In Silicon Valley, there is a palpable sense of gloom, a fear that the good times are not only over, but that there is no sign when they will return.

We decided to gather the brightest minds to find a glimmer of hope. We hosted The Most Interesting Dinner in The World at Protégé, an upscale casual setting in Palo Alto. It was a fantastic evening with thoughtfully paired food and wine.

As is customary at our dinners, each participant was asked to bring a chart to discuss with the group. Please find a summary of the charts and discussion below. 

Chart 1: Long Doom “We have been so accustomed to this extraordinary liquidity environment that no one knows what will happen when global QE goes in reverse.”

Chart 2: Long Boom Households are wealthy, flush with cash, and ready to spend—setting the stage for a self-reinforcing demand explosion.  

Chart 3: Short Dreams “The only way to reduce inequality is to make poor people richer or rich people poorer.”

Chart 4: Short History What can the seventies tell us about how we should be thinking now?

Chart 5: Long Vultures “What happens when a $1.5 trillion asset class is tested?”

Chart 6: Short Widgets “I remember learning about the bullwhip effect in college. It was all theory. Now I see it all around me.”  

Chart 7: Short Death “Denial of death” is the defining feature of the post-enlightenment West and it must be “cured.”

Chart 8: Long Rembrandt “Leave your preconceived notions at the door. Don’t start with what you think will happen, look at what could happen.”

Chart 9: Short Status Pre-owned Rolex watches have nearly tripled in value over the past decade.

Chart 10: Short Anxiety “Trading is the loneliest job in the world.”

Short Doom

Source: Bloomberg, The Daily Shot, University of Michigan, Bernstein Research, Factset

“The macro backdrop is the worst I’ve seen in my career,” said the speaker. Growth is slowing, inflation is rising, and consumer sentiment is near record lows. “While everyone is focused on multiples, it’s the earnings side that now concerns me.” 

Analysts estimate earnings growth of 10 percent and 13 percent year-over-year for the third and fourth quarters, respectively. “Those numbers have to come down,” he said. The directions of earnings revisions have turned negative. 

“What consumers are doing is contradicting what consumers are saying,” said a participant. “Personal consumption expenditures (or consumer spending) increased by 0.9 percent in April from the prior month. This is on top of March’s 1.4 percent growth rate. “Earnings commentary actually paints a rosy outlook for the US consumer.” 

“The tape looks horrible,” said another participant. “Apple and Microsoft are the last men standing.” While the Nasdaq is down 23 percent, Morgan Stanley’s unprofitable tech index is down 64 percent. More than 60 percent of all software, internet and fintech companies are trading below pre-pandemic levels (and a third are trading below March 2020 lows), despite many of these companies more than doubling both revenue and profitability.

One of the participants called it “the great convexity crash.” The 60/40 portfolio, down 10 percent, is off to its worst start of the year in the past two decades. Bond market losses this past year are comparable to the global stock market capitalization wiped out in the first eight months of 2008. 

“Markets have never experienced a sustained contraction in global liquidity since the 2008 crisis,” shared another participant. Global QE has averaged $160 billion a month for the past 15 years and an incredible $458 billion a month since January 2020. 

“We have been so accustomed to this extraordinary liquidity environment that no one knows what will happen when global QE goes in reverse,” he warned.  

The speaker was asked, “What will make you bullish?” He replied, “China loosening, inflation rolling over, and stocks not going down on earnings misses.”

When they heard the last point, everyone burst out laughing, letting go of some of the sorrow they’d been carrying. In the current environment, underwhelming earnings are being slammed with massive stock selloffs.

Long Boom


Source: Bloomberg

The speakers’ chart offers a fresh take on the secular stagnation that has plagued America since the 2008 financial crisis. His work shows that the share of peak spenders (those aged 35 to 54) has been declining over the past decade. It’s only now turning up and expected to remain strong in the coming years. This is good for growth, but it also raises issues.

A material underinvestment in capex has built up in recent years. Looking at the pent-up spending power on the horizon, there needs to be significant investment in productive capacity. The alternative is to continue to live in a supply-constrained world. There are not enough raw materials, energy, inventories, housing, or workers.

While the headlines tend to focus on the pandemic-related supply problems, the speaker pointed to Bridgewater’s analysis that shows the supply of almost everything is at all-time highs. What explains rising prices is a self-reinforcing demand explosion. Households are wealthy, flush with cash, and ready to spend—setting the stage for a lasting recovery. 

China’s output is 20 percent greater and exports are 40 percent higher than they were at the start of 2020. For copper, aluminum, and nickel, supply is much higher than in recent years, but prices are still rising, and inventories are being driven down. 

Housing is an example where supply just hasn’t been able to keep up. In the US, housing inventories have fallen to levels far below anything seen in recent history. As a result, home prices and rents are surging. It used to take 4 months to build a house and now it takes 9 months. 

In the 1970s, there was a supply shock: supply collapsed while demand remained relatively stable. Today, demand is outpacing the level of supply, which is higher than pre-pandemic levels. As a result, the underlying demand/supply imbalance is getting worse, not better. This will continue to be the case unless productivity increases significantly or policy tightens substantially. 

“The risk is inflation will not decelerate as much as the Fed hopes,” said the speaker, “especially when current policy continues to stimulate rather than restrain demand.” 

Short Dreams


Source: StoneX

Writer James Truslow Adams coined the phrase “The American Dream” in 1931 to describe a society in which he hoped anyone could attain the “fullest stature of which they are innately capable.” The promise of the American dream—and with it, economic and social mobility—is a unifying tenet of American life. 

The speaker calculates what it costs using the S&P 500 index (25 percent), US bonds (25 percent), a home (25 percent), college (12.5 percent), and healthcare (12.5 percent). His chart shows that the price of the American dream in minimum wage has increased by 350 percent in 40 years. 

“The enduring promise of opportunity remains an unfulfilled one for many Americans,” he said. “This is what is feeding growing populism and partisanship.” 

The speaker reckons inflation is the “cure” and the system is fixing itself through higher wages and lower asset values. He expects these trends to persist in a secular power shift from capital to labor. “Eventually, this leads to universal basic income,” he argued. 

MIT’s living wage calculator shows the average American city has a cost of living of around $30,000 a year for a single person. That includes the cost of housing, food, transportation, and other basic needs. However, the Bureau of Labor Statistics estimates that at least 27 million US workers do not earn enough to hit that very low threshold. (In San Francisco, a single parent would need to earn $101,000 a year just to scrape by.) 

“The only way to reduce inequality is to make poor people richer or rich people poorer,” one of the participants added. But others were less optimistic about labor’s fortunes. 

The majority of the “working poor” are concentrated in two industries: retail trade and leisure and hospitality. “Automation will replace a lot of those jobs,” a participant said. Workplace robot orders jumped by 40 percent during this year’s first quarter. 

While productivity should increase, which is synonymous with higher standard of living, corporations have not passed on the gains to workers in recent decades. There is little evidence that’s about to change. 

Wage growth is slowing once again as the prime-age labor force participation rate has returned to pre-pandemic levels and 1.5 million retirees have reentered the labor force. Job postings peaked in January and have been drifting lower. 

In the first quarter, companies were less apt to mention labor shortages on earnings calls. Walmart and Amazon both said that they had over-hired. More recently, we have started to see layoffs and other belt-tightening announcements. The pursuit of profits lives on.

“We are in the fourth turning,” one of the participants stated, citing the influential book by William Strauss and Neil Howe. “We have managed to postpone the reckoning, but history warns that this will be a tumultuous decade in which the old civic order is replaced by a new one.”

Boomers are beginning to retire. Gen X are beginning to assume mid-life roles as the dominant parent generation and leaders. They were born in the ‘60s and ‘70s. Millennials are coming of age and redefining young adulthood. And a tiny new generation is emerging that has no recollection of anything before 2008. 

Written in 1997, the book’s full title says it all: The Fourth Turning: An American Prophecy-What the Cycles of History Tell Us About America’s Next Rendezvous with Destiny.

Short History


Source: The Felder Report

Today’s inflationary and war backdrop reminds investors of the 1970s. What can that period tell us about how we should be thinking now? The speaker’s chart shows an overlay of the S&P 500 with the 1973 analog. 

Back then, stocks fell 20 percent over an eight-month period, and then surged 15 percent by the end of October. Bulls were lulled into believing that a new leg up had begun. 

On October 19, however, oil-producing Arab countries instituted an embargo. Oil prices quadrupled and the US economy fell into a recession. That’s when the second down leg began, a 27 percent decline. 

“There’s only one question that matters for investors here,” posited the speaker. “Are we entering a recession or not?” He observed that recessionary bear markets result in a 35 percent decline on average and last nearly 15 months. Non-recessionary bear markets lead to a 23 percent decline and last just over seven months on average. 

“If yes, we’re entering a recession, then we should expect stocks to keep sliding,” the speaker argued. “And if not, then we have likely seen the worst of the selloff.” Unlike 1973, he does not see recession risks on the horizon. Seven of the past 12 bear markets did not lead to a recession.

It’s worth noting that, from 1973 to 1977, the S&P 500 gained 2.5 percent annually, while the Nifty Fifty stocks lagged, with five-year annualized returns of negative 4.4 percent. “How many people are prepared for a long period of tech and US underperformance?”

Long Vultures


Source: J. P. Morgan

The 1970s was a period of high and rising inflation and interest rates. Rolling over short-term paper yielded far higher returns than owning stocks and bonds. As a result, a whole new asset was born: floating rate debt. 

Citicorp sold the first fifteen-year floating rate note in 1974, yielding 9.7 percent for the first ten months and 1 percent above the three-month US Treasury bill rate thereafter. The notes were sized up to $650 million from $250 million originally given strong investor demand. 

In July 1974 the three-month prime commercial paper rate was 11.9 percent while Treasury bills of similar maturity yielded only 7.6 percent. Citicorp's floating rate promised a cheaper and more assured source of funds than commer­cial paper.

“The public leveraged loan market (all floating rate) has only scaled in a low inflation environment,” the speaker reflected. “What happens when a $1.5 trillion asset class is tested?” 

It’s unclear at what level of the Fed funds rate we’ll start witnessing significant credit market problems. The financing environment is getting trickier despite healthy corporate balance sheets. “Primary software convert issuance has stalled in the past six months due to the valuation reset,” he noted. 

The speaker, a credit specialist, said that he’s finding attractive opportunities in mispriced high growth software debt. High growth software companies make up 30 to 40 percent (or $120 billion) of the $400 billion convertible asset class. 

As the Silicon Valley downturn persists, one of the participants said that he expects distressed funds to swoop in, similar to the distressed debt funds established to invest in energy assets following the shale bust in 2016.

Short Widgets


Source: Gartner

Demand for technology has boomed since the pandemic. Global PC shipments surged 15 percent last year to reach 341 million units, the largest shipment total since 2012. A higher-than-normal proportion of PCs shipped were new additions to the installed base rather than replacement devices, especially in areas like education and remote work.

“There’s good reason to believe,” the speaker said, “that companies overspent in IT and pulled forward sales from future periods.” Global PC shipments declined 6.8 percent in the first quarter, suggesting that the pandemic boom in PC sales is over. This has implications for PC companies like Lenovo, HP, and Dell.  

A participant noted that we are seeing “panic buying or ordering” across a range of industries. In the first quarter, retail inventories (ex-auto) were up more than 5 percent year-over-year, the highest in 17 years. In the wholesale sector, inventories (ex-auto) were up 7.2 percent year-over-year, the highest in 23 years. It will take time for businesses to work off the overhang.

A participant noted that he’s seen an extraordinary amount of inventory buildup among widget-makers. “It’s massive,” he said.” “They are renting warehouses to store excess inventory.”

“I remember learning about the bullwhip effect in college,” chimed another participant. “It was all theory. Now I see it all around me.”  

The bullwhip effect is a supply chain phenomenon describing how small swings in demand at the retail level can induce increasingly bigger fluctuations in demand at the wholesale, distributor, manufacturer, and raw material supplier levels. The effect takes its name from the mechanics of cracking a whip.

“Semis have seen the highest inventory build ever,” said another participant. He’s bearish on the group in the near-term, but long-term, he’s positive. Semis are the “heartbeat of the economy,” he stated. “By the end of the decade, every company will be a semis company.” 

Short Death


Source: Clocktower Group

Every decade, there is a theme that captures the zeitgeist and expresses itself as investment mania. It was gold in the 1970s, Japan in the 1980s, Nasdaq in the 1990s, and China and commodities in the 2000s. As more investors are lured in by the big gains, a classic bubble forms and ultimately pops.

Nothing captured the investment zeitgeist of the 2010s better than venture capitalist Marc Andreessen’s prescient 2011 article, “Software is Eating the World.” Andreesen foresaw a broad technological and economic shift in which software companies were poised to take over large swathes of the economy. 

Software-as-a-service (SaaS) companies took advantage of the growth in cloud computing and the scalability of subscription-based software. According to Gartner, the worldwide cloud-services market grew from $12 billion in 2011 to a staggering $332 billion in 2021. 

Since Bessemer Venture Partners created the BVP Cloud Index of publicly traded companies in August 2013, the basket went up 900 percent, almost triple the gains in the Nasdaq and five times better than the performance of the S&P 500. 

“The best decision an investor can make is to avoid the popular zeitgeist when a new one begins,” said the speaker. This is hard since it requires going against a pattern of behavior that has proven to be rewarding. 

“Gold did terrible in the 1980s, Japan kept sliding through the 1990s, tech was weak in the 2000s, and China and commodities were a disaster from 2010 onwards. Now it’s software’s turn,” he said. There is a reluctance to accept that times have changed.

The speaker believes a new zeitgeist is starting to blow through: the race to zero emissions and the global energy transition. 

One of the participants suggested another candidate for the new zeitgeist: healthcare. He raised the alarm on the disastrous health of the American population: the life expectancy of a middle-income country, an abnormally high Covid death rate, a debilitating obesity rate, millions of deaths of despair, declining labor force participation, and collapsing natality. 

“Despite spending a record 16.8 percent of its GDP on healthcare, the US achieves a life expectancy of 78.8, about six years less than most developed countries,” he argued. “The inefficiency of the US healthcare system is mind-boggling.”

According to the CDC, 42.4 percent of US adults were obese in 2018, up from 30 percent in 2000. For comparison, the prevalence of obesity is around 21 percent in Europe, 6 percent in East Asia, and 5 percent in India. 

The life expectancy for white men has been declining for more than a decade. The participation rate for white prime age men has fallen by 18 percentage points since 1954, and the share of Americans on disability has more than doubled. Births are back at their late 1950s level, when the US population between 15 and 64 was half of its current level. 

“America’s health crisis has become a significant competitive disadvantage,” the participant said. He expects ageing will result in “a tsunami of healthcare spending.” Average annual healthcare spending doubles between the ages of 45-54 and 65+. Boomers, the largest and wealthiest generation in the West, are just entering the high spending zone.

The S&P 500 Managed Healthcare Index has rallied by an incredible 1,280 percent since the passage of the Affordable Care Act in 2010. “The next reform of the healthcare system will be another windfall for healthcare incumbents,” he said. The healthcare sector has been a discrete outperformer this year and is less likely to suffer from the breakout in long-term yields.

According to the participant, the “denial of death” is the defining feature of the post-enlightenment West and it must be “cured.” Google’s Sergei Brin and Larry Page have invested in Calico, whose mission is to “solve death”, while Peter Thiel and Jeff Bezos have backed Unity Biotechnology, which attempts to reverse ageing.

Long Rembrandt


Source: The Rijksmuseum, Amsterdam

On the surface, it seems unlikely that a seventeenth century Dutch painting would have much relevance today. But if you take a moment to look at Rembrandt’s masterpiece, “The Night Watch,” you may notice that every person depicted in the painting is looking in a different direction, each bringing a unique view to the gathering.

The Speaker said that the painting inspired a multidisciplinary research team he built at his firm to look at highly uncertain events, evaluating possible scenarios and considering potential outcomes. This proved extremely helpful in forecasting the fallout from the pandemic. 

“The No. 1 rule of the Night Watch is: Leave your preconceived notions at the door,” said the speaker. “Don’t start with what you think will happen, look at what could happen. We can then act quickly if needed to address the unfolding events.”

The latest scenarios being considered by The Night Watch include what would happen if the US currency lost its reserve status or if China invaded Taiwan. 

One of the participants stated that he worries about a climate-driven disruption, particularly in China, the country most vulnerable to flooding as global temperatures rise. Can aging dams maintain historical levels of flood protection in the face of extreme weather changes?

The Yangtze River basin provides water, transport, and food for almost one-third of China’s 1.4 billion people and supplies more than 40 percent of the country’s GDP. The Yangtze is the heart of the global supply chain and central to global manufacturing for companies like Apple, Walmart, and Nike. 

A report from the Intergovernmental Panel on Climate Change says that rainfall and floods seen as “once in a decade” events are going to become increasingly more frequent.

Short Status


Source: Watch Charts

The speaker stumbled upon the secondhand Rolex market during due diligence for a luxury watch marketplace. He was surprised to find that used Rolex watches have nearly tripled in value over the past decade. While he passed on the marketplace, he bought himself a Rolex as an “alternative asset.” 

An index of 30 popular Rolex models with high trading activity has risen 72 percent since the coronavirus outbreak in March 2020, and 88 percent in the last five years (a 12.6 percent annualized return).

What explains this? The rise of social media, status seeking, younger demand (those newly minting wealth), scarce supply, and it’s the only “jewelry for men.” The pre-owned luxury watch market is worth $20 billion. 

One of the participants noted, however, that the value of the Rolex index has fallen 5 percent in the past month. “The everything selloff has claimed luxury watches as well,” he said. Another participant stated that he has been short luxury goods group Richemont. 

Short Anxiety

“What is my default state?” It’s a question the speaker has been pondering. By default state he means the mental and emotional baseline in which we spend most of our time. 

“It used to be motion,” he said. “I was always chasing after worldly success, running from goal to goal, believing it would fulfill me.” Then he grasped Rumi’s secret.

When I run after what I think I want, my days are a furnace of distress and anxiety; If I sit in my own place of patience, what I need flows to me, and without any pain. From this I understand that what I want also wants me, is looking for me and attracting me. There is a great secret in this for anyone who can grasp it. 

“Now I don’t make myself miserable with what is to come or not to come,” the speaker reflected. “Contentment is my default state.” He requested everyone to share theirs.

“Anxiety,” said one participant. “I feel anxious thinking about things I need to do at work or for my kids.”    

Another participant shared that his default state was “anxious” as well. But this was linked to his trading, which he said was the “loneliest job in the world.” He finds solace in stoic philosophy and spends time thinking about worst case scenarios.  

“Even if you have a great year, you know we could have done so much better,” he said. “So, it’s easy to beat yourself, especially as you know your mistakes.” 

Another participant added, “A bad year feels worse than a good year feels good.” This is particularly true in the current market environment. 

One of the participants stated that his default state is “thinking constantly.” He admitted that he was “not present.” As his children are growing older, he finds himself wondering where did the time go? This is something he is looking to change.  

“My default state was always being in my head,” said a participant. “Now I’m enjoying being guided by the heart.” A heart-centered living invites more love, compassion, kindness, patience, forgiveness, and cooperation.

Another participant stated that “love” is his default state. He has no time for “dicks and assholes.” He had a rough upbringing as a gay Latino, and he wants to help others feel like they have a place in the world, that they belong. “I’m a lover, not a fighter.” 

The next participant said that he oscillates between “happy, pensive, and manic.” Lately, his default state is more manic given market volatility. He feels like he needs to stay on top of everything. That’s an exhausting endeavor. He must objectively fight this tendency because it sacrifices his happiness. 

A participant shared that he’s not getting enough “me time” now that’s he had a second child. He is striving towards more “peace and balance.” He has hired a full-time nanny and is working with a coach. A life-long surfer, he’s looking for “calm waters.” 

One of the participants, a venture capitalist, said that his default state is “efficiency seeking.” In each of his first three years in the business, he met with over a thousand startups, only to realize that it’s not about the frequency of meetings but rather optimizing to have better screening. His efficiency skills apply to all areas of his life, even his hair blower’s placement and plugging. 

A participant who had endured a difficult year personally and emotionally stated that “gratitude” had become his default state. He was especially grateful for discovering Rumi, whose words had helped him in regaining composure. 

With great courage, he shared that his father was dying. He was flying to Paris to see him the next day and asked everyone for any advice on how to cope with such a grave loss.

“Don’t leave anything unsaid,” a participant offered, who had also lost his father. “Say whatever is in your heart.” 

“I had a great relationship with him,” he replied, reflecting on the many beautiful memories. “Then just thank him.”