Weekly Update: CPI Down, Cloud Up, FTX & Twitter Chaos
A few highlights from the week of 11/7
After a benign inflation report on Thursday, cloud stocks surged. The WCLD cloud index jumped 16% on the week to $27.30.
Thursday’s CPI report showed 7.7% year-over-year inflation, lower than expectations. The markets soared, with the S&P up 5.5% and the NASDAQ up 7.4% on the day.
Even former Treasury Secretary Larry Summers, who has been quite vocal about his inflation concerns, acknowledged the CPI data point was positive:
If inflation is trending down, then the Fed won’t have to hike rates as much as thought. The bull case here is that this will translate into cheaper credit to spur the economy and to boost asset prices in 2023.
There is one other macroeconomic consideration that hasn’t been a focal point of market news lately - but I expect that to change. The Fed has actually been following two anti-inflation policies. Besides raising the Fed Funds Rate, the Fed is also implementing a quantitative tightening policy, undoing the massive QE stimulus program it pursued in the pandemic. This means:
QT drains liquidity from markets by removing a guaranteed buyer of massive amounts of debt securities. Removing that much liquidity from the market inevitably has a cascading effect, and bubbles like the meme-stock craze that took hold of markets during the pandemic will wane.
As predicted, a bubble just popped as the crypto markets had their most brutal week in years. Most notably, FTX - and it’s $32b valuation, imploded. This is one of the most rapid and spectacular falls the tech industry has ever seen.
What happened? It appears it was your typical, ho-hum, run-of-the-mill “let’s raise billions from some of the most respected VCs on the planet and then let’s use client funds to cover up our $10b of off-the-books trading losses.” In all seriousness, I found this explanation very helpful:
While it’s not as sensational as crypto implosions and Theranos comparisons, arguably the most important topic in the world of SaaS & VC is that a recession seems imminent. The good news is that it will likely be mild compared to 2008/2009 — and that period saw continued growth from public SaaS companies:
While it will be a painful period, I think a recession will actually prove a positive in the long-term for SaaS leaders as it will clear weaker competitors from the market. My general view is that the best SaaS companies will consistently take share in their given market segments. Occasionally, those market segments will experience softness. But that won’t stop the best companies from consolidating their market leadership positions.
Podcast Recommendation of the Week:
Paul Graham’s essays are severely underrated.1 They might not get as many clicks as hot takes or Twitter dramas, but I think they will endure as classics. For a concise audio summary of PG’s greatest hits, I highly recommend David Senra’s wonderful two-part series:
Reading Recommendation of the Week:
Depending on the news source, Elon Musk is cleverly following a classic private equity playbook at Twitter or he’s as strategic as the proverbial dog who finally catches the car. The NYT has a reasonably balanced account of the first two weeks. If you’re looking for a more critical view, here’s a good one:
They are must-reads for aspiring startup founders - but I think they are also rich with life insights that could appeal to a general reader. Also, they are the seed from which bloomed Y Combinator, the most important venture capital firm on the planet.