Updated: Sep 5
This week's market update focuses on the new "Startup Boom" and how the growth in small businesses and "gig" employment is making it harder to interpret traditional economic measures like hours worked, unemployment rate, productivity, and inflation. We begin with a summary of recent market moves and our trades. We then get into the implications of the Startup Economy for investing. We will also be discussing our plans for launching our own cryptocurrency and our unique use case. Don't miss our podcast every [UPDATED] Monday 6PM EST. Zoom link is available below and in our pinned Tweet.
The S&P 500 has gone ten months now without a 5% correction. That is rare but not unprecedented. The year 2017 was similar, but with some notable differences. Both came on the back of a presidential election providing some catalyst in the form of increased certainty. But the strength of this bull market has been larger in terms of the growth rate. There is also more differentiation in performance within the index. For example, the Value vs Growth correlation in the index has typically averaged around 75-80% since the creation of SPY in 1993.
This correlation fall sharply by mid year to 20% when calculated over a 170 day period. The last time this occurred was in the year 2000; which could be why some prominent investors such as Michael Burry believe some “Growth” stocks are in a bubble. Dr Burry was made famous in the movie, “The Big Short”. His short on Ark Invest’s flagship ETF was made public this week in a quarterly 13F filing.
Our take on this is articulated in our "Value vs Growth" article from 8/8 in which we argue that parallels to the Dot-Com Bubble are baseless. The most obvious reason is that interest rates on Treasury bonds averaged 5.5% during the run up in 1999 vs today's circa 1.5% ... and CAPE ratios today are materially lower (although quite high compared to the past decade). The other reason is that our top holdings are adding tremendous value, growing quickly and many are profitable unlike internet companies in the late 1990s.
We are concerned about valuations in the market more broadly. That is why we started shorting "Value" oriented stocks ripe for disruption as we discussed last week before markets took a dip. We are already up materially on these short positions as a group. We made some adjustments to these positions, mostly adding to shorts on auto manufacturers, oil exploration, and the Saudi Arabia ETF $KSA. We also swapped our short on corporate bonds $LQD with a short directly on treasury bonds vs $TLT. The primary reason for this was the jump in $VIX and associated increase in corporate credit spreads, so we could sell the higher perceived credit risk and position for a move out of treasury bonds once investors recognize that nothing of material significance in terms of tail risks manifested.
We also bought into weakness in our top holdings in #3DPrinting $DDD $SSYS #Genomics $NVTA $ARKG and #EdTech $LRN $COUR $TWOU by purchasing long dated call options expiring in January 2023 with proceeds from selling spot. Some of the cash we used was generated from shorts on $GM $F $XOP which fell during the week.
We will provide details on exact positions in our next monthly portfolio update.
More details will be discussed on tonights podcast, available to the public through Zoom link in our Pinned Tweet.
The labor market continues to show signs of strength, but interpreting the numbers could be more challenging given changes in the way we work. The reason for this is the new Personalized Economy; which we wrote about here and discussed on Twitter (below) and now available on Spotify. Evidence for this can been seen across nearly all sectors and across the nearly all countries...but one of the most powerful data points is in the new Startup Boom.
The NYT’s published an article yesterday on how the “Start-Up Boom in the Pandemic Is Growing Stronger”. In short, Americans started 4.3 million businesses in 2020, a 24% increase from the year before, and the first material increase in 40 years. The boom has proven to be broader and more durable than early skeptics expected. So far this year the economy’s reopening has not reduced the share of workers reporting as self-employed with the number rising in July to an eight-year high.
Measuring things like “Hours Worked” and “Productivity” is more challenging for the self-employed. That has always been the case in part because self-employed people generally don't has set hours or track them. The new “Gig Economy” makes these measurement issues even harder. Platforms like Uber, Etsy, UpWork, Ebay, YouTube, Amazon … etc (long list) … create new opportunities and flexibility for individuals to work when, how, and where they want. Some of this “Work” may technically qualify as “Leisure” to individuals working in more traditional jobs.
For example, is blogging or sharing conversations with friends on a podcast “Work” or “Leisure”? Does it matter if your friends are also clients? What if one’s use of social media does not generate income, but builds a digital brand that can be used to create income later?
Economic data has always been a lot more sketchy to interpret than market prices. Prices reflect the reality of a transaction. Economic indicators are estimates constructed by economists with varying assumptions and measurement error. Take "Jobless claims" as an example. Jobless claims fell to 348k last week … a new pandemic low suggesting the labor market continues to heal. But given the startup boom we would argue that this number over-estimates how many people are truly "jobless". A higher portion of those filing today are likely engaged in getting micro-degrees (and thus not in the labor force) and doing gig-like work such as trading sneakers and baseball cards on Ebay, or designing Renaissance garb to sell on Etsy, or selling Minecraft skins anonymously through Discord.
The changing nature of how we work could mean the strength of our recovery is even stronger than the numbers suggest. We all know the pandemic shocked the labor market. We can see the recovery in the numbers like “Unemployment Claims” and “Hours Worked”. But the pandemic also shocked how we work … and that makes measuring and interpreting these numbers harder than recent decades.
Join us tonight at 7pm EST for our weekly podcast! We are also talking about our plans to launch a new cryptocurrency.