November 10, 2021 | macro-economic research report

Research Report: Metaverse… Closer than you think

BY: Richard Croft
Are we to assume from Facebook’s name change that Mark Zuckerberg is embracing a corporate transformation? Or could it be an attempt to shift attention away from mounting regulatory headwinds? Perhaps, it is a bit of both. Whatever the reason, Meta Platforms Inc. (Facebook’s new name) reflects the company’s growing ambitions beyond social media. To that end, the company is setting in motion a ten-year US $10 billion spending initiative to ensure that its platform and more than two billion daily active users will be the central player in the next iteration of the Internet… the “Metaverse.”



Are we to assume from Facebook’s name change that Mark Zuckerberg is embracing a corporate transformation? Or could it be an attempt to shift attention away from mounting regulatory headwinds? Perhaps, it is a bit of both.

Whatever the reason, Meta Platforms Inc. (Facebook’s new name) reflects the company’s growing ambitions beyond social media. To that end, the company is setting in motion a ten-year US $10 billion spending initiative to ensure that its platform and more than two billion daily active users will be the central player in the next iteration of the Internet… the “Metaverse.”

Whatever your position on the social and regulatory implications of this transformative technology, we need to understand what it is and as investors, more importantly, the potential long term economic impact.

Think of the Metaverse as the Internet 2.0. It will be built on the latest evolution in transformative technologies (in this case “Augmented Reality”) that should enhance the online experience. Just as previous technologies transitioned the Internet from a text-based environment to graphics and now to video, augmented reality on the back of 5-G networks, will allow developers to build 3D systems that will put the user via an avatar into the Metaverse using multiple systems such as desktops, phones, 3D glasses, and new systems under development.

That will change the way we work, play, travel, watch concerts, enjoy movies, and engage in e-commerce transactions that will be settled digitally. It is that latter point that underpins the potential for digital currencies, which developers believe will become the lynchpin for Metaverse e-commerce.

Meta is developing these systems through Spartan AR, an internal division tasked with building out its Horizon platform. Meta is betting the Horizon platform will embed the company in the Metaverse in much the same way Windows entrenched Microsoft in personal computers.

The prevailing view so far is that Meta may be late to the game. Nvidia Corp. (symbol NVDA) markets its Omniverse platform as a multi-GPU real-time simulation and collaboration platform for 3-D production pipelines based on Pixar’s Universal Scene Description and NVIDIA RTX technology. Omniverse is the platform of choice for mainstream gaming companies, many having already developed systems that allow the gamer to put themselves into the action via an avatar.

What Meta does have is significant financial resources and two billion daily active users. Both significant carrots for premier developers. The company can also look at history to develop catch up strategies to compete despite being late to the game.

Think back to the days when Microsoft was late in recognizing the importance of the Internet. In the early 1990s, Netscape Communications Corporation marketed an easy-to-use web browser that quickly became the tool of choice to go online. To compete, Microsoft developed Internet Explorer, which was embedded in Windows. Microsoft’s installed base decimated Netscape and Netscape’s market share fell from more than 90% in the mid-1990s to less than 1% by 2006.

Given its size, user base and determination, Meta may be in a similar position. However, its competitors are much larger and have significantly greater financial resources than Netscape did during the browser war era.

On the other hand, there are striking similarities. For example, Nvidia develops ‘drivers’ that entertainment companies use to build games, among other things. But, as Netscape discovered, software tools such as drivers can be replicated by visionary companies that understand the long-term risk and have the financial wherewithal to compete.

Meta is offering developer tools at cost or slightly above cost. The idea is to make it easy and cost-effective for developers to build apps on the Horizon platform. If Horizon provides an open architecture environment – as Windows did and Omniverse does – it should attract a following.

To build apps for the Horizon platform Mr. Zuckerberg has proposed a series of standards for developers that include presence, avatars, home space, portability, virtual goods, and natural interfaces. To manage the regulatory landscape, developers must ensure privacy by allowing users to opt in or out of the tracking metrics. This is probably an attempt to get ahead of the regulatory curve by skating to where the puck is going rather than where it is. We suspect that regulators will be hard pressed to keep up.

From a financial perspective, the Metaverse could alter the economic landscape as we know it. Augmented reality is already a mainstay for millennial gamers who engage with other players anywhere in the world. Some gaming companies like Epic Games (developers of Fortnite) insert celebrity concerts to keep players engaged by attending an afterparty. At these virtual parties you can buy swag from your favorite rapper, thus generating income for Epic Games, the clothing manufactures, and the celebrity performer.

Consider the potential. How great would it be to test drive a car online, through any terrain for as long as you like? You can buy the car with digital currency, get insurance as part of the package and have the car delivered to you without ever leaving your home, or use tokens to buy an augmented reality version of the car for your augmented reality Home Space.

The e-commerce possibilities are unlimited. You can outfit your augmented reality Home Space – your private domain – with artwork, furniture, visual landscapes, non-fungible tokens (NFTs) or 3-D graphics purchased with digital currency.

Then there are the social interactions already entrenched in the Meta platform, which also includes Instagram. The implications are mind boggling and, as with any disruptive technology, a little disconcerting. Will the next generation spend more time online fostering avatar relationships and less time interacting with real people in real time? These are issues confronting our collective social consciousness.

Our focus is to assess the possibilities and weigh the short-, medium-, and long-term risks. That means reading the tea leaves as corporate executives try to adapt their business models to an augmented reality and looking for ways to take advantage of the economic ramifications. Some companies could potentially benefit from this new frontier and others will have difficulty adapting.

For example, Mastercard’s (symbol MA) decision to accept digital currencies demonstrates transformative thinking. Same with Square (SQ) and Pay Pal (PYPL) which should benefit as digitally driven financial intermediaries.

We must also confront what this could mean for mainstream financial institutions. Not now, but at some point in the future ‘money center’ banks will have to replace lost transaction revenue. Can mainstream financial institutions build appropriate systems to engage in the world of augmented reality?

As a transformative technology, the challenge will be to balance the positives that will allow creativity to flourish with the associated negatives of stay-at-home activity that impacts the human psyche.

Like it or not, the potential for augmented reality is unbounded. Especially if the Horizon platform becomes the standard for developers, which we believe, over time, it will. Meta is already enticing developers with low-cost tools to build games. We anticipate new tools for artwork, music production, clothing design and to develop online workspaces.

If the Horizon platform offers secure transaction processing and access to a market of more than two billion potential customers, that would be nirvana for social media developers and advertisers.

Maybe not now… but the future may be closer than you think.


The Democrats got a Halloween wake up call during the off-term elections. Two gubernatorial races in Virginia and New Jersey took place on October 28th, ending with a split decision. Republicans won Virginia; the Democrats retained New Jersey.

The results have Democrats deeply concerned. These were two States that Biden won handily during the Presidential election and New Jersey (Biden won NJ by 16 points) was too close to call at the end of election night. A bad sign from a State that has been a Democrat stronghold.

The October 28th results may be a harbinger for the 2022 mid-term elections. As the political winds change, it is likely the Democrats will lose their slim Congressional majority and be relegated to a minority stake in the Senate.

It is hard to view the October 28th results through any lens that does not fixate on the single-minded tax-and-spend pursuits of progressives in the Democratic party. Exit polls overwhelmingly support that position.

It was also likely a repudiation of Biden’s presidency. Registered Democrats saw Biden as a moderate who had the political connections to mobilize both sides of the aisle. He was the best choice to champion a middle-of-the-road ‘build back better’ platform. In reality, he was likely elected as a moderate alternative to Trump in the hopes that the Republican party could reset in time for the next presidential cycle.

As the dust settles, it is becoming clear that neither outcome is likely. The Democrats continue to be the party that can’t agree on their own priorities and, so far, the Republicans have not been able to gain momentum with theirs beyond Trump’s rock-solid base.

What we know is that American voters are equally divided across party lines. This split spotlights the chasm between spending initiatives that may or may not improve the lives of working class people, but that will certainly increase taxes at a time when inflationary pressures are mounting. The resulting stalemate creates gridlock and nothing gets done.

For investors, gridlock is not a bad thing. Biden’s goal of increasing the corporate tax rate has all but failed, which means that 2022 corporate profits will be better than originally envisioned.

Also, the build back better infrastructure legislation is a shadow of the original proposal, which should dampen longer term inflation expectations. The idea that the S&P 500 index will hit 4,800 by year end, once seen as an outside-the-box forecast, is now a distinct possibility. And there is a real prospect that we could see 5,000 on the index within the next three months.

That said, the only certainty when it comes to forecasting is uncertainty. There is always the possibility of a black swan event that could curtail the most optimistic forecasts. But the base case is reasonable and, given the moderating inflationary impact of the downsized infrastructure bill, there is less urgency for the US Federal Reserve to raise rates.

In short, gridlock removes the variability of political whims, which allows us to make investment decisions based on more reliable economic factors like supply and demand. To that point, demand is resilient as Covid fear wanes amidst new therapeutics from Merck and Pfizer that appear to dramatically reduce hospitalizations. There is also the possibility according to Dr. Gottlieb – former FDA member who sits on Pfizer’s Board of Directors – that Covid could be contained by the first quarter of 2022.

To cite a poker analogy, investors are holding four aces. They could still lose the hand, but the odds are stacked in their favor. The strategy of choice is to sit tight and enjoy the ride.


croft group nft

That the US Securities and Exchange Commission (SEC) recently approved a series of Bitcoin-futures ETFs was a watershed moment. The challenge for the SEC has long been the risks associated with overseeing an unregulated security. But since the demand was there, and because Bitcoin futures are regulated by the Commodity Futures Trading Commission (CRTCS), it was the best solution to an awkward problem.

The problem with Bitcoin futures is the necessity and impact of rolling contracts from one month to the next. Such rolls are complicated because futures are subject to supply demand imbalances, which can make the process expensive, ultimately detracting from the performance of the ETF.

To address this issue, the SEC will eventually have to look for a way to approve physically backed Bitcoin ETFs – something that has already been approved in Canada. We believe that when that occurs – we suspect approval will be granted at some point in 2022 – there will be a surge in demand for Bitcoin, which may well push the price to US $100,000.

According to crypto bulls like MicroStrategy’s CEO Michael Saylor, Bitcoin will take center stage as a gold alternative. He believes that over the next three years gold ETFs will become the market’s version of the horse and buggy. Saylor is the biggest bull among CEOs and has invested much of the company’s treasury in Bitcoin. He believes that a physically-backed Bitcoin ETF will attract so much attention that it will dwarf the largest based US ETF the S&P 500 index ETF (symbol SPY) that is currently holding US $425 billion in assets.

The key to his outsized view is that a spot Bitcoin ETF will provide institutional investors with an acceptable way to invest in the security. And while we do not currently share his overzealous view, we believe there will be a surge in Bitcoin values on the back of a listed US ETF that holds physical Bitcoin. The two major funds tracking Bitcoin futures started trading in October and within days attracted more than US $1 billion in assets. Despite the futures-based ETF limitations, they did set in motion a series of new applications for spot alternatives. The prevailing view is that a spot-based product would be the hottest commodity ETF to launch in history, which would mean attracting more than US $100 billion in new assets within days of the launch.

Wall street points to the success of spot-based crypto ETFs in other countries including Canada. The argument is that a spot-based Bitcoin ETF could access existing security structures and collateral packages offered by prime brokers. Despite that, the SEC has been reluctant to approve a security that does not look or feel like traditional investments.

We believe, over time, the SEC will have to make some concessions to allow investors to access a high demand product. It is not a question of if, but when.

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Richard Croft, Chairman & CIO

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