The Great Pandemic Bubble Is Popping
The past week reminds me of the quote “There are decades where nothing happens, and there are weeks where decades happen.” It feels like chaos and uncertainty are the name of the game. No one knows what will happen next, but there is a lack of good news or positive outlook.
This is because we are being punished for our past sins. What were those sins? I call it “The Great Pandemic Bubble.”
Here is how it breaks down — the pandemic struck in early 2020, markets went into free-fall as governments locked people in their homes, central banks and politicians stepped in with historic monetary and fiscal stimulus, economies and assets recovered in record time, and one of the greatest bull runs in history was topped off with an epic asset bubble at the end of 2021.
They make movies out of this type of stuff.
But as with all great asset bubbles of history, eventually the market has to pay the price for lack of discipline. That is exactly what we have been watching play out in the last 12 months.
There was the initial wave of tech layoffs, followed by a round of margin calls and contagion in crypto, and finally the market seemed to accept that the environment had changed. All good, right? Wrong.
The past week has shown that the pain may just be getting started. There were layoff announcements from Twitter (50%), Stripe (14%), Lyft (13%), Chime (12%), Dapper Labs (22%), and many more. Some of these companies did layoffs in the first half of the year, but many of them didn’t. Obviously the CEOs and Board of Directors believe things are going to get worse.
The reason I say that we are paying for our sins is because many of the issues today were created because of too much money flooding into the financial system and entrepreneurs being unable to predict or plan what would come next. Jack Dorsey said it publicly:
Stripe founder Patrick Collison explained the difficulty of planning in his memo to employees as well:
In making these changes, you might reasonably wonder whether Stripe’s leadership made some errors of judgment. We’d go further than that. In our view, we made two very consequential mistakes, and we want to highlight them here since they’re important:
We were much too optimistic about the internet economy’s near-term growth in 2022 and 2023 and underestimated both the likelihood and impact of a broader slowdown.
We grew operating costs too quickly. Buoyed by the success we’re seeing in some of our new product areas, we allowed coordination costs to grow and operational inefficiencies to seep in.
We are going to correct these mistakes. So, in addition to the headcount changes described above (which will return us to our February headcount of almost 7,000 people), we are firmly reining in all other sources of cost. The world is hard to predict right now, but we expect that these changes will set us up for robust cash flow generation in the quarters ahead.
As if these layoffs were not enough, Meta (formerly Facebook) announced today that they were laying off 11,000 employees. 11,000 people is A LOT. It is only 13% of the company, but that is still one of the largest layoffs that I have ever seen announced.
Layoffs don’t tell the full story though.
Next, of course, we have FTX entering into a non-binding agreement to be acquired by Binance yesterday. The agreement itself has surprised many people, but the speed at which it played out is probably even more shocking.
I know there are a lot of hot takes floating around — unfortunately, no one really knows what transpired, nor has a full understanding of the facts. Rightfully so, there are a lot of questions and concerns. As more information comes out, we will get a sense for how bad the situation was and where things went wrong.
In hindsight though, the undisciplined monetary and fiscal policy that fueled companies over-hiring and unable to plan adequately for the future, also drove investors - both retail and institutions - to continue to fund insane strategies with questionable assets. If you have historic inflation, capital holders are going to push further out on the risk curve to seek returns that can outpace the inflation.
That is how it has always worked.
So where does this leave us? Frankly, I don’t know. We have high inflation that doesn’t seem to be coming down in a material way. The Federal Reserve has continued to create tighter financial conditions. Tech companies are preparing for the worst. The bitcoin and crypto industry continues to see companies implode. Crypto assets are taking a beating. Stocks have been suffering. And no one can predict the future.
Wild to see how much can change in a single year.
The good news is that this too shall pass. I don’t know when, but it will pass. The bear market will eventually turn into the next bull market. The recession will eventually subside. The Fed will have to pivot at some point and return to loose monetary policy. Those are all easy predictions to make as long as you aren’t required to put a timeline on them. It could be 1 month, 1 year, 5 years, or 10 years. They will all come true, but no one knows when.
This leads me to what I’m doing at the moment — building, waiting, and learning.
I’m trying to build companies, build a strong balance sheet, and build more knowledge and skills. Each of those assets will serve an individual well when we get to the other side of this mess. But I’m also patiently waiting. In moments of chaos and uncertainty there are a lot of unforced errors. My goal is to simply avoid making mistakes and let time work on my side.
Lastly, I’m spending time learning. There are many events transpiring right now. It is the equivalent of getting a master’s degree in financial markets and economics. Paying attention and trying to understand each development will hopefully pay off over the length of my career.
I hope each of you is doing well. Things are crazy. People are scared, uncertain, and worried. That is not fun. My wish is that each of you finds happiness in your daily work, while also finding time to spend with your family and friends. None of us make it out of this game of life alive. Do your best to enjoy it while you’re here :)
Talk to everyone tomorrow.
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CBDCs May Need Global Regulation, EU Commissioner Says: Central bank digital currencies (CBDCs) may require a network of international deals to stop state-backed money from infringing on other countries’ sovereignty, European Union Commissioner Paolo Gentiloni said on Monday. The bloc of 27 nations is considering a digital version of the euro, but needs to resolve issues such as how a digital euro will work for cross-border payments. Read more.
Virgin Orbit raises $25 million from Branson’s conglomerate as cash reserve dwindles: Virgin Orbit raised $25 million, the company announced Monday alongside its third-quarter results, as the alternative rocket launcher faces a dwindling cash reserve. The company disclosed that Richard Branson’s Virgin Group, an existing shareholder, made the additional $25 million investment on Nov. 4. Virgin Orbit emphasized in its report that it will “continue to be opportunistic in the capital markets,” as the company is “focusing on cost and operational efficiency to improve cash flow.” Read more.
US DOJ announces seizure of $3.36 billion in cryptocurrency: The U.S. Department of Justice on Monday announced that law enforcement seized $3.36 billion of bitcoin from a man who “unlawfully obtained” more than 50,000 bitcoin from darkweb market Silk Road over a decade ago. The U.S. Attorney for the Southern District of New York said that James Zhong of Gainesville, Georgia, pleaded guilty on November 4 to committing wire fraud in September 2012. The charge carries a maximum sentence of 20 years in prison. Read more.
Mastodon reaches 1 million monthly active users: Mastodon, the decentralized social network that’s increasingly being positioned as an alternative to Twitter, has eclipsed 1 million active monthly users. That’s according to CEO and lead developer Eugen Rochko, who revealed the milestone in a post on Monday morning. Read more.
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