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The biggest guest in Equity Mates history

This is a particularly exciting week for all of us here at Equity Mates. Maddy and Sophie from the You’re in Good Company podcast are releasing their interview with Cathie Wood on Tuesday. If you’re yet to subscribe to their podcast - now is the time.

For those who are unfamiliar with the name, Cathie Wood is the founder and Chief Investment Officer at Ark Invest.

Ark Invest has built a reputation for investing in the cutting-edge of technology, everything from self-driving cars to genomics. They are some of the most bullish technology investors and are known for publishing extreme predictions of where companies like Tesla and assets like Bitcoin are going to end up (for example, Wood believes Tesla will eventually be worth $3 trillion and that Bitcoin will reach $1 million by 2030).

To get a sense of Ark Invest’s views on emerging technology, the best place to start is their Big Ideas 2023 report.

Ark’s bold predictions have brought in plenty of criticism, but also plenty of investor money. Ark Invest manages $60 billion across their ETFs.

In the upcoming You’re in Good Company podcast interview, Maddy and Sophie ask Wood about recent advances in Artificial Intelligence and how we should respond both as investors and as workers. They also delve into where Wood sees opportunity in today’s market and cover a wide-range of topics from self-driving cars to emerging healthcare technology.

Make sure you’re subscribed to You’re in Good Company so you don’t miss this interview (Apple, Spotify, or search ‘You’re in Good Company’ wherever you listen to podcasts).

China’s record-high 20.4% youth unemployment

This stat is mind-blowing. And it shatters a lot of preconceived notions about China’s rise and how the job market functions in the quasi-communist, quasi-capitalist economy. 1-in-5 young people are unemployed in China.

As this article from Forbes notes, a decade ago, China’s huge flow of STEM (Science, Technology, Engineering, Maths) graduates was seen as a competitive threat to the West. A decade later, this huge flow of STEM graduates is becoming a headache for China. There is nothing more destabilising for a country than a massive number of highly-educated, idealistic, unemployed and ultimately disaffected young people. China’s social contract is a little different to the West - it asks Chinese people to give up a number of their rights and in return the system will deliver them prosperity. Such high levels of youth unemployment suggest the state isn’t living up to its end of the bargain.

China has responded to this situation with a 15-point plan which includes a major focus on retraining, programs to support entrepreneurs and an expansion of jobs at state-owned enterprises. But this will remain a story to watch over the years. How this generation of Chinese people find their way in the system - can they find jobs, can they buy homes, and can they start families - will have a big influence on China’s direction when they ultimately take leadership positions in decades to come.

We were warned - tales of bad companies

When we look back at past market mania’s we can see obvious signs of the bubble. The companies in the first Dot Com Bubble that preferred to be valued on their web traffic rather than their revenue. The subprime mortgages of the Global Financial Crisis that almost brought down the US economy. And now, as we look back on the past few years, we can see obvious (in hindsight) signs of the 2020/2021 COVID bubble. This article looks at a company that we’d never heard of, but appears to be a classic example of the 2020/21 bubble: Skillz (NYSE: SKLZ).

Skillz’s share price is down 99% from its high in February 2021. At its peak, it had a market value of $16 billion. Today, it is worth just $250 million. And even that may be generous.

The company manages an online platform that hosts multiplayer games and tournaments. Some games are free, others require entry fees. Skillz takes a cut of those fees. And when it went public, the numbers looked great. $229 million in revenue, up 92% from the year before, with 95% gross margins. Cathie Wood’s Ark Invest bought shares and the Motley Fool initiated a buy recommendation.

But as this article explains, there were red flags everywhere. From the management to the product, investors needed to look beyond the headline and dig into what they were actually buying. A good reminder of some common red flags for those of us that like investing in individual stocks.

The impending collapse of commercial real estate

Beware click bait headlines. And beware authors that have a history of making euphoric or dire predictions on social media (in this case, Anthony Pompliano, is notorious for it). With those key caveats in mind, this was an interesting perspective on America’s $20.7 trillion commercial real estate sector.

There are a number of forces acting on the commercial real estate sector:

• Entrenched hybrid work: According to a recent National Bureau of Economic Research Working Paper, attendance in the 10 largest business districts in the US is still below 50% of its pre-COVID level, as white-collar employees spend an estimated 28% of their workdays at home

• Higher interest rates: The US has just seen the fastest 500 basis point rise in interest rates in its history, pushing up mortgage rates

• Tighter lending: 67% of commercial real estate loans are issued by small and mid-sized banks, which have become a lot more cautious after Silicon Valley Bank, Signature and Silvergate’s collapse

• Debt maturities: It is estimated that ~$1.5 trillion in commercial mortgage debt will come due by the end of 2025 and Fitch Ratings estimate that $5.8bn of commercial mortgages coming due between April and December 2023 will not be able to be refinanced

A a result of these factors, we are starting to see fire sales in real estate assets. There was a a building in San Francisco, which was previously valued at ~$300 million, put on the market for an 80% discount. And earlier this month in New York City, two office buildings reportedly sold for 50% less than their asking price.

A lot of reasons to be worried, but it is important to stress that the likely outcome here isn’t an all-out collapse. Rather, many of these buildings may need to be sold at deep discounts to the prices they were bought at, which will lead to the whole real estate sector having to revalue its holdings. This will be bad for real estate funds and the banks that lend to them, but doesn’t suggest there’s anything systemically wrong. So this is less “impending collapse” and more “markets acting as they should”. As rent from buildings fall so the prices of those buildings fall.

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