspective, in our view.
  - Zero knowledge proofs: privacy focused projects using zero knowledge proof technology are coming into focus.
- DCG, Genesis, Gemini sage resumes: There is reporting that the Joint Plan Term Sheet is falling apart. We do not believe there is enough time to create a new term sheet, secure a vote on the joint plan, and provide forbearance for DCG in time. This creates headline risk that DCG will be unable to make its May debt payment to Genesis. Expect this story to come into the forefront within days. DCG may attempt to sell its holdings of GBTC and digital assets. However, it’s not clear this would generate enough liquidity and would also cause harm to their own portfolio. Read our Twitter thread summarizing the situation.
- Franklin Templeton MakerDAO Proposal: $1.5 trillion asset manager Franklin Templeton made a proposal for the MakerDAO treasury to invest in Franklin’s on-chain money market fund with a proposed $100m initial allocation. Great step forward. That said, we believe the larger opportunity is mortgage backed securities going on-chain.
  - Why it Matters? Crypto needs to keep funds sticky in the ecosystem. Higher yields in the real world create an opportunity cost.
- Celsius Auction Heats Up: Van Eck, Coinbase, and Gemini are bidding in the Celsius auction. The auction is a key step for Celsius customers to recover funds.
Banking
- First Republic Deposits Decline: FRC announced its deposits declined by $100B. Outflows were larger than expected, and FRC is losing money due to high funding costs. FRC has no imminent doom risk since its cash exceeds uninsured deposits. However, FRC does require committed funding. One chunk of that funding is coming from $30B from competitor banks. That deposit ‘bail-in’ term is set to expire 120 days after the date of the bail-in. The market is not clear what happens when those funding lines expire. Read our thread for more FRC analysis.
  - One meta takeaway? Wealth management as a bank business model remains strong: FRC’s assets under management grew by 7% and 90% of Advisors are retained.
Banking Fears Overstated: we believe the ‘banking crisis’ fears are overstated in the near-term. It’s a good time to consider quality GSIB financials with ample liquidity, cheap funding, and sound business models. We have conviction around a handful of names.
Macro
- Markets expect the Fed to raise rates 25 bps in May: We agree - this is consistent with our ‘higher for longer’ thesis. Markets are now getting the front-end of the curve right, but are still dovish - expecting 3 rate cuts in 2023. We don’t see that happening with inflation at 5% (unless there is a break in financial markets).

Source: Atlanta Fed, Lumida Wealth Macro Chartbook

Durable Goods Shows Demand Weakness: the increase in durable goods in March was almost entirely due to airline orders, with private sector core capital goods showing a continued reversal in demand.

Source: Bespoke Research

Investing in the AI Era:
- Our early thoughts on AI-resistant assets: land, real estate, energy, select digital assets, and regulated industries like banking and healthcare. We remain excited about distressed commercial real estate as a best idea: inflation hedge, asset appreciation, and tax efficient cashflow.
- We expect the next 10 years of Venture Capital returns will be lower than average. There are exceptions to the rule. Here are two threads that share our concerns: Asset Class Performance & Quickbooks AI.

Chart of the Week

BTC dipped suddenly from $30k to $27.5k.. Markets are complex and have multiple interleaving factors so there's really no 'correct' answer. Some candidates: Coindesk Indicator Shift, DCG, Thin Market / Random Sells.

Source: CoinDesk Indices Source: CoinDesk Indices

Source: Messari, Cointelegraph

Lumida Research Spotlight

In case you missed it, we recently released our Macro Chartbook outlining our views on the following:

State of the Consumer
State of the Banks, Fed & Credit Growth
Macro & leading economic indicators

Twitter

AI & Investing: AI is increasing innovation at a blistering pace. How will VC/PE invest with conviction over a 10-year timeframe? A thread.
Takes on First Republic:our thoughts on FRC earnings and suggestions price JPM would consider buying them at.
AI Twitter Spaces replay: we hosted an AI & Crypto Twitter Spaces with a crypto fund manager, NFT investor, and a VC focused on the AI space. See here for the replay. We talk through questions such as: if AGI is truly a Singularity type, what types of investments are most defensive to disruption, and what does AI mean for the future of humanity.
AI Impersonation Acceleration: we’re starting to see AI impersonation which should increase the importance of cybersecurity, fraud detection, identity management which could be an intriguing theme for VCs.

Meme of the Week

Here is a meme capturing AI progression. Management refers to Middle Management. Executive decision making - asking good questions and exercising judgment - will be more valuable than ever. Study up on the Socratic method!

Source: imgflip

Upcoming Events

Bitcoin Miami: May 18-20th
- Ram will be on a panel about Investing
SALT iConnections New York May 18-20th

Quote of the Week

"The secret of change is to focus all of your energy not on fighting the old, but on building the new." - Socrates

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