Malt Liquidity 56
Hare of the Dog
Coffee is for Closing Seed Rounds
Color me confused, but isn’t there a limit to how many coffee shops humans can possibly visit?
Even a couple of years ago, a rapidly growing chain of no-frills, low-cost coffee shops might have had trouble finding interest from tech investors. But in today’s booming market for early-stage startups, the New York-based company has received commitments for its third funding round in a year. The $35 million investment comes just three months after the still-fledgling company received $25 million…
The current regime of markets is pretty much summarized by “we’ve run out of places to put the money”. Whether it is a new repo record every single day , large cap tech, electric vehicles, or crypto, there’s an excess of cash and not a lot of use to have it sitting around. But “hot coffee startup” really doesn’t fit the same bill as the other venues people are normally raring to throw powder at. Not that nobody is noticing the weirdness:
Fred Wilson, a partner at Union Square Ventures and early backer of Twitter Inc. and Coinbase Global Inc., said in a November blog post he had seen quite a few investment rounds in which companies were valued at $100 million before they had a sustainable business model.
“They are being delusional, comforted by the likelihood that someone will come along and pay a higher price in the next round,” he said of the investors. “The numbers just don’t add up.”
One notes the greater fool-ness present in every single market at the moment. Everyone is trapped in the same game of trying to punt something off to the next person who has nothing to do with their money. When VCs have raised too much money, weird stuff starts to happen.
In September, startup Colossal Inc. raised more than $16 million for its plan to bring back the woolly mammoth as a species in the wild—by modifying the genomes of the Asian elephant to make the animals look and act like woolly mammoths.
The Jurassic Park-like business plan largely calls for making money off new technology, said Ben Lamm, the company’s CEO. But Colossal also told investors in 2020 there was the potential for “mammoth park attractions,” among other potential revenue sources, according to a slide presentation.
Mr. Lamm said the company only set out to raise $8 million, before finding far more demand than expected.
Speaking of hot markets…
What do people do when they’re flush with cash? Well, they buy houses:
Mortgage lenders issued $1.61 trillion in purchase loans in 2021, according to estimates by the Mortgage Bankers Association. That is up slightly from $1.48 trillion in 2020 and above the previous record of $1.51 trillion in 2005.
The real estate market shows no signs of cooling down even as houses get bid up further and further. The inflation narrative fuels the craze as people treat real estate as an inflation hedge. Inflation is a bit of a self fulfilling prophecy, and the only “inflation hedge” is to outpace the rate of inflation through rate of return. This is why owning large cap liquidity or real assets is so valuable until the speculative mania tapers off, and why everyone and their mom is afraid of the sky falling constantly.
Rising mortgage rates have slowed the wave of refinances that drove the boom in mortgage lending since the spring of 2020.
It seems obvious that if the Fed is projected to hike rates, the optimal play is to lock in a low interest rate while they are still near-zero on the FFR.
Mortgages are less affordable relative to income than at any time since 2008, according to the Federal Reserve Bank of Atlanta. In early 2021, Americans needed about 29% of their income to cover a mortgage payment on a median-priced home, the Atlanta Fed estimated. That rose to 33% by October.
It might seem like there’s no opportunity to get into the housing market other than to pile in, but no trend lasts forever. The current market is overheating due to rates, excess cash in the system, and supply constraints for actual materials to build houses. The common trope is to “wait two years”, but it seems to be pretty solid advice to wait for housing to mean-revert a bit before buying and holding. Once cost-of-living adjustments hit all the remote workers who purchased houses in hot markets like Austin, you might start to see some homeowners less comfortable than they previously thought they were making payments. Cash chasing houses will inevitably end with negative equity somewhere down the line - hopefully this comes sooner rather than later for prospective buyers who are avoiding chasing.
All is not well in hedge world
The other day, I wrote about how the retail baskets seem to have taken it on the chin in the past six months, and it doesn’t seem like the hedge funds did much better:
Hedge funds gained 8.7 per cent on average from January to November 2021, according to data provider HFR. That marks their third consecutive year of gains, but trails by some distance the US S&P 500 index’s 24 per cent total return over that period.
Though benchmarking to the S&P isn’t really a fair comparison, it certainly has to hurt to try and find value and alpha in a market where 5 stocks make up a bulk of the returns.
Over the past year, we’ve covered some of these market oddities, namely TSLA, GME, and AMC. All were adverse events for “tradfi” capital as memers and savvy traders captured a truly remarkable regime. It’s important to remember that valuation is not a short thesis, as you always need a catalyst for the market to realize that it’s pricing something incorrectly. Even as the retail basket deflates, the short side remains -EV due to the potential of blow-off-the-top events, like TSLA running up 12% on the first day of the year. It seems for the time being, the only market-neutral trade is to accumulate value and wait.
On that note…