It’s unmistakably palpable that the investment world around us is rapidly changing. The Fed is probably running full speed towards no-gimmicks recession (in a recent research note, Goldman Sachs predicted a 35% chance for the U.S. economy to enter a decline cycle within the next two years as a result of the Federal Reserve’s rising dilemma of how to effectively curb accelerating and even refueled by geopolitical developments global inflation without hurting the economy).

Graph 1. U.S. Treasury Yield Curve Rapidly Steepening

The truth is that based on the common market expectations of rapid interest rate hikes, the U.S. Treasuries look apparently overvalued, and no-one knows if their eventual reality check would be comfortably smooth or violently abrupt. This makes conventional investors increasingly nervous and reluctant to invest in traditional asset classes. Current banking Q1 earnings numbers are muted at best. Netflix blatantly blew it. Let’s see how good will be FAAMNG stocks and carmakers beyond Tesla – especially, their own guidances – facing rising costs because of the sticky inflation amplifying the well-known Covid global supply disruption issues.

 

For example, according to CNBC, on Tesla’s Q1 earnings call, CEO Elon Musk said Tesla absolutely wants to make EVs as affordable as possible still, but lamented that pricing can be a challenge in the face of shifting macroeconomic conditions. Musk also said he thinks that inflation is worse than reported and is likely to last all year in 2022. Musk’s remarks came in response to an analyst’s questions about recent price increases for Tesla vehicles, and how Tesla plans to make good on its longstanding goal of bringing fully electric vehicles to the masses, in part to reduce people’s reliance on fossil fuels.

 

The CEO said, “I think the official numbers actually understate the true magnitude of inflation. And inflation appears to be likely to continue for at least the remainder of this year.” In some cases, Musk said, Tesla suppliers are requesting 20% to 30% cost increases for parts from 2021 to 2022. What’s keeping costs down at least in the short term is that we have locked in contracts with suppliers. Those modular contracts will obviously run out, and then we’ll start to see potentially significant cost increases.”

Graph 2. U.S. CPI (Consumer inflation rate)

 

As a result, many investors prefer waiting on the sidelines, but they cannot stick to the wait-and-see approach for longer than they can afford to. Those who overstayed in equities – especially, in Nasdaq names – will likely see their opportunities of jumping out while minimizing losses – fizzle.

The recent online crypto investment event hosted by CFA Society of Austin, TX USA demonstrated that top investment managers located by both coastal sides across the Atlantic are getting increasingly serious about portfolio investments into this emerging class, and mounting fears that the world economy can abruptly tip only spur this process. Simultaneously, famous Bitcoin investor and advocate Cathy Wood running her well publicized MicroStrategy fund, is getting more and more high profile followers.

Next in the, so to speak, DJ lineup appeared the true heavyweight BlackRock with AUM (assets under management) of $10 trillion. Now, in addition to managing the primary cash reserves of USD Coin (USDC), a $50 billion digital asset available on blockchains including Ethereum, Solana, Algorand, Stellar, Avalanche and Flow, and pegged to the value of the U.S. dollar, BlackRock has entered into a broader strategic partnership with Boston-based Circle, one of the primary issuers of USDC. This was announced yesterday alongside a $400 million funding round raised by Circle from BlackRock, Fidelity Management and Research, Marshall Wace LLP and Fin Capital. Circle is planning to make a public debut via a SPAC deal, valued at $9 billion, by the end of this year.

According to Forbes, five years ago, BlackRock’s chairman Larry Fink remarkably mocked at the cryptos calling Bitcoin an “index of money laundering.” So when Fink wrote in his annual letter to shareholders, published in late March, that the havoc caused by geopolitical developments in Russia and Ukraine could accelerate the adoption of crypto currencies, many interpreted it as a sign that the financial behemoth is finally changing its worldview, which cannot come and go unnoticed by its industry rivals.

While BlackRock declined to comment on the particulars of the deal, according to its recent Q1 earnings call, it is looking at more than just cryptocurrencies and stablecoins, towards asset tokenization and permissioned blockchains. In June, it was reported that BlackRock was looking to hire a blockchain lead.

The partnership with Circle appears particularly noteworthy because it is the first digital assets engagement that involves the BlackRock’s own proprietary investment position. Previously, the asset manager was credited with having exposure to crypto through a 7.3% stake in Cathy Wood’s MicroStrategy (read above) with nearly $5 billion worth of the cryptocurrency, and a few dozen contracts of CME Bitcoin futures, USD cash-settled contracts based on a once-a-day reference rate of the U.S. dollar price of bitcoin. But those investments were made through BlackRock’s subsidiaries or funds that manage clients’ assets.

The deal is also a major victory of approval to USDC, which is a clear sign of the expanding regulatory adoption. Its market capitalization grew from $4 billion at the beginning of last year to over $50 billion today, but still shy of Tether’s $82.5 billion. Speaking to Forbes, CEO of Circle, Jeremy Allaire said the partnership will “explore ways to apply USDC in traditional capital markets.” Though Allaire added that the relationship has been developing for almost a year he did not disclose what percentage of the stablecoin’s reserves BlackRock is managing or other details of the partnership.

USDC, launched by Circle and Coinbase four years later, was also criticized for its opacity in declaring its reserves, specifically when it came to the size and creditworthiness of commercial paper and corporate bonds underpinning the asset. However, last August it adjusted its risk strategy and pledged to only back the asset with physical cash and treasuries. It has also applied to become a national bank. Now, with BlackRock’s support, the stablecoin hopes to find a footing as the go-to digital asset for traditional financial institutions and investors. Now, with BlackRock’s support, the stablecoin hopes to find a footing as the go-to digital asset for traditional financial institutions and investors.