During the COVID-19 pandemic, articles and “experts” continue to suggest doubling down in equity markets even while the main street economy is sinking. Although there are quality investment opportunities, they must be evaluated more carefully as most asset classes will not behave as they have in the past due to hefty government interventions. Most calls for investment action through the end of 2020 are premature, even to the point of naiveté. Political uncertainty combined with uncharted monetary and fiscal policies requires unprecedented thinking. The real downward trend of many market sectors hasn’t begun.

So, what to do with cash reserves in a hyper-quantitative easing and multifaceted fiscal stimulus environment? Many choose to hold cash until enough of a downturn allows asset acquisitions internationally for pennies on the dollar. Yet, holding cash for too long risks depreciation. Some will seek equity plays in businesses they are familiar with. However, unless your business sector is one of the few benefiting from higher pandemic sales, changes in business models may produce a different ROI than past performances. Traditional safe havens are performing mediocrely (precious metals) or generating little to no yield (bonds). So, where are we now, and what’s considered good positioning during this great uncertainty period sponsored by COVID-19?

Traditional Markets

Cash is again king, but with so much currency created, by every central bank on the planet with the means to do so, cash quickly loses its luster in the post-COVID-19 world. The U.S. Treasury via the Federal Reserve is attempting to support markets at unprecedented levels, but they work with blunt tools and are not detailed specialist investors. Only those who are targeted and closest to the money will benefit. Thus, even with near-term bonds and equity prop-ups, stagflation may be the best hope for the next several years as the real economy seeks to adjust. Zombie and underperforming companies will continue to survive and appear to thrive, which could offer up mega bull traps. The true market price becomes more and more difficult to discover.

 

During such uncertainty, volatile price swings will affect traditional safe havens such as precious metal commodities. When investors are forced to make market margin calls, large liquidations of assets such as gold or T-bills will help cover positions. Thus, even safe harbors will take in burning ships. Public shares in general may fair better than private equity, but what is the tell for things going back to “normal”? Unfortunately, there is a new normal from here, but there’s one canary in the coal mine of the post-COVID-19 market, the Federal Reserve’s balance sheet. Hopefully, the Fed will sell its balance sheet assets quickly and unwind Treasury’s Special Purpose Vehicles. When within a 3–4 trillion balance sheet range, it will signal a new thriving economy and less burden on the U.S. Treasury, and thus future tax payments, for trillions of debt. This is if they attempt to get back to business as usual.

Real Estate

When deflation of physical goods and real estate strikes, it will feel like great buying opportunities; however, as current owners attempt to unload properties at deep discounts, be aware of credit markets drying up and the new heightened 3rd party risk, government mandates. Residential, commercial, multi-family, and even alternatives like trailer parks and storage will soon avail themselves to fire sales. The problems for new owners are numerous.

• What happens if there is a problem with the vaccine and a second outbreak wave?
• If mortgage delinquency evictions occur en masse, as expected, will new government regulations halt any new evictions and mandate more forbearance while individuals or businesses are receiving relief payments? Which could last well into 2021.
• Even if the virus is eradicated, how many small to mid-sized businesses will continue their commercial leases and pay for excess office space vs continue most employees working remotely?
• The consumer appetite may change dramatically. If any property serviced the supply chain for products that are no longer in demand, the property owners must quickly re-purpose or sell to an Amazon-like player if the location is geographically positioned well.
• Whether you want to leverage a property or flip, banks are tightening, and surely private lenders will hold on to their cash positions at a higher percentage. Plans to multiply leveraged assets or off-loading to financed buyers must factor in more difficulty.
• RE investments will continue as a primary choice for Family Offices to preserve, grow, and protect wealth with smart investments. However, during this period, due diligence must be more rigorous and stringent to ensure sound decisions.

Main Street Business

How will inflation become a part of the private equity story, especially the American small to mid-sized business story? During this time of hurry up and wait, small and mid-sized businesses are waiting for relief that’s coming very slowly. The pressure to maintain a full workforce while waiting on funds and the pressure to keep a full workforce in order to have loans forgiven will have one of two effects on many businesses.

The first scenario; is a business does not float its payroll until stimulus checks arrive and fully releases low-wage employees. Once they have the funds deposited, they will attempt to hire back the employees who were let go to save themselves from owing large loans. However, what if one employee is not willing to come back to that job and chooses to look for other opportunities during the phase of receiving unemployment checks? The unemployment check could be equal to or greater than what their old job paid, so the worker could truly “afford” not to come back. The business will need to do more with less in an economy with lower demand. Within a year or two, businesses will make a decision to go into greater debt to pay back the stimulus loan, fire more employees and run on a skeleton crew, or file for bankruptcy to make everything go away.

The second scenario; is that a business keeps everyone employed until stimulus support arrives. However, with changes in spending patterns, demand for many goods or services will not return to pre-Corona virus outbreak levels. Thus, sales are made at deep discounts to entice customers to spend. Ensuing deflation squeezes the business’ margins to such a degree that when loans are forgiven, the business will eliminate the expense of labor and send many more to the unemployment rolls. If unemployment insurance and federal benefits continue or increase over an extended period of time, people will believe they have enough money saved to spend more liberally. However, the supply side will be severely crippled at this point. Once the first wave of spending depletes most goods, surviving businesses will raise prices to not run out of goods quickly or avoid overbooking for their services.

The prices of goods and services rise as more helicopter money is spent to purchase the goods and services that everyone wants. At this point, more programs will attempt to come online to help small and mid-sized businesses either start up or expand. However, consumer demand moves faster than the long grind of starting a business or expanding without failure. The small percentage of people with the expertise, discipline, vision, and courage to start a Main Street business is small, and most of this generation’s entrepreneurs will suffer greatly due to the COVID-19 experience and never start a business again.

Where to Go:

Technology markets should be the first market movers after normalization with communication tools, automation, 3-D printing, robotics, AI, and most importantly, Blockchain or Distributed Ledger Technology (DLT).

DLT provides the rails to enable many other technologies to operate in the post-COVID-19 environment. Blockchain ensures distributed security, new audit capabilities, better operational checks, and faster settlements of contracts and transactions.

Layer 1 platforms continue to compete for market share in the nascent DLT ecosystem. However, technological advances are moving fast due to teams’ ability to focus more on development versus marketing during a 3-year bear market for cryptocurrencies. Most projects are meeting or exceeding their roadmaps, except for the leading player, Ethereum, which seems to be 1–2 years from full enterprise-ready development.

Newer entrants are on the cusp of enabling the next generation of interconnectedness, called Web 3.0.

• What’s needed for trustless exchanges that move much quicker than the Fed’s emergency stimulus packages?
• What’s needed to enable the Internet of Things to interact securely from threats of hacks?
• What is needed to measure and verify machine and software activities without human auditing?
• What is needed for contractual agreements between individuals and/or businesses in real time with confidence and without the need for lawyers to overlook and advise on the agreements?
• What is needed as we move away from China as a primary source of low-cost manufacturing to ensure goods come from quality origins and ship with an accurate manifest?

 

Projects answer the call; like Digibyte (DGB) or XRP, to transact currencies to a unique public key wallet address connected to a unique digital ID.

Hedera Hashgraph (HBAR) or Power Ledger (POWR) can handle the technical requirements of the Internet of Things, for devices and human user interfaces, securely.

VChain (VET) or Accumulate (ACME) focuses on international logistics and product life-cycle verification.

Smart contract platforms consist of highly advanced players such as Cardano (ADA), Cosmos (ATOM), and EOS.

Most next-generation smart contract platforms utilize some form of Proof of Stake, a consensus method upgrade planned for Ethereum (ETH). Alpha Stake believes delegated proof of stake (DPoS) protocols hold the most current value and are flexible enough to capture future value.

Summary:

As economic paradigms shift, it’s critical to explore various DLT projects and how they could shape the new economy. Traditional technologies are exposing their inadequacies, outright failures, and enhancing uncertainties during the pandemic. Fears of current systems not meeting the needs of people in every economic market structure demand answers to pressing problems.

Now industry leaders, political leaders, non-profits, and advocacy groups are seeking solutions, even in areas rarely considered before COVID-19. Those who invest now will benefit from the new economy once the benefits of DLT are fully understood and platforms move from niche community projects to enterprise applications. A new economy that expands exponentially due to the capabilities of reaching and including billions of unbanked people with a cell phone, can connect to micro-transactions, establish unique identities, and agree to bind smart contracts. Expansion continues due to new economies such as micro-grid energy trades, localized manufacturing, and machine-to-machine transactions, including an entire virtual world monetized via DLT.

Family offices that are not investigating DLT solutions can continue with traditional investments, but in a post-COVID-19 world, most assets are now high-risk investments. The risk and volatility of Blockchain kept many Family Offices away from the space. Now, with volatility and uncertainty increasing across most asset classes, is it time to consider a portfolio’s percentage toward a new technology that will eat the world? The outlook for DLT’s expedited adoption and projected payoff of 100x–1,000x from its current market value looks more feasible.