Hello there,

A terrific Thursday as stocks sank lower on concerns over higher oil prices sapping growth at a time when tighter central bank monetary policy already risks recession.

In brief (TL:DR)

• U.S. stocks sank on Wednesday with the Dow Jones Industrial Average (-0.81%), S&P 500 (-1.08%) and the Nasdaq Composite (-0.73%) all lower on inflation concerns, fueled primarily by a surge in oil prices.

• Asian stocks fluctuated Thursday as investors were rattled by fresh Covid-19 testing lockdowns in a district in Shanghai, China's key financial center.

• Benchmark U.S. 10-year Treasury yields soared to 3.051% (yields rise when bond prices fall) as inflationary pressures shook sentiment for bonds.

• The dollar rose slightly in Asian trading.

• Oil gained with July 2022 contracts for WTI Crude Oil (Nymex) (+0.26%) at US$122.43 after U.S. stockpiles tightened further.

• Gold fell with August 2022 contracts for Gold (Comex) (-0.05%) at US$1,855.50.

• Bitcoin (+0.30%) was flat at US$30,246, but could slide below US$30,000 again as investors look to key inflation data out on Friday for further clues.

In today's issue...

1. Private Equity Primed from Private Valuations

2. Goddess of the Good Times Cathie Wood Declares Inflation Peaked

3. Ethereum Moves Closer to Major Blockchain Milestone

Market Overview

Depleting U.S. stockpiles of oil are fueling concerns that the key energy source may continue to rise in price and increase inflationary pressures at a time when central banks are tightening monetary policy.

Even if there is an end to the Russian invasion of Ukraine, sanctions on Russian energy exports may persist for longer, meaning that a major source of crude remains off global markets and continue to put upwards pressure on energy prices.

Asian markets were mostly lower on Thursday morning with Tokyo's Nikkei 225 (+0.16%) up marginally, while Seoul's Kospi Index (-0.49%) and Hong Kong's Hang Seng Index (-0.18%) up, while Sydney’s ASX 200 (-0.92%) was down in the morning trading session.

1. Private Equity Primed from Private Valuations

• Private equity is seeing record inflows from institutional investors and family offices keen for higher returns outside of the public markets.

• Investors should be cautious that the opacity of private equity, which helps with returns, is a double-edged sword and lends itself well to price manipulation.

In quantum mechanics, Schrödinger’s cat is a thought experiment that illustrates a paradox of quantum superposition.

In the thought experiment, a hypothetical cat may be considered simultaneously both alive and dead as a result of its fate being linked to a random subatomic event that may or may not occur, and its state is only confirmed when the observer looks at the cat.

Which may be why private equity is seeing a resurgence of late.

Investors, perhaps weary from observing their portfolios of listed and published securities are increasingly looking to more opaque vehicles such as private equity, where there is only finality of price during liquidity events.

And that may explain why money managers at family offices managing vast fortunes for wealthy individuals have increased their allocation to private equity from about 15% in 2019 to a whopping 20% last year, the largest gain for any asset class.

As a family office manager, you can’t be fired for poor performance since that performance hasn’t been crystalized yet.

And a report by Swiss bank UBS, suggests that many more family offices plan to keep putting money into private equity.

The UBS report, based on a survey of some 200 family offices that each manage more than US$2 billion on average comes despite worries that tighter monetary policy will cool the economy and expose weaker private equity firms, especially heavily leveraged ones.

Despite these risks, many family offices appear to be confident in private equity’s ability to deliver superior returns because of tighter due diligence and privileged relationships with top managers that have the inside track on exclusive deals.

Public markets have continued to disappoint since central banks started tightening and understandably institutional money, from pension funds to large asset managers, are having to look elsewhere for returns.

Drawn by the promise of higher returns and as potential inflation hedges, a McKinsey report suggests that private equity has grown to manage over US$6 trillion.

Much of this reallocation of resources to private equity has come at the cost of bond exposure, which has seen a steady decline.

Nevertheless, investing in private equity can be a tricky business, especially as the rush of new money and players into the space, at a time when dealmakers are waiting to deploy a record cash pile from the pandemic, could see more investors chasing fewer quality deals.

And private equity firms may be tempted (some are already doing so) to “wash trade” companies amongst themselves to gin up their valuations and attract higher fees.

2. Goddess of the Good Times Cathie Wood Declares Inflation Peaked

• Ark Investment Management's Cathie Wood declares that inflation may already have peaked, pointing to massive inventories at American retailers.

• Even if inflation has peaked, it's less clear whether the U.S. Federal Reserve will reverse its current policy course.

Cathie Wood’s Ark Investment Management, the darling of the tech boom and primary beneficiary of loose U.S. Federal Reserve policy suggests that inflation may have finally peaked.

The past year have not been kind to Wood and her suite of innovation-inclined ETFs which invest in shares of companies pursuing disruptive technologies.

Despite a drubbing, there haven’t been significant outflows from Wood’s various ETF products, and instead, there have actually been some inflows.

Now Wood is suggesting that massive inventories held by U.S. companies, which stockpiled goods last year in anticipation of supply chain disruptions, have a shot at keeping inflation down.

In an interview with Bloomberg Television on Wednesday, Wood noted,

“I’ve never seen inventory surges like this in my career and I’ve been around for a long time. This inventory issue highlights the cyclical reason we’ve been saying we think inflation will unravel.”

Major American retailers amassed stockpiles last year amid pent-up pandemic demand and supply chain bottlenecks that led to over-ordering, but now retailers are having to contend with excess inventory and some are even resorting to sales to clear stocks.

Wood’s flagship Ark Innovation ETF is down by over 50% this year alone but so far outflows have been stemmed and many investors remain convinced of her ability to pick winners in the long run.

If Wood’s contention is accurate and inflation has really peaked, the bigger question is whether the Fed will revert to a more accommodative monetary policy that could see a sharp turnaround and leg up for tech and growth-biased investments, which would be a huge boost for Ark Investment Management.

All eyes will be on the U.S. Labor Departments’ Consumer Price Index data due on Friday which will confirm whether the pace of price increases has moderated.

3. Ethereum Moves Closer to Major Blockchain Milestone

• Ethereum completes successful upgrade of Ropsten testnet, taking it one step closer for major software upgrade of the mainnet.

• Ether's price may not necessarily enjoy an uplift even if The Merge software upgrade of Ethereum proves to be successful as long-term issues such as network dominance, transaction fees and competing blockchains have yet to be adequately addressed.

Ethereum’s latest software upgrade on its Ropsten testnet has been a resounding success for the world’s most heavily used cryptocurrency blockchain network.

Developers ran the latest software upgrade known as “The Merge” on one of Ethereum’s Ropsten testnet, one of several testnets that programmers use to test their upcoming decentralized applications.

Ropsten is one of Ethereum’s oldest testnets and used by developers to find potential bugs and glitches before moving their applications on to the main blockchain, or the mainnet.

The Merge worked on Ropsten without any major glitches.

Although The Merge was carried out on other testnets earlier this year, Ropsten is see nas providing the most realistic technical environment and the best estimate for the outcome of when the main Ethereum network merges later this year.

The Merge will mark a significant upgrade for the Ethereum blockchain, the world’s second most valuable blockchain and most heavily used, will be shifting to a proof-of-stake system to secure transactions.

Whereas Bitcoin uses proof-of-work, which many have criticized for its energy consumption, proof-of-stake will enable existing holders of Ether to “stake” their cryptocurrency to act as validators of transactions, negating the need to mine cryptocurrency using specialized computer equipment.

Although many investors believe that Ethereum’s switch to proof-of-stake as bullish, the macro climate has not been favorable for the cryptocurrency which has continued to decline alongside other risk assets.

The Merge is expected to reduce Ethereum’s carbon footprint by 99% and slow issuance of new Ether tokens, which some suggest could give a boost to price.

But others are concerned that The Merge will not address some of Ethereum’s biggest issues such as high gas fees, network congestion and the rise of competitors, which have seen usage on Ethereum fall.

It could very well be a case of buy the rumor and sell the news and investors could be surprised after a successful upgrade of the Ethereum network precipitates a sharp fall in the price.