#3 The Latvian story - markets drop it like it's hot
š¦§ Let's not gonna lie here - 2022 is the year when everyone is losing money in the markets & losing it bad. The markets are down & are struggling to find the bottom, so what does the future hold?
š Brief intro
I am back with the #3 & officially last part of the Latvian story or the Life of Matīss. Now, rest assured, this is not the end; I will be as sneaky as the creators of Game of Thrones & will add some new parts that are somewhat related to the story or just interesting to me.
Without further ado, the topic is investments. This is my favorite part as it goes into one of my main domains. I hope that you will feel it & I promise to do more speculations this time. Furthermore, what better week to do this than a week when S&P 500 goes into the bear market. š„²
Our topics in the Latvian story:
šø Inflation remains high &Ā interbank lending rates get ready for lift-off
šµāš« Geopolitics landscape is uncertain, to say the least
š©ø Markets are bleeding
š® Other things & speculations (this one will be updated periodically)
Read responsibly as this is being written only as speculation & I am no expert in all of these fields so there is no need to take me too seriously. However, I am more than interested in discussing any of the topics in more detail & hearing your thoughts - be they the same or different. I am just scratching the surface here.
š©ø Markets are bleeding
But are they really? How bad actually is it & how bad could it still get based on the past? Alright, letās check the actual facts before we do the speculation part.
Stock markets as of mid-2022
Helicopter view
To have a helicopter view, we have to take a look at the worldās larger public markets. We are mostly looking at the value lost (or gained) from the all-time high (ATH).
United States:
S&P 500 (index of 500 larger US companies) dropping 22%.
Dow30 (index of 30 most prominent US companies) is also down 20%.
Drumroll Nasdaq 100 (index of 101 mostly US tech companies) collapsed 34%. Many growth tech stocks crashing 60% - 80% & even 90%.
Europe:
DAX40 (index of top German companies) slumped by nearly 20%.
CAC40 (index of top France companies) has lost nearly 20%.
FTSE 100 (100 larger UK companies) is an outlier that is up during the last 12 months & only 8% down from its ATH back in 2018.
Asia:
Japan's Nikkei 225 has declined 10% from its high pre-pandemic high, not ATH, as the index was trading much higher in the 90s.
China's Shanghai Composite (SSEC) is 10% down.
Hang Seng Index (Hong Kong) has plummeted nearly 40% from its peak, but this is due to many factors.
When in doubt flat out.. okay, no, zoom out!
S&P 500 Index is still up (after dropping more than 20%) around 50% during the last 5 years, meaning that itās in line with the index average of 10.5% annual return. Itās also up 10% compared to the pre-pandemic level, so below the market average as already 2 years have passed. That being said, is this the bottom? I believe that not really.
If we zooomin even further back it does not look as bad as it feels, yet it should be acknowledged that itās a still pretty steep drop that follows a very strong growth since 2012ish. The ever stronger evolution of the technology accelerates growth & creates efficiency/productivity that was not enjoyed before, so it may make sense. Or it may not. Letās dig deeper.
The money printing business
Sorry, if you hear it way too often, but to make sense this has to be mentioned. Central Banks have been creating too much money & yes, Central Banks can actually do it. I will not compete with Mr. Dalio to explain it, so please check the video below - you can start around the 24th minute of the video to get the idea, but I really recommend watching it in full.
So now you know & you canāt make this stuff up. This in turn has likely created a situation when this freshly minted money is used for goods & services that actually are not creating enough value. Just look at the graph below which shows the increase in US money supply after the pandemic - it skyrocketed from below $5 trillion to more than $20 trillion. This money partly finds its way to consumers & then it goes somewhere - be it a new phone, some speculative stock, more food, or more travel.
A couple of public market speculations
Read with caution, these really are speculations, not recommendations.
S&P 500 will drop to around a pandemic low during the next 12 months. Itās around a 50% drop from ATH, namely $2,500. It is a smaller drop than back in 2007-2008 but on the level of the dot.com crisis. Why? I believe that the ATHs were heavily inflated and do not really make sense. On top of that, we have lots of uncertainty, inflation & a lack of clear leadership globally.
As the investors will feel the burn from the high-flying & mostly cash-losing tech companies. A lot of funds will flow from the tech sector to more traditional industries, like the good old manufacturing, especially, related to energy, and climate, so this may become the new black.
The higher you climb the harder you fall. This could be the case for the high-flying tech stocks that gained the most due to the pandemic.
Private markets
Helicopter view
Private markets (venture capital, private equity) will follow the path & already kind of is, but it will be only really seen in Q2 2022 numbers. The numbers are still solid in Q1 2022, see chart below.
With the drop in the stock market & effectively the extreme change in the company valuations some of these things are very likely to happen:
VCs will be looking for safer bets (read the best performing) as the market is uncertain.
Due to the drop in valuations, there will be many down rounds - raising capital at a lower valuation compared to the previous round.
Employeesā stock option packages will suddenly lose their expected value. Employees sad.
Founders are unlikely to take the situation well, so a good potential for stupid decisions due to elevated stress.
Raising capital will become slower & almost impossible for some which will lead to companies running out of cash. Even good businesses may wake up too late by underestimating the situation.
To escape running out of cash companies will cut their costs - layoffs, challenging services used, etc. This will further worsen the already bad situation.
All in all, it can get ugly pretty quickly.
A couple of private market speculations
Hundreds (or thousands) of companies will cease to exist due to simply running out of cash as no funds will be given by the former (and new) investors. These will be the companies that have negative cash flow, unit economics & that are not among the very top (top 5) companies of the specific industry.
Layoffs will get from bad to tragic. Btw, if you promise to remain sane, then you can follow them here. Due to this, unfortunately, a lot of great but more conservative employees will move to less ambitious but safer companies.
Itās not all bad news - strong companies are created during the downturns as you need to be even more capable to thrive. To name a few - Apple, Microsoft, IBM, WhatsApp, Airbnb and so we go.
No worries - I am not forgetting Matīss
As you surely remember he had a portfolio of EUR 6,420 and a cash position of EUR 3,580.
People tend to think that they can beat indexes, and Matīss is no different. He even calls himself a senior analizator, like analyst + alligator. Therefore, I feel like he was buying the hot stocks & some crypto & a little of LUNA & for safety just some silver. Therefore, for me, it feels fine to assume that his portfolio is down at least 54% to EUR 2,953.20. See the proportions in the image below.
Cash position - itās already down to EUR 2,974 (May inflation was at 16.9%), but on top of that EUR as a currency has been doing pretty badly. It has depreciated by more than 11% against the USD which is the world's reserve currency. With this in mind - we could take another 10% from the position.
MatÄ«ss EUR 10k has fallen to EUR 5,630.68. For the stocks, yes, it is an unrealized loss if MatÄ«ss does not sell and it can surely go back up, but will he hold? And if he sells then itās fair to also add inflation on top of that. Unfortunately, history shows that people less experienced in the markets tend to sell near the bottom and buy near the peak.
Matīss overall investment status:
Iām writing this to guide myself through the current events & I hope that I will manage to help others by doing that. As usual, I am more than interested in your thoughts.
Hope for the best but be ready for the worst.
Here goes the song for this one & please try to be more positive than my posts as this too shall pass & we will see the green dollar bills being pumped once again.
š Next up: I will do my best to give out useful tips on how to hack the currently turbulent environment. Be it inflation, heating, or the stock market. Another topic that we may see is quarterly or some periodical updates from MatÄ«ss. I hear that he is a very much loved character.
Yours sincerely,
Roberts L.
Q2 numbers for European VC funding:
https://infogram.com/europe-venture-dollar-volume-2022-q2-1hdw2jpjkgv0p2l
QoQ: -24%
YoY: -38%