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The Bubble Question

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Re: The Bubble Question

#61

Post by 7Figures2Commas »

hagbardgroup wrote: post #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…

There are a number of gross oversimplifications here.

> What you want are equity stakes (control) of productive assets.

Productive assets are great, but valuation matters. When everyone is chasing yield and you are forced to overpay for productive assets, you are extremely vulnerable and stand to lose a lot more in the long run.

I'm not suggesting that you should have a mattress full of cash, but "I'm losing money if I leave my cash in the bank" is not a good justification for, say, chasing Momo stocks, especially at these levels. The risk of losing 1-2% a year is a different proposition than losing 10% in two weeks.

> You will not see interest rates go up if the Fed can help it, because to do so would provoke an immediate fiscal crisis.

You have to look at the yield curve. Short term rates are still incredibly low, but the 10Y has already crept up. Right now, it appears likely that short term rates will be kept at incredibly low levels, but long term rates will rise modestly.

If you don't consider the entire yield curve, you're liable to make bad investment decisions. For instance, a market in which the Fed is holding short term rates at near historic lows and allows long term rates to rise a bit would create an ideal scenario for mortgage REITs, which borrow money at short term rates and invest in long term mortgage bonds, effectively pocketing the spread.

Re: The Bubble Question

#62

Post by silverlake »

tpeng wrote: post #40

I generally agree with fred that monetary policy is driving valuations. However, I think it's not quite as simple as he describes (although he may be intentionally simplifying for his audience). It's true that financial assets compete with each other for investors. So when the Fed reduces the yield on Treasurys or MBS, the marginal investor will rotate to a riskier asset. This will create a chain reaction that eventu…

Paul Krugman argues that there's too much money chasing too few assets. Combined with low interest rates we have a bidding war for anything that isn't Zynga. Even Greece has seen money pouring in recently because, really, where are you going to put $10B?

Re: The Bubble Question

#63

Post by streptomycin »

hagbardgroup wrote: post #60
streptomycin wrote: post #59

Earlier quoted context omitted.

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.

Yep, I'm sure USD hyperinflation is right around the corner. Eminent economists such as Peter Schiff and Ron Paul have been predicting it for decades. They can't always be wrong about it, can they?

Re: The Bubble Question

#64

Post by hagbardgroup »

streptomycin wrote: post #63
hagbardgroup wrote: post #60

Earlier quoted context omitted.

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.

Yep, I'm sure USD hyperinflation is right around the corner. Eminent economists such as Peter Schiff and Ron Paul have been predicting it for decades. They can't always be wrong about it, can they?

I didn't say that. I compared it to other steep depreciations. I also dislike Peter Schiff for various reasons.

Re: The Bubble Question

#65

Post by hagbardgroup »

7Figures2Commas wrote: post #61
hagbardgroup wrote: post #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…

There are a number of gross oversimplifications here. > What you want are equity stakes (control) of productive assets. Productive assets are great, but valuation matters. When everyone is chasing yield and you are forced to overpay for productive assets, you are extremely vulnerable and stand to lose a lot more in the long run. I'm not suggesting that you should have a mattress full of cash, but "I'm losing money if…

>There are a number of gross oversimplifications here.

Yup. Dunno if I'd call them 'gross' or 'over,' but sure.

>Productive assets are great, but valuation matters. When everyone is chasing yield and you are forced to overpay for productive assets, you are extremely vulnerable and stand to lose a lot more in the long run.

Yes, I agree with this. As far as VCs care it's OPM. As far as entrepreneurs care it's the OPM of OPM. So mostly good for both classes of people until the music stops.

>I'm not suggesting that you should have a mattress full of cash, but "I'm losing money if I leave my cash in the bank" is not a good justification for, say, chasing Momo stocks, especially at these levels. The risk of losing 1-2% a year is a different proposition than losing 10% in two weeks.

Absolutely agree unless you are a professional trader, and even if you are a professional trader.

>You have to look at the yield curve. Short term rates are still incredibly low, but the 10Y has already crept up. Right now, it appears likely that short term rates will be kept at incredibly low levels, but long term rates will rise modestly.

Entirely possible. Also possible that there will be another round of intervention to respond. Further possible that that round of intervention would not work at achieving its intended goal of rate suppression.

Re: The Bubble Question

#66

Post by debt »

hagbardgroup wrote: post #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…

Can you offer a good book on that coherently explains US federal monetary policy? You have a good handle on what's going on. I still don't quite understand it.

Re: The Bubble Question

#67

Post by IronIvan »

hagbardgroup wrote: post #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…

A good explanation!

I made a rather long (2 hours) YouTube video that explains the fundamentals of our current economic system - perhaps it is helpful to someone who wants to get a better understanding of the issue:

http://youtu.be/t8_sjmRBGPE

Re: The Bubble Question

#68

Post by inthewoods »

mactitan wrote: post #51
hnnewguy wrote: post #43

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.

"The pt. Is that nothings changed in the financial system"

Actually, a ton has changed in the financial system - some good and some bad. Banks are larger than ever (bad - more potential systemic risk), but they're being more strictly regulated (probably better). Mortgage rules now exist that didn't exist in the housing bubble (generally good) - but Fannie and Freddie are the only game in town. Our bailout of Fannie/Freddie has now paid back the invested capital. And we haven't hit the hyperinflation that Peter Schiff and other similarly ill-informed pundits said would happen. The notional value of the derivatives contracts says nothing about the risk - just total exposure.

Re: The Bubble Question

#69

Post by tpeng »

netcan wrote: 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…

Keep in mind that this generation of startups is delaying IPO as long as possible. The main reason appears to be a desire to delay public company reporting requirements, not a lack of capital needs. Since the IPO market remains strong, a set of new investors has entered the market to play this "public/private arbitrage" opportunity, buying private stock shortly before IPO for apparently* sure gains. This group of players includes hedge funds (Tiger Global), mutual funds (TROW), and private equity funds (TPG). Traditional growth-stage funds are starting to pull back as this competition is pushing up valuations. Note that the arb players are betting on near-term market reception to the stocks that they are buying, and less sensitive to absolute valuation. Without commenting on current valuations, I will say that these dynamics certainly have the potential to create significant overvaluation in the private markets.

* I call them apparently safe gains because if the IPO market collapses, these investors will be stuck with some very large, illiquid investments.

Re: The Bubble Question

#70

Post by netcan »

tpeng wrote: post #69
netcan wrote: 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…

Keep in mind that this generation of startups is delaying IPO as long as possible. The main reason appears to be a desire to delay public company reporting requirements, not a lack of capital needs. Since the IPO market remains strong, a set of new investors has entered the market to play this "public/private arbitrage" opportunity, buying private stock shortly before IPO for apparently* sure gains. This group of pla…

That's the straightforward reason, but it doesn't sound big enough to me.

First, AirBnB just got valued at 10bn. FB's IPO broke valuations records. Reporting requirements are a drag and I'm sure they impact IPOs on the margin, but 10bn is not marginal. Reporting for a company like AirBnB is not that hard. They have a straightforward business model with one business. It's not like they have 50 years of hair, cross ownership, JVs and zombie businesses.

Second, FBs timing indicates (to me) that something else is going on.

Third, WTF is the reason for these arbitragers. Arbitrage requires a willing seller. Why raise capital (sell shares) at a lower cap 9 months before an expected IPO?

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