As Free Money Unwinds, 100 Fires to Put Out

It’s “absolutely a speculative mess, completely divorced from anything I learned in valuation.”

That’s how Starwood Capital’s Barry Sternlicht described markets before they began to nosedive the day after the Federal Reserve announced the largest rate increase in more than two decades. By Monday, trillions worth of market value was stripped from the Nasdaq 100.

“You guys should have been alive in 2001 when the Nasdaq dropped 85% and companies disappeared overnight, and it’s just happening again,” Sternlicht told me Friday in Miami from Bloomberg’s Power Players event. “You’re seeing the exact same run. Every 20 years people forget, and they do it again.”

The air being sucked out of the stock market and cryptocurrencies is leaving investors searching for liquidity. Treasuries and gold were under pressure, too. On Monday, the Federal Reserve warned that while conditions are not as extreme as in some past episodes, “the risk of a sudden significant deterioration appears higher than normal.”

And if you take a view from one very large asset manager: “No matter how you slice it, financial conditions are tightening,” Apollo’s David Sambur, co-head of private equity, told us Monday in a Bloomberg Television interview. “As borrowing costs are going up, companies are going to struggle to service their debt, and there’s never been more corporate debt in the history of America.”

He says this as Apollo prepares for distressed investments. “Every sector will be impacted by higher borrowing costs. It’s impossible not to be,” Sambur said. History shows, “Whenever spreads gap out, it starts in one area -- it could start in energy, it could start in hospitality -- but it quickly spreads to almost every corner of the economy.”

Beyond the rout in the Nasdaq and S&P 500, one corner of the market that’s wiped out its gains over the past 12 months is Bitcoin. “We’re unwinding this era of free money,” Mike Novogratz, the longtime macro investor who runs digital asset firm Galaxy Digital, told us Monday in a Bloomberg Television interview. While he has a positive view on crypto over the medium term, he added that there would be chaos ahead.

He also is preparing for a recession. He says too many investors went too long on the markets into this rout, and there will likely be funds that will have to restructure or shut down over a number of quarters ahead.

And unlike sell-offs in 2008, 2009, 2018 or 2020, the Fed’s response might be muted unless inflation expectations come down. “We’re in for volatility and pain until there’s an all-clear on inflation,” he said.

“Right now, if you’re an investor, you’ve got 100 fires to put out,” he said. “Did you over-commit to venture? Do you have enough liquidity to pay your private equity commitments? Oh my goodness, I used to be in risk parity -- that doesn’t seem to be working at all anymore. Very few people want to put on new risk in a moment of this kind of tumult.”

More on Wall Street

• My conversation with Keith Rabois on investing in Twitter, taking on Amazon and the politics of Miami, for Bloomberg’s Power Players event
• Goldman Sachs and Bank of America start to scale back work on SPACs due to potential liability as SEC guidelines signal greater risks for underwriters
• Morgan Stanley says the day-trading army has given up gains from the meme-stock era
• The private credit behemoths are coming for the junk bond market, Bloomberg’s Paula Seligson reports
• If you’re not an oil baron, the commodity is trading between $150 and $275 a barrel, according to Bloomberg Opinion’s Javier Blas
• In a close watch on macro trends, longer-term inflation expectations rise

More to come. It’s a rocky time in markets, I’ll be filling in as an anchor on Friday from 2:00 pm to 5:00 pm Eastern for Bloomberg Television, please join us. Send all tips and opinions to [email protected] -- I’ll want to hear about how you and your clients are navigating this volatility.