No. 40: The End of the BS Economy, Good-time Cartels
There's been a lot of hot news and hot takes. I'm sure all newsletters have rushed to say something about Silicon Valley Bank. And probably offer mediocre trading tips on top.
That game requires being quick to post something, which I don't want. So instead, I'll write about more general sea changes I see on the horizon.
The End of the BS Economy
Zero interest rates created an ever-flowing tide of funds. 13 years of zero made people believe things that weren't necessarily true. For example:
House prices always go up
Stocks only go up
Crypto only goes up
Everyone can get rich off a YouTube Channel
"I am now qualified to invest in China because I went to China once when I was 19 on a university exchange".
The list goes on and on....
Because everything kept going up, nobody could call BS on their own ideas. In fact, the more stupid the idea, the better it worked. We ended up with monkey JPEGs changing hands for millions.
Now capital has an actual price due to rate increases. Companies have to find a way to make money this year - otherwise capital flows elsewhere and the stock price languishes. And so it should. When short terms rates are 6% - why should my random E-commerce startup receive capital when it won't be profitable for 7 years? The opportunity cost is too high for mediocre opportunities.
Not only that. Many jobs existed in the zero interest rate economy because people had spare disposable income. Which meant that if anyone built any business - it was likely to have a wave of either consumer or B2B customers lining up with their pockets full of cash. Not necessarily because it was a great idea, but because funding and consumer spending was flowing freely.
No longer.
Many investors I know are still invested in companies that will likely turn out to be mediocre (I will too). In fact, many fund managers I know probably only got given capital to manage because money was so free flowing for the last 13 years. Those who are in denial on this fact will probably get hammered the hardest.
It's time to be careful and select a new wave to ride. Because the wave that worked for the last 13 years won't necessarily work for the next 13.
That doesn't mean we need to learn new tricks. But if we're basing an investment thesis on something "becoming profitable by 2030 with an exit multiple of Y x EBITDA", I'd rather take T-bills.
Good-time cartels
The zero interest rate economy also caught me out. I was bullish on semiconductors, and to some extent still am. I thought the newfound consolidation in memory/storage would make Micron knock it out of the park.
I re-learnt something that I learnt in my timber days.
Many timber companies in New Zealand co-operated while times were good - while they were all making money. Ironically, when demand fell they started pumping out more timber. In other words, they back-stabbed each other and went back to pirate economics.
OPEC is a similar story for oil. On the way up, the motley crew of nations support each other. But when prices are on the down slide - they slit each others' throats and ramp up output - probably to support their own national budgets. Yet another reason why oil markets produce very dramatic swings, rather than just reacting to production, inventory and demand.
I thought memory was different. There are three major players, Samsung, SK Hynix, and Micron. They cooperated during the 2018 inventory overhang, reducing supply and clearing excess inventory to quickly get back to profitability.
In 2022, Samsung decided to "go gangsta" and continue producing. It seems they got some sort of capex subsidy from the Korean government which changed the math for them. Fair. But still, had they cut output and cleared inventory along with Micron and SK Hynix, the industry would have cleared up by now.
Now we have to wait an extra year or two for the industry to get back to profitability again. And who knows how Samsung will behave on the other side when we finally get there.
Will they be commodity pirates? Or sophisticated crony oligopolists?