Afterpay ponzi scheme unravels

Before you all get too excited, let me underline that I am not saying that Afterpay the business is a ponzi scheme. Not at all. What I am saying is that the sharemarket dynamics that have lifted APT and no-earnings tech worldwide has classic ponzi dynamics.

As we know, that trade flourished through COVID as deflation took root and the longest duration stocks of all – never earnings – became irresistibly attractive. Since earlier this year when bond yields began to back up into the return of inflation, the earnings duration sought by investors has suddenly shortened and value stocks have drubbed growth:

As the tech bid has unraveled, it is becoming apparent that some very serious ponzi-dynamics were at work on the way up.  Certain tech funds developed an extraordinary following, especially among retail investors. They bought relatively small-cap stocks (not all), so when their trade became fashionable their own buying spiraled prices higher. ARKK is a classic example. It is exactly the same trade as the GS non-profitable tech basket:

The dynamics are simple. ARKK had more inflows than any other fund last year. It went into the stuff it held, increasing performance, increasing inflow, increasing buying.  But the same cycle can work in reverse.

Others piled in on the back of it:

In Australia, it was buy now, pay later stocks:

Some of these may turn out to be good businesses but there’s no need to buy them yet. US inflation should ease through H2 and offer some of these stocks respite but next year the real challenge comes as the US labour market tightens and inflation rises more persistently.

That said, I put crypto, SPACs, EMs and now commodities all in the same manic bubble basket. As those bubbles pop ahead, especially commodities as China slows sharply, it is possible that quality tech will get a renewed bid.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. APT isn’t really tech. It is plain old Australian desire for debt; in an app. We’re just so bereft of anything you could call ‘tech’ it’s labelled as such.

    • Ronin8317MEMBER

      It behaves like a ‘tech stock’ though : massive growth with no profit in sight.

    • James O'ShannassyMEMBER

      Perhaps the share price performance of APX is a preview of what is to come for APT. APX is profitable with no debt and should do very well over the next decade but has been savaged by short term uncertainty around growth. Management is conservative and has been transparent about the current state of play but this has exacerbated the sell off. Up until recently stocks like APT have been inflated to epic proportions by the invest( gamble) now worry about profit later mindset.

      • Honest management in a company, surely it cannot be. Whatever it takes to pump the share price right – including vaccines which kill people.

        @DLS – Look up the Hype Cycle to get a better lens on technology adoption curves, it always the same and relatively predictable. BNPL will go through a consolidation phase with a few winners in the end and many more thrown aside. My guess is that BNPL on its own wont survive and will need additional drawcards in any companies product line up to remain viable. Also wonder what a rapidly increasing interest rate would do to their business model, makes it unsustainable no?

  2. APTs behaviour is more like that of a parasite. Australian retailers are having to pay ridiculous fees to APT, which in turn means their pricing is higher than it otherwise needs to be as they spread that cost across all their customers. At least with a c/c payment a surcharge is able to be levied.
    All of this is fine until non-Afterpay customers start going elsewhere.