2022 in Review — an epitaph

Malt Liquidity 77

If I had to pick one theme for 2022, it would be “dressing-down”. Inflation gave a dressing-down to the Federal Reserve, who took it out on markets with aggressive rate hikes, which exposed the full gamut of industry (including tech, finance, and everything in between) as glued to the teat of artificially subsidized cost of capital and reduced the reputations of the ‘geniuses’ we were barraged with throughout 2020-21 to tatters, or at least brought them down a peg.

V @iven1852

ZIRP personality = zero personality

Most importantly, the use of the wealth creation mechanism as the source of wealth growth itself seems to be on hold for now. With rates nearing a “natural” rate and continuing to rise to tamper down inflation, the playbook of exploitation of cheap leverage and private market valuations to blitzscale unprofitable companies to punt off on public markets that (particularly American) financiers and investors perfected into the late 2010s is firmly shut. Growth stories that were too good to be true that were shoved into the market by SPAC charlatans have been laid bare, and the market is no longer buying the stories of revenue growth that will “eventually” transfer into profitability anymore.

With the end of ZIRP comes a personal reckoning of the sort you’d have when leaving for college, reflecting on a particularly impactful divorce after a decade of marriage, or experiencing a death in the family (or your portfolio.) The regime has definitively shifted, and like moving on to a new partner from an old one, you wonder what knowledge from the old regime is still applicable and what needs to be thrown out, no matter how painful it may be. While I was never a “ZIRPersonality” (I’m always good, baby), in the past 15 years of financial media consumption, it has been the lens through which I’ve learned to analyze markets, businesses, and the world and its culture. I think in terms of everything being derived from liquidity — I talk in terms of everything being derived from interest rates.

First, we talk about the US. In the wake of 2008, the first ZIRP years transitioned us away from the slick murky coolness of fin-nance, models, bottles, and bonus culture into valuing the technical world of builders with market share and equity. While cantankerous Buffett and Burry acolytes nasally complained about how what they were “building” and how it was funded was just as nebulous of a value add as the construction and sale of a synthetic CDO, nobody cared, because there simply wasn’t any money to be made in caring. The search for yield slowly went more and more haywire, as money plunged into existing stocks, then into crypto, then into reverse-merger-abusing piles of nonsense, then into even more nonsensical fake internet money. Really think about how shocking it is that trading volume still remains so high in altcoins. We grew so accustomed to speculating on baskets of hot air that we still don’t fully grasp how ridiculous it is that even today, DOGE has a market cap of $10 billion with $300 million volume traded. In 2020 and 2021, the mindset of searching for yield took a darkly cynical turn. The question we were trying to answer for the past decade — “what is the value of the dollar when there’s no value in holding the dollar itself” — resolved itself with no concrete thought, but rather the fatalist conclusion that if the dollar didn’t matter, nothing really mattered, which resulted in the punting of gobsmacking amounts of money into blatant pump and dump schemes and outright fraudulent markets, where otherwise smart people would pontificate to me about the merits of “Ponzinomics” with a straight face and postulate that we might be able to invalidate the prisoners dilemma by simply coordinating the holding of hot air, thus making (3,3) the first verb written in “math”.

What the past decade resulted in was one of the greatest random wealth transferals of all time from bubble chasers to early adopters, and the creation of essential online infrastructure that we’re all hooked to but have no guarantee on its ability to remain solvent for years to come. We put off questions that we were too high on financial heroin juicing our returns to answer — “how will the gig economy continue to function and create margins where they can’t exist and when people are fed up of being exploited”, “what happens when META loses its grasp on the social media singularity”, “how were SPAC prospectuses ever legal in the first place” — and dragged the world’s markets along with ours for the ride up, just to have it all burst. WeWork, a company which I knew was considered an obvious house of cards by some VCs as early as 2017 itself, is perhaps the paramount example of how utterly fucked the mindset of the people deploying investment capital was. The fact that the company was only exposed right before its IPO showed the power of ZIRP to manufacture and fund as obscene a financial mirage as I’ve ever seen, as the public markets barely dodged a nosedive crash. Of course, that garbage later went public by SPAC anyway. The lending freeze that persisted for the first ~8 years of ZIRP was a canary that we ignored — a clear sign that QE was not stimulating natural growth in the way it was intended to. The flaw that will eventually end dollar hegemony was revealed to those closely watching — the US is built on the presumption of growth, first and foremost, and needs to provide the illusion of it at all times on a quarter-by-quarter disclosure basis. And somehow, some way, we’ve found a way to generate actual growth by showing up at the plate when it matters, for 200+ years. But for the esoterically minded, and particularly the people who control the capital, the deep cynicism that ZIRP evoked in us makes this mindset ring particularly hollow.

And yet, things are nowhere as bleak as I made them sound prior. I still expect growth in the near term future, especially when rates start to fall again and inflation is curbed. While I expect dollar hegemony to end in my lifetime, no other country in the world is really positioned to supplant it or impose its own philosophy on how rates should be maintained relative to growth. The goal of central banking is to maintain growth, not to create it itself. The stranglehold that dollar-denominated debt and liquidity has on the world is still in place, as evidenced by the fact that an entire class of products that peaked at a market cap in the trillions would completely evaporate if the demand for crypto eurodollar liquidity (Tether, etc.) reached critical mass and/or the supply became constrained. Compared to the rest of the world’s ZIRP, the US version at least had a fair few positive externalities. It gave us something to do with the capital, and a vision to believe in and build. Beyond the laundry list of scams, bamboozles, cheap tricks, and flim-flams lies some major successes including the building of essential electronic infrastructure, improved communicative tools, and increased liquidity in transportation methods.

The rest of the world didn’t really keep pace. The American mindset of meticulously grinding out alpha and maximizing regulatory capture results in increased liquidity to capital allocation, some of which does make it to where it induces growth. Compare this to Germany, where rates literally had to go negative because of the steadfast commitment of its investors to buying fixed income over searching for yield, or Japan, where more and more debt is piled on top of a dormant volcano to provide the illusion of financial stability, inducing a lot of hand-wringing across the globe. China retains an inability to realize and globalize the gains of its paper growth fueled by a real estate bubble, and the rest of the Eurozone (and the UK) is being forced to reckon with the fact that they just didn’t create enough off the back of cheap debt. In a sense, as long as there is an equity component to liquidity provision and capital allocation, isn’t it always fake-it-til-you-make-it to some extent? Rather than “exceptionalism”, American posturing should be the real cultural export. Maybe then, we’ll see a true threat to the dollar emerge.

Looking back on my predictions from last year,

• btc/eth will not make new highs in 2022

• gme/amc will deflate to about half of their current levels

• we will close in on 1% FFR by the end of the year

• looking back from Dec 2022, inflation will appear pretty close to transitory

• there will be at least one major piece of legislation regarding reverse mergers/SPACs in the pipeline

• large cap tech will take a haircut, and value stocks will become bid again

• I will cross Malt Liquidity 105 and have 10 new fiction posts up

some were spot-on, while others were less so. I was correct in my expectation of rates to rise and how markets would react (GME is down almost exactly 50% on the year, and BTC/ETH didn’t come close to making new highs), but I was wrong on how fast rates did rise and how much inflation persisted throughout the year. SPAC legislation is definitely under way, though the SEC seems to be prioritizing curtailing crypto post-FTX, and large-cap tech took a haircut while value retained bid in comparison. However, I failed miserably in hitting my post target (due to an unfortunate mid-year hiatus), though I must admit I made an effort to come back at the end. Nevertheless, here are some predictions for 2023:

• 20% chance that one of the major remaining stablecoins (The likeliest of which is DAI, then USDC, then USDT) will blow up.

• Rates will not fall during 2023, but inflation will end under 4.5%

• The flippening will happen…

• …but it will be due to both BTC and ETH trading down from their current prices

• Value stocks will outperform growth, though AAPL, AMZN, and MSFT in particular will outperform both. GOOGL will lag the aforementioned 3

• SBF gets over 25 years in gaol (if sentenced by EOY), while Caroline and Gary Wang get under 7

• Bullish: Twitter, SpaceX — Bearish: Tesla, ChatGPT

• Bullish: Substack, Discord — Bearish: TikTok, BeReal, Mark Zuckerberg

• Malt Liquidity Over/Under: 124.5

Thanks so much for reading this year and sticking through the hiatus! I hope to bring more entertainment and insight in what will assuredly be a tumultuous year to come. If you’ve enjoyed reading these posts, I’d appreciate the sharing of a link or the forwarding of an email. Happy New Year!