Cartoon of the day

Special mention

  

Cartoon of the day

Special mention

 

Cartoon of the day

Special mention

  

Cartoon of the day

Special mention

 

Cartoon of the day

Special mention

 

How to kill a unicorn

You can’t, of course, kill a unicorn. Because it isn’t real. It’s just a mythical creature.

Except, it seems, in the world of venture capital. There, as I’ve come to learn from Rupert Neate [ht: ja], unicorns abound. And they just may represent the beginning of the end of the current tech bubble.

source

In January 2014, only 43 tech startups had been worth $1 billion or more pre-flotation in the past decade. Today there are 82 $1 billion pre-IPO startups in the United States and a total of 125 worldwide. Uber, for example, has been valued at $52 billion.

Alan Patrick, co-founder of technology consultancy Broadsight, agreed that there has been too much “irrational enthusiasm” for investing in startups, and it is unlikely to be matched by what the market is prepared to pay at IPOs. “The private market has been driving these valuations to extraordinary levels, and as they approach the public market the smart money is starting look at it and go ‘oh no, no, no’.

“The number of unicorns is a sign that there is a bubble in the private market – in the dotcom era there were 10 or something, now there are too many to count,” he said. “That for me is a sign that these values are untested and out of step with reality. And none of them are making money, they are all buying revenue with huge war chests.”

Patrick reckoned the 2.0 tech bubble will come to be defined by the unicorn. “Whether it’s the ‘big swinging dick’ of the last one [the build-up to the financial crisis], there is alway a name that attached to a bubble; for this one it will be the unicorn.”

But he added that he doesn’t think the bubble is about to burst just yet. For that to happen, he said, there needs to be an “insanity event” – “something that in hindsight is so extraordinarily crazy, but looked normal at time”.

“Last time it was AOL-Time Warner [a $165bn takeover]. It’ll be an event when everyone goes, ‘Oh my god, that was nuts’,” he said. “That’s what I’m waiting for, and when that happens you blow the whistle.”

I suppose, if “irrational enthusiasm” (based on a tremendous amount of surplus chasing potential profits) is what gives life to unicorns, then it’s appropriate that an “insanity event” (after which the surplus moves elsewhere) is what will kill them.

BUBBLE, n.

Bubble, according to Jason Zweig’s new book, The Devil’s Financial Dictionary, is defined as

A mania; a rise in asset prices that seems irresistible at the time and irrational in retrospect; a bull market blown full of hot air until it reaches the bursting point.

The term is commonly believed to have originated around 1719–1720, when shares in the Mississippi Co. in France, the South Sea Co. in Britain, and the Dutch East India Company in the Netherlands rose approximately tenfold in a matter of months and then collapsed.

But the word is older. To bubble, meaning to cheat or trick, was a common term in England decades before the Mississippi Co. mania. “Let them be bubbl’d by them that know no better,” wrote Daniel Defoe, in his pamphlet “The Free-Holders Plea against Stock-Jobbing Elections of Parliament Men” (1701).

As a noun, “bubble” was also a synonym for someone who had been robbed or defrauded. As the rake Dorimant advises in George Etherege’s Restoration comedy, The Man of Mode (1676): “Lose it all like a frank gamester on the square, ’twill then be time enough to turn rook [swindler] and cheat it up again on a good substantial bubble.”

The Dutch were also familiar with the word “bubble” (which they presumably borrowed from the English). It was closely related to windhandel, or “dealing in wind,” the Dutch expression for trading in stocks that weren’t in the speculator’s possession, as SHORT-sellers may still do today. (Windhandel also referred to trading in derivatives such as options and futures.)

Anatomy of a bubble

I’ve been listening to and reading lots of financial pundits over the course of the past week—all of whom use the same lingo (the U.S. economy as the “cleanest shirt in the hamper,” the “deterioration in risk appetite” around the globe, and so on) and try to explain the volatility of the stock markets in terms of economic “fundamentals” (like the slowing of the Chinese economy, the prospect of deflation in Europe, and so on).

Me, I’m much more inclined to think of terms of uncertainty, unknowability, and “shit happens.”

Let’s face it: stock markets are speculative markets, in the sense that individual and institutional investors are always speculating (with the aid of computer programs) about how others view the market in order to make their bets—with fundamental uncertainty, unknowability, and the idea that shit happens. That is, they have hunches, and they have no idea if their hunches are correct until others respond—with the same amount of uncertainty, unknowability, and the idea that shit happens. And then all of them make up stories (using the lingo of the day and often referring to changes in the “fundamentals”) after the fact, to justify whatever actions they took and their advice to others.

That’s pretty much the view outlined by Robert Shiller. It’s all about stories characterized by uncertainty, unknowability, and shit happens.

In general, bubbles appear to be associated with half-baked popular stories that inspire investor optimism, stories that can neither be proved nor disproved. . .

the proliferation of such stories is a natural part of economic equilibrium. Successful people who value their careers rely on an instinctive sense for what pitch will sell. Who knows what the truth is, anyway?

As time goes on, the stories justifying investor optimism become increasingly shopworn and criticized, and people find themselves doubting them more and more. Even though people are asking themselves if prices are too high, they are slow to take action to sell. When prices make a sudden drop, as they did in recent days, people tend to become fearful, even if there is a subsequent rebound. With the drop they suddenly realize that their views might be shared by other people, and start looking for information that might confirm their belief. Some are driven to sell immediately. Others are slower, but they are all similarly motivated. The result is an irregular but large stock market decline over a year or more. . .

It is entirely plausible that the shaking of investor complacency in recent days will, despite intermittent rebounds, take the market down significantly and within a year or two restore CAPE ratios to historical averages. This would put the S. & P. closer to 1,300 from around 1,900 on Wednesday, and the Dow at 11,000 from around 16,000. They could also fall further; the historical average is not a floor.

Or maybe this could be another 1998. We have no statistical proof. We are in a rare and anxious “just don’t know” situation, where the stock market is inherently risky because of unstable investor psychology.

I would only add one correction: we always “just don’t know”—not just in anxious situations of volatility (such as during the past week), but also in more stable periods. In fact, we don’t even know if we’re in a volatile or stable period (until a new story becomes the common sense that what we’ve been through was volatile or stable) and we certainly don’t know how a stable situation becomes volatile (and vice versa).

Really, all we can say, when it comes to bubbles, is: shit happens.

Cartoon of the day

Special mention

 

Cartoon of the day

Special mention