Turns Out the Unicorns Were in the Wrong Ark

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May 17, 2022
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The collapse of Crypto is important, but likely not as significant for markets and economies as the collapse of the Unicorns from a supposed $3.7tn valuation to…a lot less. Like the Dot Coms before them, the ecosystem attracted a lot of leverage and mispriced a lot of capital and capital equipment. The aftermath is not going to be pretty and may even bring about a form of secondary banking crisis. On the positive side, the pressure on wages may ease as a lot of workers realise that you can’t eat in the Metaverse.

The rout in the Crypto world has destroyed a lot of instant wealth, but its economic impact may not actually be too great. Think instead that as the Fed flooded the economy with liquidity, it expanded its balance sheet and at the same time the 10,000 Cryptos that emerged inflated the balance sheets of those who owned them as their agreed valuation soared. It was only if they sold and spent the ‘money’ outside of the eco-system – or more pertinently borrowed fiat money against those assets – that there was a real world impact. As the Fed shrinks its balance sheet, so too do the balance sheets of the Crypto Bros. Sure there may have been some leverage in place, but likely not too much. Indeed, we may find a sudden easing of wage pressure; anecdotally, our IT consultant tells us that after months of finding it impossible to secure a software engineer (they were all working on Crypto), there is suddenly a glut of candidates. That was quick!

A far bigger problem is likely to be the unwind of the Cult of the Unicorn, since this is an area where there was a lot of leverage and a lot of fiat currency spilling over into the real world. At the end of last year, the Hurun Institute in China produced a report on the Global Unicorn Index detailing that there was a total of 1058 Unicorns worldwide, with a value of $3.7trn, double the previous year with 70% of them split between the US and China. Even if we ever believed in letting the investors ‘mark their own homework’ on valuations, the list of the biggest investors should have sent up a few warning signals – especially numbers 2 and 3! Notice that the top 3 investors have almost half of the total, but also that most of the rest have added more than 2/3rds of their total in the last year.

Biggest Unicorn Investors (from the Hurun Unicorn Index)

Table 13A: Most successful investors into unicorns – Top 10 (November 2021)

Source: Hurun Research Institute

If that wasn’t a big enough ‘Bell Ringer’ of a statement, then how about this (from the report)?

“Unicorns are supposed to be hard to find, but investors like Sequoia, Tiger Fund and Softbank make it look easy.”
Hurun Institute, Global Unicorn Index 2021

It’s hardly going to be a controversial statement to say that we doubt that the November 2022 valuations for the Unicorn index are going to be so high – assuming there are any left(!) Nor indeed is it going to be so easy to be mentioned on the Forbes Midas List. As this year’s list breathlessly pointed out:

At number one for the first time is Andreessen Horowitz partner Chris Dixon, the two-time entrepreneur turned crypto investment king, who jumped six slots thanks to his firm’s continued investments in crypto exchange Coinbase and a portfolio including decentralized exchange Uniswap and NBA Top Shot creator Dapper Labs.
Forbes Midas Report

Ouch. Of course, it’s technically only the quoted stocks that have marked to market, but the bubble in valuations is well and truly burst. In terms of our list of Unicorn wranglers we can also get some sense of the the damage at Sequoia by looking at some of the recent IPOs it still holds – DoorDash -50%, Nu Holdings -48%, Snowflake -53% and Unity Software -72% – just to pick its top 4 holdings listed and their performance year to date. Coinbase, with the double hit from Crypto, is obviously down 73%, ytd which is not helpful for Mr Dixon at Andreessen Horowitz keeping his Midas Crown, nor of course to Cathy Wood at ARK, who are the third largest holder of the stock. Importantly, a lot of the valuations that kept the whole show on the road were subsequently helped by the involvement of Ark and the little closed user group that included both Tiger Global and Softbank (see Stranded in Rockpools). The latter in particular, with their significant leverage against their listed and unlisted holdings represents a meaningful risk to financial markets. In effect this has all the potential of a secondary banking crisis of sorts, we may need a lifeboat for an ARK.

If you look carefully in the painting from Simon de Myle (that we posted last year when talking about ARK being left high and dry by a lack of liquidity ) you can see in the top left there are two dragons flying away from the Unicorn on the Ark. Turns out that, contrary to the legend, the (stock) Unicorns did in fact get onto the Ark, just that it was the wrong one…

The Unicorns got on the wrong ARK

File:Noah's Ark on Mount Ararat by Simon de Myle.jpg
Noah’s Ark on Mount Ararat by Simon de Myle

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Political Cicadas - no change in the product, just the sales team

The habit of spending long periods underground before re-emerging is not limited to the Cicada, for while this year sees the coincidence of the 13 year year Cicada cycle and the 17 year one, something that last happened 221 years ago, it is also 17 years sine Tony Blair was last in power and 13 since Francois Holland (likely PM in the French Hung Parliament) was. Both now look to be re-emerging to ensure continuity of policies that never really went away. The key sources of protest across Europe - crippling expensive wars against Russia and Climate change as well as uncontrolled immigration have only been addressed in the doubling down - the first thing UK PM Starmer did was fly to Washington to offer more money to NATO, while his Chancellor promised more money for Net Zero. Meanwhile, the left alliance put together to thwart Le Pen is even more pro immigrant than Macron. For markets, there is no prospect of lower spending and every prospect of higher taxes - the only 'Change' visible but not the one promised. The Technocrats and Globalists expecting this 'democracy' means that the populous will go quietly will be disappointed, especially with the arrival in the Autumn (once the Cicadas have gone) of the great populist, anti open border, anti net zero and anti war populist Donald Trump.

Market Thinking July 2024

The scorecard for the first half puts Equities, commodities and Gold in the top half of the table, with cash and fixed income in the lower half. This is consistent with the steady but uninspiring macro backdrop and positioning ahead of a tricky H2 from a political perspective. The anomaly of the Market Cap weighted SPX out-performing the equal weighted SPW by over 10% points tells us both that the SPX is no longer telling us anything about the US economy and that this excess return is for taking (considerable) concentration risk. Meanwhile, with Bond analysts 'pivoting from the Pivot' the fixed income markets have calmed down a little and leaving The Donald' rather thna 'The Fed' as likely the biggest policy influence on Markets over the next 12 months. In particular, we would look out for a 'Trump Plaza Acord" early next year, 40 years after the last one- something the FX markets aren't talking about, but the asset allocators seem to be (at least subconsciously) pricing in.

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