7 Dec 2021

VC funding in Australia

For the 3rd month this year Australian VC’s raised more than $1 billion. 5yrs ago $1bn for the year would have been significant. Australia is no different to the rest of the world we are simply seeing the effects of close to zero interest rates and a system awash with money.

If you have followed me for some time you will know how I describe there is always a counter balancing force to every action. What we have is an environment that is supportive of cash hungry companies growing exceptionally quickly at the expense of sound money checks of economic viability. This is classic bull market economics and the VC’s cashed up coffers are there to support the cash burn needs of these crazily valued companies. Another great thing about VC investing is that valuations are not marked to market by the open market on a daily basis but rather carefully orchestrated capital raises at progressively higher valuations giving the VC firms the ability to produce a steadily accretive return on investment. With outstanding IRR’s for investors the capital raising departments of the various VC outfits are making hay while the sun shines. This probably means that if and when things turn down there will still be decent runway for capital hungry startups. As long as you are not locked in for too long then you should be ok as a bear market in equities will take a little time to follow through to the VC market. I think the new capital being raised now is likely to struggle to not only see a return on their investment but rather the return of their investment.

I have been bleeting on how worried I am about the Chinese economy. It seems like things are starting to look up on this front with Chinese Composite PMI back above 50. Clearly a little bit of money printing never hurts. As you will see through the rest of todays letter, the theme of whether we should have been buying the dip.

You can see that wage growth is clearly above trend in the US so there is every possibility that inflation is going to be stickier than first thought.

Central Bankers are getting a little gun shy now. While some were quick to shoot off a few rounds others are pausing for the moment. None have been cooler than RBA Governor Dr Lowe who has held steadfast that he will not raise until around Q1 2023. Perhaps he will have the last laugh.

In the scheme of things rates on the 1yr Aussie bonds seem to have settled down for now. As a betting man I think it is safe to say the bottom is in, the question remains how much higher are we likely to go in the near term?

Rounding up some of the overnight activity the S&P500 managed to rally more than 1% shaking me out of my short once again. As you can see from a market breadth point of view things have turned a little pessimistic which is probably the perfect setting for a Christmas rally.

Bitcoin seems to have settled and there continues to be very little news about the selloff. Just like the equity markets this recent pullback could well be the clearing for a renewed rally into the new year. Buy the dip pundits are getting all frothed up.

Last chart for today, Brent Oil also staged a big move with a 5% rally. These could all be sucker rallies so let’s see if there is any follow through over the next week or so, I will use strength to get short with stops at previous highs.

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