Will the Fed Thread the Needle? with Itay Vinik

Bankless Nation, welcome to the state of the nation, where today we are asking the question: can the Fed thread the needle? Can the Fed thread the needle between inflation and a recession? We've been going on this world tour of macro. It started with the banking crisis, the bology, bit signal, followed by Arthur Hayes, Ben Hunt, and finally Jim Bianco. And so Bankless Nation, while this is a macro episode, the conversation here today is not a part of that macro world tour. Today we are bringing back on Ite Vinnik. We've had him on once before. He is coming equipped with a mass of graphics, slides, charts to walk us through an extremely thorough audit of the US economy, the banking sector, the equities market, risk assets, and interest rates and inflation, all in the hopes of answering can the Fed thread the needle between decreasing inflation while not triggering a recession? So, just a snapshot this we have core inflation that is yet to turn over. That thing is still up and to the right. We have consumer health running on fumes, and we have a Federal Reserve that is still increasing interest rates in the face of a banking crisis. Etai thinks the next three months are critical to seeing what happens next in global markets everywhere. And he's going to walk us through all of the data to help us understand this picture. Bankless Nation, this is a very, very visual heavy podcast. So if you have the luxury of watching this video on YouTube or on Spotify, this would be one of those episodes to do that. Although I do my best to articulate the charts and the vibe along the way for all the podcast listeners, it would be useful to be able to watch this visually. Ryan, the AI, is powered down for today's show. It's just me, but Etai is a fantastic guest who's in the driver's seat for this show with all the slides. Bankless Nation, I want to introduce you to Etai Vinnick. He is the co-founder and chief investment officer at Equi, an alternative investment platform that brings sophisticated investment strategies to accredited investors. And ETI has been on banklists once before. And of course, the goal of uh Equi is to make non correlated investment strategies accessible to as many people as possible. The last time we had ETI on banklist, it was December of 2022.

And back then, things were uh kind of dark, I would say. Uh post-FTX, crypto hadn't recovered yet, Fed still looks like it was gonna continue to punch us in the stomach over and over again.

And so we are bringing him back on today to ask, perhaps.

Has anything changed as it relates to the Fed policy, to the United States economy, and also perhaps our beloved risk assets as well? Etai, welcome back to the show.

Thank you so much for having me. Uh it's a pleasure to be back here.

Like I said, Etai, the last time we brought you on, December of 2022, uh, there were four main points of conversation, uh, four main themes that we had, four main questions. The first was how did we get here?

Here being uh wrecked, at least in risk risk assets, but also with just high interest rates and uh no end in sight for the Fed raising interest rates. And then the next question is where are we now?

In the crypto land, in the status of the United States economy. The third was, when do we pivot? And the fourth was, is this the end? And at least for these last two, I remember the answer being uh no, this isn't the end. Uh, but it does seem close. And in the the conclusion of that episode is that you estimated some sort of pivot, some sort of uh revitalization of

the stock market, equities, uh, even perhaps risk assets, sometime around the middle of 2023.

So here we are in early April. Uh, and it's about that time to start to revitalize this conversation, return to this conversation. Uh, so to start this conversation off, before we get into your updated April 2023 slides, is there any sort of uh reflection or anything you want to say about that snapshot in time that we talked about uh last December?

Um yeah, I think it was really uh interesting and things have pretty much progressed um

with along expectations in a way. Um it's typical that

Fed hiking policies break something.

We didn't know what that something would look like at that time. But we knew it's going to go. If you recall, we talked about it going from crypto world at that time, FTX and the liking into the real world. And now, you know, we've we're behind SVB, Signature Bank, and potentially others. So we've seen that leak going here. And I think now is really the most interesting time.

As you know, what uh that that old quote used to say that

sometimes years happen in weeks. I think we're approaching uh one of those times in the economic cycle.

Right now we are, you think?

I think, yeah, I think within the balance of this year is going to be incredibly interesting as many inflection points in macro pointing to.

A really unique End 23.

Okay, so um before we get into again the the the the updated slides that you have for us and the updated perspective that that you're going to bring to the table here in this episode, I just want to provide a little bit of uh context for listeners about uh who you are, your skill set, your background, and also what Equi is and why we have so many fantastic things to look at, just to provide some context for listeners. So let's start with that. Who who are who are you, Itai? And then also what is uh Equi and what does it do?

Yeah, so I'm the CIO, chief investment officer, and co-founder here at Equi.

ECWI is basically a digital tech platform that enables an accredited investor

with a relatively low dollar amount to build a diversified portfolio of many alternatives,

various types of, let's say, hedge fund strategies, credit strategies, other things that are not necessarily correlated with the stock and bond world. And I think in these types of times, it's one of the more unique.

Um things you can invest in. And I obviously I wouldn't be doing it otherwise, but I think there's a greater need for diversification outside of the traditional investing world.

Mm-hmm. And uh the actually the way that this second show came about was I ran into to your co-founder uh and he was talking about uh just he said he said that you had some perhaps doom and gloom as it relates to the Federal Reserve. Uh so so we'll we'll get into that as well. But um can you just like give a preview of uh the performance of of what some of these products that you have for the for and like the composition of them, just so we can understand the the base.

Yeah. So the broader type of equity portfolio has 13 to 15

uh diversified investments. Some of them are somewhat correlated to markets, but capture a higher beta, some of them are not.

We initiated what we called Equihedge in February of 2022 when we saw that correlation picked up, even across managers that are not supposed to be correlated as a way to somewhat offset risk even more. So in 2022, which I believe was one of the most challenging investing years really since the global financial market uh crisis in 2008,

uh, our flagship growth and income fund was slightly positive, about positive 1% with very low beta and correlation. The more aggressive growth fund um was flat to maybe negative uh 40 or 50 basis points or something of that nature. So um flat performance, I would say, in 2022 uh for the broader flagship.

Um, is something to be proud of in a year where uh the 6040 portfolio is down nearly 20%, treasuries are down, crypto is down at 70%, gold is down, like uh everything was down. There was almost nowhere to hide. So proud of that fact. We also have a fund that we manage internally as well that is a tactical macro fund based on the macro calls. Um, that was actually up around 20% for 2022.

Okay, so um I don't know if I represent the archetype of bankless listeners, but uh bankless listeners would definitely know that more or less 100% of my personal portfolio is crypto assets. And so starting there at that base, uh, what is the composition of uh the if you could just amalgamate everything? And maybe that's an unfair question, but uh we could like do your best. If you could just amalgamate everything, what what is the composition of some of these things that we're talking about? Just so we can get some context before we go into some of these charts and slides here.

Yeah, so the flagship fund is really a collection of various types of strategies. So you have some small business lending on one end, um, you know, that's backed by some collateral all the way to macro systematic uh funds that

uh would trade currencies, interest rates, uh, things of that nature, and everything in between. So it's really a very diversified uh basket of uh of alternatives that we really try to keep as low uh correlation to risk assets as humanly possible.

Okay, so uh the average crypto person, again, I would say is heavily concentrated in crypto. And when we hear diversification, like uh at least a decent part of many of listeners will be like, oh yeah, different NFT collections or

Bitcoin and Ether, in addition to like some small caps. But so we're talking about what kind of seems to be

completely opposite end of the spectrum in terms of just like what actually diversification means. It's in we're talking like real world traditional markets diversification.

Right.

Uh and so uh and so this is like the the right perspective to go into when we talk about some of the these uh slides and conversations that we're about to go into, correct?

Right. So one of the things that I think is of note is that institutions, uh, large family offices, endowments, and things of the liking, um, since the 1980s have been moving their portfolio more and more into alternatives and less and less into stocks and bonds. And that's actually in response to this decades long declining interest rate environment we've been in, right? So interest rate peak in the 81, 82 in the mid double digits on the 10 year uh treasury and have been going down towards zero in 2020. Now they've gone back up towards 4%. But

As you're getting less juice from bonds, um, and also valuations have gone become very rich with that. Um, most of these institutions have shifted the portfolio into alts, um, you know, 50% all the way to 80% in some family offices. And the traditional um retail investor just doesn't have access to any of those. So um that's really the mission behind neck. We did we thought that bringing that type of portfolio to the average investor is something that we believe the market is um

is looking for.

Yeah, and and when you say alts, you're not meaning uh alt layer ones or uh uh crypto alt tokens, right? These are uh again uh alternative asset classes, correct?

And particularly strategies. So even when you dig into that, not all alts are created equal. There is a huge difference between the top 5, 10% of outperformers and the

bottom of the pile. And there's a ton of funds out there that are

just buying risk assets and charging a high fee for that. So those are not the ones we're looking for. We're looking for unique strategies, we're looking for differentiation, we're looking for much lower correlation than uh traditional assets. So it's a big difference between I own stocks, bonds, and crypto, and I have all these different hedge fund strategies that each one does something totally different.

Right. Okay. So I hope that was helpful for bankless listeners and myself to really um understand where where you're coming from and where your expertise lies. And I hope that can um just be good context for as we go through some of the these uh these conversations. Uh so like I said last time in December of 2020, when we had you on, there were there were four main questions. How do we get here? Where are we now? When do we pivot? Is this the end? Uh uh Itai, I believe you're coming to the table with four new questions. So so maybe it's time to break open the slides and we can start to talk about these high level discussions that we're gonna go through today.

Yeah, let's dig right in.

So, starting this, uh, the topics for today, uh, we're going to talk a little bit about the macro environment and the overview of what led to these bank collapses that we've heard about.

The biggest question, again, is do the bank failures actually make the Fed pivot? Um,

as of the last

few weeks, at least, uh, it seems like the market is convinced that that is the case.

We'll dig into that and see whether or not that is true.

We'll talk about the positioning in the current economic environment, some of the future of the banking system. And generally, we're still going to try to answer the question of whether or not we're going to have the soft landing, hard landing, or catastrophic landing, because regardless of the Fed pivot, that is actually going to guide the prices of risk assets even more so.

There is a lot of dependency on the Fed, but the Fed is not the only game in town.

Okay, beautiful. And I remember uh the last conversation, uh, this also is where this started and ended is soft landing, hard landing versus catastrophic landing. I think that's kind of the overarching theme here is can the Fed thread the needle? Uh and so uh

Itai, if you could just uh run back us in time to December of 2022 when we last had you on versus where we are now. Did the ability for the Fed to thread the needle and get us to a soft landing, no recession?

Below trend trend growth, that's fine. Uh, did that needle get bigger or smaller?

I think their job has become incrementally more difficult.

Yeah, incrementally, so not not crazily, just just as a little bit. But