Monthly Chartbook - AI Narrative Takes the Wheel

“The world’s favorite season is the spring. All things seem possible in May.” — Edwin Way Teale

Market Musings

This month’s musing will be devoted to analyzing vibes. You might think, what’s the point of wasting time on, uh, “vibes?” Shouldn’t we focus on more important stuff like numbers, charts, and math? Well, no. Until GPT-5 takes all of our jobs, and we can just chill on the beach all day, the world will still be run by humans. And humans run on vibes, not Dunkin. So, vibes — “narratives” or “sentiment” in more sophisticated parlance — are critical to understanding the market and our place within it.

chloe21e8

A quick example of the impact ~vibes~ can have on markets comes from a friend, George Ejupi. In his Narrative Ping Pong blog post, George highlights the chart below: SOFR December 2023 in yield terms.

For context, a SOFR (Secured Overnight Financing Rate) futures contract is a financial instrument that traders use to speculate on changes in short-term interest rates. Like other futures contracts, a SOFR future is an agreement to buy or sell a thang at a future date for a predetermined price. In the case of SOFR, what’s being bought or sold is the SOFR interest rate.

The yield associated with the contract is determined by market expectations of what the SOFR will be at the expiry date. A rising Dec 2023 SOFR yield suggests market participants expect rates to rise before December 2023. A declining Dec 2023 SOFR yield suggests market participants expect the Federal Reserve to lower interest rates.

Anyway, the point is, nobody knows what’s gonna happen! The chart is literally ping-ponging up and down. We’re trading off ~vibes~ right now. And unfortunately, in the long-duration corner of the market (tech + crypto), the vibes aren’t great. The most recent All In podcast, E130, offers a case in point.

pythianism

For the uninitiated, the All In podcast is hosted by four Silicon Valley investors, entrepreneurs, and IRL “besties” — David Sacks, Jason Calacanis, Chamath Palihapitiya, and David Friedberg. The four began meeting once a week at the height of Covid to stave off boredom and discuss current events. They enjoyed the conversations so much that they started to post them on YouTube. All In has since become the #1 technology podcast in the world and single-handedly raised the profiles of all four already accomplished co-hosts.

During a recent episode — E130 starting at 1:11:52 — the besties discuss the state of Silicon Valley, venture capital, startups, and dealing with failure. The conversation serves as an insightful vibe check and is worth watching in full. A few excerpts follow below.

David Sacks:

My take on what’s happening in Silicon Valley right now, or tech more generally, is it’s a tale of two cities.

David Sacks

It’s the best of times for AI startups and the worst of times for everybody else.

WSJ

For AI startups, there are a lot of interesting things happening there, and money is being pushed at them by VCs. It’s very frothy, arguably bubbly. But then, at the same time, if you’re a pre-AI company, maybe the one that raised a lot of money at a big valuation in 2020 or 2021, it’s a pretty tough time. I don’t know of any startup, especially, like, later-stage startups, that are hitting their numbers. Everyone is re-forecasting down. Everyone’s missing.

@tomloverro

I think that speaks to the larger economy is not doing that well. I think the economists a year from now may say that their recession had already begun. It certainly feels like that. That’s what Druck said at the Sohn conference. And startups are absolutely seeing that in their sales right now. Sales are slipping, it’s taking longer, and buyers are sharpening their pencils. It’s a really tough environment, I think, for software startups that are actually trying to make sales. AI startups are a little bit exempt from that because people are still investing based on the dream, not based on the metrics.

David Friedberg:

In the last 15 years, we’ve been in a structurally inflated environment because of the zero-interest rate policy since the 2008 financial crisis.

And everything’s been up and to the right so much, it’s been so easy to kind of inflate things, fill up hot air balloons and go up and to the right. And unfortunately, most folks who are working in the investor community that sit on boards weren’t around for the dot com crash the last time this happened. That’s why it’s so challenging right now to figure out a way out. There’s a lot of failure going on in Silicon Valley right now.

David Friedberg

You know, Sacks, you talked a little bit about having paths for exit and options for SaaS companies, but there are many sectors in startup land that don’t have those sorts of options in biotech, synbio, FinTech, and direct-to-consumer e-commerce.

WSJ

There are a lot of markets and a lot of types of businesses that feel like there isn’t a great way out. And it’s having a deep psychological toll on entrepreneurs, on founders, on CEOs, and everyone is experiencing some degree of failure in this environment.

There are very few folks who aren’t feeling this acute pressure and this acute pain. I heard some pretty horrific stories this week from a friend of mine and someone who ended up in the hospital because of the pressure he was under. And it’s really trying.

Even within our broader community of investor friends, there are v