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Are we entering a recession?
The Nutgraf is a 10-min newsletter sent at 10 AM IST every Saturday. It connects the dots and synthesizes one big event in business, technology and finance that happened over the week in India. In a way you’ll never forget.
This is a paid newsletter that’s available exclusively to The Ken’s premium subscribers.
Just 10 mins longSynthesis not analysisSometimes memes
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Good Morning Dear Reader,
Remember when I wrote to you last Saturday saying I was down with a flu infection? Well, I did a couple of tests and found out that my infection has a more popular name.
Yes, I managed to avoid it for over two years, but even I couldn’t escape Covid. Fortunately, it wasn’t too bad and I’m recovering nicely. I’m still locked indoors until I test negative, but I expect to be back to 100% by next week. I appreciate your understanding and patience while I was away.
Anyway, it looks like I’m back to a vastly different world than the one I left. A few weeks ago, everyone was gung-ho about everything in business, and now it looks like the world is up in flames. Equity and capital markets seem to be on a downward spiral all over the globe, thanks to a combination of interest rates, inflation, and geopolitical uncertainty. Technology companies seem to be the most affected. IPOs are going unsubscribed. It’s now surprisingly easy to find empty tables at coffee shops in Indiranagar in Bengaluru.
If you’re one of those young GenZ wide-eyed optimists just starting your career (and recently got into investing), this is probably going to be your first recession. Your Zerodha or Groww portfolio looks like a violent crime scene. You know someone who has been laid-off, usually a friend of a friend. Your company All-Hands meetings are getting more and more sombre. All those perks are suddenly vanishing. And this is just the beginning. Remember that things could be worse. You could have quit your job last year to join some crypto company. If you already did that, I think it’s time to update your LinkedIn. Web3 does not, in fact, solve everything.
Now, I’m hardly a grizzled veteran, but I’ve also done stupid things when I was young, like invest in the Reliance Communications IPO.
So, let me just say that this too shall pass.
However, today, let’s do a tour of the global bloodbath, with quick stops to explain what’s going on, why it’s going on, and maybe try to find out what happens next. To do this, I’m going to reference an absolutely brilliantvideo created by the meme account @litquidity on Twitter. There’s something incredibly poetic about watching the opening scene of the war movie Saving Private Ryan, where soldiers storm Omaha beach, set to Metallica’s Enter Sandman with captions trying to make sense of the fog of war.
Let’s dive in.
Winter is here
One can argue that it all began with Netflix.
This newsletter does not over-index stock prices, but it seems pertinent to note that at the time of writing this, Netflix is trading at a little over US$180, down from US$690 just seven months ago. For good reason. If you’re wondering what happened, well, the abbreviated version of its last earnings call went something like this:
Netflix: We have bad news for you. It has not been a good quarter for us.
Analysts: Don’t worry, we don’t expect you to add more than 2.5 million subscribers this quarter. Of course, you added 4 million subscribers last year in the same quarter, but we understand things are hard this year with increased competition.
Netflix: Yeah, about that… we had to cut off Russia because they decided to go to war with Ukraine, so we lost about 700,000 subscribers there.
Analysts: Hmmm. Understandable. So, you must’ve added 1.8 million—
Netflix: No, we actually lost 200,000 subscribers this quarter.
Analysts: What? But you’ve never lost subscribers.
Netflix: Yeah, what to do. Oh, also, we are going to lose more subscribers next quarter.
Analysts: Ohh how many—
Netflix: Maybe 2 million.
Analysts: ARE YOU SERIOUS?!
Netflix, Oh, also, now users will see ads on Netflix.
Analysts: OH MY GOD CAN SOMEONE CALL ELON
As someone who’s uniquely qualified to talk about subscriptions (because I build subscription products), and advertising (because I used to build ad-tech products), I think that the road ahead for Netflix is going to be hard for a while. They may eventually emerge successfully on the other side, but to build subscriptions and advertising simultaneously is like trying to merge two companies into one. Very different skills. Very different ways of thinking. Different DNAs.
Then, as I’ve written about before, there’s distribution partnerships which Netflix badly needs to crack if it needs to win in India, which I've described earlier as Netflix’s last growth market.
If you ask people what Coinbase does as a company, they’ll tell you that it’s a crypto exchange. Coinbase sits in between our somewhat bizarre financial universe and the completely bizarre crypto universe, and collects a fee for all transactions that transcend the two universes. It’s a great business. The more people want to buy and sell crypto, the more money Coinbase makes. That’s it. Simple.
Exchanges are usually boring companies and nothing exciting happens there.
But not Coinbase. Coinbase is a hilarious company, even by crypto standards, and the bar for hilarity is ridiculously high in that space.
For instance, I could tell you about the time when Coinbase made a big splash last month at its India launch where it announced that it would allow users to buy crypto tokens using UPI. This announcement caught the attention of India’s payment regulators, including the RBI, and in a matter of hours, all crypto exchanges in India got iced out of the financial system, effectively cursing crypto in the country. My colleague Jaspreet covered this in detail in his wonderful newsletter, Tokenised.
That was last month. Since then, Coinbase has also announced its first quarter earnings, and they were bad. It turns out that fewer people want to buy crypto when crypto prices have collapsed. And the company’s share prices are down 70% compared to when it went public a year ago.
Normally, when there’s a fire like this, companies keep their heads down and wait for it to pass.
Not Coinbase.
Instead, Coinbase took a long look and decided to throw in a can of petrol.
Cryptocurrency trading platforms might look and feel like regular brokerage apps to everyday users, but regulators have long warned they lack the oversight and investor protections that are built into traditional financial services.
Coinbase Global Inc. acknowledged that reality this week. In its quarterly filings, the crypto trading firm suggested that the digital tokens it holds for its users might not really belong to them if push comes to shove.
“Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings, and such customers could be treated as our general unsecured creditors,” the company said.
By contrast, securities held for customers by a registered brokerage are legally segregated from the assets of the brokerage, meaning they can’t be touched in bankruptcy proceedings.
Predictably, this led to an explosion, which forced Coinbase to issue a statement insisting that it’s not about to go bankrupt. But for a company, talking about bankruptcy is a little bit like celebrity marriages. If you issue a statement claiming that everything is fine, a lot of people interpret that as a confirmation that things aren’t fine at all.
This is self-explanatory.
Zomato. Paytm. Nykaa.
All down by as much as 40-70%.
Not all of them necessarily have bad business models, but my point is that it’s not a great time to be a growth tech stock.
This is one of the biggest guns that’s killing the stock market.
Inflation numbers for the month of April came out yesterday, as reported by the Ministry of Statistics and Programme Implementation.
Retail inflation was recorded at 7.79%, up from 6.95% in the month of March and 4.23% in April 2021.
This is the highest recorded inflation in India in eight years.
Things are getting expensive.
Look, this is complicated, and I don’t even understand it completely, but let’s just say that this is one of the biggest events that’s happening in the crypto universe right now.
And the worrying part is that this has deep implications beyond crypto, because this bleeds into our financial universe.
One type of cryptocurrency, a so-called stablecoin, is meant to keep its value at $1. But on Monday, the third-biggest stablecoin, TerraUSD, fell as low as 69 cents, causing a flood of investors to sell their holdings.
Stablecoins get their name from their being tied to the value of government-issued currencies, such as the dollar. These $1 pegs are usually backed by Treasurys, cash and other dollar debt that is easily sold in times of market stress.
More than $18 billion was invested in TerraUSD as of this past weekend, making it the third-largest stablecoin, according to crypto data provider the Block. But unlike traditional stablecoins, TerraUSD is an algorithmic stablecoin. These pseudo dollars aren’t necessarily backed by any assets at all, instead relying on financial engineering to maintain their link to the dollar.
Such designs have been criticized by market observers as risky because they rely on traders to push the value back to $1 rather than having assets that continuously support the price. If traders aren’t willing to buy them, coins can go into a so-called death spiral. TerraUSD has mostly maintained its dollar peg, but it has been broken in bouts of heavy volatility.
Yesterday, TerraUSD crashed to near zero, wiping out 99.99% of its value.
In very simple terms, things that were supposed to be safe in the crypto world, i.e stablecoins, are unraveling.
The question is how much longer before other stablecoins are affected.
A couple of days ago, Masayoshi Son, founder and CEO of SoftBank, stood on a stage and made a presentation. In it, he revealed that the Vision Fund lost nearly US$27 billion from investments last year.
According to the Financial Times, Son began his presentation with a massive Chinese character in white against a deep blue backdrop.
The word on the slide was mamori.
Translated from Chinese, mamori means “to protect” or “to defend”.
Tells you everything when the biggest venture fund in the world is in self-preservation mode.
I just want to laugh loudly.
Sigh.
Well, Bitcoin is down to its lowest price in 12 months.
So, there’s that.
And it’s expected to fall even further.
Gulp.
All of which leads us to…
They don’t. They collapse too. And sometimes, they take years to recover.
And sometimes never.
Ask anyone who bought Reliance Communications in 2008.
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Synthesis not analysis 
