Back in February 2021 in the heat of the crypto, cloud and SPAC fever (FOMO), Fred Wilson wrote a post titled ‘How This Ends‘. He started with:
We are in the middle of one of the great asset bubbles of modern times. It has been brought on by the easy money policies of central banks around the world aimed at weathering the global Covid 19 pandemic. Interest rates are near zero or negative in most developed economies and asset prices have gone way up as a result.
When interest rates are zero or negative, the value of future cash flows is huge and that is how you get PE and EBITDA ratios of over 100 and price/revenue multiples approaching 100.
The big question is how does this end?
I believe it ends when the Covid 19 pandemic is over and the global economy recovers. Those two things won’t necessarily happen at the same time. There is a wide range of recovery scenarios and nobody really knows how long it will take the global economy to recover from the pandemic.
But at some point, economies will recover, central banks will tighten the money supply, and interest rates will rise. We may see price inflation of consumer goods and labor too, although that is less clear.
When economies recover and interest rates rise, the air will come out of the asset price bubbles that have built up and the go go markets will hit the brakes.
He went on to say:
“When the one year treasury yield gets back above 2%, we are leaving the easy money era. We aren’t close to that right now.”
My friend Jason emailed me this morning that the one year treasury rate hit 2.01 % yesterday.
Oh boy!
In August 2020, before Fred outlined how this would end, I was worried about all the supply that would eventually kill this bull market.
We got the supply and now we have the double whammy of much higher interest rates.
No wonder everyone has started to panic.
I think it is fine to panic as long as you panic first. The big question today is ..if you sell your tech stocks are you the last one to panic.
I highly doubt it.
BUT, while crypto supply keeps coming, tech IPO’s are done and supply is finally dropping. Prices have dropped to the point where Elon Musk and Apollo are throwing out bids. While Elon may quickly run out of capital, Apollo will not!
The FED is late in doing the one job they promised to focus on all these money printing years which was to guard against massive inflation and so that remains the big wildcard.
I am not running a hedge fund and worried about my next quarter or redemptions so I would rather buy Netflix, Zoom, Shopify, Coinbase and Spotify down here than sell them (not that you should).
Hope this helps.
Have a great weekend.
