"Q4 2015 pretty much the same as Q4 2014, the sky is falling!"
https://www.pwcmoneytree.com/HistoricTrends/CustomQueryHisto...
My interpretation: 1999-2001 was, obviously, a completely different beast. While there was a bit more investment in 2015 than 2014, it was variable by quarter over the last 2 years and just looks volatile rather than bubble-y. What I focused on, and believe is the most important thing to notice, is that the number of deals hasn't really changed. Any spike can be attributed to larger investments per company/round. The reason I see this as more important is that the reach of any "bubble" to the downstream dependents of VC cash (data analytics startup land) likely wouldn't extend as far as the end-of-the-world crowd likes to suggest.
Outlook: I think this year will be more telling than the last as to whether or not funding in 2014-15 was just volatile or if we're actually making a move towards 2002/2009 troughs. I struggle to believe it will trending upward from here. I'd like to think the VC world is slightly more cautious (which is likely why we've seen the recent volatility).
To fix this, change the time period from after 2002 to remove the offending peak. Then, you see pretty much a rise from the 2009 recession onward with wiggles in the number of deals. Of course, the only issue is as a non-business man, I don't know if 300 deals per quarter over ~7 years is a significant increase or not. Also, I don't know what is considered "normal" as I assume the minimum at 2009 is probably below the norm, so for all I know, we could be hovering just above 0. Still, there is definitely an upward trend there at least for the aggregate category (if that is what we are discussing).
EDIT: 2016-2009 = 7, I can't count
So yes, patience is surely a virtue. But it's probably worthwhile to be vigilant because it doesn't take long to fall hard from the peak.
It's infinitely easier to raise spending than cut it. The latter involves morale crushing things like layoffs and telegraphs an outward appearance of failure that drives off customers and future hires.
Startups that have avoided this trap or who have a model that converts into revenue more easily than "get users and pray" might be fine, but I think a lot of unicorns and want to be unicorns with bricks strapped to the accelerator are about to be turned into glue.
But unicorn glue is great. It's sparkly and can bond any surface. :)
Edit: of course the wildcard here is the question of how economically incestuous the startup world is this time. That's what made the landing so hard in 2001. We know there are some startups that mostly serve startups, but nobody knows the percentages.
They do this because it's easier than tackling deeper issues like wage stagnation and demand collapse that are preventing a true robust resurgence of growth across the entire economy as existed from the 50s until the late 90s and the 2000 crash. That would take things like fair trade reform to limit wage arbitrage and possibly a rebirth of unionization or something similar. It would radically change the economy and would probably involve even more short term pain since the whole Normal has organized around cheap labor, cheap manufactured goods, cheap credit as a substitute for wages, and high asset prices. All that would invert.
As far as the mainstream economy goes, 2000 was the end of the postwar run. Leave any of the coastal bubble fueled rich cities and visit the American interior and you'll see the long term decay... or Google the stats on heroin and meth addiction. These bubbles barely touch the heartland, which is in a depression that began in 2000.
I don't think the central banks are doing this on-purpose. They're doing it because the people with control over fiscal policy have decided to spend all their time worshiping the Austerity Gods.
(Belts for the belt-tightening god! Cuts for the cut throne!)
Most of the country has been in a depression of varying intensity since 2000. I don't care what Pravda says.
This long-term depression (since around 2000-2001) is hidden in the data because the data we look at is aggregate. The collapse in the interior is outweighed on aggregate statistics by the booms that have occurred in places like SF, NYC, LA, Seattle, etc. These are places with closer links to finance and higher tech industries. The interior of the country was always the center of bedrock industry, but all that's been replaced by China.
IMHO anyone who argues otherwise is deluded, wrong, or a liar. Just visit a place like Kansas, Michigan, Ohio, etc. and look around a bit. The collapse is viscerally real and physically tangible. Everywhere you will see failing infrastructure, desperate cities installing casinos and other vapid quick-fix ways to stimulate commerce, and people with raging heroin and meth habits and loads of alcoholism. Hard drug addiction is a clear historical indicator of deep depression and social collapse. Then talk to young people and university graduates. You will find that all the best are leaving as soon as they can and that the dream of every young person is to get out.
The Midwest is where I'm from. Last time I was there it was a little bit scary. All the gun talk, fear and hatred talk, meth mouth at gas stations and grocery stores, and the general smell of collapse and pessimism. I grew up there and I've watched this happen. It was not like this in the 1990s. There's always been a bit of a gap between places like NYC and the "flyover country" but it was never, ever this extreme. Now it feels like third vs. first world. I actually almost felt unsafe there. I could feel this edge of alarming despair that triggered some kind of hindbrain "watch your back" emotion in me. My wife said the same thing.
Automation's role has been minimal so far when compared to the massive effect of wage arbitrage, but if self-driving trucks hit the mainstream we're going to see the bottom really fall out and it's going to be ugly... like rural USSR in the late 80s and early 90s ugly. Trucking and related industries are a major employer in the interior and it's been one of the few jobs that can't be outsourced. Of course this new technology will add new jobs: on the coasts to write the software and overseas to manufacture everything.
If this trend continues we're looking at a future not terribly unlike The Hunger Games (there's a reason these books are popular): mega-rich enclaves surrounded by "districts" that have reverted to something resembling a 19th century standard of living but with smart phones (and ubiquitous surveillance, drone attacks, etc.). Either that or there will be a backlash, possibly an over-reaction that tips completely into socialism or fascism. That's the other thing I heard the last few times I was there: depending on whether they leaned right or left people were almost ready to vote for that Hitler guy or that Lenin guy. Trump and Sanders are much, much milder cousins of these... expect far more radical and dangerous versions of both if nothing changes. Think Trump without the restraint and integrity or Sanders without any lingering belief in the American way... and both without any belief in the rule of law. You could even see a... well... "national socialist" hybrid: a warmonger Sanders or a socialist Trump.
Of course the globalists will retort that eventually wages will rise in places like China and the tide will start to balance if not actually reverse. That's the theory and indeed it would work if places like China were actually being run for the benefit of their citizens and if those citizens were allowed to participate in the global economy. But China's currency devaluation and continued clamp-downs on both free speech and free international movement of capital tell me that the few dozen party elite families that basically own China have other ideas. China is a cheap labor farm where its people are exploited as a resource, effectively a form of "light" slave labor, and all the benefits are to be captured by the Chinese Communist Party (China, Inc.) and its officials and state-linked industry leaders. If this view is indeed correct then the great outsourcing wave will never reverse and Western workers will forever have to compete with a 1.2 billion head work force held at perpetually deflated wages through currency manipulation and uneven trade agreements. The invalid assumption of globalism is that the leaders of other countries actually share liberal democratic values. They clearly do not. The slaves exist to serve, thank you very much, and this silly notion of universal human prosperity is for woo-woo Western liberals.
I do not blame the Chinese one bit. While we're de-industrializing they are getting screwed out of the first world status they've worked for all their lives. They were promised a gleaming future and they're huffing heavy metals instead while the buying power of their money is cut by edict. I blame their "owners" and the folks getting rich off this situation while deluding themselves about the realities. I do think there's a fair amount of self-delusion in places like Washington where lots of people want to believe the lets-all-sing-kumbaya globalist narrative. It would indeed be wonderful if it were true but I see absolutely no sign of any of the upside happening.
At least that's my pessimistic view. I hope I'm wrong. In any case I think this explains both Trump and Sanders, both of whom in their own way are running on an anti-globalist platform of reversing the above. I can't say I disagree all that much. The time may be near to call bullshit on China (and the whole globalist model) and erect import tariffs in proportion to the relative cost of foreign wages (and environmental protections, etc.). In other words: tax slave labor. Maybe the US can use the money to invade its interior and build roads and schools. I just hope we can do it without sacrificing liberal democracy and without starting WWIII.
As for Silicon Valley and the much ballyhooed collapse: don't fret much. There will likely be a pullback but the worst that will happen is the collapse of a few overvalued startups, a retrenchment, and a restart of the next cycle of growth. History is on our side, economically speaking. The thing to worry about is the naked fascism or punitive socialism about to bubble up from the massive inland region of America you've forgotten exists. While you are forced to endure a lack of catered sushi the interior will be experiencing yet another ratchet-step down. It didn't see the boom but it will see the bust.
I do feel a potential blog post in this, but I'm waiting to see how it shakes out in the near term. Even blogging about politics makes me sick but there are things that might need to be said. Hopefully somebody else will say it first and let me off the hook.
It's completely ridiculous that software development is concentrated in any one geographic area. Software development can be done just as effectively from anywhere. So why isn't it spread as uniformly as the world's population?
Maybe part of the solution to the problems you describe is a call for programmers (and other professionals that can work from anywhere) in the US's interior to not leave for the coasts, but start companies and hire people locally.
Solving that problem would help the interior for the reasons you explain.
That illustrates another point: ecosystems have a draw because they draw people in, and brain drain has the opposite effect. Both effects are exponential: the more people come the more people come. That's part of why interior places that have very strong university systems or major local employers with a lot of drawing power (or government labs, etc.) have been spared the worst of it.
I wasn't implying that labor arbitrage is the only cause of this depression, just that it's probably the largest single cause.
If people here can create self-driving cars, delocalizing software work doesn't seem so far fetched. I'm inclined to believe that there is a lack of will and vision rather than a lack of ability.
I don't think you can pin all of this on interest rate hikes and it is not all tech, or at least all Silicon Valley startups. It's a combination of globalization, a much more service oriented economy than before, and some political decisions that ate away at the middle class (especially lower middle) in favor of wealthy interests.
Things aren't improving either since Brownback seems to be happy enough with companies leaving the state despite the low taxes because he and his ilk refused to acknowledge that the major corps wanted well educated workers and have on many occasions worked with Wichita State University to improve their programs. It's why I left more than anything. The anti-LGBT sentiment is bad, but having no jobs in my field is worse.
Edit: I believe it wasn't an ad, but actually an Op-Ed pinned by Carl Brewer that gave the numbers I described on the growth rates.
TBH, the fed should not have gone from 0.25 to 0.5 That was really really dumb. They should have gone from 0.25 to 0.3 or something.
My guess if the bleeding keeps up, the Fed will have to do a rate cut. Should help things.
Since I got downvoted, let me show the math:
For an entity borrowing at fed funds rate, on 100B loan that is 250M to 500M annual payment after the hike. If it were 2.5% to 2.75% on 10B, that would be 250M to 275M. See the difference? Even a 50bp hike would just be 20% higher payments.
If you're surviving at the edge of these loans, then doubling your payments could easily wipe you out.
'''"The short-term volatility is not something that worries me for monetary policy; it reflects market participants trying to make sense of global developments," Williams told reporters on Friday, adding that he sees no signs of distress or a weak economy in declining asset values, and is unsurprised that stock prices .SPX would decline as the Fed raises rates.'''
That's a pretty clear signal that the Fed have knowingly and openly popped a bubble. This is going to be painful.
If your balance sheet is such that the incredibly marginal increase in borrowing costs is anything other than a bump, than you are a dead man walking anyway.
This wasn't a marginal increase. It was a very dramatic tightening. Marginal would be going from 2.5% to 2.75% or 3% .. this was doubling.
And they did not telegraph anything. If you tracked the CME fed funds probability you'd see that it waffled up until a couple of months beforehand and we were at 0.25 for a very long time.
The reason 0.25 used to work as a min step was because a) we were never at such low rates for so long before and b) things didn't have a chance to settle into a particular rate structure so it wasn't really an issue. The difference this time was everyone started building businesses based on 0.25 and had time to do so.
Agreed, you shouldn't be doing that. But heck, the economy is pretty messed up so the rules have changed.
Of course, one tends to hear these stories after it is too late. No doubt plenty of people ignore the warnings and get by just fine, right up until they don't. And then it's someone else's fault.
[1] http://www.wsj.com/articles/fed-chief-janet-yellen-rate-incr...
Living on the edge is always a risk, and those who do should be prepared for the risks associated with it.
Then its time for those industries to restructure (and, if they must, fail).
Well, I disagree with your comment on policy, but yes, anybody that was on the edge is pretty toasted right now. The important question is whether VCs were there.
If you're looking at medium-term financing options -- on the scale of multi-year business loans, mortgage fixed rate periods, and the like -- in most of the Western world, you should probably be considering whether you can afford at least 2.5% interest rate rises over the next few years, not just 0.25%.
I happen to think it was a good decision. But why does everyone insist on calling this change "small"?
My point is, this attrition turned up to be incredibly small, and still irrelevant at the US later interest levels.
Maybe I'm missing something really obvious here, but in what practical sense is that true?
But why does everyone insist on calling this change "small"?
Because by law or convention 25 basis points is the smallest increase in base interest rate that most national banks will ever make, and since this change was telegraphed long ago it's literally the minimum anyone working with serious finance was expecting.
Maybe some of these companies need to start making money and before they are valued at a billion dollars.
2. You changed the amount of principal in your example. A company that goes under due to an expected 0.25% bump in short term interest rates was in extremely poor financial health to begin with.
2. I was under the impression that VC firms typically raise money from a pool of investors and they take a cut of the % return to those investors. How likely is it that VCs are financing a substantial (if any) portion of their investments through short term loans subject to the short term interest rate?
3. The minimum possible FFR adjustment is 25bp (historical, not a hard rule but a custom)
4. Fed does not adjust monetary policy to suit specific sectors of the economy
5. Fed has committed to getting to 2.0% core inflation by 2018 [1] and would not have risked credibility loss by raising rates if it did not intend to continue to hike (and hike fast)
[1] http://www.federalreserve.gov/monetarypolicy/fomcprojtabl201...
As others noted it wouldn't double your payments as tech doesn't have access to overnight rates with zero spread.
Rents from L.A. San Francisco, Denver, Chicago, New York, are climbing at double digit rates year over year. The overwhelming majority aren't getting the kinds of salaries and wage increases to afford such increases.
The Fed had only been saying rates need to go up for 2 years before they actually did it, but did the market price this in? Not entirely, a good chunk of the market was in denial about the inevitable.
That's not how interest rate setting works at all. Plus, the Fed is still using a banded window that encapsulates your five basis point rise.
What company is borrowing at Fed Funds rates? If - theoretically, because we have to be quite theoretical to operate under your assumptions - a company was that exposed to interest rates and had zero hedge against interest rate vol they would not have the credit to hope to get funding anywhere near Fed Funds rates.
If you're surviving at the edge of loans (i.e - you're in a potential distressed scenario) you'll have bonds trading at a significant discount. This is exactly what began to happen during the early part of 2015, when Fed Fund futures had little chance of the Fed moving priced in.