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I watched Powell's speech and it was really amazing because in December he was extremely hawkish and he was basically like listen we're going to keep rates higher than you like and longer than you want and that was pretty clear and the markets reacted and then not but 35 40 days later he essentially said we have two 25 basis point hikes left to go and he's going to try to stick the landing essentially and even though the rest of the language in his entire speech and the press conference if you read it in the absence of his body language so if you just read the transcript would seem very hawkish as well but the reality was he basically capitulated and then the market essentially said okay we're at the end of this thing and we've talked about this before but markets tend to bottom six to nine months before it's clear that you could have done this and so we're a little bit Off to the Races in the short term it's compounded by a couple of other factors one is that at the end of last year so many people were tax loss harvesting which means if you had some gain somewhere else you sold some things that were losing money so that you could net the two together you saw a lot of stocks Tesla was probably the poster child for this trade all the way down to like 108 a share and it's effectively doubled in the last 30 days right so everybody tax loss harvested everybody degrossed nobody was really owning anything and then when Powell basically said we're mostly done there's been so much systematic buying right now that nobody's really well positioned to me this is very similar and yearly reminiscent of the end of 2018 and beginning of 2019 and if you guys remember at the end of 2018 October November December the markets just fell and part of it was Powell's going to raise rates inflation's getting out of control et cetera et cetera and then we got all this data that said China may be entering a real period of malaise and Powell capitulated again trying to stick the landing and long story short he didn't that was a head fake and the markets just ripped higher then we went into the covet pandemic and all that stuff happened so I think we're about to replay a little bit of that at least in the next 30 to 90 days if you listen to Buffett Buffett's teacher this guy Ben Graham in Ben Graham's book the way that he would look at a stock and obviously look things have changed but the way that he would look at his stock is he would look at that risk-free rate he would double it and then the inverse of that is the maximum price to earnings ratio that he would pay for a stock right that's the trade-off is if you can get more than two times the risk-free rate then it's worth owning a company what that means is that if if you take three and a half percent as a terminal rate the right p e is around 14 for the s p 500.
right now the S P 500 trades at 22 times p e which would mean that we are 50 overvalued now that again that's a Benjamin Graham model and I think the world has pretty cleanly moved away from it but there's probably some rooting in that intellectual framework that's still valuable and to your point David it just reinforces that man we need to start to learn a new regime here because when rates are not zero there's just a lot of excess that you can't support because the alternative trade-offs for investors are plentiful you know and plowing money into a money losing startup becomes less attractive and to just give people some background that's the intelligent investor was that book I believe and he was talking about value investing which is hey what's the earning per share what's the ratio what's the PE and that's something that growth and momentum investing has been the opposite of and this is a could be I think you wrote a blog post about this jamaat short of the regime change if you look at the Googles the Facebooks the apples Amazon's is is a little bit of an exception here those companies printed money they had profits they built up large cash reserves if we look at the next cohort of companies airbnb's coinbases Ubers Etc they focus on the top line growth uh much like the Amazon which was a very obscure approach correction uh in in the history of this Nick do you want to just throw up this chart we did a little analysis over here and it was just basically looking back 60 years of company formation we looked at all of the 100 most valuable public company startups and we indexed that to the 10-year interest rate so what are we looking at here trim off with this chart so basically we went back from 1960 onwards so basically you know 63 years and what this shows you is the hundred most valuable public technology companies then the size of the circle here is their market cap and then it's overlaid on top of the 10-year interest rate as well as gray bars for recessions so what is this graphic meant to illustrate well it just was for us to study is there a correlation between the value of companies and what the interest rates were or what the economy was doing at the time and to your point Jason the trend is pretty starkly made on this chart which is that if you were a company that was founded in a period of austerity you had the ability in general to build a much larger company then that which was founded in a period of wealth and excess right so when you look at when rates were sort of approaching zero or were zero there was a lot of really successful companies they're listed here in the in the light gray on the right but none of those things really represent the success that these other companies had that's the first interesting takeaway the second interesting takeaway though from this has nothing to do with rates per se but it is that when rates intersect with the emergence of huge technology Trends so in the case of the 1970s it was the PC revolution in the case of the late 1990s it was the internet Revolution those two things which required enormous progress in both physical infrastructure so atoms as well as software infrastructure bits when you put those two things together those also created big companies and so if you add that all up the point is that whenever you see huge tectonic shifts in technology combined with periods of austerity that's when the gargantuan dollars are made so from the 1970s companies like Microsoft and Apple from the get-go had to be profitable right and in the absence of one very important round of financing that Amazon was able to close the next big wad of companies were founded again in Rising rates where they just had to get profitable or find a way to be positive free cash flow or have positive working capital faster than anybody else so these are like really interesting trends that I think just say that as rates creep back up and if we can intersect that with some improvements in technology over the next five to ten years that we've all talked about it could be a real Boon for startups and startup investing
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