Is this a bubble? If so, what type of bubble? Where are we heading? We share our views on where the economy is going, the importance and effect of COVID, several key opinions on both sides of the spectrum and land on whether the current situation is sustainable or not.
- Introduction (01:33)
- Section 1: The COVID effect (02:43)
- Section 2: The economy…stupid? (11:08)
- Conclusion (43:33)
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Bertrand: Welcome to Tech Deciphered Episode 25. So this episode 25 is part of a 2-serie episodes: episode 25 and 26 that will be around the current bubble. We believe that at this stage from a big macro perspective there are a lot of questions around where’s the economy going, and this would be the topic of episode 25, that big picture perspective on where is the economy going?
Of course, all of this being impacted big time by COVID. We’ll talk a bit about that. We’ll talk about inflation, prices where all of this is going from a macro perspective. In episode 26 we will talk more about, in more details, what does it mean for entrepreneurs, tech entrepreneurs, tech industry, VCs, where the VC landscape going, where are exits going, and what does it mean for me as an entrepreneur or me as a VC?
Nuno: And today we start with, where is the economy heading, all the macro conditions that are happening in the market and their implications. Bertrand?
Section 1 – COVID effect (02:43)
Bertrand: We have to start with COVID it has so much impact, not just on our lives, but on the state of the economy, on some big decision on the financial market side, on additional government interventions, or not. So I would say it’s a very mixed picture. I think I had a sense of optimism that day to day life was going in the right direction just maybe a month ago, even if I was, and we were being both realistic as we discussed in some previous episodes. Back to normal, like international travels and the like, as we used to do on a regular basis might just be for some time next year, maybe summer next year. I guess there are some serious concern that our basic everyday life might be back to some sort of war footings. In where I live in Seattle area, King county, we are back to mask mandates indoor.
It’s not yet forced, but I guess it will be there soon. It’s highly recommended we all heard about the CDC recent news also advising for masks mandates indoors for everyone. Vaccinated or not. It seems it’s both because we cannot trust people who are not wearing their masks, that they have been vaccinated and because now there is also the risk that even if are vaccinated with delta, you might harbor the virus and share it with others.
And I guess, in your region in the bay, it’s also back to mask mandates. This time it’s mandatory actually indoor.
Nuno: From what I just saw. And, basically I got information from a club that I’m actually a member of that everyone now in San Francisco should wear a mask indoor, irrespective of being vaccinated or not. My understanding it’s going to be mandatory at least for a period of time, but I’m not fully sure.
Certainly there is a step back. From what was promising to be very nice summer for everyone. If you’re vaccinated, you don’t need to wear anything, et cetera, et cetera. In some ways, leaving this to the criteria of people wasn’t a wise idea in the first place, because how do I know that someone’s vaccinated or not?
We saw a little bit of reverse engineering later on. There were bars and San Francisco clubs, there was a bunch of different stakeholders that started basically enforcing this notion of you have to share with us that you’ve been vaccinated or not either through your digital card for California.
Forget the name exactly of it. Or just a copy of your vaccination card and digital format or a negative test. We already saw some news around that in the last few weeks, but in some ways I feel there now is going to be a more aggressive stance on this. The Delta variant is upon us and in some ways we sort of got it right, Bertrand, right? A couple of episodes ago, we talked about this isn’t going to be until next year, 2022. Despite getting it right as we probably both became a little bit more optimistic about the conditions around us and probably also ease some of our guards in how we behaved.
Bertrand: Yeah, and it feels like for a grand two weeks, I started to stop wearing masks indoor initially taking my time. And then as soon as I saw the rise in not just delta variant, but the fact that the that Delta variant might be more risky. Then I started before there was this news of new mandate, that I felt that the right thing was to actually start wearing a mask again indoor. I also noticed other people doing it by themselves. And of course we have to talk about Europe, I think in some ways Europe was, at least continental Europe, was a pioneer of starting to mandate showing your vaccine or a proof of recent test for a lot of activities and France actually was one of the pioneer to force that big time, basically saying, you know what vaccinated people are doing all the right things, we need to make their life easier, not worse because of the others.
And I think that in some perspective it felt like it was actually the right thing to do. That you have to force a lot of inconvenience on people who are not vaccinated so that they become vaccinated in order to make us all safe. And that was the result, I think, in France there was 14 million registration in two weeks after that, a 1.5 million in just a few hours. So it had a huge impact. Israel maybe might have been doing that, some other Southern Europe countries. And I have the impression it’s coming to the US a bit more indirectly. More like employers in a way are starting to force vaccination.
So we saw some employers forcing it. I believe Walmart is forcing it, the federal government intends to force it, or force you to do a lot of testing. So I think that it’s also coming to the US in one way or another. It might not be exactly the European standard, but it feels like it’s coming and personally, I feel it’s the right thing to do. But I must say that I start to feel, this is way more, how can I say, way more difficult to predict where it’s going next. And that’s my bigger worry. I think that we are going to go through the current delta virus. We are going to get more people vaccinated all over the place because people have no choice keep to keep living a good life or just go to their office and keep their work. But I’m not sure it will be enough. I’m seeing more and more articles that are, I’m not sure they are pessimistic, but I think they might be more realistic that we don’t know where this is going. The last big pandemics were flu virus, they were not SARS, at least not at scale. And realistically we don’t know where it’s going and you have a chance that as we see with Delta, for instance, that: yes, you are more resistant, yes, you don’t die thanks to the vaccine, but now it looks like you might still get infected, you might still infect others way more than expected. It might get worse with a new variant and you might have a new variant where your vaccine is not enough at all to protect you against a severe disease.
Or, worse, you might have new variants where young people, kids, become more at risk. It feels actually realistically there might be a lot more uncertainties in front of us in the coming months, if not years actually and on the good side, the good news thanks to the new mRNA approach for vaccines like Pfizer, like Madonna. we can create very quickly new vaccines, very fast based on the latest variant. So on the positive side, if the virus evolves quickly, we may be able to make vaccines even faster. And hopefully now we have the capacity to distribute even faster, but. it feels like it might be a long game of hide and seek, whack-a-mole type of approach for potentially years to come.
And I start to think we will have to live with it, with this level of uncertainty for quite a while. And some people say, oh, that’s okay. You just get used to it or you’re vaccinated. So it’s less dangerous. I don’t know. In six months we might have a variant that is as dangerous as the first one when you were not vaccinated.
Nuno: This is a complex system. And in some ways we’ve been, over-simplifying all along the analysis. And by we, the world, not us too, but the world it’s oh, it’s very simple, and we have these tiers and we move counties and cities and countries back and forth and openness and closeness. And we’re now realizing the system is actually super mega complex.
The variants make it extremely complex. We don’t know what’s next. Then after the Delta variant, I’m sure there will be others. We now obviously start to understand that obviously the effectiveness of vaccines is different. The Astra Zeneca vaccine, the SINOVAC vaccine doesn’t have the same efficiency, the same effectiveness in some ways and efficiency of the Pfizers and Modernas, et cetera.
We are running into a very complex system. I think the mandates now in vaccines, that we’re starting to see all over the world. As you mentioned, also in the US also in government, not just private sector is pushing people to really behave in a more concerted way. But maybe we are right.
Maybe it’s going to be next year. And I hope at this stage, given that we’ve started having some bad signals that we are right that next year, is it, but if not, we will see.
Bertrand: On a positive note, there has been some good news very recently in the UK where it looks like, they have opened up like crazy normal restriction and initially it went bad but now cases are crashing down very fast and it’s not because they stopped that. So it looks like it might be because they finally reached herd immunity at 90% plus either having a vaccine or having got the virus. So again, it doesn’t remove the fact that a new virus might evade our defense, but it might be good news on the short term.
Section 2 – The economy… stupid? (11:08)
Nuno: As it is often the case in the cases of extreme tragedy, at certain point in time, you can’t cry anymore. You need to start laughing. It becomes almost a comedy, but today’s episode is not about COVID it’s really about the economy. And so moving and migrating the topic directly to the macro conditions of economy and how it’s evolving at this stage.
It seems, and we’ve referred to it in previous episodes that something magical happened. Last year, we had a mini crash around March, April last year, and then everything went back to normal. We continued on a bull market, which was already the longest bull market certainly on equities that we’ve ever can recall in our lifetime.
And it seems to be going great, but we seem to be hitting a ceiling, and so today’s episode is about that today’s episode is we’re going to hit the ceiling. Is this really a fundamental bubble? Which means is this going to burst? And we’re going to have a hard landing, or is this not going to burst because it’s not a huge bubble, but rather we will have a soft landing and there’ll be a realignment down the road.
What do we think?
Bertrand: Yes, that’s a tough question. I must say last year I was expecting that crash. I actually predicted it pretty well just a week before. But then I got it wrong. I was expecting that crash to go deeper, not just 30%, but more in that 50% range, if not more. So I was waiting on the sidelines and what I certainly under estimated was the intensity and the speed of the government intervention.
And I think that’s always proof that looking just at past history is not enough to predict what’s happening right now. And definitely there was a much faster move, way more liquidity where put to use extremely fast. Like we have never seen before. And that’s a bit the worry, that we look at the market as a signal about where it’s going.
But we forget that the market is constantly manipulated by the government. Governments are controlling money. Supply governments are controlling interest rates. We keep talking about our capitalist economy. Personally, it’s not a capitalistic economy. When the most important piece of the capitalist puzzle is actually under government control.
So I think we are living in a fake capitalist system actually. And so the markets are just reflecting that. They are reflecting that, Hey, there is an insane amount of money supply suddenly appearing, and guess what have been people doing with that money? One is some of that money went directly to the banks, went directly to investments.
And so we’re sent directly to wall street, but then another piece was, a lot of money went to consumers. And where I was shocked, a friend of mine is working in the audio video industry. And he was telling me, I think it was May 2020 or June, was their best year ever for the sale of big screen TVs.
Bertrand: That was three months in the pandemic. When governments all over the world were saying, hey, you cannot displace people if they cannot afford their rent, we are going to give them free money and free money they gave, and what did people do? They bought big screen TVs. How nuts can you go listening to that and hearing that. And so of course, as a result, a lot of companies ended up doing pretty well because suddenly money was pouring like crazy. And two, you had the second part around new solutions, like Robin Hood in the US and others in other countries where suddenly consumers were given free money and some actually felt you know what? I’m going to put that money on the stock market.
So a rush of free, and I don’t want to say dumb, but inexperienced money rushing to the market. And so suddenly if we look at just from an external view perspective, market is going up, without thinking about why was it really going up as. Have we suddenly distorted the whole economy to in a way prop the markets, prop the economy as well.
And are we starting to pay the price right now? And I think that’s really in some ways the question, because I feel that we have lagging or lying indicators with the markets. So we need to go beyond that and deeper than that to understand what has been happening and as a result, what might happen next?
Nuno: And just as a quick disclaimer, I am an investor in Robin hood. So anything I say today does not relate at all to my investment in Robin hood, on my perspective on Robinhood and in plays along those lines, just to really reiterate a couple of points here that are really fundamental. One is an tremendous increase in money supply, a tremendous increase in money supply.
I think as high as 25% in some markets,
Bertrand: 30% in six months in the US
Nuno: Okay. So 30% in six months in the US. So ridiculous.
Two, obviously we’re not economists or macro people we don’t play in the macro world. So anything you listen to today take with a grain of salt. This is our observations, looking at the stamps that we’re in.
Bertrand: Not an investment advice.
Nuno: Not investment advice to be clear, right?
Three very clearly here. You just need to follow the money as Bertrand was saying, I think I would fully agree with him. There’s a tremendous increase in consumption. I was just literally got a report from Morgan Stanley that’s showing a net spending intentions pre COVID on average post COVID outside of technology sector.
It’s going through the roof. The Delta, and this is not a pun. The Delta is so positive post COVID that’s ridiculous. So pre COVID the net intention of spend in a specific sector was much lower than it is right now. So there’s something going on. And what’s going on right now is people are consuming.
There is no tomorrow. I don’t know. I hope there is a tomorrow. They’re consuming in several different ways. They’re consuming in purchasing things for their home, purchasing things for their own lives. We saw a lot of that when we looked at some numbers back last year on what were the most purchased things.
A lot of them were actually connected to the home. We had an episode on this is becoming a little bit your castle the place where you surround everything around you, the things you need for your life, right? From wellbeing and fitness to entertainment, you talked about large screen TVs, et cetera.
The second piece, which is really interesting in this report I just got, is actually the capital goods orders are going through the roof to levels that are much higher. The chart that I’m seeing is back to 2006. It’s going higher than that. It’s going higher than the max we saw between 2006 and today. So capital goods, again, this is with the exception of defense and aircraft is going through the roof as well.
And so you’re like, what’s going on? And the ripple effect of that. And we’ll talk a lot about equities later on. So I want to center part of the discussion we’re having today around equities, because it is the crux of the matter. And we’ll go back to startups and we’ll go back to VCs and investment because that’s the stuff we actually are experts in. The piece that’s really important is a lot of this money floated to public equity markets. It floated to backing companies that we thought we were going to win. And a lot of the companies that were backed that we thought we were going to win were obviously digital native companies that were intrinsically digital.
That makes sense because during COVID we saw that if you’re not digital, you’re going to lose, there was no way because if another pandemic happens or pandemic prolongs a lot longer, the companies that win are systematically the digitally native companies. And so we see the fact that both large cap tech companies have done very well, small and medium cap tech companies have actually done very well.
We have price to earning ratios today that are to be honest, in some cases. Ridiculous in some industries that are definitely, I don’t think very justified in what’s happening and the reason for that is the money had to go somewhere, right? Because if there’s more supply of money, if consumers are getting this money, if everyone’s getting this money, then where am I putting it?
I’m not going to put it in bonds. So I need to put it somewhere where I think there’s an appreciation and that props up the value of the tech giants of the small/mid cap tech companies. But it also prop the value of other types of companies that are in the market. And we’ll come back to this later because it has also prop the value then of private markets.
It has also propped the value of companies that are raising money anywhere from early stage to pre IPO. Again, very understandable. The money needs to float somewhere at a certain point in time. There’s only so many public equities you can back. You need to then float that money back to private equity firms, to growth funds, to venture capital firms in venture capital funds so that there is a propping of that market.
And we’ll talk about it later, that pushes everyone’s value above. So again I’ll put a stick in the ground. I think we’re in the middle of a bubble. I think we’re going to have a hard landing again. I’m not a macroeconomist. I can tell you for sure. I can’t tell you anything. Even if I was, I probably couldn’t guess it.
But I do believe we’re in the middle of a very significant bubble. We will have a hard landing not a soft.
To represent the other side of the fence. I’ve talked to people that do this for a living, and at least I’ve heard from one or two people that they are more on the soft landing side of the scale that, what Bertrand was talking about, that there’s a lot of mechanisms that are controlled by governments and government agencies.
And therefore you can manipulate the market. Somehow. It’s like the casino owner, it always wins. And that there’s a little bit of propping over the market. And therefore there was a soft landing I’ve heard numbers of we’ll have a 15 to 20% crash at some point. Some people are thinking it’s going to be next year.
Others believe it’s going to be the year after. There are some aggressive people that think it will be by the end of this year. I’m probably more on the next year camp. Again, I’m more on the hard landing side. I don’t see the sustainability of a lot of the valuations we’re seeing. This will ripple again, back to private markets as we’ve seen the past.
So public markets will, again, diffuse, implode and then everything will ripple down the road. Am I too negative Bertrand, am I just too negative?
Bertrand: I don’t know, if you are too negative, but a few other points I want to highlight before we go further in that discussion. One is and this is another asset class, but real estate, real estate prices have exploded probably for two reasons. One people desperate to move to new places, usually leaving center cities to go to suburbs and limited supply.
So then you have 20% plus people who want to move to a new place. You don’t magically create that supply. So you have an imbalance so prices go up. The other piece of course, is when interest rates are super lows and you can of course afford bigger loans, so you can afford more expensive places to live.
That was one piece of the puzzle. Another piece for me is really that, maybe don’t talk enough about it, but there is a big issue with schools. In many countries not so much, if I take France and most of Europe, as far as I know, they kept the schools open. So that means that technically, you still have as many people going to work or the office as before.
Maybe not the first 3 months of COVID because people are afraid, you were locked down, you didn’t have access to masks, to anything. So you couldn’t work even if you wanted to in some ways. But now in the US, you have this situation where a lot of kids still cannot go to school, cannot go to school, physical school. Virtual your schooling is just to be frank very crazy. You probably know by now that I’m a big believer in remote work. I’m not a big believer in remote education if you are 5, 7, 12. This is madness. This is different story at college level to be clear, or post-graduate level.
But before that, that’s pure madness. And so we still have a lot of parents who cannot go back to the office and cannot go back to work as normal and the other piece is that a lot of the support options have disappeared.
You know these very nice checks that governments have been spending all around the world. As a result, a lot of people now do not want to work. So where is it that you are going to find a nanny to support you for instance, if your kids is too young to go to school or after school. All of this is stuff that’s part of helping maintain the maximum supply for the workforce.
And right now in many countries, in many regions, in many states, it’s completely broken. We are not back to normal. even as of today, when there should be no reason not to go back to normal, you can go to school in physical with mask, with the right protocol, everything. It’s not as great. It’s not as fun, but it works and it’s much better than doing it remote.
So my point is that the industry. It’s not just everything we discuss, but are still impact of that COVID situation that are impacting us as of today. And will keep impacting us for the foreseeable future. So you have an imbalance of supply and demand in term of hiring. And we see that in the number: there is a lot of companies, industries that cannot hire right now enough.
And as a result, we see an increase in wages that huge and in a way, governments have managed to go beyond their stated goals of increasing minimum salaries, because they have actually given huge amount of money to people so that they stay home. So of course, employers have to manage that supply demand imbalance and are increasing salaries as a result.
But the problem is, and I think now we can talk about that. The way I’m seeing it is that what we did 15 months ago to solve the crisis is starting to come back to hit us with inflation and we have seen inflation in asset price. It’s clear, it’s obvious, but now it’s inflation in everything else, it’s in the cost of everything you purchase.
I believe it’s a huge problem. We have not been used to inflation in the Western economies and Japan and Korea in the past 20 to 30 years, it has been tamed. It has been put back in control. I’m very worried right now. And we see right now, the last two quarters of inflation were super bad.
Was it 2 quarters or two months? It was super bad. Annualized, we are talking about 5% inflation. I see people who were telling me they see inflation easily at 8% pretty soon – annualized. This is super bad and you see a FED who is saying, it’s all right, it’s all good, it’s temporary.
This is not temporary if you have increased wages all across the board, you are not going to decrease salaries This is not going to happen. This is not temporary. I’m not a professional economist, I was not a professional doctor when I saw a crisis with COVID. I was scared late January last year and I prepared for it.
So I think we should stop thinking we are not expert in this or that. I think sometimes common sense might be better than some level of expertise that is actually tainted by special interest.
Nuno: Yeah, there is a big bet here that somehow this inflation that we’re seeing is transitory and that things will go back to normal next year. I think that’s probably the fed bet right now, the biggest bet that the table. We could believe that’s the case. Again, we’re not economists I think we’re both on the same camp saying we think be in an inflationary play, in an inflationary economy for a longer period of time than probably the fed does. And so this is going to affect everyone for a longer period of time than they have in mind. And just adding to what you were saying, there’s a lot of imbalances around supply and demand and those imbalances on supply and demand you talked about real estate, people, resources, workers, employees. Clearly, also a lot of issues around that. One of your pet preferences and you shared an interesting article from the CEO of Intel saying that the supply demand dynamics weren’t going to be normal in the chip industry until 2023.
So it won’t be normal until 2023. It’s difficult to get, for example, cars right now. I was just sharing some stories before we started this recording with Bertrand, I’m trying to get a car at some point next year, predicting that there’s going to be shortage, I’m trying to get on that list. And I’ve already been told it’s going to be nine months.
And to be honest, the sales rep doesn’t even have any intentions of taking my deposit. So I’m trying to even push him to get it. So it’s incredible what’s happening right now. There’s a lot of imbalances in a lot of industries around this dynamic of supply and demand.
I do believe we’re gonna face inflation. Inflation comes from these imbalances. And so it’s a “fait accompli”, I don’t think we will have a way around it with all the dynamics we just talked about. The other side of the fence is in some ways the capital that has been deployed by a lot of these agents.
And we have talked about institutional funds, banks, family offices, we haven’t really talked about much, but all of these different sort of animals of the financial services industry have a lot of assets and they normally run these assets with a very aggressive portfolio management. So they have their assets distributed across different asset classes that provide them in some ways with different returns.
That’s a very different risk. Now, the interesting piece of what’s happening right now is equities are particularly appealing, right? Because they are incredibly volatile as we’ve seen, but also they keep going up magically as we’ve discussed. not really magic we’l,l come back to that in a second.
Bertrand: It is in some ways.
Nuno: What’s happening in some ways for these agents is they need to step back and say, okay, if I’m generating all these returns, for example, in relatively liquid markets, like in public equities, let’s say I’m a family office. I need to pour them into something else. And that’s the moment where family offices start giving, maybe more money to new emerging managers and venture capital, helping them create new venture capital firms, helping them fund new funds that they’re deploying capital from. Also doing direct investments into startups and also pushing their capital into, as I was talking about earlier, private markets.
Now, if you put all of this together: magic. Again, what happens is there’s a ton of capital. There’s a ton of capital. I said something the other day and someone took offense, I was talking in a panel, I said if you can’t raise money right now and you are a startup, I’m not sure you’ll be able to raise money at any other point in time. And obviously I’m exaggerating, sometimes you can’t raise money because your fundamentals and the stage you’re at don’t quite match. You don’t have the numbers to raise that amount of money at that stage.
You might be able to raise later on. So I was obviously simplifying the message, but at the same time, in some way, I stand by it, which is: this is the easiest market under which you’ll raise capital because there’s an abundance of it. There’s a lot of actors participating that need to deploy their earnings from other areas that are in principle, more liquid.
And once they start doing their portfolio, reallocation of capital and looking at risk reward, they’re like, you know what, I’m going to put in higher risk reward. So I’m going to put it in private markets that are also longer. So less liquidity, they’re going to take years to return to me. So this is the moment we’re in.
And so for me again, I’ll put the stick in the ground and before we move on to really more the micro space of venture capital and what’s happening there because there’s a lot of stuff happening there, I would say we are in the midst of a bubble. The bubble is very significant. Assets are over valued. Public equity assets are over-valued, private equity assets, venture capital assets, startups are overvalued. It’s not true of any, every single company, but it is true of the market in general. So on average and on median, I stand by that comment. And if that’s the case, again, there’s only two ways to come back from that either a soft landing or a hard landing. Again, I’m on the hard lending side.
Yeah. to follow up on this, you talk about difficulty of finding a new car. Let’s not forget that right now it’s 35% increase in cost to get a used car. So if you want some proof of insanity that’s one. So this one, it might be a bit easier to argue that it’s temporary. We will see.
Me we talk about the Fed and what they say. I cannot forget that these are the same people telling us in 2007, that everything was great. That the economy was great, that there was no bubble, that everything was under control, up to the very last minute and the explosion of Lehman Brothers. So I think I’ve learned, and we should all learn not to trust a single word coming from them. We might try to guess. We might trying to get some data point, we might try a lot of stuff, but to believe the truth coming from them, for me, is extremely difficult at this stage. The have proven again and again, that they always are incompetent or lying about their take on the economy. It’s one or the other.
But when you make mistake after mistake on the state of the economy, at some point, that’s what it is.
For me, the analogy is you have a bomb, you have a bomb on your hands and you’re trying to defuse it. And you’re trying to diffuse it with all the different techniques that you know, how to diffuse a bomb. And so probably what the fed is doing is, ok I am going to increase money supply, I’m going to think through interest rate as a link to it.
So all these different agencies as they’re working together, they’re working together on this bomb and trying to defuse it by playing with money supply, playing with interest rates, playing with everything else. Their best hope is that it doesn’t explode, right? Now it could explode still.
And we are in pretty unknown territory and it’s a bomb that they don’t know much about. So imagine this is a movie and the main protagonist is all these agencies put together and he’s using all these little things. It might still blow up. So I wouldn’t say they’re always lying in some ways, they have the interest of not having the bomb explode.
And so they’ll try and throw stuff at it as much as they can. So it doesn’t explode. What I think you and I are saying is it’s likely going to explode and so good luck guys. Let’s all hang tight and see when it explodes, what happens, right? What’s the radius of the blast?
Bertrand: But I think that if you believe you have a bomb ready to explode and you’re doing your best, so that it doesn’t explode, that’s still lying because that’s not what they are telling us
Nuno: But they have to otherwise we’d have a run to the banks, right?
Bertrand: That’s lying for the best interest of their job, of their seat and a lot of things. But for me, it’s still lying, and I cannot help but remember at the beginning of this COVID crisis, that was the same story from the CDC. Oh, you don’t need mask, and masks are dangerous, and then flip-flop when you have enough masks, oh now that we have enough masks, maybe it’s a good idea you have them because you know what, it can block the virus.
So I’m very worried that we have moved to a new world where these agencies will keep trying to guide us and hide from us the truth are proven faster and faster how wrong they are or how misleading they are. And I think at the end of the day, there is probably only the mainstream media, or overall people don’t want to think too hard by themselves who keep believing them.
And I think as a result, their impact on the market is going to be lower and lower. At least if it’s only based on a communication perspective, but obviously they have way more tools at their disposal. My worry is that they are running out of tools at their disposal and that inflation is showing us that.
To your point let me address soft landing, bubble or not a bit after. I want to go back to your point about money moving from public equity to private equity, I think you’re right. Both are happening, there is more money going to the public market and at some point there’s also more money moving out from the public market, going to the private equity.
I think it may be connected to a bigger theme, which is the move from traditional to new economy. Given what has been happening with COVID, everyone has been moving faster and faster to becoming digital, but it’s pretty evident that If you are a digital native, or a digital enabler, or a tech company, you are going to fare so much better whatever the environment is.
And therefore there might be a true long lasting benefit for you to be a digital company. Or a very very digitally competent company at the very least. So the bar has been set higher and therefore I think there is a new analysis on how you should analyze return and how you should predict return on the longer run of different type of companies.
And that’s why we are getting, I think on the longer run even higher valuation for public tech companies or tech-enabled companies. And obviously if we look at the private market, it’s all about, especially on the VC side, obviously it’s all about these new tech companies. So if you believe in that in the public market, you should put even more money actually on the younger ones, coming up in the private markets.
So that might be part of what’s happening at least I believe that’s what’s happening.
On the bubble or not, as we discuss it’s a very different type of bubble. It’s a type of bubble where it’s not like one piece of the economy got it wrong like the tech bubble in 98, and actually did not so much has got it wrong, that got it too early, versus where it truly was. So ultimately it was just too early by 10 years, probably.
But here it’s different. It’s really a bubble of the size of the global economy which I guess is the worst bubble it can get. But my point that I don’t see where that money is going to suddenly re-allocate So I hope it’s going to be soft landing, and if it’s going to be hard landing, it’s going to because we don’t know what to do next to save the situation. And as you say to diffuse the bomb, because we will have seen that actually our tools to diffuse the bomb are not working anymore.
The biggest issue has been, we have been giving money like crazy for no good reason and money that has made things worse, meaning people have invested money in not very rational way. And we have incentivized, at the moment where we needed as many people as we can, to stay out of the economy. So I don’t know for sure if it will be soft or hard at this stage, but if it’s hard, it’s going to be super hard because it’s the whole economy and the whole economic system that will be at risk at this stage.
Nuno: So maybe two or three points, and then we’ll set the stage to go to the micro stuff of investing in venture capital, investing in particular and startups. The first point is I remember 98, 99 and magically the discussions around new economy. That was the exact term. And we had incredible economists defending it was going to be different. And there were arguments on the micro economic side saying it was going to be different because these companies were going to command eyeballs. They were going to command users, and it wasn’t so much about how much money you could make out of those users. It was about the number of users you had now.
To be honest, they were half right, right?
We today look in particular, all of the consumer spaces around tech, and eyeballs, number of users, retained users, engaged users, very, very important metrics. What they got wrong is you still needed to monetize them. And over the years we saw obviously the advent of advertising based business models, which we’ve seen through the years that are also limited.
We’ve seen other business models like subscription-based, freemium, as more natural captures of value for that space. So in some ways they got it half wrong half right. The half wrong was pretty, pretty half wrong. The macro part that there were totally wrong is obviously the value, intrinsic value, of an industry, sub-industry or of the companies in that industry.
And we are seeing the same thing. Maybe leading to my second point to what you’re saying Bertrand, it’s like, I understand the migration of value. If you believe that digitally native companies are going to win systemically as part of the system, they will win systemically in the spaces they’re in. That Amazon will kill retailers, right?
That Amazon will kill a lot of other things like mom and pop shops, et cetera, et cetera. You migrate that value through the form of your investment in that company in a strong way. I totally understand that. What we’re seeing right now is not so much that.
It served three things first of all, it’s not a zero sum game.
It’s not like I’m migrating value from one side to the other, magically the other side hasn’t fully imploded. Again, that must be magic. Secondly, the propping up of the value of the Amazon of the other player is incredible. It’s ridiculous. And at that point in time, you need to believe that the price earning ratios we’ve been having for decades in specific industries don’t make sense anymore.
So we’re in a different latitude of price earnings ratios, going forward. So it’s not you know, 30 50, 60 X is normal. 10 X is the old high growth scenario. I can’t believe that either.
And the third thing is in some ways, because there’s so much propping up of the public equity markets in itself as an asset class because of elements we’ve referred earlier in the episode, because people were given checks, literally.
I got my transfer, I gave it to charity. But I got my contribution on my bank account a couple of times. And I’m like, why have you sent me money? And what’d you do with that consumption? The consumption was not tied to anything, a lot of the consumption that arise or rose from that is the consumption of, you know what, I’m just going to put money in the stock market.
Because that’s the volatile high yield play. So I’ll see what happens. It’s like putting money in the casino, I wasn’t getting this money anyway. So I might as well see what I do with it. Maybe I’ll put either that or crypto, at the end of the day and see, and let it roll.
And the let it roll thing, there was nothing sustainably economical in that. So again, that’s why I believe we’re not in a new economy we’re in an economy that’s just migrating, which makes sense, which has had a huge disruption that has moved it into fundamentally digital. If you’re not digitally native and if you’re not digitally enabled, you’re dead. I still believe in that we mentioned it in one of our previous episodes. But at some point in time, you need to go back to basics and fundamentals of, what’s the valuation of a company. What valuation does it make sense? And I don’t think we’re even close.
I think we’re really far off on many companies, even some of the really large ones.
Bertrand: Yeah, but on that point valuation is of course dependent on the amount of money supply in the system. So at some point, the more the money the more the numbers
Nuno: But my point Bertrand is we’ve heard this before and it didn’t end up well.
Bertrand: oh yeah. I’m sorry, I’m not saying it’s going to end up well.
Nuno: and now we’re hearing it again. I’m like, I don’t buy that. It’s somehow we’re all going to pay for that. And we’re going to pay it in the form of inflation.
We’re going to pay it on the form of some equities are dramatically over valued, they will need to rebalance. Some companies will fail. Some companies will fail.
Bertrand: then we are in agreement. But maybe one more point is that you said that, some industries, olders industries actually not imploding. So it’s not so bad actually, but I would argue that actually, if they are not imploding it’s because only of insane helicopter money thrown at them.
Look at the cruise industry. Look at the travel industry. Look at the airline industry. Look at some small restaurants. If they have not imploded it’s because of all the they have received the past 15 months and they keep receiving in most cases. And I’m very worried because if this situation keeps going very randomly, you never know, six months, 12 months what’s happening.
I hope at some point, governments are going to take notice and say you know what we are going to let this industry consolidate because we cannot keep that going. We cannot keep airlines at a level that was needed in 2019 for the next five years. If we need 20% of that for the coming 10 years. This is just not going to fly.
So I’m pretty worried from that perspective that we might start to see at some point when governments are going to say, you know what, I thought it was all we need for five months, eight months, 12 months, 15 months. No, we are at two years. We are stopping this stuff and guys who are going to let you implode and reconfigure and restructure.
So I’m worried we might start to see that at scale actually, whole industries imploding.
Nuno: Maybe the biggest bet of them all, and we will move forward to venture capital and startups.
But the biggest bet of them all is that we’re in an interim state where if I sustain the supply, that is in the market, the restaurants, the airlines, the hotels, as much as I can, all of these different pieces of the puzzle, which obviously were tremendously disrupted because of a pandemic that in a very near future, these things will go back to the same levels as before.
And when that happens, the supply will still be there and we’ll live happily ever after. That’s probably the big bet of them all. And then the question is, do we believe in that or not? In some ways I think what we’re saying is probably not, there’s going to be disruptions to many use cases. There’s going to be disruptions to many things that are happening and the world will be different.
It will be a new normal, it will not be the normal we had before. But anyway, I think that’s probably the biggest bet of them all.
To conclude episode 25, where we focused on the macro situation on where the economy’s going, all the key metrics around inflation and how we’re seeing the market evolve, we will then move to episode 26, which will conclude our two series part on the bubble, whether there is a bubble or not what the implications are. And the next episode 26, we will focus on where is the VC landscape going and evolving into? What is happening around liquidation and exits? Not just IPOs, but also SPACs, mergers and acquisitions, and other transactions.
And finally, we’ll end up with a “so what are your takeaways”? If you are an investor or an entrepreneur, join us for our next episode 26.