Bubbles & Gold
Gold is hitting new highs and holders of a certain currency aren't likely to be happy, plus bubbles in the rearview are a funny thing.
A Bubble In The Rearview
There’s a whole, kind of silly, debate out there about whether a bubble can be spotted ahead of time. A memorable exchange from The Big Short comes when (fictional) investor Lawerence Fields confronts hedge fund manager Michael Burry in his office regarding Burry’s new bet against the housing market.
When Burry points out to Fields that there’s a bubble in the housing market, Fields is incredulous. “Nobody can spot a bubble,” he says, “that’s why it’s called a bubble.”
“There are always signs,” bemoans Burry in response.1
There is some truth to what ol’ Lawerence says. Most often, what is called a bubble before it pops is just a contrarian, crank opinion about something that most everyone else thinks is fine. The folks caught up in the bubble are generally no better at realizing that, at some point, the music is gonna stop because they’re highly incentivized to view/portray the bubble as not a bubble but a paradigm shift.
Anyway, a subject of much less debate is whether or not bubble exist once they pop. Like a broken spell, everyone—the cranks and the bubblers—are all now well aware of the bubbles’ existence.
An interesting bubble from the end of the ZIRP era was the precipitous rise in ‘Unicorns,’ or private startup VC-backed companies that surpassed a $1 billion valuation. Take a look at this visual from ChartR:
It’s a pretty shocking fall to see a high of 67 (67!) individual Unicorn companies in December 2021, to only 3 in July 2023 worldwide.
This is (like everything else in finance when you peel back enough layers) in large part an interest rate story. Take a look at the U.S. 10 year yield since 2016.
While it follows fairly approximate, inverted pattern, it’s not one-for-one. For example, 2016 saw some of the slowest Unicorn-minting despite rates being lower than in 2017 or 2018. So what gives?
2021’s huge growth is also odd when you consider that the drama around WeWork WE 0.00%↑ , long considered the poster-child for VC-backed startup excess and hubris, came to a head with the company’s S1 filing in 2019.
At the end of the day, however, low rates, piles of cash at VC firms, and fewer viable businesses available for investment created kind of a stampede effect (‘frothy’ in finance-speak) in the private startup market.
Of course, that’s my speculation.2 What’s clear, however, is that the Unicorn bubble has burst (for now).
Of parallel interest is the fact that private equity returns from certain ‘vintages’ (I.e., the year the investment was made) are similarly down.
Per Bloomberg:
Private equity firms that spent hundreds of billions of dollars on acquisitions at the top of the market risk a nasty hangover.
A combination of higher interest rates and lower valuations could lead to disappointing returns for deals struck in the frothy mid-2020 to early 2022 period, after which borrowing costs rose sharply. In industry parlance, it’s shaping up to be a disappointing “vintage.”
This is interesting for the fact that PE is kind of the VC in reverse—instead of taking a company from infancy into maturity, PE firms look to take mature firms private (generally) and make them more efficient. But it makes sense that the two industries would have some degree of connection in terms of a return profile.
After all, aren’t you curious to see the valuations today of those few hundred unicorns that came out of the woodwork in 2021-2022?
Goldbugs, Rejoice?
The yellow metal is a strange thing. It doesn’t carry the same heft that it once did in day-to-day life (you can’t buy gas or pay your Netflix subscription in bullion), but that doesn’t mean that the metal hasn’t maintained an ardent set of supporters or a somewhat useful place in the financial system.
An article from the Financial Times today noted that the spot price for gold has hit a 6-month high as the dollar slides and investors see an interest rate landscape that looks toppy.
Admittedly, though, it is an ugly chart. Sure, gold is making a new 6-month high, but there’s not a lot about this chart that screams ‘VALUE!’ to me at the moment.
It’s probably not a good day, though, for a particular breed of goldbug who occupy (mostly) Utah and have devised a gold-based currency of their own—the Goldback.
Goldbacks are paper currency that contain a small amount of gold and are meant to be used daily for daily things. There are all sorts of ways this thing could run afoul of of the government, in my opinion, but it is real, and Goldbacks really are in use today. (Probably a great subject for a future write-up.)
So, again, while the six-month high of gold in the spot market doesn’t mean all that much to me, the good folks spending Goldbacks are certainly learning that when you swear by an asset-backed currency, run of the mill inflation isn’t the only thing you need to keep an eye on (and make sure the merchants you’re paying are keeping an eye on as well).
Final Thoughts…
Short sellers are villainized and misunderstood. Once thought of as the friendly neighbor to the world, Canada is suddenly front and center in some serious geopolitical drama. Investors think interest rates will go down soon. Amazon has overtaken FedEx and UPS as the largest domestic delivery service. Elon Musk is in Israel today because of his tweet.
Yes, I’m paraphrasing here, don’t come at me.
It could always be the case that every single one of these Unicorn companies was worthy of investment and it was just a particularly great, innovative time. I don’t think that’s likely, but hey, I wasn’t in Silicon Valley in 2021, and maybe you had to be there.