Peter Thiel Says Just About Everything Is Overvalued, Not Just Tech
bloomberg.com
bloomberg.com
Basic Econ 101 tells us that inflating the base money supply should eventually result in higher nominal prices for goods and services.
Meanwhile the basket of goods and services used to measure inflation has remained mostly flat, meaning "low inflation", ensuring that the Fed can continue its cheap-money strategy, while also helping the government minimize its expenditures by keeping cost-of-living adjustments to a minimum.
Meanwhile, as Peter points out, investment and speculative assets have increased wildly in value. Fortunately for the wealthy, these are not considered part of the "basket of goods and services" used to calculate inflation.
It's almost as if the very wealthy have more money than they know what to do with, and cannot find enough rational places to invest it. It's almost as if none of this wealth is "trickling down."
It's almost as if there is a disconnect between the economy that the very wealthy live in, and the economy that the rest of us live in.
My wife is a photographer and buys glossy magazines as a part of getting inspired, so I picked up a Vanity Fair special on watch movements a few days ago and thumbed through it. I was struck by the fact that the shots of watches weren't accompanied by prices so I typed "tourbillon" into google. I got 5 returns in the "shopping" banner, with prices ranging from £380,000 to $22.
One of the things I learned from the Vanity Fair article, which is pretty obvious, is that the patents on automatic watch movements have all expired. New designs are not, by in large, technical innovations, the patents on them protect novel arrangements with novel aesthetic characteristics. Therefore if you have a little cnc machine or a 3d printer you can make a movement for pennies and sell with the comfort of IP protection. The gold and gems on a watch are worth ~£10k, leaving ~£360k as margin.
Staggering.
1. Assembled by hand (in Switzerland, for the most famous brands, where labour isn't cheap)
2. Made of precious material, as you pointed out.
3. Require a lot of R&D and design to develop (fitting movements and complications in each model's unique case is a hard problem).
4. Very limited numbers of them are produced (mostly because of 1.). It's common for watches to be unique.
5. Come with an "eternal" warranty (they will fix my dead grandpa's watch for free, forever).
So while having a CNC and a 3d printer, making a wearable watch to the same specs will be quite a challenge.
There is a magnificent analysis of this process of "luxurification" here : http://www.ablogtowatch.com/rolex-prices-past-60-years-revea...
you need to do a little more research on what goes into even assembling the movement, much less the manufacturing, etc.
I would say that is only true for real estate and government bonds[1]. Most other asset classes are only only slightly overvalued. For example, on a PE basis, the SP500 is only slightly rich. I am not commenting on pre-IPO start-ups because I cannot make heads or tails of them and saying they are rich feels knee-jerk to me even though most of them to me seem like pie in the sky valuations.
[1] non-government bonds have been under pressure since Q4 of last year and many of them are at attractive yield spreads (certainly when you consider defaults in the US are largely negligible outside of out and gas)
The monetary base doesn't affect asset prices and consumer prices if it just sits there doing nothing.
Bank reserves with Federal Reserve Banks match your chart during the same time, showing that this money is just sitting with banks, not in the real economy [1].
Consequently, the velocity of money declined steeply at the same time [2].
When you talk about trickle-down, you're talking about the economy as a whole not just a specialised sector with a scarcity of skills ... if anything the value we create "trickles up" because half the time it's hard to see benefit to the man on the street.
Effective economic policy is not just about me having loads of money. It's about not seeing your friends and family having to struggle; your friends having to emigrate; cuts to services for the sick & elderly, and a spiralling cycle of fucking the poor.
When the cost of goods and services eventually rises, will that result in a rebalancing of where the wealth is flowing?
Meanwhile rich people in develoepd and developing countries make tons of money on the differences between the poor, decreasing them in the process.
It definitely trickled down to resource economies. Without the influx of cheap capital, "unconventional oil" like shale and oil sands would never have gotten off the ground.
That money does not stay in the system forever. It's slowly reaching the maturity date one security at a time, with the created money being erased. Unfortunately, we have no further visibility into Fed's portfolio, duration of securities, percentage of defaults, etc.
That money went into inflating housing and the securities market. It did nothing to help the economy, and only helped distort prices of those assets.
But of course the question is, will interest rates remain low? Basic economics would tell us the answer is no, because the FED and ECB have pumped billions and billions of dollars/euros in the economy on a monthly basis meaning the supply of money has greatly increased and hence the value should drop and lead to inflation and hence higher interest rates. But this clearly hasn't happened (yet) and I haven't really found anyone who has a good explanation. Warren Buffett, Charlie Munger and Bill Gates all expected this would of already happened a while ago. (TV interview on CNBC)
Also, although base rates are around zero, long term interest rates are higher. True they're not high by historic standards but you still get some discounting for cashflows beyond the short term.
When t --> inf, it becomes r.
But I do believe that there was and still is a lot of overvaluation in tech even after discounting at low interest rates.
If he's confident everything is overvalued, a big short on the market would be easy money.
Or maybe he's just trying to convince everyone that assets are overvalued, so he can buy them at a lower price.
As usual, follow the money. He's looking to actively invest $1.3Bi in tech firms, which shows that he doesn't believe his own bullshit.
Since he's a smart guy and can't possibly believe that he's right and everybody's wrong he spends his apparently overvalued cash despite of what he feels.
It would be like most hedge funds: "I believe assets are overpriced, so I've shorted them".
He's doing the opposite: "I believe assets are overvalued, so I'm buying them".
This isn't even bullshitting, is blatantly lying.
Not really trying time time it per se, but this just feels like a particularly bad time to move a lump sum into stocks. Quite a few big names seem to think a crash is due soon:
http://thesovereigninvestor.com/exclusives/80-stock-market-c...
I can dollar cost average it I guess...but would prefer if the market just gets it over with and crashes.
Problem is the size of the expected drop. If it does drop then I'd imagine a good 30-50% much like 2008. So quite aware that I'd be losing out on gains for a while.
Its all guesswork though - the "right" move requires timing the market as you say. My gut feeling tells me its dicey though so I'm leaning towards losing out on gains for a while.
If you have low interests rates like now many crazy valuations are actually not so crazy (well in tech they are crazy anyway but outside of tech not so much).
That's because the cost opportunity of employing 1€ in equity is very low since debt is giving you little. All the future cash flows therefore get just a small discounting factor.
Financial press is so boring and unreliable. One day there's a deep crisis and China is collapsing and oil will never come back and the honeymoon is over and a week later things are back to normal, growth is good and.. what the heck ?
Of course everything is in a bubble, but doesn't that mean that there's no point in mentioning it, because it's part of normality ?
Overseas markets are excellent for making money. Less regulation, lower salaries, etc. But the downside to a less overbearing government is that it's fairly easy for people with government connections to run off with your investment money if you're not watching.
Western nations are just safer places to passively invest money.
How can a bubble be "in cash"?
Inflation depends on a number factors, whether it be productivity, supply, unemployment, etc, or how that cash is being spent. If it's being invested, who's to say it isn't in capital goods, thereby reducing cost of goods?
Because it puts more cash back into the economy. It transfers cash from people who previously hadn't been spending it to people who might not be so reserved.
> If it's being invested, who's to say it isn't in capital goods, thereby reducing cost of goods?
That's just the butterfly effect. It's the equivalent to saying that the fed printing money can cause deflation because people might use all the money to pay down debts and then use what would have been interest on the debts to pay down even more principal. It's theoretically possible, and sometimes it even happens, but you still don't expect printing money to cause deflation in general.
It's clear to us all when one says there is a bubble in housing, but this doesn't make much sense, and may well on further elaboration be found to be nonsense!
If one were to be treating cash an as investment, i.e. in a savings account, then one would think a cash bubble would be where you're getting a relatively good return, and were the bubble to burst, the return would collapse. That's clearly not the case now: cash returns little or a loss (interest - inflation).
And in terms of its value, rather than its return, well it's been losing value there too, relative to stocks and housing. So hard to see a bubble there either.
Don't be silly, Peter. There are no places outside Silicon Valley.