E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning
All-In with Chamath, Jason, Sacks & Friedberg Podcast Recap
Published:
What Happened
The Federal Reserve raised interest rates by 25 basis points, and the markets responded positively. Chamath Palihapitiya noted that Jerome Powell's speech suggested a less aggressive approach, with only two more rate hikes anticipated. This news, combined with tax loss harvesting mechanisms, led to a significant rally, particularly for stocks like Tesla, which doubled in value within 30 days.
David Sacks described the current economic climate as a 'whipsaw economy', with fluctuating expectations regarding inflation and recession. The U.S. added 517,000 jobs, drastically exceeding estimates, which reduced recession fears but raised concerns about potential inflation risks. The job market is at a 50-year low unemployment rate of 3.4%, yet figures like Larry Summers warn that a higher jobless rate might be necessary to stabilize inflation.
There are signs of renewed interest in IPOs, with banks discreetly gauging the market for potential listings. Facebook and Tesla's stock prices have seen recent surges, partly due to efficiency measures, such as Facebook's reduction in middle management layers. The term 'disinflation' is being used by the Fed, indicating a decrease in inflation despite ongoing market volatility.
Chamath Palihapitiya discussed the valuation of the S&P 500, suggesting it is overvalued by 50% according to Benjamin Graham's model, as it trades at 22 times PE. He also observed that companies founded during austerity periods tend to be more successful, with technological advancements historically fostering the creation of large companies.
The venture capital landscape is facing a potential 'mass extinction event' for early and mid-stage startups, with predictions that 50% of recently funded seed to Series B companies may fail. A survey by January Ventures reported that 80% of early-stage startups have less than 12 months of runway, emphasizing the funding challenges ahead.
Venture capitalists are reassessing their strategies, shifting from momentum investing to fundamental analysis. Many startups are expected to face a funding crunch by late 2023 and 2024, with some receiving harsh term sheets. Venture debt, previously viable in a low-interest environment, now poses a challenge as companies struggle to raise new funds while managing existing debts.
The tech ecosystem is undergoing a reset, mirrored by job cuts and lower valuations, despite strong overall job growth in the economy. The SaaS index's enterprise value to next 12 months revenue ratio has increased, indicating a market rally, though still below 2021 peak levels.
The episode also touched on the Adani Enterprises stock drop following allegations of fraud by Hindenburg Research. Short selling and its impact on market efficiency were discussed, with calls for greater accountability for short sellers, similar to insider trading regulations. The SEC's proposed Rule 13F2 aims to increase transparency by requiring institutional managers to disclose their short positions.
Key Insights
- The Federal Reserve's recent interest rate hike of 25 basis points was positively received by the market, with expectations of only two more hikes to come. This move aligns with a less hawkish tone from Jerome Powell, suggesting a more moderate approach to managing inflation.
- The U.S. job market remains robust, adding 517,000 jobs and maintaining a 50-year low unemployment rate of 3.4%. While this reduces recession fears, it raises concerns about potential inflationary pressures.
- Venture capital is facing a significant downturn, with predictions that up to 50% of seed to Series B companies funded in recent years could fail. A large number of startups have less than 12 months of runway, highlighting impending funding challenges.
- The tech ecosystem is experiencing a reset, with valuations and job cuts impacting the industry despite overall economic growth. The SaaS index's enterprise value to next 12 months revenue ratio has increased, indicating some market recovery but still below the 2021 peaks.
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