Sorry y’all, I was out last week with the itis, but I am back with some predictions for next year. If you have been reading along, you know I have been directionally correct on most things, and even nailed some obvious layups (such as Elon suspending Kanye from Twitter - which happened quite quickly). But now I am going to put my reputation on the line and make some outright calls. Not financial advice of course.
First, some corrections (also for the first time ever!):
In Culture Wars 2.0, I said that Twitter’s encrypted messaging would replace Snapchat. In my haste, I conflated “encrypted” with “ephemeral”. Twitter 2.0 has no plans of ephemeral messaging so it would be more of a replacement for “WhatsApp/Signal/Telegram”.
In Thought Leader Diversity Matrix, I incorrectly had Vitalik opposed to Trump’s reinstatement of Twitter. He is actually in fact in favor of it despite his mostly left-leaning politics.
In Thought Leader Diversity Matrix, I said Balaji is in favor of a Death Tax due to him being a meritocrat. I also classified him as “right-leaning”. Balaji actually reached out to me and well, you can read the correction for yourself..
I hope to someday flesh out this Thought Leader Diversity Matrix with more and more thought leaders and their actual (verified) opinions so I can dive into trends, interesting parallels, and thought cohorts. (I just bought ThoughtLeaderDiversityMatrix.com) I feel like this will help us all realize that everyone’s opinions are as diverse as their backgrounds, the traditional big tent binaries are functionally (if not publicly) extinct, and we can all get rid of this horrible polarization once and for all.
2023 Predictions
Continued Rate Hike Slowdown
As 80% of the market predicted, the last Fed rate hike was 50 bp down from the 75 they had been doling out. This marks the beginning of the slowdown, and yet nothing has really “broken” yet in the economy. It was telegraphed from the beginning that JPow was going to raise rates until something substantially broke to signal the end of inflation, but other than a bunch of Tech layoffs, we have not really seen anything change in the economy, inflation prints aside (which have their own data collection and integrity issues). I think we will see a couple 50 bp hikes, leading into 25 bp hikes, culminating in a peak of 5.75% to 6.25% in by Q3.
Market Fake Out
Fresh off of the success of the biggest shopping holiday of the year in Black Friday Cyber Monday, everyone will still be pressed to grow in 2023 despite the objective of the central bank to literally be reducing economic demand. This means putting money into the traditional places that have historically weighted heavily in the S&P 500: Meta and Google and their digital marketing cash streams. These companies will beat their (low) Q1 expectations, which will spark a moderate Institutional buying frenzy across a modicum of tech stocks for no other reason than boredom. Retail investors will follow, Institutional money will take Retail’s money by selling the local top (S&P at $4,000), and the fake out will be over and done with by the time summer comes around.
Spread trade idea: short HOOD 0.00%↑ and buy DKNG 0.00%↑ People trading stocks on apps will realize that if you are not investing (ie buying and holding, you are essentially gambling, and it is easier to gamble on something you have knowledge on (sports) vs something you don't (stocks)).
No Significant Big Tech Product Launches
As these Big Tech companies remain cashed up for the duration of the recession, there will be no reason to expedite R&D or material product launches. Apple’s iPhone 14 was already the least impressive upgrade of the past decade by any number of accounts, and the 15 will prove to be a similar dud. Meta will launch a new Oculus under the same theme (no material upgrade). Google, Amazon, Microsoft, and Tesla will all hold off on whatever cool device thingy they have up their sleeve. iPhone’s and Oculai (I think is the correct pluralization) will sell because both of those companies have a captured audience in those segments, and they will count as wins, but the average consumer will save their money for next year across all tech purchases.
Google Search is Not Dethroned
There has talk for the past couple years about dethroning Google’s Search supremacy. First it was TikTok, and now ChatGPT. Neither of these will unseat the king in 2023 for multiple reasons. For TikTok, even with all the work they are doing to create SEO vibes, they are fighting two uphill battles. The first is against society and government for their deprecation of our collective children’s attention span, the other is their own dominance of said attention span. TikTok is too good at keeping you on the app to sell you a product, and their excellence in short form detracts from its ability to “teach you things” the way YouTube has already perfected. TikTok does have ways to purchase in-app, and brands continue to pump billions into display ads on it, but the beauty of Google Search is that it's purpose is to link out to a specific destination (webpage). Along a similar argument, ChatGPT will unquestionably answer complicated queries better than Google can, but again, that is a different product. Google Search shines because it is the center of the internet. It make its money because I can type in the product I am already looking to buy, and it shows it to me in .0001 seconds (with the best price!). Sure, TT, YT, and ChatGPT can teach me how to fly fish faster than Google can, but after I learn to fly fish and I want to buy the fishing rod from the cool flyfisherman influencer I learned from, I am going to type that product into Google Search (if not going direct to the website) and buy that shit. If anything, these product enhance Google’s core product, even if they are nibbling at them from the fringes. These competitors are not actually competitors but supplemental to Google’s Search business. When the overall experience of the internet increases in value (which these products enable), Google gets a piece of that.
(Larry and Sergey laugh voraciously on a private island somewhere)
Main Street Layoffs Signal the Beginning (of the End)
In Middlemen America, I talked about how when Tech innovates, it makes it easier for people to do complicated things, but it creates a greater separation between the code and everyone else. The Middlemen are the layer of non-technical humans that intermediate between executives and the actual technical folk. The problem here is that because Tech is such a deflationary thing by nature, it leads to massive growth (and massive valuations), and growth always means hiring more people. The massive valuations are coming to a head as we see with the decline in multiples that VC and PE are paying for business, the contraction of the Stock Market, and the obliteration of Crypto prices. We also see what Elon (acting in a sort of PE kind of way) has done with Twitter and the 75% layoffs and how that is acting as a signal to companies everywhere. When free cash flow and EBITDA starts to matter again as the main KPI (instead of the valuation multiples and growth percentages of years past), you have no choice but to remove the Middlemen. Like I said weeks ago, they are a luxury of growth. But when you no longer can afford luxury, the technical people will need to learn how to communicate and manage projects, or the executives will need to learn how to engage technically. This affects Tech first and foremost, as we have seen in recent months with massive layoffs, but as we have also seen, the economy has not broken yet.
The Fed has two jobs: keep inflation low and keep employment high. And they have one tool to accomplish those goals: the federal funds rate. When rates are very low (or functionally 0) for a long time, and the government is printing lots of money, inflation obviously gets out of control. The only thing the Fed can do to combat this is raise rates and hope that it slows business growth enough so that jobs decrease, so that people have less money, and they stop buying things so that supply can increase and businesses have to lower prices in order to actually sell anything. It’s a little sadistic, but whether you know it or not, we are all rooting for more layoffs.
As of yet, we have not seen any pricing decreases on much of anything. In fact, everyone is still increasing prices because inflation is as much a psychological phenomenon as it is an economical one. Also, the only people that have been laid off so far are the “surplus elites” (to use a David Sacks term), ie people who were overpaid for not doing much of anything. Laying off tens of thousands of people who were making $300k+ per year doesn’t do anything to the price of milk, because these people have substantial savings and could probably ride out a few years without working. Or better yet, with their resumes and perceived talents, they are primed to take the positions of the “regular” extractive Middlemen. This finally puts Main Street jobs at risk, which of course was going to be the real signal that Fed is waiting for to declare an end of the rate hikes. I predict that, after the market fake out, there will be a huge uptick in unemployment starting in Q2 and continuing into year end. The official unemployment number touches 4.5%, which is about 1.3M jobs lost between now and then.
A Second (Lower) Bottom
In Everything is a Valuation, I foreshadowed the current environment where valuations were becoming increasingly ridiculous, and that all markets (VC/PE/Stocks/Crypto) were essentially under the same spell of growth addiction. I have another idea for an article called Everything is a Ponzi, because the same characteristics of what people think are debunking Crypto can also be used to debunk literally any asset class. (hint: if it doesn’t pay dividends, you are just hoping to sell the thing you bought to someone else at a higher price later on. There, that’s the whole article)
This “realization” of true valuation as market clearing prices are discovered, coupled (or enhanced) by Main Street job loss, will result in another (lower) market bottom. This bottom will be felt most harshly in Crypto, as it is (for now) still the wonky exponential derivative of equities and VC. However, I do think the S&P will bottom slightly below where it did a few months ago (official call $3,500). I think $BTC hits $12,000 and ETH hits $1,000 by Q3.
More Centralized Exchange Collapses
I’ve already written why The FTX Blowup is Good for DeFi, and in the wake of that drama we saw many other CEX’s collapse as well. I don’t think we are even close to the end. Any non-regulated (read: US based) CEX is at risk. If you have money on a CEX I highly suggest you move it off of there to a decentralized wallet (this is Financial Advice). In the days post-FTX collapse, I was utterly shocked at the amount of Crypto/NFT influencers on Twitter (with upwards of 50-100k followers) who were learning (and tweeting about learning) in real time about the dangers of CEXs and instructing their followers to get off of them. That tells you all you need to know about the state of the Crypto market. We can all laugh about Jim Cramer’s horrible stock picks, but at least he understands the mechanics of the industry he works in. People are out there screaming about decentralizing the Finance industry while their money is literally sitting on a centralized exchange that doesn’t have laws about securing customer deposits 1:1.
Audacious Bet: Binance (the worlds largest crypto exchange) blows up. Not as a result of having to pay back $2.1B from their sale of FTT tokens (which I don’t think will happen), or because 29% of their balance sheet is their own trading token (BNB), or because 22% is their own stablecoin (BUSD), but because 19% is made up of Tether (USDT). There are so many investigative sharks circling the waters right now looking to break the next scoop, I think it is long overdue that some internal employee at Tether blows the whistle that the biggest stablecoin in the world ($66B market cap) is backed mainly by Chinese commercial paper, and that the companies issuing that debt are shady, or themselves insolvent and relying on some further upstream financial source. The ramifications of a Tether collapse would reach far, far further than just Binance, but Binance in particular would be disastrous as it is does almost 8x more volume that FTX did.
Binance Balance Sheet Allocation
Increasing Bitcoin Maximalism Exposed
This is already starting to happen, and in fact has been happening for quite a while. However, the amount and severity of maximalism will increase in correlation with the contraction of the Crypto market. As coins and exchanges go under, the consolidation means that there are fewer players competing over a finite resource. What I am seeing more of now is blatant trash talking about any coin that is not Bitcoin. Specifically the attacks are against Ethereum, its largest competitor, and specifically about its change to Proof of Stake. I talked a little bit about The Merge in Crypto’s First Fundamental Trade.
For years, Bitcoin maximalists have secretly dominated the entire Crypto internet. For those who don’t know, the most popular Crypto pricing website, CoinMarketCap.com, is owned by Binance. This means that they are allowed to gatekeep which tokens get listed on their website, the same way they gatekeep which tokens are listed on their exchange. Tokens like $HEX (currently the 22nd largest token by market cap) are delisted due to political opposition of the founders and communities. To make matters worse, news publications such as CoinDesk, CoinNews, CoinTelegraph, CoinUpdate, and CoinWeek, all have ties back to Bitcoin and it is reflected in their publications. It’s like if Facebook and Twitter were in charge of what Tech news got shown to people (errp.. too soon?).
Bitcoin paved the way and paid for the infrastructure that is the ecosystem, but they are also incentivized to pull the ladder up behind them. Crypto (or stocks, or any asset) is a competition of market share. It makes sense to be competitive, but when the flow of information is controlled by a certain group of people, the truth gets distorted. I think someone will coherently put together the entities and influencers that are controlled by Bitcoin, and along with it some of BTC’s negative externalities get exposed. This is partly why I think ETH dips less than BTC on the next bottom.
Audacious bet: some high-level connections get exposed, and wallets are linked to one or more US politicians. They expose that they are secret BTC maximalists, and are working to secure legislation that declares all tokens (except BTC) as securities.
Biden Runs Again, and No One Challenges from the Left
The two most eligible candidates, Newsome and Harris, have both already stated that they won’t challenge Biden if he runs, and Biden has already hinted to officials that he plans on running. Because the big parties always stick together when they are in power, it would be too much of perceived in-fighting for someone to challenge the incumbent. The only other viable candidate with name recognition is Buttigeg, but he is now in the Biden administration too. I don’t think this is smart of the Democrats because any non-Trump Republican is likely to beat Biden based on pure energy and the state of the economy I just described. It would be smartest to have him step down, and allow a Newsome vs DeSantis standoff, but history (except for the most extreme recent history) tells us that incumbents have the best shot. I understand this logic, that Trump was an anomaly, but I also think the pendulum is swinging back and forth faster now. People of color are shifting more Right, while younger people are shifting more Left, and without Trump in the General Election to drive the young people to hate-vote (which is the only thing that lessened the hurt of the mid-terms), it will be tough to get them hyped about Biden. A Biden re-election campaign is a defensive bet by Democrats that Trump will win the Primary. I just don’t think Trump’s odds are favorable enough to place that bet.
In conclusion, almost nothing changes! It is a status-quo year of tech and the market Groundhog Days itself another 2022 but with less jobs. One more prediction though: 2024 will be fucking wild. Finally.