Tim’s Tech Tidbits #9–100 Degrees Celsius

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Coinmonks

5 min readJun 21, 2022

Hi friends,

Got caught up with work and life so it’s been a while since my last newsletter. Did you guys miss me… or at least my tech tidbits? 🙂 Hopefully that got a laugh out of you. Because we could definitely use some humor in dark times like these. At the moment, it feels pretty damn close to lights out.

Since we last spoke, the Fed has become more aggressive with their rate hikes, the Russian-Ukraine conflict rages on in a protracted manner, and financial markets, particularly growth stocks and crypto, are being decimated. JPow and Yellen have finally acknowledged that inflation isn’t transitory, but it feels a little too late. As we go about our daily routines, it is hard to ignore the ripple effects of inflation: higher prices, increasing job cuts and greater pessimism.

While US government officials assert that it is “not inevitable”, whispers of the dreaded “R” word is making the rounds as the economy reaches its boiling point. Today, I will discuss the possibility of a recession and share my view on how investors and businesses should be positioning themselves.

Today’s topics

Macro: The “R” word — Recession or Rebound?
Investors: Avoid trying to catch a falling knife
Businesses: The survival of the most adaptable

Macro: The “R” word — Recession or Rebound?

The main purpose of the Federal Reserve System is twofold: foster economic conditions that maximize employment and ensure price stability. With 40-year high inflation of 8.6% in May driving up food, transport and accommodation prices, the Fed has opted to hike rates by 75 basis points, its most aggressive hike in almost three decades. They have also signaled a series of future hikes which would see benchmark rates reach 3.4% by end of this year and 3.8% by end 2023
In previous newsletters I’ve covered how the Fed has to tread a fine line between keeping inflation low while avoiding a recession. While the Fed remains optimistic about achieving a soft landing, I do not fancy that these chances are high but rather think we are headed straight towards a recession. That said, my view in January still holds, in that it would be challenging for the Fed to increase rates beyond 5% without creating too much stress on servicing interest costs. After all, we are structurally in a long-term declining rate environment and it is clear that the US economy is struggling with the prospect of higher interest rates
In fact, we are seeing this play out in Japan in real-time. The country has committed to keeping their ultra-low rates despite tightening by other central banks globally. Japan officials are concerned that higher rates may divert spending away from other much-needed areas such as education, defense and infrastructure. They estimate that even a 1% increase in interest rates would translate to an $80 billion increase in interest payments! For the US, it is crucial that current rate hikes resolutely curb inflation even at the risk of a recession, because the Fed is running out of options at their disposal

Investors: Avoid trying to catch a falling knife

So the bear market has finally arrived. The S&P 500 is down more than 20% from its peak and growth stocks / crypto is down even further at 60–80%. For investors with dry powder and committed capital, it is almost tempting to believe that things cannot get any worse. Founders and sellers are starting to become more realistic, and valuations are beginning to look reasonable for the first time in years.
A successful playbook for a bull market may fall flat in a bear market. It is important to take stock of the situation and recognize that we are still in the early innings of things unfolding without any clear indication of a recovery. Many uncertainties remain in the horizon — will inflation subside? What will the end game for the Russia-Ukraine conflict look like? How will the outcome of the US midterm elections affect policy making?
Savvier investors are taking time to digest new information and recalibrating their hypotheses. It is now more important to preserve capital and minimize losses as risk-reward skews asymmetrically towards higher risk and lower upside in the near term. The nightmare scenario every investor should avoid is the need to justify a snap investment as its valuation continues to drop over the next 6–12 months. Instead, more time should be allocated towards monitoring existing investments and helping portfolio companies stay afloat. I suspect better deals will start surfacing as markets reach the point of max pain

Businesses: The survival of the most adaptable

I have an incredible amount of respect for entrepreneurs and what they do on a daily basis as they bring their visions to life. If you are a young founder, this will likely be the first real recession you will be encountering, so it is important that you are as prepared as you can be. Sequoia published their “Adapting To Endure” presentation that outlines how founders should be navigating the current market conditions. I’m sharing my takeaways below so you do not have to read the entire presentation
As interest rates continue to increase, “growth at all costs” mentality has now shifted towards a “growth + improving profitability”. Three important factors in determining who survives: (1) adaptability — it is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change; (2) responsiveness — companies that move the quickest have the most runway; (3) opportunity — recognize this as an opportunity to emerge stronger through a crisis
The one who wins is the one most prepared. There are three ways to prepare: (1) yourself — confront the reality at hand, avoid a negative spiral and stay positive; (2) team — reaffirm your mission and values to all stakeholders, including employees, customers and investors; (3) company — cash flow is king, focus on creating more cash flow or reducing burn by earning more from customers, improving unit economics, cutting overheads and raising equity / debt even if the cost is expensive. Constraints can help to prioritize efforts and can lead to more creative solutions

If you found this useful, please feel free to share with a friend or colleague who may find this interesting and/or relevant. If there is any topic you would like me to cover or expand on, please let me know and I will see what I can do.

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Tim’s Tech Tidbits #9–100 Degrees Celsius

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Written by Timothy Leow