In a previous post Calling Your Shot, I spoke about the amount of weight investors put on themselves and others regarding predictions. I see investors constantly pontificating on what they see in their tea leaves on twitter, blogs, and podcasts. I tried my hand at being a fortune teller in my Annual 2021 Investor Letter under my market outlook section. I re-read it this morning and laughed out loud.
Consumers and businesses have massively deleveraged. The amount of savings and liquidity on the sidelines is staggering. This discretionary capital will result in people buying goods and services– hence, companies still making money.
Well that changed pretty quickly. There is a massive balloon in consumer debt that is absolutely terrifying.
Historically, margins have remained intact during inflationary periods. Thus, goods become more expensive, but people also get paid more to afford these goods and services. The worry is stagflation – where goods and services become so costly that people do not want to buy them, hindering growth. Data today shows that people are getting cost-of-living adjustments to their take-home wages to combat inflation.
Cost of wages have increased but margins are getting crushed in labor dependent businesses specifically in healthcare and hospitality. Retail is also getting destroyed based on supplier inflation.
Is there going to be a recession? Absolutely. That is like saying the sky is blue. I predict that a market-defining recession will cause conflict with China or our country’s party system will want to start politicizing the national debt. If we do not see either scenario play out in 2022, I believe we are looking to have a single-digit appreciation in the equity markets as per the guidance of Goldman Sachs and UBS analysts.
Single digit appreciation or double digit recession- whatever works for you.
I will say however that I did get some things right on emerging technology trends which I will display below.
Products within Products: Most businesses have digitized themselves, using spreadsheets and email for core workflow functions – i.e., CRM, ERP, marketing automation, and HR platforms. I see an emergence of products that can scale within other SaaS platforms continuing to generate value to the end user. Ideas include AI/ML engines for predictive insights, natural language processing applications for business enablement, and so on. I believe the winners of this Products within Products category will be those with the strongest and most developer-friendly integrations.
Climate Tech/Frontier Tech: I believe there will be bountiful investments in these categories given the amount of private market capital. Companies that fall into these classifications generally have a long-term horizon to commercialization and are, therefore, patient investors. These companies will have milestones based on financing instead of revenue. Therefore, they cannot be adjusted by a discounted cash flow analysis. These categories will be stuffed with cash to avoid near-term expectations of liquidity. Remember that I love these categories; I am just predicting that the capital allocation in these companies will not entirely be altruistic.
My two learnings from this exercise: 1) don’t trust analyst reports especially from big financial firms like UBS and Goldman Sachs. 2) my crystal ball needs to go in the shop for a little while.
