Noahs' Arc 2021 Q4 Newsletter
Happy New Year's!
Happy New Year’s, and welcome to our 4th Newsletter! This one’s a bit more focused on current events than the particulars of our strategy - that being said, we’ll be launching our first White Paper sometime in January with a detailed overview and articulation of our investment thesis and strategy; more on that below.
No aspect of this material is intended to provide, or should be construed as providing, any investment, tax or other financial related advice of any kind. You should not consider any content herein or any subsequent services provided to be a substitute for professional financial advice. If you choose to engage in transactions based on the content herein, then such decision and transactions and any consequences flowing therefrom are your sole responsibility. Noahs’ Arc does not provide tailored investment advice to any person directly, indirectly, implicitly, or in any manner whatsoever.
Executive Summary
Our Performance: Overall, we’re happy with our strategy’s performance this fall, having outperformed our benchmark while maintaining tail hedges.
Q4 in Review: We’re passively watching the tech sector as equities have started to come under pressure while rising interest rates presented new, attractive alternative investment opportunities. Still, there might be some cash sitting on the sidelines…
COVID + Inflation: As COVID reaches its second year, we discuss why we believe inflation will get worse regardless if COVID shuts down the economy again or abates all together.
Launching a White Paper: This will be an all inclusive explanation of our strategy and the “why” behind it. If you’re subscribed to this newsletter, you will get it in your inbox when we publish in mid-January.
Fall in Review: On a personal note, we look back at what we’ve been up to during Fall 2021.
Our Performance
After putting money back into the market early in the fall (September 20th) to build an official track record, we’re satisfied with our performance. We’ve been able to outperform our benchmark while maintaining our tail hedging protocol.
For more detailed information, after 6 months of consecutive performance, we will be having our track record reviewed by a third party - if you are interested, it will be available for review in a month or so.
Q4 in review
Since the end of Q3 and throughout Q4, the market’s increased volatility, mainly concentrated in the tech sector, has trickled down into general market funds; no surprise, given the weighting of tech stocks in many of these portfolios.
It appears that investors are realizing that our continually increasing money supply will likely make inflation less “transitory” and more permanent than many had originally expected. This may be a contributing factor to the pull back in tech as investors re-allocate to sectors that are better positioned to resist or even benefit from inflation. Of course, some of these nosebleed level valuations may have been prone to return to Earth regardless of the recent market shift. Still, we’ve outlined a few potentially interesting examples of industries poised to gain from inflation in our Q3 newsletter.
The WSJ touched on a particular model that may gain from the devaluation of the dollar in its December 27th issue: the Journal found that for every 100 basis points that the Federal Reserve increases interest rates, banks such as Bank of America could see their net interest income (revenue from loans made) increase by $7 billion per year. Since most of the capital for these loans is already on their balance sheet in the form of deposits from customers, we’d expect the profit margin to be healthy and to have an immediate effect on the bottom line. For reference, Bank of America’s current annual revenue is $87 billion. This is an example of an inflationary business model that is beginning to show an opportunity to grow revenue and profits in a nonlinear fashion, not far off to one of the principles that has been an appeal of tech companies.
While we remain cautious and (as always) hedged against an overall market correction, no one can ever know if the market will necessarily experience a dot com level bust in the next week. After all, there is still an unbelievable amount of capital on the sidelines that could be deployed at any time. The WSJ recently noted that $900 billion is earmarked for tech and growth companies in the form of PE funds, growth equity, SPACs and traditional VCs. In fact, SPAC issuance has jumped in the past quarter, re-approaching the levels we saw in the spring of 2021, with an average of 3 SPACs a day being launched in December. While the public markets are beginning to tame in the valuations of high flying tech names that trade at 50 times sales, many investors may continue to hold the belief “my investment is different.” As long as there continues to be 1-2 success stories like Tesla or Facebook/Meta per 10 failed tech ventures, there is good chance that there are those waiting to pour billions into tech startups, whether that be in private markets with VC’s or public markets with SPAC’s. Capital markets are flush, and it looks like they continue to favor founders and their companies vs. investors in valuation negotiations.
COVID + Inflation
As COVID nears the completion of its second full year of wreaking havoc on our world, it’s clear, now more than ever, that it will have lasting effects on the global structure, regardless of whether it ends in 3 months or five years.
As we have been reiterating since Spring, the monetary response to the pandemic has created too much money for inflation to disappear overnight. Insane amounts of money have been printed since March of 2020; the economy cannot likely just absorb it without meaningful, long term price increases. Click here for our earlier discussion on it.
So regardless of what happens with COVID, we believe inflationary pressure will remain:
1. If COVID is here to stay, continued supply chain disruptions can cause perpetual price increases. Then, if employers raise wages to adjust to rising prices and a tight labor market, these increased prices become harder to move away from and more than likely will only stay flat or move up.
2. If the world decides that COVID is truly tamed in a relatively short time, perhaps 6 months, we still think there is a probable situation in which global inflation continues. While much of the US has returned to a new normal with masks, vaccinations, and testing, much of the globe has dealt with rolling waves of variants and vaccination shortages by continuing to keep their economies locked down. Canada, Western Europe and China are great examples, with consumer travel and leisure spend tracking way lower than in the United States, more than likely due to stricter lockdown policies. These consumers, who have surplus savings much like we have had, haven’t spent nearly as much. If the whole world is reopened in a synchronized fashion, unless global consumers adopt a new, frugal mindset, it would not be surprising to see global demand for core commodities explode. Of course, this will only further ratchet up global prices, decreasing purchasing power.
Perhaps most surprisingly, a scenario where the whole world rids itself of COVID in a short period of time is a non-zero chance. Right now, the world is dealing with the Omicron variant. This far more contagious and theoretically less harmful variant is creating new case highs in more parts of the globe at the same time for the first time since the pandemic started in March of 2020. That is, most parts of the globe are getting sick at the same time, unlike with past variants which saw delays and unsynchronized cycles. So, if global immunity (from booster shots plus infections) can reach a critical threshold, we may escape the pandemic. History provides the Spanish Flu as an interesting point of reference - it was eradicated when the virus evolved from deadly to become more like the common cold. The story is hopefully fore telling; we’ve attached a link here.
To be clear, we are not arguing for everyone to go get sick (this will likely destroy our fragile healthcare system). Rather, we see it as inevitable that most people will either get this variant or become vaccinated in a way that makes them mostly immune to it, increasing our conviction in the second scenario.
White Paper
While we put our money back in the market in September and we feel good about our strategy, we’ve yet to formulate the bulk of our investing thesis into one, concise place. You may have been able to develop an understanding of our thesis scattered throughout our last four letters, but we’ve decided to articulate it all in one place.
We’re currently finishing up a White Paper outlining the strategy and rationale and hope to have it available by mid January. We’ll be sure to send it out via this newsletter so it will land in your inbox to check out! Of course, as always, we will be more than happy to chat about your thoughts on it and will appreciate all feedback.
Recap of fall and looking into winter
On a personal note, the fall has been a busy semester for us. Being in person at the University of Michigan, going to football games, trying new Ann Arbor restaurants, and even remembering what it feels like to walk to class in a blizzard are, quite frankly, the things we missed.
Still, we’ve both been up to a bit. Asides from work on this venture, both of us published books this fall: Noah Cox released a personal memoir called Squirrel Town, a coming-of-age story about building tree houses and growing up meant to remind the reader of their youth; Noah Jacobs wrote variants on a coded life, a poetry collection that uses a survey and AI to craft a custom collection of poetry in a one-of-a-kind book tailored just for the reader.
Additionally, we have made a bit of time to travel this semester, with both of us visiting Mackinac Island, and Jacobs making it out to the West Coast for a weekend, as well as taking a brief backpacking trip near the Great Smoky Mountains.
We’re looking forward to a busy winter as we go full steam ahead with our venture and can’t wait to see where it takes us. In the meantime, we hope everyone has a happy and healthy New Year. And of course…
Beat Georgia!
GO BLUE!!
-Noah & Noah
DISCLAIMER
> The information and opinions contained in this newsletter are for background purposes only and do not purport to be full or complete. The information herein is not personalized investment advice or an investment recommendation on the part of Noahs’ Arc. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein, and no liability is accepted as to the accuracy or completeness of any such information or opinions.
> All investments involve the risk of a loss of capital. Noahs’ Arc believes that its proprietary investment program and research and risk-management techniques moderate this risk through the careful selection of portfolio investments. However, no guarantee or representation is made that our investment program will be successful, and investment results may vary substantially over time.
> Certain information contained in this document constitute “forward- looking statements,” which can be identified by the use of certain terminology, such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof, or other variations thereon or comparable terminology. Any projections or other estimates in this document, including estimates of returns or performance, are “forward- looking statements” and are based upon certain assumptions that may change. Due to various risks and uncertainties, actual events or results, or the actual performance of any investment vehicle, portfolio or product described herein may differ materially from those reflected or contemplated in the forward-looking statements. Actual events are difficult to project and often depend upon factors that are beyond the control of Noahs’ Arc.
Just read the Q4 newsletter and loved it! Concise summary of the year and provides plausible alternatives for how 2022 might shape up. Keep up the great work guys!