E80: Recession deep dive: VC psychology, macro risks, Tiger Global, predictions and more

Following this May 2022 conversation, U.S. residential home prices will begin to decline as rising mortgage rates force sellers to drop prices; the downturn in home prices will materialize in the ensuing housing data (within the next few quarters after May 2022).

“I think home prices that's coming, Jason, because like you said, mortgages are going up.” View on YouTube

Over the several months following May 2022, U.S. consumers will be significantly hurt financially (e.g., via higher borrowing costs, increased use of credit, and reduced real wages), becoming the next major area of economic weakness after the financial market correction.

“the consumer in general, that's the next shoe to drop here, because right now it's been you had this sort of financial correction... Now I think you've got a bunch of different factors. They're going to really hurt the consumer over the next several months.” View on YouTube

Following the roughly 14% destruction of global wealth observed by May 2022, a large recession in the real economy is inevitable and will materialize in the near term (within the subsequent 1–2 years).

“I think like recession now is just inevitable. You point you can't have 14% of global wealth wiped out practically overnight and not have that translate into a big recession.” View on YouTube

Beginning around mid-2022, the Federal Reserve will commence quantitative tightening at roughly $90 billion per month, and at that planned pace it will take about three years to run off approximately $3 trillion of excess assets/liquidity from its balance sheet.

“we actually haven't started to remove the money in the system. So the process of quantitative tightening... is going to start now to the tune of about $90 billion a month. But to run off all the money that they printed will still take three years. Right. So we have to take about $3 trillion of excess capital out of the economy.” View on YouTube

The U.S. economy will enter a recession in the near term following this May 2022 discussion, driven by stagflationary conditions (high inflation combined with weak real economic growth).

“that's where we have a problem with stagflation and where we are inevitably going to run into a recession.” View on YouTube

The United States will be in a technical recession in Q2 2022, meaning real GDP growth for that quarter will be negative following a negative Q1 2022, producing two consecutive quarters of negative real GDP growth.

“Let's be honest, we're in a recession right now. This is a second quarter.” View on YouTube

In the period following May 2022, the U.S. may develop a severe consumer credit bubble, characterized by unsustainably rapid growth in consumer borrowing (credit cards and other personal credit) that creates systemic risk and is likely to end in a sharp correction or spike in delinquencies and defaults.

“we may find ourselves in a really ugly consumer credit bubble.” View on YouTube

Despite broader financial market turmoil beginning in early 2022, the U.S. real estate market will not experience a systemic crisis or major structural collapse similar to the 2008 housing crisis.

“I don't think we have like an issue in real estate, to be completely honest with you.” View on YouTube

U.S. employment has already peaked by May 2022, and the unemployment rate will rise from its then-current lows in the ensuing months.

“Unemployment's going up. I think employment has peaked.” View on YouTube

The venture and growth equity ecosystem will experience several years (on the order of a few years after 2022) of painful adjustment, including portfolio triage, layoffs, down rounds, and restructuring, before reaching a new equilibrium.

“So, you know, we're going to go through a few years of sorting this thing.” View on YouTube

During the downturn beginning in 2022, venture funding will be available for startups that exhibit high growth and moderate cash burn, while startups with only moderate growth and high burn will be unable to raise capital and will fail or be forced into drastic restructuring.

“So in a weird way... startups with high growth and moderate burn will get funded through this downturn starts with moderate growth and high burn will not get funded.” View on YouTube

Large, traditional venture funds will slow their deployment pace after the 2020–2021 boom; instead of deploying funds in roughly one year, they will revert to a roughly three-year deployment cycle over the coming period.

“However, there will be the big traditional venture funds will have large funds, but they're going to deploy them much more slowly. These one year pace of deployments, they're going to stop... They'll be back to three.” View on YouTube

After the 2022 market correction, crossover hedge funds that had aggressively entered late-stage private tech (e.g., Tiger Global, D1, Coatue) will effectively withdraw from new private tech investing for an extended period, leaving traditional VCs as the primary capital providers.

“the crossover investors are washed out of the system. They're gone. I mean Tiger's already deployed all of its capital. And I don't know when they're going to be back.” View on YouTube

From the roughly $250B in VC dry powder available as of mid‑2022, at least one new technology company will emerge and grow to a market capitalization of $1 trillion or more over the subsequent years, transforming some part of the economy and retroactively making the VC industry’s recent capital deployment look attractive.

“All you need is one of the next trillion dollar mega-caps to emerge from the quarter trillion that's sitting for the entire industry to look fantastic and for that business to transform the landscape of some part of the economy.” View on YouTube

The roughly $250B of VC dry powder available as of mid‑2022 will be deployed over the following years in a way that is significantly stimulative to the real economy, funding new technology companies that in aggregate create substantial new employment and new areas of economic growth, offsetting much of the prior speculative excess.

“We’ve never had this much dry powder sitting on the sidelines. And this is where the free money should go. It should go to creating new companies that create new jobs. And it is it's found its way there... some amount of it made its way into funding the creation of new companies that are going to create jobs. And that is the good thing of what's happened over the last couple of years, despite the asset implosion of all these bubbly things that have happened.” View on YouTube

Within roughly 9–12 months from mid‑May 2022 (i.e., by around May 2023), the US will experience a consumer credit bubble culminating in a noticeable credit crisis, characterized by widespread concern about consumers’ ability to service their accumulated credit card and loan debt.

“I really think we're going to run into a consumer credit bubble here... We're going to face a credit crisis and call it 9 to 9 months, to a year where we're all going to wake up and be like, wait a second, how are consumers going to be able to afford all this credit?” View on YouTube

Around mid‑May 2022, the S&P 500, then near 3,800, is near its cyclical bottom; although in theory it could fall toward 3,000, in practice a Federal Reserve 'put' will activate before then, so the index is unlikely to drop significantly below 3,800 for a prolonged period in this downturn.

“If you look back through time roughly, if you look at like the average mean PE for the S&P 500, it can go down to as low as 3000. It could. But I think the reality is there's a fed put somewhere in between here... so, you know, I actually think we're probably close to a near bottom ish here. 3800 ish in the S&P 500.” View on YouTube