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The Bubble Question

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51–60 of 95 posts

Re: The Bubble Question

#51

Well, this chart focuses on tech but Robert Schiller also thinks the overall market is bubbly. I'm amazed that interest rates could have been held down so long and this is the real danger: how the heck can they ever normalize? If they do it will wreck havoc so the fed is trapped between the proverbial rock & hard thingy. Lo interest also hurts older people who rely on savings (But theyre not going to be here long any…

> If they do it will wreck havoc No they won't. Rates don't magically rise in a vacuum; rising rates coincide with improved economic conditions or rising inflation. Or, most likely, both. The Fed Board of Governors, unanimously, predicts interest rates of ~4% beyond 2016[0]. They certainly are not infallible, but they have the tools and the mandate to get there. Do you claim the market isn't pricing this in already?…

When the fed raised rates the last time ,stepwise & slowly it didn't work as planned and I think they're going tohave a helluva time normalizing. 2)Keeping savings is putting money to work . (sure I'd rather be a VC) I just believe Peter schiff on this.

That notional value didn't help AIG. The pt. Is that nothings changed in the financial system. 1 quad means things are riskier than ever.

Re: The Bubble Question

#52
It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low.

The discounting is what's propping up the market. It's a strange phenomenon in that the market is betting that earnings will hold or grow, but the economy will be weak enough to discount future cashflows at a low rate. This is why signs up recovery that suggest tightening cause the market to tank.

Re: The Bubble Question

#53

Earlier quoted context omitted.

> If they do it will wreck havoc No they won't. Rates don't magically rise in a vacuum; rising rates coincide with improved economic conditions or rising inflation. Or, most likely, both. The Fed Board of Governors, unanimously, predicts interest rates of ~4% beyond 2016[0]. They certainly are not infallible, but they have the tools and the mandate to get there. Do you claim the market isn't pricing this in already?…

When the fed raised rates the last time ,stepwise & slowly it didn't work as planned and I think they're going tohave a helluva time normalizing. 2)Keeping savings is putting money to work . (sure I'd rather be a VC) I just believe Peter schiff on this. That notional value didn't help AIG. The pt. Is that nothings changed in the financial system. 1 quad means things are riskier than ever.

>When the fed raised rates the last time ,stepwise & slowly it didn't work as planned

You mean how when they raised rates in part to prick the housing bubble? How did it not work "as planned"? When the economy heats up and inflation is a risk, rates will rise. This is the business cycle.

>I just believe Peter schiff on this.

Being as how he's been wrong on just about every public prediction he's made, and his hedge fund gets crushed both during the crisis (which he "predicted") and since, I think you'd do better to expand the borders of your economic prognosticators.

Re: The Bubble Question

#54
This is the most honest article that I've seen from a mainstream financial figure about why valuations are so high.

ZIRP (zero interest rate policy) means that money is near worthless to financial institutions that can run the carry trade on Treasuries, or other carry trades involving foreign exchange. VCs manage money for those guys, along with pensions and other enormous concentrations of capital.

What you want are equity stakes (control) of productive assets. The cash that you use for that is not that useful except to normal suckers like you and I who need to hand over a bunch of paper tickets every month to the landlord, the grocer, and the government. The guys who issue the tickets are generally above those concerns, but they still need to get a return on their capital.

I would rather own stock than a pile of green tickets. Stock is, again, just another kind of ticket, but they're more expensive tickets that grant you rights to a productive asset. It is a safe bet to dump your green tickets into speculation because, while the speculation may work out, you know for a fact that those tickets are going to depreciate.

You will not see interest rates go up if the Fed can help it, because to do so would provoke an immediate fiscal crisis. Bubbles result from rational allocations of funds based on a certain set of assumptions. It is a good assumption that the US government will not permit rates to rise as long as there is zero public appetite for a major reduction in government spending. Once that reality changes, the structures that rely upon that environmental state will either need to adapt or will fail.

Startup-land is a greenhouse arrangement that thrives so long as the temperature remains high. When the guy who owns the greenhouse cuts the power, most of those plants are gonna die. If you want to be resilient to that risk, you must leave the hothouse. However, the hothouse plants have a lot more access to capital in the near term, so it is rough to compete with them directly. That is the trouble with bubbles: you can't really escape their effects by being 'prudent,' because low interest rates make prudence imprudent.

In order to raise rates, the US would probably have to either confiscate a lot of assets (which would harm its international status as the cleanest dirty shirt), raise taxes, raise retirement ages, implement means testing on medicare + social security, and cut military pensions/VA expenses. There is no real solution that does not involve provoking some sort of major crisis, so it is much easier for everyone to keep the carnival going as long as possible until something snaps internationally. The federal government can't afford even a slight rise in rates without having an immediate cash flow crisis.

Re: The Bubble Question

#55
post #32

One interesting thing about the high valuations of tech startups now is where the money is coming from. It's not stock markets. At or near the bottom (or is it top?) of this "bubble" funnel a lot of high valuation investments from "private" money acquisitions & other supposedly smart money, like the recent AirBnB investment. Were $10bn valuations possible without public markets before recently? Does that make us daff…

> One interesting thing about the high valuations of tech startups now is where the money is coming from. It's not stock markets.

See, I think that it is coming from the stock markets. These valuations are there because the investors think that they can dump the stock onto the market for above that amount. Look at KING--investors in KING knew that the jig was up, they dumped it onto the stock market and got out.

$10bn valuations are possible because of the public markets. If the investors weren't extremely optimistic that the stock market will eventually buy their stock for more than that valuation, they wouldn't do the investing. That's the only time they'll get their money back. Make no mistake: they're (VCs) not in it to keep it private and to keep the profits to themselves. They're in it to take it public or get bought by someone even bigger. That's all it is.

The stock market is their end-game, and that's what they're targeting with these investments. The intermediate money isn't coming from it, but ultimately that's where the money comes from, in my view.

Re: The Bubble Question

#56
post #32

One interesting thing about the high valuations of tech startups now is where the money is coming from. It's not stock markets. At or near the bottom (or is it top?) of this "bubble" funnel a lot of high valuation investments from "private" money acquisitions & other supposedly smart money, like the recent AirBnB investment. Were $10bn valuations possible without public markets before recently? Does that make us daff…

VC is private equity, so generally we do not know who invests in whom. But many of the ways that VCs receive investment are through highly diversified means.

VC is some fractional line item allocation for diversified investors. The Sultan of Brunei or whatever is not calling Fred Wilson to yell at him about how USV is performing, unless the Sultan invested directly for some reason. The Sultan has 7% of the 5% of his funds that he handed to his asset management guy at investment bank X to handle.

It's possible that the asset management guy will yell at Fred Wilson about Zynga being a turkey, but not likely, because that fraction of the Sultan's money was supposed to be high risk anyway. It is playtime fun money for him anyway.

Similarly, CALPERS bureaucrats do not actually need to show a stupendous return -- they just need to maintain the appearance that their allocations have the possibility of providing a stupendous return. They won't get fired if they tried to hit 8% and can show that some model shows that according to previous decades of performance they were on track to hit 8% until some act-of-god prevented it from occurring. Their VC allocation helps them maintain this appearance so that they can maintain their 3rd wife to the lifestyle she has become accustomed to and continue to golf.

Re: The Bubble Question

#57

This is the most honest article that I've seen from a mainstream financial figure about why valuations are so high. ZIRP (zero interest rate policy) means that money is near worthless to financial institutions that can run the carry trade on Treasuries, or other carry trades involving foreign exchange. VCs manage money for those guys, along with pensions and other enormous concentrations of capital. What you want are…

Thanks for the insightful comment. I am curious to know whether you subscribe to the Keynesian or Austrian school of economics (or neither).

I would also be interested to get your insights on how this game might play out in the long run if other high-powered countries are afraid to make the move to raise interest rates for fear of upsetting the local/global economy.

Re: The Bubble Question

#58

It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low. The discounting is what's propping up the market. It's a strange phenomenon in that the market is betting that earnings will hold or grow, but the economy will be weak enough to discount future cashflows at a low rate. This is why signs up recovery that suggest tighten…

More on the discount rate here:

http://www.propertymetrics.com/blog/2013/09/27/npv-discount-...

Re: The Bubble Question

#59

This is the most honest article that I've seen from a mainstream financial figure about why valuations are so high. ZIRP (zero interest rate policy) means that money is near worthless to financial institutions that can run the carry trade on Treasuries, or other carry trades involving foreign exchange. VCs manage money for those guys, along with pensions and other enormous concentrations of capital. What you want are…

It is a safe bet to dump your green tickets into speculation because, while the speculation may work out, you know for a fact that those tickets are going to depreciate.

Green tickets are almost guaranteed to depreciate, but probably very slowly. Speculation can result in very fast and large losses. There is no such thing as a safe bet.

Re: The Bubble Question

#60

This is the most honest article that I've seen from a mainstream financial figure about why valuations are so high. ZIRP (zero interest rate policy) means that money is near worthless to financial institutions that can run the carry trade on Treasuries, or other carry trades involving foreign exchange. VCs manage money for those guys, along with pensions and other enormous concentrations of capital. What you want are…

It is a safe bet to dump your green tickets into speculation because, while the speculation may work out, you know for a fact that those tickets are going to depreciate. Green tickets are almost guaranteed to depreciate, but probably very slowly. Speculation can result in very fast and large losses. There is no such thing as a safe bet.

Probably? We see a lot of examples where they depreciate quite quickly, both in American history and worldwide more recently. Look at a JPYUSD chart, or ask a Japanese guy. Whoa Nelly, that's a steep drop from 2012.

I agree that there are risks in absolutely everything. What's important is to understand and manage them.

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