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2023 Q1 Newsletter


2022 closed as one of the worst years for financial markets in recent history. However, the first quarter of 2023 showed significant signs of recovery across a wide range of assets. In spite of a banking crisis and potential looming recession, the crypto market proved to be remarkably resilient and is showing signs that the worst of the bear market might be behind us. In this newsletter, we provide a summary of the state of the economy, and insight into Parkour’s positioning and outlook.

Inflation, the Fed and Banking

Throughout the majority of 2022, and continuing into 2023, the Federal Reserve has continued to raise interest rates to combat inflation. Fortunately, this has been effective as month-over-month CPI continues to decline from a peak of 9.1% last June, down to 6% in February. However, this is still significantly higher than the stated goal of 2% inflation. The Fed maintains that they intend to keep rates elevated for the foreseeable future. Side effects of higher interest rates have put significant strain on the economy as borrowing becomes more expensive for banks and businesses alike. The rapidity of the rate hikes has also led to the collapse of several banks who were overexposed to bonds and securities that are highly sensitive to interest rate hikes.

The Regional Bank Crisis

The regional bank crisis began to unfold in early March, when depositors started to move money from small and medium sized banks (where they were earning sub 1% interest) into money market funds and treasury bills (where they are able to earn ~4%+). The roots of the unfolding crisis stem from as far back as 2020 and 2021, when the Fed injected massive amounts of money into the economy in response to Covid and economic slowdown fears. The Fed’s stimulative measures led to banks becoming flush with money as businesses and customers deposited excess cash. The banks then used the deposits to purchase government securities and mortgage backed securities, offering rates that reflected the near-zero Fed Funds interest rate at the time. Trouble started to brew earlier this year when short-term rates crossed 4% in concert with the Fed’s aggressive rate hiking policy.

The rapid rise in rates caught the regional banks off-guard and resulted in major mark-to-market losses on the government and mortgage backed securities. During normal economic times, this

would not be an issue, as most banks hold these securities to maturity and receive 100% of the par value back. However, as regional bank depositors started to withdraw money en masse, banks were forced into the market to sell some of these securities at a substantial loss. The mounting losses then began to cause insolvency issues for many of these banks, as they were struggling to meet the withdrawal requests due to losses they were incurring on the security sales. The crisis really began to deepen when a number of banks, including Silicon Valley Bank, Silvergate, and Signature Bank disclosed holes in their balance sheets that rendered them insolvent, or no longer able to continue to operate and meet future customer demands. While Parkour has used Silvergate bank in the past, Parkour no longer holds any assets there and had no exposure to Silvergate at the time of the crisis.

The Fed, seeing the severity of the unfolding crisis (and wanting to prevent further contagion and possible systemic failure), stepped-in with a new lending program for the regional banks. This lending program allows banks to post the government and mortgage backed securities with mark-to-market losses as collateral and receive 100% of the par value. Thereby filling the holes in their balance sheets and allowing the banks to meet all customer withdrawal requests.

So far, this new borrowing facility has been successful at preventing a major banking crisis. However, banks are still not completely out of the woods and it remains to be seen what the longer-term effects are going to be on the economy as a whole. Some analysts see the situation as a longer term “bank walk” (as opposed to a “bank run”), and there is speculation that the situation could still turn into a credit crunch that could cause a significant downturn in economic activity going forward.

Crypto Market Response

When the banking crisis began, assets across all financial markets sold-off as the uncertainty of how widespread the contagion of these banks was not known. However, Bitcoin and a few other select crypto assets are often seen as a secure alternative to traditional banking. So as the crisis unfolded, investors began buying crypto as a more reliable store of value. Additionally, the Federal Reserve announcing that they would backstop the economy and banks many would argue equates to a potential significant amount of future liquidity being injected into markets. This is a general loosening of monetary policy and could imply the beginning of a return to market conditions where cryptocurrency really thrives.

The combination of events and policy response resulted in Bitcoin breaking out of a several month channel of consolidation after a year and a half down trend. This could indicate the lows for the bear market are in, and investor focus return to the next cycle of innovation and adoption of cryptocurrency and blockchain technology over the years to come.

Looking Forward – The Path for Interest Rates

While the market has made significant strides towards recovery in the past quarter, there are a few potential concerns to monitor as we move into the rest of the year. The Federal Reserve backstopping the banking crisis, provides relief to markets for the time being. However, this can potentially create more inflation, which in turn would necessitate the Federal Reserve keeping interest rates higher for longer. According to the Summary of Economic Projections released at the March FOMC meeting, the Federal Reserve expects the Fed Funds rate to be 5.25-5.50% at the end of 2023.

However, according to CME Fed Fund futures, the market expects the Federal Reserve to raise rates one more time and then start cutting rates BEFORE the end of the year. Fed Fund futures predict the rate will be 4.00-4.25% at the end of 2023 – over a full percentage point lower than what the Fed is signaling.

This discrepancy can be explained two ways. One possibility is that markets are overly optimistic and are pricing in rate cuts sooner than they will actually occur. This is the bearish case, as it would mean the market would need to reprice assets according to a more extended high interest rate period. The other (bullish) possibility is the Federal Reserve will end up cutting rates at some point later this year, but they are choosing to posture more aggressively in order to keep markets from becoming over-exuberant. This has been a tactic used by the Federal Reserve in the past because expectations for inflation often lead to actual inflation. Managing the expectations of the market can be just as important as setting policy. Monitoring the Federal Reserve’s actions and verbiage in the coming meetings will be key to understanding which scenario will play out.

Parkour Update and Outlook

Given the support that the cryptocurrency markets have found, we believe the worst of the bear market for crypto is behind us. Additionally, decreasing inflation, a softening Federal Reserve, and the next halving event for Bitcoin in early 2024 make a strong case that we are at the beginning of the next bull cycle for crypto.

As has been stated in previous communications, the Parkour fund has been primarily out of the market for the past year (since Bitcoin was around 40k) in an effort to wait out the majority of the bear market and properly manage risk. Our strategy to re-enter the market is not to try to buy the exact bottom; we do not want to attempt to “catch a falling knife” and rebuy as things are still falling. Instead, we have been waiting for confirmation that the market is recovering and re-enter on the beginning of the upswing to extract maximum value from a trending market. If we look at how Bitcoin created a bottom during the previous cycle in 2018, we see that Bitcoin traded between $6,000 and $8,000 for several months before finally bottoming around $3,000. Market participants trying to time the bottom and “catch the falling knife,” began to buy at each attempted bounce around point A on the chart below. The market finally bottomed at point B, but it was not confirmed that the bull market had returned until there was a clear break of the consolidation channel at point C. It should be noted that buying at this time at point C returned over 1200% during the next 2-3 years.

Looking at the Bitcoin market over the past year, we see a similar pattern forming. After a long period of consolidation, we see the price of Bitcoin breaking out of this channel and confirming the beginning of an uptrend to start the next bull market. This point in the cycle appears to be analogous to the aforementioned point C in the above figure for 2018.

Parkour has made aggressive moves to reallocate our liquid assets back to our target allocations for Bitcoin and Ethereum. Since then, both have continued to rise to new 52-week highs.

While there are still some potential concerns surrounding the path of interest rates and market recovery in the near-term, we also want to highlight the potential for where things may go from here.

Historically, Bitcoin has followed a 4-year cycle centered around Halving Events where the reward to mine Bitcoin is cut in half. The next halving event is projected to occur around April or May 2024. This, combined with loosening monetary policy, an eventual recovering economy, and ever-increasing innovation and adoption in the blockchain space, sets the stage for the next crypto bull market to reach levels far beyond previous all time highs over the next few years.

The Parkour Team

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