> There is a LOT of money still sitting on the sidelines waiting to be deployed. And it WILL be deployed, that’s what investors do.
Reminds me of the saying: "Venture Capital starts with too many good ideas chasing too little money, and ends with too much money chasing too few good ideas."
checkout the citrix bond situation. unable to raise targeted goal through issuing corporate yields. its really scary we are seeing corporate bond yields spiking and liquidity drying up.
if a legitimate large corporation is having trouble raising money, its a huge red flag.
Citrix was struggling to borrow $4Bn for a leveraged buyout, they issued bonds that effectively yield 10% annually. That's a massive return we haven't seen forever in fixed income.
Yeah, sure. That being said, the fact that there haven't been any other deals like this this year is a suggestion that the market for them has changed, mostly independently of the company involved.
its not just Citrix but corporate bond liquidity was highlighted in 2019 then the pandemic happened and everybody just glossed over it. now the pace of liquidity crunch across all corporate bonds is picking up as rates pick up.
The curious part is that even with insane returns, they still struggled to get attention from institutional investors who appear to be a mix of cash and short positions.
If you have to ask, probably the better approach is to buy a junk bond ETF like any of the ones on [0]. This will give you a more diversified portfolio than just betting on Citrix.
It’s definitely a buyout specific problem; deals that were inked before the Fed’s rate increases have pretty unattractive terms compared to the current market conditions. There’s a supply glut of buyout debt at those terms, underwriting banks are the ones holding the bag.
the thing is this corporate bond liquidity issue is not new. first alarms were raised in 2019, then they printed money like crazy in 2020, and now they are tightening and we are seeing bond liquidity meltingdown.
theres a very real chance that 10% yield will spike further and downgraded
It’s like leasing a building to a first time restaurant owner or a big public company doing restaurants and getting identical rent. One is more durable (and valuable) than the other. But it gets left out of cash flow.
i don't think it's that simple. pretty much every asset class posting shitty returns this year, hell even bonds are in a bear market. so institutionals are gonna look at other managers and see a bunch of red and not necessarily stop alt allocations.
it's also relevant that you can't just ask for capital back as an LP. it's committed to a fund. you can not commit to another one but the price of much greater returns in alt assets is much lower liquidity.
Surely 'all asset classes' can only drop relative to some exception, where is everyone taking their money? I know we have significant inflation, are people going into cash despite it?
Well no. Valuations are based at least in part off discounted future cashflows at a very basic level. If projected cashflows drop enough due to bad economic conditions the value of everything will drop. If you think at a basic level there is less capital to return to shareholders via buybacks or dividends.
Also the fed finally stopped propping up valuations with QE, money is leaving the economy (about damn time).
FWIW VC/PE/some other private stuff isn't actually down yet at least not on paper. But this is bc they are not marked to market very often at all. The reason activity is still good is bc valuations are way down, like half in a lot of cases.
The saying might just be an observation, but I'm not sure what else people should be saying about VC. VC matches people-with-ideas to money. Have they ever advertised being anything else (while sober)?
The recent (since the 80s) history of financial ups and downs has been
- savings and loan
- junk bond
- dot com / financial engineering (Enron)
- mortgage backed securities
- VC
Basically, money chases outsized returns, some new thing emerges to satisfy the demand, it becomes effectively a ponzi / house of cards, it falls apart, we shift to the next thing. It's impossible to predict when and what will happen of course, it will be interesting to read retrospectively about what's happening with VC as we have with the rest:
Barbarians at the gate / Den of Thieves
Smartest Guys in the Room
The Big Short
(Bad Blood is partway there but Theranos wasnt a turning point like the others)
Honestly, those traders kept around until the dirty work was done got the best deal. Million dollar bonus for a couple of days of work and a clear way out, I would have taken that deal in a second.
Side note: Regardless of the borderline sociopathic ruthlessbes of Jeremy Irons character, I'd propably work for him as well. At least for a while. Heck, he was flown to a crisis meeting, listened to the people on the ground, understood the problem, met a decision and implemented a plan. All that in one night! Most senior managers I know would have needed a month to understand the why the underlying mathematical model had any significance.
Having been CEO through similar crisis situations, I really related to his character and situation in that movie.
People who criticize his actions don't understand that hard decisions are always between two shitty options. There wasn't a warm-n--fuzzy way to get out of there.
You can criticize their risk management strategy, and honestly we should more criticize the USG / SEC for allowing such risk to build up.
This seems logical but I always think if it was that obvious it would already happen. We don't even know if there is ONE good idea with crypto yet, but there are whole funds and firms dedicated to chasing the plethora of crypto businesses.
Well, the one good idea is using it as money. Although the adoption didn't really happen, and its difficult to earn money from crypto being used as money, so people are desperately searching for other things to do with it.
The major component of crypto being distributed consensus it has absolutely no way to work with external world, therefore it can only work with blockchain-borne stuff. The only thing dreamed up yet are cryptotokens.
Since blockchains have no way to interact with external world it can only be used to exchange cryptotokens between wallets - there is no way to ensure that other side of the transaction involving anything else but cryptotokens is upheld. So it CANNOT be used as money by probably any sane definition of money.
Crypto scams are natural consequence of this inherent property.
The chart of how much money is still left waiting to be invested in crazy. Looks roughly that 2021 and 2022 have as much money waiting to be invested as 2012 did total. Each year has added that much.
So valuations need to come down dramatically is the argument, but the amount of capital trying to get spent is going up astronomically. How does that mismatch resolve in an actual marketplace? Do we assume there are suddenly 4x as many good investments to make from 10 years?
Even valuations of 2-4 years ago included inflation: It’s worth putting 10x the yearly revenue if it’s probable that every company will increase prices by 50% in 3 years.
So many people working in VC went straight into it after Stanford without ever starting a company, like it’s investment banking or something. Maybe the VC industry will shrink along with the startups, or at least the unhelpful partners.
Things may trend back to normal and invest more in people who already know how to profit from their activities in addition to having a promising dream.
The difference in risk is orders of magnitude.
These investments can not have terms that are as one-sided as some have specialized in, plus it becomes less realistic for an entrepreneur who can properly leverage $10 million to be served by capitalists who have to borrow $10 million to do it.
The truly success-bound entrepreneur will have a much less limited upside by leveraging the $10 million from someone who is actually worth lots more than $10 million instead.
I expect the herd will be thinned considerably.
Kind of like the difference between somebody visiting Miami, renting a Lamborghini which is almost out-of-their reach, then being seen having their car parked at South Beach by a valet. As compared to a well-retired resident owning half-a-dozen European performance cars in their garage. They only drive one at at time anyway, just like everybody else.
Wasn't it Buffet that said when the tide goes out real quick you see who wasn't wearing anything covering their bottom?
Hm. Thing is as profitable big tech companies get larger and the TAM of tech sectors grow it makes some sense that early stage valuations would increase.
This is both because there is more opportunity for a company to scale, but also because when you have several trillion dollar tech companies out there happy to acquire innovative tech companies then multi billion dollar exits become much more feasible. Companies like Microsoft are making close to $100b a year today and they have to put that money to work somewhere. Google's digital ad business was big relative to the size of the internet in 2010, but it was absolutely tiny in comparison to today. And it's not just the size of the digital ads market, but everything - digital audio/video content, ecommerce, hosting, social, productivity tools, etc. All companies operating in tech sectors today have far more potential than they did in 2010 if they execute well.
So no, in my opinion 20x EV/sales isn't that crazy for a good SaaS company. Profitable tech companies at scale with high gross margins typically trade at 5-10x sales because if you can achieve operating margins of say 30-40% (which isn't uncommon for SaaS companies) then you're basically trading at a 20-30x projected earnings multiple. Which yes is high compared to the historical market average (15-20), but if you're also growing at 50% YoY and have steady recurring revenue streams then that's not a hard multiple to grow into at all.
Perhaps what was stupid about 2020-2021 valuations was that a lot of investors assumed that the extremely low interest rates and accommodative monetary policy was going to persist. Some companies did trade at valuations very hard to justify without the low interest rates and pandemic-era tech growth rates (Zoom, Shopify, Peloton, etc).
I'm sharing because I seem to have a fairly controversial take on this and I don't know why. It seems to me everyone has just forgotten that companies like FB traded at sales multiples in the mid-teens for years after they went public and they haven't been bad investment at all. It depends on the company obviously, but a company growing at 50% YoY with 80% gross margins would be ridiculously cheap at a valuation any less than 10x sales based conservative earning projections.
In my opinion most of the reason for this crash is just macro headwinds. Tech companies saw a huge growth boom in 2020-2021 which has now reversed. Interest rate risks have also been dragging on public valuations and this caused a drop in sentiment for tech investments generally. My guess is that in a couple of years once we're through this period tech valuations will trend back to 2018-2019 levels. But I guess we'll see.
Finally this current crash is hardly isolated to tech. Companies like Fedex, Starbucks and Nike have all seen ~50% valuation declines from their peaks this year.
> So no, in my opinion 20x EV/sales isn't that crazy for a good SaaS company.
I agree but with the specification that the only way to get that "good SaaS company" multiple now from an acquisition is with the stick rather than the carrot.
What I mean by "stick" that is the target (e.g. Figma) needs to be a active threat to the acquirer's (e.g. Adobe's) business -- as opposed to the "carrot" wherein the target (e.g. any AI-first company making interesting pictures) has a valuation driven by narrative ("humans will prefer AI-generated content over celebrity-generated content).
"Companies like Microsoft are making close to $100b a year today and they have to put that money to work somewhere"
They'll make stock buybacks, and they'll pay out dividends, far less risky to their stock price and long-term management incentive schemes than most value destructive large acquisitions.
A little late, but this is only somewhat true. Stock buybacks only make sense if the stock is cheap to fairly valued. You need to think of buybacks in terms of a return on equity. If a company spends $10 billion buying back stock of their overvalued company which later falls 50% in value then that company is allocating capital extremely poorly. Companies should decide whether to buy or sell stock depending the company valuation. Tesla is an example of a company which has made some incredibly smart decisions from a capital allocation perspective not from buybacks, but by issuing stock when their stock is high.
That's not to say companies won't do buybacks though, just that they have a duty to shareholders not to blindly buyback their own stock if they believe they could allocate that capital better with an acquisitions, etc. At a time like this when unprofitable, yet very innovative companies have lost a lot of value relative to big tech companies like Microsoft and Google I'd argue that they might be better off allocating that capital more towards acquisitions than buybacks.
This is also why I don't really understand why shareholders of Apple support their current buyback program. Given their stock trades at a near record-high valuation both absolutely and relative to the market large buy backs makes very little sense from a capital allocation perspective. Although I guess they would argue there is literally no where else to put those billions of dollars. Still, that doesn't mean it's a good thing for shareholders, just that they're now forced to allocate capital poorly given their size.
I like that better than anyone who can take endless free money loans with little concern because of zero or negative interest rates can play “VC”.
I can easily name a dozen companies and technologies that massively changed the world from 2000-2010 (not saying for better, but undeniable), what have we really developed that didn’t exist in 2010-2020 in this era of Free Money and “Unlimited Potential”?
Hypothetical question.
From my view, I’ve seen VCs come in and use capitol to build up people with good intentions or ideas, and immediately get them absorbed into the giants who are also throwing away endless free money even if their business model is awful.
I’m not looking forward to hyper inflation. But I am looking forward to a slower tech market that actually has to provide something useful in order to stand out.
VC just means venture capital. It's a generic thing. Any capitalist - in our society, anyone - can supply venture capital; they just have to have enough.
If anything is unnatural, it's thinking of VC as something gatekept and for the elite, as opposed to a generic function which can be fulfilled by millions.
Genuinely curious what you think crash means. 2021 definitely inflated our stock market way too much but we're definitely within reasonable corrected zone IMO. What should we expect as a crash? Even with the Great recession, we're looking at a 27% drawdown so we're about halfway there?
It's not over till people start giving up and cashing out. Right now, the retail investors are still frantically buying the dip. It's just the smart money that is getting out while the getting is good.
Look: right now the S&P500 and the Dow are still twice where they were in 2016, and the Nasdaq is almost 3 times. Even after the recent drop. Do we have double the population we did in 2016? Double the resources? Double the technology? If not then why is the stock market twice as high?
My guess is, (and it's only a guess): the nasdaq will bottom out around 5000, the S&P somewhere around 2000. The Dow in the neighborhood of 15k. That's assuming there are no financial collapses like in 2008.
> Do we have double the population we did in 2016? Double the resources? Double the technology? If not then why is the stock market twice as high?
One easy answer is that the "value" of a dollar is half what it recently was. And that seems to hold fairly true whether you want to use that dollar to buy groceries, a house, a hotel room or a share of a company.
If I measure my investments not in dollars but in say, days of vacation (so hotel, food, gas/airfare, tickets to things, etc) then my S&P500 investment is about where it was in 2016.
Going in the other direction, we’re 11% above the pre-COVID high for the S&P. And that’s with $6+ trillion dollars having been pumped into the economy. There’s plenty of crash and plenty of inflation left in the pipes.
You are misunderstanding "flat for a decade". Flat for a decade is decided in retrospect. It's not flat along the way. Flat for a decade very likely means way down from here right now.
Your attitude isn't unique, I'd describe it as "It's not a crash until the people/companies I consider fraudulent get destroyed." I hear it about some crypto investors in particular. There's a lot of people who basically consider recessions cosmic justice and want a cleansing fire to reign down on certain entities/people they despise. I propose: that's not what a recession/crash is.
I would assume in a real crash, especially if we're comparing it to the 2000s tech crash, someone must get destroyed. I personally think companies that can't even make a car drive for a demo, something most at home diy ev hobby builders can do, and also lie about it, probably would go first in a crash.
You propose that's not what a crash is. What is it then? And when can we say it's as severe as the early 2000s crash?
I just think of a crash as a sudden drop in asset values, we've seen that so far. A recession I think of as negative GDP growth for a couple quarters at least (i know i know but this is a reasonable definition and you know it) which we've also seen so far. So this is a crash/recession. It doesn't mean it will necessarily wipe out X. I don't know why it has to be as severe as Dotcom or Housing crashes. Doesn't seem to be a requirement to me. It has been incredibly severe for unprofitable tech companies looking for VC funding to keep them going indefinitely at least.
That just means the market is illogical though, does not mean a crash must mean all of sudden all investors are logical? As quoted by the famous Keynes, “The market can remain irrational longer than you can remain solvent.” It’s like meme stocks like AMC/APE and GME. Does any of it make sense to me? Nope. Are people making and losing a ton of money? Sure. Is it a good indication of US economy health or dare I say, US stock market health? Really hard to say.
I guess I would say that a crash is when the market shifts to being illogical towards the negative side, where even seemingly good companies are struggling.
I wouldn't call it a crash if there is positive irrationality.
Well I'll go on record predicting the opposite. Meta is an advertising behemoth and has taken a very big bet on metaverse, they can ensure unlimited good press for their baby, especially if their real customers aren't buying as many ads as before.
I can see it now: "Life sucks because of the crash? Move to the Metaverse!"
Nikola is 50% down from pre-covid IPO, and -93% from Covid peak.. Even a bad business has assets, and could make some money selling something or getting acquired for basic competencies.
Taken literally, it is true :) None of us know what is going to happen.
Personally, I think it won't be the crash that will hurt more, but the time it will take for recovery. Anyone who has invested money in something, gets impatient with no growth for a long time following a crash that resulted in a loss for them.
The put options that I closed out based on my correct prediction that the market would drop literally the day after I posted this would disagree.
Additionally since the Fed meeting and the subsequent market drop that general consensus has shifted pretty rapidly towards agreeing more with me than not.
I still think the market is even more optimistic than it realizes.
It's not doomerism, its reality: we're still in an insane asset bubble that has been propped up by a decade of insanely low interest rates and cheap money. Various conditions around the world are causing rapid inflation which is forcing central banks to raise interest rates ending the era of cheap money. The market sentiment remains convinced that this will a temporary hike, not going much about 4-5% and decreasing rapidly, however there is plenty of economic analysis that indicates this does not make sense.
The ad-supported giants are barely treading water while they absolutely plaster their platforms with ads. I doubt that will sustain them through the next quarter, which is usually the biggest quarter for retail consumers.
Also someone has to pay for those adds. Other sectors cutting their advertisement spending will directly hit them. And many are seeing cost pressure already.
Do you have a particular billionaire investor in mind? Because the most obvious ones (Buffett, Icahn, Soros, Griffin) explicitly use investment strategies that don’t require knowing where the broader markets are going to go.
Ray Dalio got famous and rich specifically designing investment strategies because he didn’t believe in a crystal ball.
I’m genuinely curious which investors you are talking about where choosing where market indexes will be is their investment thesis.
I’ve worked for a macro hedge fund so I know the space.
None of the strategies I saw at my time there had anything to do with accurately predicting specific market levels. Quite the opposite they were largely off market positions for the main component with the occasional hedge on the market.
I never implied that you have to be able to predict and/or time specific market levels either. I'd argue that's moving the goal post from "what's the point of expressing an opinion without a crystal ball" which seems to be the sentiment of your parent post.
It's some variation on
1) "there's no alpha over time, only someone with a crystal ball can make money on any directional play besides line go up" to which I'd say
a) While most people can't generate alpha over time a, the idea that no one can is empirically wrong.
b)if you worked at some bizarro world macro hedge fund where no one has any interest in making educated guesses about market direction and is running some kind of medallion / bridgewater strict beta/correlation strategy (how is that macro? doing that in FX, EM equity or international debt? I wouldn't call a medallion type strategy on EM stocks a global macro strategy ) (also bridgewater clearly incorporates directional opinions based on nuanced understanding of history, geopolitics, cycle timing on top of their core strategies, so I'd say you're wrong in the case of Dalio)
2) misunderstanding or misapplying EMH (which I'm not saying you are but I hear it constantly on here) The market is alway's right, there's no point in having an opinion EMH says you can't be the market. Well scratch below the surface and that's not the conclusion you reach
Anyway, that's all to say, I find the "you have no right/validity to talk about where you think markets are heading without a crystal ball" (ie no one should waste time discussing it ever) is not only condescending but as I said, just not correct or clever.
I will finally say that of course there are huge numbers of people having very unintelligent conversations where they throw shit at the wall in terms of market predictions, but you can't judge any activity on people doing it badly, even if that's a large percentage of people in this case
“If you think what we've seen is the crash you have no idea what's coming”
Is fairly specifically indicating a dramatic change in market level. More specifically it’s calling out that the person expressing an opposite opinion is definitively wrong about the magnitude of a future market move.
I think it’s fair to ask at that point how the person can be so definitive “without a crystal ball”.
Macro hedge funds wouldn’t invest that way (at least not in my experience). They’d risk weight their positions based on a variety of outcomes, even if all of them are directionally the same, and then hedge their downside risk if they are directionally wrong.
People dreaming on a crash either haven't seen inflation before, or are hoping their US dollars will regain some value.
Not happening. The current rate raises are done to control inflation, and not to reverse it. Some prices will stay that high because of inflation. Some prices have already went down but you can't see it: also because of inflation.
Sorry, but the Fed had already robbed you, and you are unlikely to get your money back.
I see. BTW, it looks like whatever caused your old account to be deleted carried over to this one, I'm only seeing your comments because I have my showdead on.
Reminds me of the saying: "Venture Capital starts with too many good ideas chasing too little money, and ends with too much money chasing too few good ideas."