Hello and welcome back to Dry Powder. 

Thanks for being a part of Puck, our new media company covering the intersection of Wall Street, Washington, Silicon Valley, and Hollywood. And thanks for reading Dry Powder. If you're enjoying this private email, consider sharing the subscription link with a friend. 

Happy Sunday,

Bill

BuzzFeed’s I.P.O., Dalio’s “Moral Lapse,” and the Humbling of Marcelo Claure

Observations on the latest Wall Street gossip and market signals as our twelve-year bull market begins to turn.

Each week, I receive feedback from readers and sources about Wall Street’s biggest characters and concerns. I’ll be engaging with some of those questions here—in addition to a few observations of my own.

Bridgewater founder Ray Dalio got himself in trouble this week when he equated Washington and Beijing while excusing China’s human rights abuses (including the recent disappearance of star tennis player Peng Shuai). Mitt Romney called it a “sad moral lapse,” but wasn’t Dalio just saying publicly what most investors on Wall Street believe privately? 

My sources on Wall Street basically take the view that they shouldn’t worry about things they can’t control. They have zero influence over whether the Chinese Politburo engages in extensive human rights abuses. It’s just not going to happen. But they can focus on whether their firms can be profitable in China—by underwriting stocks and bonds, by trading securities, by advising on M&A deals, by investing as a principal, by managing the wealth of more than 1.4 billion people, etc. And that’s all this boils down to: The hedge funds and big banks believe they can make a lot of money in China, and therefore they will be there. Their perspective is, leave the diplomacy to the diplomats. 

You can argue that these firms should have a stronger sense of moral rectitude and declare they will not do business in a country that treats its own people the way China has been known to treat its people. That’s a slippery slope for sure. I mean, the United States is not exactly a shining example of moral rectitude either. Does that mean Goldman should close up shop in this country? That’s laughable, obviously. And that’s essentially what Dalio is saying, whether you agree with him or not. If China is going to slowly but surely eat our lunch, as Dalio argues in his latest book, then it’s folly not to engage. (Bridgewater C.E.O. David McCormick is now distancing himself from Dalio, telling staff that they’ve always disagreed about China, but that’s not surprising given that McCormick is actively considering a U.S. Senate run.)

As for the criticisms of Dalio by Romney, I find it amusing that suddenly Republicans in Congress are finding the backbone to criticise China’s human rights abuses. Yes, Romney is one of the few sane Republicans in Washington. But where was their concern during the Trump Administration? Where is there concern about voting rights abuses? Where is there concern about the January 6 insurrection? Where is there concern about the millions of their constituents who refuse to get vaccinated because Republican leaders have filled their minds with misinformation? Or that the party continues to pretend that the 2020 election was stolen?

It looks like BuzzFeed is only going to raise only $16 million or so in its SPAC merger after investors withdrew about 94 percent of the money that the blank-check company had targeted. How bad is it? 

There’s no question we’re well past-peak in the two-year SPAC boom and the BuzzFeed merger is yet the latest example of how the smart money is souring on the asset class. But this story is far from over. 

The good news for BuzzFeed is that the shareholders of 890 5th Avenue Partners, the sponsor of the SPAC that is merging with BuzzFeed, overwhelmingly approved the merger on Friday. That means BuzzFeed will get access to the $150 million of net proceeds that 890 has from a June convertible note offering it did with institutional investors and it means the BuzzFeed stock will start trading on the Nasdaq on Monday. That will give BuzzFeed C.E.O. Jonah Peretti some currency to buy other companies, if that is the direction he wants to go, and it will also give BuzzFeed’s early investors—including NBCUniversal, which invested $400 million—a path to an exit, if they wish for one. 

Yes, it was a bit surprising that the original investors in the 890 SPAC decided to take back 94 percent of the money they invested—as can happen by the rules of the SPAC market—leaving BuzzFeed with a mere $16 million of the original $250 million the SPAC raised. That’s a lot of investors voting with their feet, and presumably means they would rather have their cash back than the stock of BuzzFeed. Not exactly a vote of confidence in Peretti et al. 

But, again, it’s too early to tell how this one plays out. Not a great start, it’s true. But the merger was approved. Jonah has a stock to play with and some cash to reward employees and his long-suffering investors can begin to think about getting out. It will be interesting to see on Monday how investors react to the newly trading BuzzFeed stock; it should be instructive for all of us involved with digital media these days.

Marcelo Claure got a humility check via press leak this week after asking for a 11,000% raise: is this a sign of belt tightening in Tokyo after Masa Son got taken for one ride too many?

Hard to say, but talk about a strategic leak! There’s no question Claure has done a lot for Son over the years and probably deserves to be well paid. But come on! To demand a pay package of $2 billion, according to the New York Times story—let’s hope that wildly inflated—is beyond ridiculous, especially when Softbank stock is down some 40 percent for the year, largely because of the Chinese government’s crackdown on tech firms. 

If Claure were the founder of Softbank, or if he had invested billions of his own capital in Softbank or if he were a hedge fund manager or private equity mogul, then maybe he could make a colorable claim for some kind of billion-dollar pay package. (Steve Schwarzman received pay and dividends in 2020 of around $600 million.) But Claure, at least as far as I can tell, is a hired gun. He’s a manager, and clearly a damn good one. But he doesn’t deserve to get paid like a founder. 

Part of me thinks the $2 billion request simply cannot be too true. It’s too outlandish, even by Masa Son’s standards, which have always been outlandish. Something is going on here. Smells like high-stakes poker to me, and a prelude to Claure’s departure from Softbank. This kind of thing only gets leaked as a way to embarrass someone and as a possible pretext to firing. We’ll know soon enough, I suspect.

Elon Musk’s sale of Tesla stock continues. Tech companies are entering correction territory. Charlie Munger says today is even crazier than the Dot Com bubble. Cathie Wood’s portfolio is getting hammered. Does this twelve year market rally still have any gas left in the tank, or have we just passed the top?

Ultimately, this will all be very healthy for markets, although many investors who failed to heed the warnings, and who got caught up with the endless euphoria, will get burned. That, unfortunately, is the only way to get the message that markets do not only go up. I am glad to see Cathie Wood getting her head handed to her, which is something I’ve been writing all year would happen. She is not a savvy stock picker; she is a stock televangelist. So she and her investors will take their pain and hopefully much of the $50 billion in assets she manages will find their way to other managers who are more thoughtful and better fiduciaries for their clients’ money. 

So, yes, we are probably going to go through a much-needed choppy market for both stocks and bonds. That will ultimately be a good thing, but only those investors who hedged their exposure or signed up for insurance policies with Mark Spitznagel will be immune from the downdraft. There is nothing to do, sadly, but wait it out. 

I have been screaming for years, from the metaphorical mountaintops, about the risk in the bond market. There is no way the average junk-bond should yield something with a 3-handle on it, as happened in September. There’s no way that kind of yield compensates investors for the risks they are taking by owning that bond. At least now the correction has started. The yield on the average junk-bond is now 4.75 percent, some 80 basis points more than September and finally heading in the right direction—only 600 more basis points to go! All of the people who bought junk bonds in September will get burned— least on a mark-to-market basis—and, frankly, they deserve to get burned. This will all reset, over time, and then we can begin again. What a long, strange trip it’s been.

Have a question you’d like answered in the next edition? Email us at fritz@puck.news.

FOUR STORIES WE'RE TALKING ABOUT