#172 - The Future Of Sports Salary Caps, Chat AI and Greed vs. Envy
Thoughts on Greed vs. Envy
Shopify Q3 and Cyber Monday
Sports consumption and the future of salary caps
Recommendations and Predictions
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2022 has been a tale of 2 halves for the S&P 500, -20.6 pct in 1H and +7.6 pct in 2H-to-date. Jan – June was all about the fear of higher rates. July – now reflects relief that earnings are OK and the Fed is starting to moderate rate hikes. A VIX at 19 says market confidence is too high for a still-uncertain environment, but December seasonality remains a near-term positive.
US corporate bond spreads have had their own “tale of 2 halves” and are just as confident about futures cash flows/earnings as stocks right now.
The US Jobs Report supports the Fed’s concern that a lack of labor supply (LFP down) will continue to create wage inflation (+5 pct) even if hiring declines (Nov weakest job growth in +1 year).
Fed Funds Futures are slowly buying into the Fed’s “higher for longer” rate messaging, even if they are fading Chair Powell’s guidance about +5 pct rates next year.
Analysts have cut their 2023 earnings estimates by 8 pct since April, but they still think next year can see 5 pct growth versus 2022.
Both the NASDAQ and virtual currency valuations have the same 1H/2H performance pattern as the S&P 500, with an important caveat. The NAS is actually lagging the S&P thus far in the second half, only up 3.9 pct vs. 7.6 pct and aggregate virtual currency values are down 5 percent for the 2H-to-date. Disruptive tech valuations have not bounced back as quickly as US large caps since June 30th, likely reflecting how aggressive they were going into the year. Very little in the 2H return data suggests this valuation reset is yet over.
Theres an old Lee Cooperman quote that I think works well with todays current narrative:
“you don’t want to live in a world where the Fed can’t achieve whatever outcome it wants to see”
Right now, it wants to see inflation come down quickly and has acted decisively (relative to the last 30 years of history, anyway) to get that result. Going from Fed Funds at 0.08 percent to 3.78 pct in less than a year may not be Volcker-esque in terms of end points (rates got to 19 pct in 1981). But … On a rate of change basis Powell has outdone his predecessor. When “Tall Paul” took the US monetary policy reins in 1979, Fed Funds were already 10 percent, after all.
The bottom line here is that it is easy to see how the market may think the puzzle of higher rates is largely complete. The Fed has gone a long way in a short period of time, the results of their actions are starting to become visible, and any further rate hikes will be fine tuning but nothing more.
Now, if we are actually facing a crossword puzzle-like trajectory of market uncertainty, then the problem will be “right idea, wrong price”. That is a common hedge fund PM retort to any stock pitch featuring a clever argument paired with a stupid/nonsensical valuation.
Fleshing out this idea: yes, perhaps we’re closing in on the end of the Fed jigsaw puzzle, but how do we get bullish given the following:
We must place some non-zero odds on a US recession next year. An inverted yield curve says so. So does common sense: the Fed cannot likely achieve its goal of reducing labor market demand without an economic contraction.
We know current S&P earnings power is $220/share.
We therefore know that 1) the index trades for 18.5x earnings and 2) that’s a rich multiple going into a recession.
That’s a whole lot of empty crossword grid squares to fill, with a clue that reads “market response to a man-made (i.e., Fed-induced) recession”. Current valuations say the answer is “ignore it”, or “if we start to go down the recessionary rabbit hole, the Fed will cut rates quickly”. And that may be the correct answer, even if it has little precedence in the historical record.
All I know for sure is that, if we really are now into the crossword portion of the market’s puzzle over future stock prices, the first stretch will seem easy.
But the last bit … When we realize we don’t know where earnings actually do trough … That may be quite hard.
💸Reformed Millennials - Post of The Week
Social Media Isn't Going Away
So how do we deal with it?
I think the study of debate would empower us to better deal with the new media mediums we find ourselves exposed to.
In this 5 minute video, Bo Seo makes a case for educating ourselves and our youth in the art of debate.
Debate is crucial to a healthy society. After all, having productive debates is how people have learned, resolved conflicts, and generated new solutions for thousands of years. In Ancient Greece, it was even considered a kind of civic duty to be able to persuasively argue your point about the various issues of the day.
I think there's a good chance our solution to mass social media technology advancement isn't its removal but our re-engagement with the art of debate and long-form learning/engagement.
Chat GPT Bot: Best links and Threads From Last Week
🎙Podcast & YouTube Recommendations🎙
The Game Has Changed - The Compound and Friends
Stutz - Netflix a new Jonah Hill-directed documentary about his therapist Phil Stutz.
🔮Best Links of The Week🔮
"Remember when making actors look older or younger in movies was a huge deal? The amount of postproduction work to achieve realistic results was immense back in the day, but now, researchers from Disney have revealed FRAN, a new artificial intelligence tool that can convincingly age or de-age an actor in a fraction of the time. In an academic paper, Disney Research Studios explains that FRAN (which stands for face re-aging network) is a neural network that was trained using a large database containing pairs of randomly generated synthetic faces at varying ages, which bypasses the need to otherwise find thousands of images of real people at different (documented) ages that depict the same facial expression, pose, lighting, and background." Source: The Verge
"Major Chinese cities, including financial hub Shanghai and Zhengzhou — home to the world’s largest iPhone factory — said Wednesday they were lifting lockdowns. Zhengzhou is the site of “iPhone City,” a sprawling campus owned by Taiwanese contract manufacturer Foxconn that normally houses about 200,000 workers churning out products for Apple (AAPL), including the iPhone 14 Pro and 14 Pro Max. The city locked down its urban districts last Friday or five days as [virus] cases surged." Source: CNN Business
A Few Things We Learned - Octahedron Capital - Deck link here
Mark Zuckerbergs Dealbook Summit Interview - "So still the vast majority of what we're doing is, and will continue to be, going towards social media for quite some time until the metaverse becomes a larger thing"