Unicorns, Commodities, Warp Speed

November 30, 2022 - Max Osbon (5 mins to read)

Unicorns

The term “unicorn” refers to a private startup worth over $1b. Globally there are more than 1,200 unicorns with a combined valuation of $4.2 trillion. This term serves as a tool for marketing and recruitment as well as bragging rights for founders and investors. VC’s don’t have enough dry powder to mint or sustain unicorns on their own. In recent years, mutual funds and hedge funds have been the driving force behind unicorn creation, essentially providing access to public capital markets without actually requiring these companies to go public. New unicorn creation is back to pre-Covid levels, minting roughly 13 new unicorns per month in the 2nd half of 2022, down from an average of 50 per month in 2021. The creation of new unicorns in the face of unfavorable capital markets and uncertain economic conditions is a good sign for the overall pace and success of innovation.

 

State of the market

The next FOMC meeting on Dec 14th will likely result in rates rising from 4% to 4.5%. Those interest rates will likely top out somewhere around 5-5.25% in March of 2023. The first collective sigh of relief will come when the inflation print (CPI) is finally lower than interest rates for the first time since we started battling inflation.

The last CPI print was 7.7%, down from a high of 9.1% in June. While slow, the trends are firmly in place: rates continue to rise and CPI continues to fall. Powell has said the Fed would rather clean up the financial damage on the backend by cutting rates and issuing stimulus rather than risk prolonging inflation. Patience continues to be the name of the game until we complete this phase.

Twitter is sending a powerful signal to public company executives. If Twitter does not irreversibly fail then executives will have to look long and hard at why they are not actively slashing headcount, cutting costs, rearchitecting old tech and getting back to their scrappy roots. In order to unlock any significant value for shareholders, this is an uncomfortable but necessary process for tech companies to go through.

 

Structural issues in commodities

Social pressures driven by environmental concerns have put commodity prices in a tough spot. For energy assets and industrial metals in particular, almost every box is checked in the list of factors that can push prices higher. Those factors are:

  • Low investment into new and existing projects
  • Low inventory levels
  • Low spare capacity
  • Low investor positioning
  • Policy headwinds (ESG values refuse to recognize practical supply demand reality)
  • International demand increasing (perpetual interest in increasing living standards globally)
  • Weak dollar driving price increases

Not every commodity faces these issues. We don’t have policy issues or social pressure to not invest in grain or livestock production, for example. Changes in policy, energy education, and an overall appreciation of our practical constraints can reverse this trend. Those changes would be a positive surprise socially and economically as a whole. Until then, commodity bulls are probably going to do well. A bull market in copper, in particular, seems imminent at this point.

 

Warp speed

Small talented teams can accomplish a lot in short periods of time. When we grapple with the current challenges it’s easy to forget the bigger picture and the many reasons to be optimistic.

Prices tend to drive narratives, meaning increasing prices create an overall sense of optimism as a byproduct. This year’s decreasing prices create an overall sense of pessimism. A string of bad events and falling prices creates a recency bias than gives us all the uneasy feeling that bad news begets bad news, and so on.

While people argue if crypto is finally dead as bitcoin drops from $70k to $17k, it’s hard to remember that it traded below $500 as recently as 2016. Zoom’s market cap is now below it’s pre-Covid level, while the company has grown revenue from $600m to $4.35b over the same period and the brand is now a household name. Innovation inside and outside of the US remains powerful even with a reset in valuation and capital market slowdown.

News outlets are often not all that helpful in discerning where we’re going and how fast the world is innovating. Unfortunately the NYTimes has decided to provide a platform to FTX founder SBF to speak at their DealBook live event this week, which highlights the NYTimes’ priority as a media and entertainment production company first and foremost. Periods of struggle are acute and uncomfortable, but not permanent. Growth outshines failure over time and given how fast the world moves today that next phase of growth could be right around the corner.

 

ATM Art

The Brooklyn artist collective MSCHF debuted a leaderboard ATM at this year’s Art Basel. The ATM posts a photo of you and your account balance when you use it, with the highest balance at the top. It seems like a very Miami piece of art. MSCHF previously auctioned off a $1.5m laptop named “The Persistence of Chaos” containing six of the world’s worst historical computer viruses. Those viruses were estimated to have caused $95b in damages. This story isn’t really related to investments, but it’s interesting to follow how contemporary artists experiment and capture how life is different in the 2020’s, especially when it comes to how technology fundamentally changes our lives.

 

Image note: This week’s image is a drawing of the Archimedes Lever, “give me a lever long enough and I’ll move the world”. We used OpenAI to replace Archimedes with a unicorn, representing the potential for the right young unicorn company to make a major impact on the world. It only takes one.

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