Is the easy-money era reaching the tail-end?
Let us first understand how this era was formed. Post the Lehman brother collapsed, the Fed introduced quantitative easing (QE) measures to help support the United State economy. This disaster will never fade off in my heart as I physically experienced it in the United States. As a student back then, I saw most of the plazas go emptied and I was forced to withdraw my savings to sneak them under the pillow. Scary!
Between 2008-2014, the QE added USD4 trillion to the money supply system and they encouraged you to borrow (because nearly no cost at all). This has a spill-over effect on all types of investments. You name it, real estate, stocks of high-tech companies, ventures as well as the rise of cryptocurrency. Imagine, if you have excess money in your pocket but the fixed deposit rate is low, what will you invest in? will you invest in high-growth assets? If you have even invested a portion in high-growth assets, what else you can put your money in? “Virtual hope!” The reason I name it “hope” is because it has no underlying value and is not backed by any gold or trust from the government. Investors were desperate at some point looking for a higher return investment despite high-risk exposure to capital reduction.
In 2022, we finally see inflation in the US. The Fed increased the first 25 basis points in March 2022 since 2018 to combat rising inflation. This is also part of the contractionary monetary policy to unwind the liquidity in the market, or in laymen, they are taking out money from the system.
Now, we see
Dow Jones Industrial Average declined 9.5% year-to-date (YTD)
1Q2022 US venture capital deal value declined 8.2% year-on-year (YoY)
1Q2022 US Public listing activity registered only 28 listings vs FY2021 of 296
Is this the end of the easy money era? Nobody knows but there is a high possibility.
What if, the Fed continues to hike the interest rate?
On a macro end, USD is expected to appreciate and hence import products will see spike in prices. For a company that need high imported product as intermediate goods, Cost of Goods Sold and profitability will not be looking good.
More expensive borrowings: companies urge to pay down debt
A slowdown in discretionary purchases
A negative impact on earnings
WACC of companies will increase due to an increase in the risk-free rate & volatility of companies
Valuation should be negatively impacted by the higher discount rates due to the time value of money
The public market valuation cuts will eventually have a negative impact on the private market. There is less or even no more hot money flow into the market. It’s time to recalibrate your thoughts on how to build a sustainable entity independently without a sugar daddy. There is no more cash-burning. Companies should revisit the cost management and realistic growth projection. Silicon Valley has felt it. We see it in the recent closure of Kaodim in the domestic market.
Start relooking into your financial modeling, reevaluate your growth, cost especially advertising and marketing spending. Get yourself sustainable (must at least breakeven) with a reasonable valuation and reenter the market.
There are a few articles shared below that are worth reading for the summary above!
https://pitchbook.com/news/articles/q1-us-venture-capital-trends-five-charts-venture-monitor
https://www.thebalance.com/is-the-federal-reserve-printing-money-3305842
https://www.capitalgroup.com/advisor/insights/articles/end-era-easy-money.html