Without knowing the causes, I wouldn't be confident concluding that it's simply a correction to 2018 levels. But yes, it's also not worth the panic just yet.
What do you think is the black swan? 9/11 and Lehman were black swans. The business cycle turning over is not a black swan, especially with the majority of finance people predicting a recession this year.
I wonder if we will come to consider Coronavirus a black swan? Despite the fact that it's dropped away from being the main headline in the US, the damage doesn't appear to be contained yet, and it will take time for all of the economic ripples to be felt. (I bring up economic effects because of the context, but I in no way mean to diminish the human suffering.)
Coronavirus is absolutely a black swan event, but it will probably affect mainland china more than us/japan.
I don't see it having as big an effect on pure software companies, but it will affect hardware and companies that rely on chinese market for expansion. Apple in particular, though airpods are happening at a really good time for them to weather this
The coronavirus. There is no certainty, of course, but the CDC believes that the virus is building up steam in other parts of the world. China may be able to contain it, but other countries may not. Then it spreads throughout the world, and then, it re-enters China again. Maybe Indonesia is next. It also didn’t help that the CDC’s test kits that they shipped all over the world is faulty. Now, we have a mass pandemic, and all nations shut off their borders.
Then all the corporate debt accumulation over the past few years, means that these companies are vulnerable if they miss their profits. And a lot of companies have just warned about the virus. Three years ago, I don’t think anyone ever saw this coming, except maybe, Bill Gates, but even he didn’t know when it would happen.
I think the first shoe to drop will be China’s external investments, such as in real estate. They’ll need to re-shore their money back to China, because a lot of private businesses in China will go bankrupt. This means less money for outside investments. This might trigger the real estate bubble to finally pop. Then secondary effects will happen, as other sectors that depends on real estate, will be impacted, and the dominos will begin to fall. Even energy wasn’t expecting such a demand shock to come from China. That came out of left field. Then automotive, then aerospace, then hospitality, then tourism. China has been propping up a significant portion of GM’s international profits for the past 5+ years. Boeing was expecting to sell a lot of planes to China over the next few decades. But interestingly enough, remote software and technology services, will gain market share.
Then, nobody, it seems, wants to be on a cruise liner right now. The quarantine in Japan is just bad PR. The confirmed infection rate on that ship is growing exponentially every day, until everyone will be infected.
Also, nobody is going into China, but this also means that no one from China, is visiting the rest of the world. This was totally unexpected. I don’t think any forecaster ever saw this coming in their crystal ball. This will impact travel and hospitality, as those companies depended on those precious Chinese tourists. Then, layoffs will happen in those other countries.
Regarding the trade war, the economists were able to mitigate its effects, but the fear and xenophobia from this virus, might cause even more economic damage than imagined. It also doesn’t help that the politicians worldwide have been bumbling idiots for the past month. And the American leadership has been cheering on this virus, in their hopes that it will destroy China from within. I hope they’re ready for the fallout.
Then some are speculating that China will publish their own digital currency, to bypass the American financial system. Then Google is going to take a huge hit in the next few years, as Huawei and the other Chinese Android manufacturers are teaming up, but that loss might be immaterial to them. Then the big one, Qualcomm, which makes over 50% of its revenue from China, is going to take a huge hit, when they can’t sell to Huawei anymore.
But who knows. This is all speculation on my part. If we get another downturn, then the Fed will just drop the interest rates again, and pump another 10 years of QE Infinity into the system. House prices will go up even more, without the increased pay, and it prices most people out of the market. But at some point, QE isn’t going to work as well anymore.
What events correspond to the recent peaks in the chart? It looks like the VC world was spooked around the start of December and nothing has changed its mind ever since.
Given these are startups, I would expect much of the information to be private, but it seems highly unlikely this is a complete black box.
Edit: The comments below raise good possibilities. My own (very naïve) research yielded that there was a sharp dip in the the overnight repurchase agreements at the start of December and a small rise a month later. I don't think this is the cause, and I'm probably biased by media narrative more than anything, but it might lead somewhere assuming there's a connection by way of the amount of easy money floating around. The EFF rate also dropped around 24th of July and hasn't gone back up [2].
The chart corresponds pretty well with all the high profile exits over the last year (most of them now trading lower than what the last few rounds valued them at).
> 1. overestimate causality, e.g., they see elephants in the clouds instead of understanding that they are in fact randomly shaped clouds that appear to our eyes as elephants (or something else);
> 2.tend to view the world as more explainable than it really is. So they look for explanations even when there are none.
- whales like MS, Google, Apple, Tesla outperforming startups by a ridiculous margin
What little innovation happening is all coming from the big established corporations. We hit peak VC euphoria. You had kids with PhDs in EE/CS vying to become personal assistants for VCs. More people wanted to become VCs than start businesses and build things. Now it's time to clean house.
# of deals and # of first financings seem to be in a normal dec-feb drop period, but I think the overall index is driven by insane amounts of money per deal that peaked in june last year, making it look like a scary situation if you look at the index alone. Taking the parts one-by-one this is looking quite healthy
I wouldn't be surprised if the boom in deal amount was in turn driven by a small number of crazy large deals, assuming softbank, which given some big implosions last year has sobered up the amount given per deal. Again, this points to a healthier, more sustainable outlook since there are obvious longterm downsides to overinvesting in unicorns that can't possibly deliver.
Vision Fund 1 from Softbank is at the end of it's lifecycle, now they still try to raise for Vision Fund 2. You spend much more in the early phases of a fund, so it's big enough to make all the difference here.
There were a ton of crypto startups around that time...haven’t seen any press from them since, with the exclusion of Coinbase, which seems to be doing well.
Rich people are starting to hold their cash in anticipation of a market dropout so they have reserves to buy up cheap assets.