Good morning, all!
I (Jasper Gould — President and Founder of the BYCIG) and the BYCIG are going to work to make this a weekly occurrence for anyone who wishes to read. These thoughts/letters are not going to have much structure to them. They will be a collection of thoughts from myself and the team, covering a variety of opportunities we see in the markets. This preface will not be included in most posts; I just wanted to outline the point of these releases for all who choose to read. What will follow is a brief disclosure and then we’ll get into what’s on our mind!
Disclaimer: This is not financial advice. Nothing said in this post will or should serve as financial advice for any readers. It does not indicate anything as to the positions and holdings of the BYCIG fund, and it does not indicate our expectations for the market in the future. All that is here if for educational and informational purposes — every company and trade discussed carries risk, and you must both do your own due diligence and invest at your own risk. There is downside potential in every single investment. We are not certified financial advisors, and this is not accredited financial advice. We may and likely do hold positions in the businesses discussed and therefore are naturally incentivized to see there be upset in the companies.
Markets have been increasingly volatile and frantic as of the past seven days, in large part due to the flurry of policies coming out of the Trump White House. As is often said, volatility doesn’t help the sellers or the buyers; it helps the brokers. In essence, periods of high volatility provide more business for brokers, middlemen, and others on Wall Street. This doesn’t seem to be holding true as well as is often the case. Large hedge funds, especially those trading index rebalancing strategies, have displayed very disappointing returns in YTD and since the start of February. Millenium, the hedge fund run by one-of-a-kind manager Israel Englander, lost $900 million in February. Other uncharacteristic losses have been shown throughout the hedge fund space. No thesis or opinion here — just something to look out for.
I won’t write another recap of everything that’s happened in the past few weeks in the headlines. I assume most of you all have seen the latest. Tariffs, Ukraine, Nasdaq selloff, and more, has burned passive investors. What I will do is run through some of the thoughts I’ve been having lately, especially those that I haven’t seen reflected in other news and publication sources.
Many have aptly observed that Trump’s policies seem to be entirely ignorant of the negative impact on the stock market. This is seemingly out of character, given his prior interest in measuring his administration’s economic record by the performance of the stock market. It has been suggested that now, the second time around, he wants an entire overhaul. Some have argued that with Bessent in the Treasury position, Trump has been influenced to pay more attention to the 10-year as his indicator of economic success. This is an important note, in my opinion — a strong US note and one of the brightest macroeconomic minds of the generation would not be a catastrophic outcome. What would be catastrophic is if Trump overrides Bessent’s advisory and proceeds with little to no caution. Darius Dale at 42 Macro has used the term, “kitchen sinking,” to describe what he believes the Trump administration is doing.
This theory says that they are pursuing an overall weaker economy: slowing employment, lower GDP growth, and concerning inflation. It’s not that they are actively seeking this out, but rather, they are ignoring them as negative effects. The administration is following the principle that, “short term pain can allow for a longer-term prosperity.”
Ukraine is the first large scale conflict (large scale conflict meaning ground and air warfare between two nations and their governments) that I can recall seeing in my lifetime. There have been others, smaller and less direct, but this one seemingly is going to have a greater influence on the global world order than any others. The demand for warfare equipment and other general arms needs is somewhat shocking relative to what the United States was producing prior to the conflict. It is said that at the beginning of the conflict, Russian forces were firing 60,000 shells a day. That number has diminished with declining resources and reserves on both sides, but Russia is still firing 10,000 shells per day. Just to make it clear –10,000 shells per day is 3.65 million shells per year. Now let’s put that into context with the level of production in the United States prior to the war effort in Ukraine. The United States was producing 14,000 shells per month, annualizing at 168,000 shells per year. At that rate of production, there would have been a gap of around 3.5 million shells a year to fill, in order for Ukraine to match the usage by the Russians. Even after efforts to ramp up production, the US is only outputting 100,000 shells a month. This is a gap of 200,000 a month or 2.4 million a year. Someone has to fill this gap.
If the war between Ukraine and Russia rages onwards, as it is likely to do for the near future, European defense companies will need to help fill the gap. Pair that with the aggressive policies coming out of Germany regarding defense spending, and one is led to the conclusion that Euro defense is going to receive more revenue than it has in recent memory. The market has already reflected that. There will, though, be other businesses that can benefit from this outcome. This is the new world order: the US is no longer going to supply and produce the military materials for everyone else. To further illustrate the demands that the Ukraine War is forcing upon the global military industrial complex, I will cover some more details providing context and quantifications.
The US Army War College published a paper in 2023, stating that a high-intensity ground war in Ukraine could cost the United States a burn rate (continuous) of up to 3,600 causalities per day. That’s 108,000 per month, or, 1,296,000 in a year. For reference, in the two decades that the US fought in Iraq and Afghanistan, a total of 50,000 causalities were suffered. This is a land conflict of catastrophic scale. The United States ought to avoid land involvement and troop involvement at all costs. Another important factor is the current levels of American manpower. The Individual Ready Reserve is at nearly an all-time low in participation, recruitment is dragging, and a large-scale ground conflict would require the United States to enact at least partial (potentially full) conscription. This is not very likely, but it is not being sufficiently acknowledged.
The United States would be instrumental to any all-out conflict. If Europe gets involved or Russia chooses to aggress towards other ally nations, the United States will need to fill the gap. Ukraine currently has a line containing 75 brigades. The French Army, estimated to be the best among American NATO peers, has only eight brigades in its land forces command. Sweden, Denmark, Estonia, Spain, and other NATO allies will not contribute with significant impact. If the war turns continental, the United States will be pushed to carry much of the weight.
In case of the United States choosing to use air forces as an alternative to the underproduced howitzers and rocketry, one faces a similar disappointing conclusion. The Ukrainian Ministry of Defense faced a total of 9,590 missiles and 14,000 drones launched by Russia since the beginning of the war. The American production of the Tomahawk missile is a pathetic 100 per year. The Joint Air-to-Surface Standoff missiles are produced at 550 a year. American production of missiles and air weapons are insufficient and face a need for increased production.
The WSJ recently reported with the headline, “The America-Sized Hole in Ukraine’s War Effort.” They indicated the current dire situation. All the prior data points indicate the state of military production globally. It is not nearly sufficient to fill the needs in Ukraine. Now, the United States is turning one hundred and eighty degrees, from a ramping up of production, to an all-out stop in any contribution to the Ukrainian war effort. This leaves the onus of defense in the hands of the European allies. That’s why the above trend holds prescient — European defense manufacturers are facing a major increase in contracts. Euro governments are facing a great jump in military spending.
The WSJ says that the halt from American contributions is an attempt to “ice” the Ukrainian President, Zelensky, into a more conciliatory state of mind. Why the United States is seeking a more Russia friendly posture is a good question, but not something for us, as market observers, to comment on. The hope is that once Zelensky realizes that he no longer has the resources to pursue this war, he will settle for land losses and a half-hearted peace agreement. There are two outcomes: European defense spending increases and Euro allies fill the US gap, or Zelensky follows along with the American line. The former will influence arms businesses in Europe to the upside. The latter will likely dilute the supply of oil and apply downwards pressure on prices. It will also stabilize global asset markets. Lastly, if Zelensky obliges, there will likely be higher yields on Euro debt.
Another impact on Ukraine is the cutting off of US intelligence services. This is bearish on American intelligence contractors. WSJ writes that, “Maxar Technologies said that the U.S. has cut off Ukrainian access to the satellite images that the company supplies through an American government program — imagery used by Ukrainian forces to plan and mount operations, particularly using explosive drones.” The Ukrainian Army is being deprived of the know-how and tools that can allow for a successful war effort. Another gap that will either be filled by Euro companies, or another factor in Zelensky’s submission.
The situation in Ukraine is dire. Far more dire than most commentators are observing. Watch out for increased volatility in arms businesses and bond yields as the market attempts to price in forecasted government spending around the globe. Leonardo, Thales Group, and other Euro defense stocks are showing gains of more than 40% in the past month.
As the Euro defense complex becomes a more present part of global markets, European investment funds (specifically pensions) are facing a question of whether supporting their military supports at home now fits into their ESG policies. This is another bullish factor on these businesses. More buy flow will cause upwards pressure on the stocks. The former Dutch Minister for Defense Kajsa Ollongren urged his country’s pension funds to invest more in the defense sector. In the United Kingdom, the Investment Association, a trade body for managers and pension allocators, recently wrote that, “investing in good, high-quality, well run defense companies is compatible with ESG considerations.”
The large Danish pension fund PensionDanmark said the following about this concern; “PensionDanmark’s investment policy, including our principles for responsible investing, is discussed and approved every year by the board and has broad support. There has been a shift in the general perception of defense investments after Russia’s invasion of Ukraine.” With this trend towards Euro defense businesses being included in the “ESG acceptable” canon, we begin to see the somewhat arbitrariness of ESG definitions. This circumstance is exactly why arms companies are needed. In this moment, we get a chance to see the damage that ESG could have potentially done. With an overly aggressive and punitive ESG policy, arms businesses may have struggled to survive and if this had continued for longer, we may have seen further lack of preparedness for conflict. The Western World has too long been estranged from the inherent nature of geopolitics; power cannot and will not be maintained without conflict preparedness. This fact will play out on asset markets and more specifically, have a great impact on weapons companies. Look for some exposure and there is alpha to be generated.
Texas took another step towards establishing its strategic Bitcoin reserve on March 6th, with the passage of S.B 21 in the Texas State Senate. The stated goal is to “diversify the investments of the State of Texas” and to build a portfolio that can better weather inflation and devaluation of the USD. The Texas Comptroller, with the help of private financial practitioners in the state, would oversee the reserve, manage acquisitions, and store/secure the investments. The primary source of funds for these purchases would be the reappropriation of congressional budget in the state. A Strategic Bitcoin Reserve Advisory Committee would exist to oversee and ensure the mission of the stockpile. Lt. Governor Dan Patrick says that by enacting this bill in the house and creating the strategic reserve, Texas would ensure that it holds an important position in the growing “digital asset economy.” Dissent from State Senator Roland Guiterrez took the form of a concern that volatility in cryptocurrency and digital assets might cause loss and drawdown that exceeds the palate of a state funds budget. This bill will now head towards the house where, if approved, the governor will be given the final say in making it law.
The concern for me, is that this shows that the State of Texas is using Bitcoin not as an investment holding but as a currency reserve holding. No states have direct investment of their reserves; some have pensions funds that hold equities, some use their SWFs (sovereign wealth funds) to provide a state nest egg, and some have special use funds. None of these uses are intended to be reserves. A reserve exists both to protect the state’s financial security, and to provide resistance against any form of currency devaluation or inflation. The proposal coming out of Texas indicates that they see Bitcoin as a currency reserve holding and not as an investment. They liken it to the USD or US treasuries, rather than equity investments or private project holdings.
It is curious to see a conservative state holding up the party line on crypto, despite what the implications would be if the Bitcoin value were to fall. In case of the Bitcoin reserve losing value, the losses would inevitably need to end up creating cost cuts or, God forbid, tax hikes (this is likely the worst possible thing that the Texas government could ever imagine).
Here’s another interesting thing that we noticed this week that will likely have deep ramifications on parts of the equity markets. Despite still being a nascent innovation, Stanford Medicine has developed a naturally occurring molecule that mimics the influence of Ozempic and other weight loss drugs, with less of the adverse side effects. The study, using artificial intelligence methods (which is the silver lining bull case here for big pharma despite the general bearish theme), managed to capture a naturally occurring molecule that could induce weight loss and limit appetite for consumers. In tests with animals, the drug showed that it could reduce weight and sidestep a variety of the impacts including but not limited to nausea, significant loss of muscle mass, and stomach pain.
More details on this discovery are forthcoming but the impact, if the molecule continues to work on human test subjects, will be the introduction of an alternative to the current weight loss drugs on the market. For seemingly less cost, the startup Katrin Svensson is creating to further test this drug could steal significant market share from Eli Lilly and Novo Nordisk.
This concludes our first thoughts from the week report. Look forward to more coming soon. Thanks for taking the time to read and let us know if there is anything you think we should further discuss in our next writing!
Much thanks,
Jasper Gould — Cofounder, Copresident, and Chairman of the Investment Board @ the BYCIG