China Stock Market Drops 8.5%
marketwatch.com
marketwatch.com
Unable to raise further "growth capital" at attractive valuations, and burning money like there's no tomorrow, we see the first unicorn layoffs within 3 months. This spooks investors further, which dries up whatever funding was left for early stage deals. Within 6 months, the weakest startups are beginning to fail outright, which pulls back the tide a bit, and reveals the ponzi scheme of startup-servicing-startup revenue cycles for what they are. Suddenly, a number of heretofore assumed "safe" investments with "strong" revenues are revealed to be precarious, as 95% of their revenue streams were correlated.
Companies go from healthy revenue to practically nothing overnight, as dozens of companies all cut back on burn simultaneously. This only exacerbates the cash flow problems, and startups that were flying high are now flying into the ground at remarkable speed. Market gurus are revealed to be wearing no pants.
Within a year, the valley is in full recession, and people are clamoring for U-Hauls out of San Francisco, which are in short supply...
(In case you were wondering, this is essentially what happened in 1999, minus a few wild-cards like companies with totally fictional revenue, and companies that had no revenue at all.)
Of course there's still a large chunk of revenue today that is just recycling VC money - e.g. apps advertising in other apps, or AWS which is a huge sink of VC money from other startups. But there is a lot more "end user" money coming in from real people and companies that purchase products and services online. Even if that flow stops, the internet today is less of a ponzi scheme as a whole.
From what I know, most of the "unicorns" are neither profitable nor particularly modest with their spending. They are vulnerable to any sort of turn in investor sentiment, even if their revenue streams are real.
The key is that allegedly "overvalued" companies (like Uber say)are still under private investment which has a larger appetite for risk. Whereas in the last boom, most of the speculation were fueled by publicly traded tech stocks.
Edit: Grammar.
The buyout side of the PE market is leveraged, however, the investments in those investors' portfolios typically have big balance sheets to support the debt loads (and the interest payments).
https://en.wikipedia.org/wiki/Beta_%28finance%29
In this context, I a 'high beta investment' is likely to move with the market, ie) is dependent on some aspect of market performance. 'Beta capital' I think refers to using sources of capital that are likely to become more or less available depending on the market. I've never heard of capital sources being given beta values though, so I think this may be a finance/VC colloquialism rather than an actual calculated value.
Disclaimer: I am not a VC and may be totally wrong.
jkimmel explained what beta is. The Tech industry as a whole has a high beta, and the smaller loss making component (i.e unicorns) an even higher beta. I am using the term beta loosely here as most of the unicorns are not public so they don’t really have a true beta, but they do have a pseudo-beta. They are being funded by private equity funds in what are effectively private IPOs.
The problem is that private equity funds are a high beta asset class. In times of risk aversion investors pull their money out of high risk asset classes and put them into lower risk asset classes like large public companies and bonds. Relatively small changes in investor preferences can get amplified up the investment chain resulting in large swings in demand at the far end.
A hypothetical example might be 10% of investors pull their money out of private equity funds, the funds find that most of their money is locked up in illiquid assets like loss making high growth tech companies (i.e. unicorns). In order to return the 10% of capital requested they have to cut new investments by 50%. The unicorns find that they are not able to raise the money they need to expand at the pace they have been and so go on a crash program to achieving profitability. They lay off developers, cut back on outside services, and stop buying small start-ups. VCs and angel investors seeing this cut back on investing stop putting money into new firms further decreasing demand. All of this is not good if you are running (or wanting to start) a business based on rapid growth that needs lots of capital.
Small, early stage companies (say <100 employees, <250m valuation) that high profile investors are competing to get in on? If so, most of them are supposed to fail. The money is still small by systemic standards and so are the number of people affected. Volatility here is not dangerous, it's expected.
Or, are you talking about the Unicorns expected to go public any day now? The Ubers and AirBnBs? Thee are also kind of retrospectively Unicorns at this stage. If these guys go under, that's a problem. But, these guys aren't rely reliant on investor sentiment.
A start-up that's worth over $1B
Google didn't, but banner ads were around back then, and they were one of the main ways of making money off the Internet until the market bottomed out. DoubleClick was a pretty major player for years before Google bought them.
I remember lots of websites saying they suddenly had problems affording their hosting around 2000 because their banner ads suddenly started paying them pennies when they used to provide at least enough cash to cover the server bills.
And that started the trend of websites accepting more and more intrusive ads, because they made more money than banner ads. Pop-ups became popular because pop-ups made money and banner ads didn't.
Do they deserve their $1Bn valuations? Probably not. But do they have enough customers to give them $100M-$1B revenues? Yes.
If these startups were public companies, they'd still be valued at at least half of what their last Crunchbase entry says
Once the discounts go and they have to start charging market rates, I wonder how it will affect their prices. At market rates, I don't think most customers here will choose them.
But then again, while a cab company operates at, say, 20% profit margin to break even, Uber can probably operate at 5% margin thanks to its scale.
It happened in the late 90s in the states (remember those "trading poolside" etrade ads?); it's happening now in China. Only recently you've been able to actively trade and view your portfolio on smartphone apps; it became a kind of game and more and more people piled in. I know people there who were up tens of thousands in paper gains even a month ago and could not be convinced they were basically gambling. Well, they're convinced now :-P
I suppose this is the way people learn...
What happened in the 90s was this. People realized the internet was a huge deal. World changing, re-writing the rules of the economy, among other major human institutions (learning, governance, etc.) They were right. 20 years later a lot has changed because of the internet. Revolutions have been driven by it. Economic titans have been created by it.
A large chunk of the blue chip economy is now made up of internet and internet compliment companies, even Apple & MSFT are in that category. Google, Alibaba. The new blue chips being generated today are internet companies and I'll wager the blue chips generated in 2030 will also be driven by this.
The investors of 1997 were not wrong about the scale of the revolution. What they were wrong about was the importance of early mover advantages. It's as if they expected the internet economy to be built behind walls constructed in their entirety by 2000. They thought they were buying shares in Google, Facebook, Alibaba & Uber, that these companies were all being founded between 95 and 98. Seems silly now. But, hindsight.
The really large scale irrational exuberance lasted a short while, just 2-3 years maybe less. That's hard to justify but it's the end of a bubble when bubble thinking is totally disconnected with the rules outside the bubble.
In that environment, it doesn't matter what bursts the bubble, it's going to burst.
Without that kind of bubble, you don't get that kind of burst. With that kind of bubble, you inevitably get that kind of burst. Investor sentiment may be fickle, but U-haul traffic jams are caused by real economics, not panicky investors.
So, who are these unicorns? Can they survive a month or twenty of panicky investors? Can they do away with investors all together? Are they reliant on investor money for revenues like all the ad selling startups of 1999?
Here they are: http://graphics.wsj.com/billion-dollar-club/
I think no matter what investors do tomorrow morning, Uber, Xiomi, AirBnB and Palantir will still pay salaries, bonuses and such. The IPO might be put off by a couple of years. If the market goes extremely nasty a lot of people who expect to buy houses with stock options will be disappointed. That might cause trouble.
U-Hauls? I don't see it.
What they were wrong about was the importance of early mover advantages.
I'm not saying someone couldn't do it, but it's not easy.
One classic mockery target is the company that was going to deliver dog food to people. (I want to say Pets.com but it seems like they were more diversified than that.) The only wrong thing about that idea was that it isn't its own company. Amazon will happily deliver you dog food, as well as all kinds of other basic staples. (They even started a new program for that lately.)
Fresh grocery delivery from local stores is probably the best example I have... it exists, we can't quite call it dead, but only in very limited areas, and is still struggling to grow. (Bear in mind that there is a strong correlation between reading HN and being in an area that has grocery delivery. :) It isn't very common.)
I'm interesting in anybody who can come up with something from 1999 that still doesn't exist at all, or has failed so utterly that nobody is trying it today.
Uber are breaking records in building a business segment from scratch over an incredibly short span of time. They have been taking investment in order to grow fast. That's reasonable because (1) they have been able to use it to grow fast and (2) this is a business that probably tends to the winner-takes-all end of the spectrum.
Is it riskier than ExomMobile? Yes. Is it a nonsensical investment no? Will they be harmed if all finance markets dry up completely. Yes. Would it kill them? Probably not, but who knows. But, the only reason for a tootle dry-up is if the fundamentals are totally broken, and there is no reason to think they are.
Uber generates revenue. It's business model is pretty solid. Customer like it. This is nothing like the 99 companies.
That said, 2009 wasn't a tech-specific downturn. New York had it far worse than us, and there were still tech companies doing their thing in SF, albeit on a much tighter budget, since the money wasn't flowing. The dot-com crash (which is essentially what I am describing) had its epicenter in SOMA, and we're a lot closer to that scenario than we are to Lehman -- outside of exports (oops, spoke too soon!) and shale oil/gas (oops, spoke too soon!), tech is the primary bright spot in our economy right now. The dumb money is flooding into tech instead of real estate this time, which means that when it does go away, the hangover is going to be pretty wicked.
In retrospect, my first "this might be insane" moment happened when techcrunch wrote the "airbnb has arrived" article, announcing that they'd grown a horn and become a unicorn. That was June 2011.
Yeah, some of the banks were paying people to defer their offers to a later date.
Don't get it? Personally, I can't find anything positive about spending so much of one's income on rent? If it's crime, my car is still broken into like its 1999?
MongoDB and Gilt Groupe (both of which happen to have been cofounded by ex-DoubleClick CEO Kevin Ryan: https://en.wikipedia.org/wiki/Kevin_P._Ryan) are specifically called out.
What I'm not looking forward to is a culling of all the on-demand apps available in the Bay Area (https://www.theinformation.com/investors-asking-tough-questi...) - I've really enjoyed subsidizing convenience with VC/PE cash.
I don't know; selling support contracts for a product that requires a lot of support is a pretty solid business model. SAP comes to mind.
Plus I'm not sure MongoDB users are really able to keep the ball rolling.
I do agree that there's a lot of 1999-like companies around, especially people wanting to do Webvan 2.0.
From a US perspective I honestly don't know. Chinese investments are mostly one-way anyway (it's hard to take money out of China) so they shouldn't significantly impact any honest balance sheet; however, if Japan and Singapore start going under as well, things might turn ugly all around.
I just hope urban real estate doesn't go even more berserk with investors looking to park otherwise uninvestable money.
> When Microsoft and Apple were founded.
I fear this too, and I have benefitted greatly from this realestate bubble.
My two hopes are: The Fed doesn't chicken out, and starts to raise interest rates. Plus, I would like to see an immediate end to foreigners buying realestate without becoming citizens first! At least residential? Right now they can pick up a phone, and buy any home.
I remember seeing gas at $4-5/gallon (in the northeast USA), and figuring that everyone should be happier to stock up while it's not far more expensive, and that it's bound to just keep climbing forever as we run out of global supply. Gas is selling for $2.50/gallon or so now, which doesn't mean that it won't climb again and retail for $20 or $100 a gallon in the future, but it does mean that if I bought futures in gas ten years ago for delivery now, then I would have lost of lot of money.
tag-line: "Location based, real-time, mass-aggregator content manipulation"
there, go get rich (or not).
The question is to what extent these unicorns are leveraged against their possibly-fictitious valuations? Can they survive a collapse of those valuations to more 'sane' levels? One way they could be leveraged is options promised to key employees, all of which would now be underwater.
Of course any company that suffers a valuation collapse and has no cash on hand is toast, since they won't be able to raise on anything other than bend-over terms. So part two of my question is how much cash the unicorns have. If they have enough to last, they'll probably be okay.
Edit:
There are some good arguments against an overall bubble here. Slide 10 with "spending per person online" is a very powerful argument against an Internet bubble but not necessarily against all possible bubble scenarios.
http://a16z.com/2015/06/15/u-s-tech-funding-whats-going-on/
But as I said above, it's possible that there are "mini-bubbles" and that these could pop destructively.
Of course there are other questions, like to what extent are VC firms exposed to China risk and to what extent will stock market losses destroy angel and VC investment? It's possible that the tech field itself is not in a bubble per se, but that it's part of a larger bubble in the global economy.
I actually think this will be good for the VC industry. Valuations will come back to something based on a universe that is possible and with long term investor (all those locked up limited partners) they can invest with thoughtfulness. It won’t be pretty for the angel investors though.
I don't think we're due another cycle yet, but every cycle just decreases the amount of money you actually need to make a go of it. Sometime over the next 5-10 years another bust would probably be an overall good thing.
Oh well, I guess my family could always move into my mom's spare room.
:-)
Presumably it would be a challenge if your new startup was selling to people in China.
They're going to deploy the Model X into a temporarily contracting electric car market, with China upside down, and with the US upper class pulling back spending due to a big drop in asset values. The gigafactory will cost vast sums yet to finish and get functional, and then it'll hit the market with weak demand for several years at least. Meanwhile Tesla's growth on the Model S, which has already stalled out, will get hammered further, pushing their already high quarterly losses even higher - all at time when raising more capital is going to be painful.
Any company that needs a lot of financing to do what they do, is going to get hurt bad through this storm.
I don't really understand the way a price regulated stock market would normally work. Anyone understand this?
Normally the problem with price regulation is that the market doesn't clear. If the 10% limit was hit, there are sellers out there that tried to get out at the lowest allowable price but failed. Doesn't this mean they are probably going to be shares for sale at a lower price tomorrow?
Any time you hit the floor price you are accumulating a backlog of sellers. I don't think getting a call from a broker that he was unable to sell your shares is likely to cause calm tomorrow morning.
Basically, how's China's regulatory stuff going, now that it's getting tested in rough conditions.
When the tide goes out like it is now, you quickly discover that the bureaucrats in command economies are almost always incompetent and that incompetence was being temporarily masked.
China was propping up their markets to give the elites time to get out.[1] The stock market bubble was designed to be a wealth transfer, from household savings, to their extremely debt-laden corporations. That transfer is complete, and didn't work particularly well, so now China is prepared to allow the ceiling to cave in on the average investors holding the bag. That's why they've stopped supporting the market.
http://www.bloomberg.com/news/articles/2015-08-18/china-s-ri...
So totally unlike those Wall Street genuises, with the trillion dollar bailouts and huge weath transfer crisis...
You're making the classic logic mistake of assuming because I said X, I also must be implying Y.
So either one does an exhaustive critique of all classes of X, or his critique implicitly favors one of them (it's like if one's two kids do a similar bad thing and he only scolds one of them).
My argument was just trying to bring some counter-balance (to have the -X items people consider as "opposite" to the class of X you criticized, judged too).
I think that's exactly what's been happening for weeks by now. It's like falling down the stairs - a step each day.
- Saudi Arabia: lots of headway to cut spending; standard of living is already very high, with huge reserves to soften the impact of short-term price volatility.
- US: has imported oil for decades until there were enough combined geopolitical and economic incentives to start using its own; exports < 10% of all exports.
- Russia: > 50% of exports are oil; heavily cash-strapped already, so all decreases in oil revenues are directly painful; few options to diversify; too small to be a market maker. Oil money is a direct driver of improving economic circumstances, which in turn provide for much of the countries relative stability.
Saudi Arabia runs a large deficit at current prices, but has a pretty large pile: http://www.eia.gov/todayinenergy/detail.cfm?id=19971 The story is similar in Norway.
In Russia it's not as rosy: http://www.bloomberg.com/news/articles/2014-12-26/russia-may...
On top of the dwindeling reserve, Russia has been given some stiff fines from international courts for unlawful actions, for example $50bn to Yukos shareholders.
Edit: there certainly are also nations that are in at least as deep problems as Russia, Venezuela for example.
I'm not sure about Norway.
It doesn't apply much to the US. Among the major oil producers, the US is by far the least dependent on the oil market for the domestic economy's well being. It's arguable the US benefits more from cheap oil (industry, consumers, gasoline), than it takes a hit due to the loss of oil jobs and growth in the oil field in general. $40 to $50 oil has slowed oil well expansion and exploration, but US oil production is still sitting near all-time highs, and that will continue so long as oil doesn't go to eg $25-$30 or so for an extended period of time. At a range of $40-$50 for 2016, current projections are that US oil production will expand by another 500,000 barrels per day.
The dollar turning, which has crushed commodities, has pushed Canada into a serious recession, and is threatening to push Australia into one. To make matters worse, China's growth has been trending down for ten years - they temporarily spiked it back up after the great recession at the cost of tens of trillions in debt. China's economy tanking, is hitting any commodity dependent economies very hard.
In Norway's case, they get to start from an amazing position of strength overall. They have extremely low unemployment and a very high standard of living. They have the sovereign wealth fund to lean on if times get really bad. It's very likely that five years of cheap oil will hit Norway very, very hard. They're already facing a scenario where they'll have to tap the sovereign fund to deal with their budget demands. That's not going to get any prettier any time soon. The party is over, but Norway has a lot of wealth accumulated from it, and can weather this storm better than most.
Saudi Arabia has $640+ billion in foreign reserves that they're depleting by the month. It'll get worse over the next year, but they can weather it for a few years yet without a threat to their stability or economic well-being. Saudi is of course also among the low cost leaders on production, so while their budget demands $100 oil, on the other side they have among the best margins on what they are producing.
Out of the group, Russia is drastically worse off. Not only have they been trying to significantly increase military spending at exactly the wrong time, not only are they under international sanctions, but they're starting from a position of national weakness compared to eg Norway: their people are not well off, their Ruble is being hammered, and they're run by a dictator that is not good at managing the economy (as witnessed by their complete non-diversification the past decade plus, which has left them vulnerable to this outcome in the commodity market).
Canada is clearly in recession but I don't think we can call it a "serious" recession yet. So far more of a mild contraction (but pretty terrible if you focus in on energy). I do think the rest of the economy is lagging behind energy and bad times are ahead overall, especially with so much of Canadian growth/prosperity tied to the housing boom. I'm probably preaching to the choir here, but seriously: when the prime minister promises a home renovation tax credit during his reelection campaign - and explicitly states he's doing to help boost the value of Canadians' homes - you've gotta know people are captured by the real estate boom narrative.
On Saudi, they can afford low oil prices for a while and can just borrow if they need to. Super low debt around 3% of GDP, low cost basis as you say, and they've done this before and come back from it (100% debt-to-GDP in the 90s o the back of low oil prices). I've seen interesting speculation that Saudi is willing to hurt a bit from cheap oil because it'll hurt an increasingly-economically-integrated Iran more.
Here is a list of all the buyers http://www.treasury.gov/ticdata/Publish/mfh.txt
No country is an island anymore. Even Greece, which has a smaller economy, can cause problems for everyone around the globe.
Makes me really want to move my savings (which are already in dollar mostly) out of Russian banks, but I'm not entirely sure where to. Or just burn those on something?
Canada is a bit odd relative to oil given that a pretty large contingent of Canadians are really on the fence about exporting fossil fuels. Even in Alberta, the province where most of the oil action happens, the provincial government was recently taken over by a party that you could almost call anti-oil (to the limits of pragmatism).
1) Six of the last seven months have seen economic contraction. There's no reason to think that's going to get better soon, given what's happening to the global economy, China and commodities. Oil has continued to get cheaper, commodities have continued to go down, and China's economy is getting sicker.
2) Canada's real estate bubble will be popped by the recession. That'll make the damage a lot worse. The constantly rising housing market was contributing temporary, artificial growth to the economy for the past decade.
This is going to be a drawn-out downturn. China is going to have an extremely difficult ten plus years due to their debt burdens, and the fact that all the easy growth ended years ago. The historic cheap dollar years from 2002-2014 are not likely to return, the high dollar will continue to put pressure on commodities, and countries dependent on commodities. Canada won't grow again unless the dollar drops, or the global economy booms, either of which would send commodities higher.
Most commodity prices are doing superbly (oil is an outlier). Food prices are at all time highs. Canada's economy has faced far more of a disruption from normal globalization and mega companies shifting production elsewhere, than any hewer or wood miner of minerals disruption. It will always face threats and will always be adapting.
Nearly all commodities are lower than a year ago, and half of them have crashed. Oil is the opposite of an outlier.
Copper has gone from $3.30x, to $2.20x in a year. Copper is considered a critical bell-weather commodity. Demand for copper has fallen off a cliff.
Iron Ore has crashed by 60% in less than two years, and is down 40% in just one year.
Coal has dropped by over 20% in one year.
Steel prices are down 30% in one year.
Platinum has gone from $1500x to $992.
Natural gas was $4 last year this time, and it's $2.60x now.
Heating oil and gasoline have crashed with oil.
Sugar has dropped by 50% in a year, on a non-stop crash.
Lumber is down by 1/3 in a year, and has crashed.
Coffee is down by 40%.
Corn, wheat and orange juice are all down slightly versus one year ago. Rice is down about 15% vs a year ago. Soybeans are down 13%. Soybean oil is down over 20%.
Oats have crashed by 40%.
[1] http://www.businessinsider.com/canadian-dollar-hits-an-11-ye...
http://www.infomine.com/investment/
Anything those don't have, you can often dig up individually on sites like ycharts or similar.
It'll be FUN (in the dwarfiest sense of the word).
EDIT: Make that ~4.5%. This is getting interesting!
Index futures markets suggest that the S&P500 will drop by ~3%, and the NASDAQ will drop by 4% when the market opens.
Tech stocks get hit harder in circumstances like this: http://www.ft.com/cms/s/0/8a62642e-49b9-11e5-9b5d-89a026fda5... (Google "Market turmoil leaves tech sector exposed" to bypass the paywall).
Bill Gurley is being bearish: https://twitter.com/bgurley/status/634573025329807360
It's worth remembering how markets really work: https://pbs.twimg.com/media/CNKLWDOW8AAgUBv.jpg:large
Move along, nothing to see here...
The panic button has been pressed...
Chinese economic fundamentals (export, import, saving, consuming, government spending) will all be impacted by a failing stock market, which will translate into economic concerns across the globe.
If you check the Baltic Dry Index , it's started dropping in the past few weeks indicating a slowdown in global shipping. Similar for crude prices.
There was a similar pattern in 2008 (though the reasons this time are a bit different) with crude and the Baltic index starting to tumble in August before the market nosedived in September. Not that we will repeat 2008 but we definitely have a leading indicator for renewed weakness in the global economy.
"Shipping freight rates for transporting containers from ports in Asia to Northern Europe fell by 26.7 percent to $469 per 20-foot container (TEU) in the week ended on Friday"
"It was the third consecutive week of falling freight rates on the world’s busiest route and rates are now nearly 60 percent lower than three weeks ago."
http://gcaptain.com/asia-europe-container-freight-rates-have...
Can you explain why it worries you in a bit more detail? The drop doesn't look so bad.
46 days ago, I suggested that China slowdown may have global impact: https://news.ycombinator.com/item?id=9851214
I'm glad that I sold my stock ETFs.
If you're in it for the long haul, selling your ETFs a month ago isn't necessarily the best thing to do – at least by virtue of allowing yourself to sell your stocks when you feel it's the right time, which is mostly going to be dead wrong.
And selling them today is certainly a terrible idea.
This week is going to be ugly.
- Me, to my father, five days ago. The altera trade is not going well, so far... I may not have picked the right stock to ride the wave with.
Edit: I did. Fuck.
Though in all honesty, I don't see why a correction in China would seriously hurt the profits of Netflix. Maybe I should buy more.
Oops, did I just take sides?
Over a long enough timeline shares have always gained.
Except in Germany and Japan after WWII
Volatility can make even a bad decision right if you can wait, but a flat market will turn all trades bad.
Just write options..
If you are short stock and also fear major market moves then buy call options.
You can't really know if things are going to go down further, or jump back up again soon.
This will lead to massive drops in global equities due to fears of deflation.
I grew up in Italy during the last few devaluation waves and then the Euro switchover (when prices basically doubled overnight) -- prices of everything except food and shoes skyrocketed, it was really ugly for us little people.
In short, some specific sectors did increase prices dramatically in those years, and probably were the ones felt the most by everyday consumers (food, restaurants, retail etc). I would personally add that Italian statistics on economic elements are historically lacking, due to widespread tax evasion and unreported activity, and suffer from the huge economic disconnect between North and South.
Despite the misleading subtitle, this is a change to the way the yuan is managed and will allow continual (slow) devaluation.
What's funny about that?
shadow banking > gdp
debts > gdp
real estate over supply
infrastructural problems
political strife
pissed off middle class
Actually, this situation is pretty much just capitalism at work. It really has nothing to do with communism; every free market is susceptible to this sort of failure.
This current rout is simply a continuation of the previous one in July when similar curbs were placed to halt the plunge.
Once again, even if their tactics work they'll only help bring about yet another plunge.
All in all, the western demand is dying out since most countries are trying to in-source materials and goods (instead of importing from China) and domestic asset bubble has nowhere to pop and the lies invested in that bubble have nowhere to hide.
Oh, is that specific to China?
Thank god that US companies will never betray their nation's core values by shelling out to non-free countries in order to save production costs and circumvent labor laws.