Interview
E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning
- The next episode's ratings are predicted to decline due to alleged Google shadow-banning regarding past commentary on vaccine boosters.
- Current market conditions are characterized by a "pain trade" where prices are expected to rise further, potentially serving as a short-term race similar to the 2018-2019 scenario where markets rallied 30 to 90 days after Federal Reserve capitulation.
- Market bottoms are forecasted to occur six to nine months before a policy pivot is evident, suggesting the present rally is only the initial phase.
- Economic outlooks point toward a soft landing with a higher probability of a soft landing this year, driven by slightly reduced recession risks and slightly elevated inflation risks within a whipsaw economy.
- Federal Reserve policy constraints include a labor market that may require a 5-6% jobless rate sustained for five years to achieve an inflation target of 2-3% or below 2%.
- A risk exists that continued market gains and less restrictive monetary conditions could reignite inflation, forcing the Fed to capitulate once more and initiate a new rate hiking cycle.
- Algorithmic trading is described as a reinforced buying loop where machines drive prices up before humans front-run and sell into them.
- Equity valuations are projected to stabilize near 2017 levels rather than repeating 2021 bubble dynamics, with long-term interest rates expected to settle at 3.5%.
- Current S&P 500 P/E ratios imply a 50% overvaluation when modeled against a Ben Graham framework using a 3.5% terminal rate, with a 50 basis point rate decrease anticipated over the next two years.
- Venture capital capital raised recently will likely be deployed within the next 12 to 36 months, though a capital shortage may emerge after approximately three years.
- A mass extinction event is predicted for early and mid-stage companies in late 2023 and 2024, with estimates suggesting 50-60% mortality rates for startups and 50% of seed to B-funded companies exiting the market.
- SaaS valuation multiples are expected to permanently decline from 2021 peaks, stabilizing at 8-12x revenue compared to previous 16x to 30-35x levels.
- A tech sector recession is anticipated that will bifurcate the broader economy, characterized by significant job cuts and lower valuations within technology while avoiding a general economic recession.
- The next 18 to 24 months will present severe survival pressures for companies that failed to lengthen runways or reduce costs.
- Future VC returns over the next 5-10 years will likely differ significantly from the last decade due to increased startup mortality rates.
- Facebook is forecasted to compound shareholder value over the next four or five years through buybacks and dividends following headcount and expense reductions.
- Startup investing trends suggest a shift toward technical skills for AI waves, while many new funds and solo capitalists face potential elimination during this period of retrenchment.
- Many Series B through E companies face risks of value erosion below their total capital preference stacks due to feature-focused strategies and short-termism.
- Junior venture partners may face difficult trade-offs regarding cutting losses and prioritizing limited partners as momentum investing strategies come under scrutiny.
- A reckoning is expected in the second half of 2023 and 2024 as startups confront down rounds and new market conditions.
- Investors are urged to avoid misallocating capital to AI companies that are merely rebranding without fundamental substance.
- Seed and Series A founders frequently lack accounting and operational proficiency, requiring investor intervention to correct these gaps.
- The Adani Group's market cap saw significant losses following short seller research, though the fraud allegations remain unverified.
- Proposals for mandatory short position disclosure via Form SHO are expected to pass to aggregate data and prevent system critical fails.
- Short sellers spreading fear, uncertainty, and doubt may face accountability measures, such as holding funds in escrow if their claims are proven false.