H1 Review & H2 Outlook

It’s hard to believe that 2022 is already halfway over, but it’s equally as hard to believe how much chaos and uncertainty has descended onto markets (and the world) in just that short period time. Unlike last year, I haven’t been doing much trading or buying this year — after exiting all my crypto positions (aside from a cold storage BTC stack) in early Jan, I’ve traded some $XLE calls here and there and still have not gone long on anything (I don’t expect to for some time). Knowing when to stay on the sidelines and preserve capital has been extremely important to me; discipline is, after all, everything. Despite this, I’ve made it a point to stay engaged and keep paying close attention, partially because it’s fascinating, also because unprecedented times comes with unprecedented learning opportunities.

Just to run through a quick recap of some H1 2022’s major happenings:

  • Russia invading Ukraine (& getting their FX reserves seized)
  • Inflation continues to surprise to the upside — worst in 4 decades (now approaching 9% YoY)
  • One of, if not the, worst bond markets in recorded history
  • Companies such as Netflix and Facebook selling off +25% in one day
  • Increasingly aggressive rate hikes from the Fed (latest was 75bps)
  • Russian ruble up over 30% against the US dollar YTD
  • The de-pegging of UST and collapse of the Terra ecosystem (~$50B in marketcap destroyed over night)
  • Widespread insolvencies among crypto funds, CeFi lenders and exchanges
  • Ethereum most popular L2 application announces it’s moving to Cosmos
  • The Merge begins on some Ethereum testnets (Mainnet schedule for mid-July)
  • Japanese Yen getting crushed as the BOJ tries to hold JGB yields at 25bps
  • Worsening civil unrest and protests as a result of food & energy inflation
  • FTX goes on a bailout/acquisition shopping spree

Major Takeaways from H1

  1. The energy situation is really bad.
  • Like most people, the state of the world’s energy supply chains is not something I’d been tracking at all until pretty recently. This issue has forced it’s way into the public consciousness as a result of Russia’s invasion of Ukraine, but what I’ve learned from reading more deeply into this situation is that it very much pre-dates this conflict. A more accurate characterization would probably be to say the Russia/Ukraine conflict is actually becoming the tipping point of where we finally feel the pain of years and years of disinvestment and entirely counterproductive energy policy from Western governments. What’s become clear to me is that there’s a structural supply issue here, and when you consider the relative inelasticity of energy and how capital and labor intensive brining more production capacity online is…. the picture is bleak at best. I do expect to see an acceleration of the political and economic unrest that’s already unfolded in some countries as a result of this, and don’t think it’s reasonable to call any kind of bottom in markets until this has played out. Some amazing resources I’m relying on for this: Doomberg, Tony Greer, Tracy Shuchart

2. The real recession vs. the technical recession

  • If you ask most people what defines a recession, they’ll respond with something along the lines of “X # of consecutive quarters of negative GDP growth” and/or “X % drawdown in the stock market.” This is what we might refer to as a technical recession, which is distinct from what we might think of as a real recession, which is about a material slowdown in things like production, corporate earnings, labor/hiring, etc. We are already in a technical recession and have been for some time, but it looks like the real recession (assuming we get one) is still probably 6–12 months out, as there’s a number of areas within the real economy that are nowhere near as beat down as financial markets (yet). This is where that “demand destruction” that the Fed is trying to create should really show up — the drawdown in markets (I would argue) up to this point has more so been about *fears* of drying up liquidity and raising rates. Major credit to Darius Dale who constantly highlights this distinction, can’t recommend following him and his macro research enough.

3. Underwriting risk is the hardest part of highly-convinced long-term investing

  • With this being my first crypto winter and overall real bear market, understanding this has probably been my biggest learning from the last 2 years. Understanding the fundamentals, identifying potential winners and discerning what’s a good idea & could be transformative if successful is only half the battle — managing one’s psychology enough to execute effectively is at least as important (arguably more!) and much more difficult. The further out the time horizon and the more concentrated the bet, the more variables (and thus risk) there is to manage — which can quite easily descend into the worst kind of emotional decision-making. Subconsciously, I think that’s a large part of why find short-to-medium trading to be orders of magnitude easier than “HODLing.” When I consider how much the crypto industry alone has transformed in the last 2 years (DeFi Summer was literally summer 2020), I have little-to-no confidence in my ability to be right about anything besides macro themes beyond 30–36 months out, and heavily allocating to specific coins is the opposite of macro. Nonetheless, sustainability is a very beautiful but peculiar property and I can’t yet say I’m confident in my ability to reliably sniff it out, but working on it!

Focus, Hopes & Predictions for H2

  1. Expecting the food & energy situation to get worse in the short-term
  • I can’t keep track of how many energy & fuel related crises I’ve read about across the globe now, with the Netherlands now in the spotlight and Germany looking to be up next. It unfortunately looks like the die has been cast, and all that’s left to do is watch the chaos unfold and hope it doesn’t become totally untenable wherever you happen to live. I would actually love to be wrong here, but my suspicion is that much of the dip we are currently seeing in energy prices is exactly that, a dip, and this trend continues upward for the time-being. Absolute worst case scenario is that parts of Western Europe (and even the US) actually go dark & we see real loss of human life in the developing world due to famine.

2. The real recession enters the chat

  • As referenced in the previous section, my guess is that meaningful signs of slowing in the real economy probably start to become apparent this summer/early fall and continue through H2. I’m quite curious to see how high rates actually go — at this point I don’t have a super strong opinion on how it will play out, but I’m certainly not someone who believes everything breaks exactly at X% and the Fed put automatically kicks in. I think they actually do feel the need to bring inflation down (if for no other reason than to save their personal legacies & reputations) and will do what they can to execute on that. At this point, I’m mentally prepared to see BTC get down into the $10-$15k range and will be an enthusiastic buyer of my favorite assets at those levels.

3. Bear market dumpster diving

  • As always, I’m keeping tabs on some areas that I believe could be real catalysts for next cycle’s bullish narratives. A couple areas I’m super into (and will write more about) are 1) what Tushar Jain calls “proof of physical work,” which is essentially leveraging crypto-economic networks and incentives to build physical infrastructure in the real world. One of the earliest and most successful projects in this category is obviously Helium (building a decentralized IoT network, now expanding to 5G, WiFi, VPN, etc.), but there’s a couple more that I’m quite fascinated by, such as Render Network (GPU compute). I wholeheartedly agree with Jain that crypto bull markets have always been kicked off by discovering new token distribution mechanisms, and that this will be the next one. Looking to get my hands on some crypto-hardware (Helium miners & SIM card, Solana phone, etc.) The second is 2) the “modular” stack — I’m particularly curious to see how projects such as Celestia operate once live in production on mainnet and whether this paradigm shift is worth the hype. Lastly, but certainly not least, I’m trying to get more educated on the world of 3) zero-knowledge proofs, and how they can be useful to the ecosystem outside of the just being used for zk-rollups. I do think the conversation around privacy will beging to make its way into the forefront, but not in a crazy crypto-anarchist sort of way, moreso with regards to issues around user data, disclosure & more.

Outside of all that, my primary focus is stacking and preserving as much cash as possible for deployment next cycle.

As always, feedback & suggestions are welcome & appreciated :)

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natalie marie

natalie marie

musings of a dispassionate observer