The After Party

Hope you are enjoying the party. It is just four months into the year and feels like everyone in the market has aged a bit faster. The SPAC show is over and so is the IPO show. Both the shows were exhilarating while it lasted and everyone got stone drunk on it. The VCs and the PEs have exited from some of their most egregious investments and have successfully unloaded it in time for the market to take the spill. All the chorus of how they wanted to democratize the retail investors role in the public markets has died down. Super stars like Chamath are nowhere to be seen on TV anymore. 

But like any good tragedy movie, the climax is yet to come and with this quarter the climax is building up. The darling FAANG is the final act in this show. The ones that the most ardent of retail investors had held with fearless spirit has finally come on screen. NFLX down 50%, FB down 60%, AMZN down 35%, GOOGL down 23% and MSFT down 20%. AAPL is the only one that still holds some respectability but I think that is also just a matter of time. 

The thing about confidence is that it tends to shift until there is nowhere to hide. After the COVID rebound confidence was low, but the market reversed and eventually made everyone a believer to the extent that SPAC and IPOs came rushing in. These are the people who knew the party was getting over. So they got out when they had the chance. Cant fault them for it. Then came the SPAC swoon followed by the IPO swoon. Confidence shifted from those to cloud stocks like DOCU, SNOW etc. Then that shoe began to drop and the confidence began to shift to semiconductor stocks as they were the future of tech and so on. Then came the inventory build up and enterprise slow down and semiconductors began to give in and that is when the FAANG stepped in as the last bastion. In the last couple of weeks, this too has began to falter. Confidence is finding it hard to find a place to shift. So the argument is that the Fed will not raise rates as aggressively as expected and so things should bounce back soon.

But none of this is what creates the tragic climax in a bear market and so celebrating a bottom might be too premature. After all, with all this drama behind us, the S&P is only down about 11% after a good 5 years of amazing returns in the order of 15-25%. No, the real fear sets in when the debt markets cave in. While most investors know that the bond market is really the tell tale sign, very few retail investors really track it. Once the debt market start cracking is when real fear in the equity market sets it. And understandably so because equity is subordinate to debt and hence if debt is faltering, then equity has no ground to stand. 

In the last couple of weeks after breaking a stubborn uptrend you can see those cracks forming. HYG, LQD, JNK etc are all down as interest rates tick up. Mortgage rates have nearly doubled as well. While this is not a sign of a debt crisis, there are plenty of fodder for this in the world today with the Ukraine war pressuring the Ruble, the Japanese QE pressuring the Yen and the devaluation of the Yuan by China in response to slowing economy. These countries are all fairly large economies and might wade through these challenges, but not so for the counter-parties.  Added to all this there is a FED that is hell bent of raising rates and tightening money supply to curb inflation. Somewhere in one corner of the world there will be a counter party to these seismic shifts that is wriggling nervously. The thing about a debt/currency crisis is that it is always extremely improbable until one day it is not. 

So the Pessimistic Optimist that I am, I add to my longs as the market pulls back, but rather timidly while looking for the final shoe to drop in this climax. Once that shoe drops, there will be confetti everywhere to be picked up and a lot of trash to clean up and then we all go home and lick our wounds till the next party gets started.