This is the most honest article that I've seen from a mainstream financial figure about why valuations are so high.
ZIRP (zero interest rate policy) means that money is near worthless to financial institutions that can run the carry trade on Treasuries, or other carry trades involving foreign exchange. VCs manage money for those guys, along with pensions and other enormous concentrations of capital.
What you want are equity stakes (control) of productive assets. The cash that you use for that is not that useful except to normal suckers like you and I who need to hand over a bunch of paper tickets every month to the landlord, the grocer, and the government. The guys who issue the tickets are generally above those concerns, but they still need to get a return on their capital.
I would rather own stock than a pile of green tickets. Stock is, again, just another kind of ticket, but they're more expensive tickets that grant you rights to a productive asset. It is a safe bet to dump your green tickets into speculation because, while the speculation may work out, you know for a fact that those tickets are going to depreciate.
You will not see interest rates go up if the Fed can help it, because to do so would provoke an immediate fiscal crisis. Bubbles result from rational allocations of funds based on a certain set of assumptions. It is a good assumption that the US government will not permit rates to rise as long as there is zero public appetite for a major reduction in government spending. Once that reality changes, the structures that rely upon that environmental state will either need to adapt or will fail.
Startup-land is a greenhouse arrangement that thrives so long as the temperature remains high. When the guy who owns the greenhouse cuts the power, most of those plants are gonna die. If you want to be resilient to that risk, you must leave the hothouse. However, the hothouse plants have a lot more access to capital in the near term, so it is rough to compete with them directly. That is the trouble with bubbles: you can't really escape their effects by being 'prudent,' because low interest rates make prudence imprudent.
In order to raise rates, the US would probably have to either confiscate a lot of assets (which would harm its international status as the cleanest dirty shirt), raise taxes, raise retirement ages, implement means testing on medicare + social security, and cut military pensions/VA expenses. There is no real solution that does not involve provoking some sort of major crisis, so it is much easier for everyone to keep the carnival going as long as possible until something snaps internationally. The federal government can't afford even a slight rise in rates without having an immediate cash flow crisis.
It is a safe bet to dump your green tickets into speculation because, while the speculation may work out, you know for a fact that those tickets are going to depreciate.
Green tickets are almost guaranteed to depreciate, but probably very slowly. Speculation can result in very fast and large losses. There is no such thing as a safe bet.
Probably? We see a lot of examples where they depreciate quite quickly, both in American history and worldwide more recently. Look at a JPYUSD chart, or ask a Japanese guy. Whoa Nelly, that's a steep drop from 2012.
I agree that there are risks in absolutely everything. What's important is to understand and manage them.
Yep, I'm sure USD hyperinflation is right around the corner. Eminent economists such as Peter Schiff and Ron Paul have been predicting it for decades. They can't always be wrong about it, can they?
The fact that the yen has fallen against the dollar means that yen are worth less in countries where they use dollars, but not necessarily in places where they use yen. If yen were worth less in Japan that would reflect itself through higher yen denominated prices on stuff in Japan -- it would show up in inflation -- but inflation in Japan is somewhere south of 2%.
There are a number of gross oversimplifications here.
> What you want are equity stakes (control) of productive assets.
Productive assets are great, but valuation matters. When everyone is chasing yield and you are forced to overpay for productive assets, you are extremely vulnerable and stand to lose a lot more in the long run.
I'm not suggesting that you should have a mattress full of cash, but "I'm losing money if I leave my cash in the bank" is not a good justification for, say, chasing Momo stocks, especially at these levels. The risk of losing 1-2% a year is a different proposition than losing 10% in two weeks.
> You will not see interest rates go up if the Fed can help it, because to do so would provoke an immediate fiscal crisis.
You have to look at the yield curve. Short term rates are still incredibly low, but the 10Y has already crept up. Right now, it appears likely that short term rates will be kept at incredibly low levels, but long term rates will rise modestly.
If you don't consider the entire yield curve, you're liable to make bad investment decisions. For instance, a market in which the Fed is holding short term rates at near historic lows and allows long term rates to rise a bit would create an ideal scenario for mortgage REITs, which borrow money at short term rates and invest in long term mortgage bonds, effectively pocketing the spread.
>There are a number of gross oversimplifications here.
Yup. Dunno if I'd call them 'gross' or 'over,' but sure.
>Productive assets are great, but valuation matters. When everyone is chasing yield and you are forced to overpay for productive assets, you are extremely vulnerable and stand to lose a lot more in the long run.
Yes, I agree with this. As far as VCs care it's OPM. As far as entrepreneurs care it's the OPM of OPM. So mostly good for both classes of people until the music stops.
>I'm not suggesting that you should have a mattress full of cash, but "I'm losing money if I leave my cash in the bank" is not a good justification for, say, chasing Momo stocks, especially at these levels. The risk of losing 1-2% a year is a different proposition than losing 10% in two weeks.
Absolutely agree unless you are a professional trader, and even if you are a professional trader.
>You have to look at the yield curve. Short term rates are still incredibly low, but the 10Y has already crept up. Right now, it appears likely that short term rates will be kept at incredibly low levels, but long term rates will rise modestly.
Entirely possible. Also possible that there will be another round of intervention to respond. Further possible that that round of intervention would not work at achieving its intended goal of rate suppression.
Thanks for the insightful comment. I am curious to know whether you subscribe to the Keynesian or Austrian school of economics (or neither).
I would also be interested to get your insights on how this game might play out in the long run if other high-powered countries are afraid to make the move to raise interest rates for fear of upsetting the local/global economy.
I made a rather long (2 hours) YouTube video that explains the fundamentals of our current economic system - perhaps it is helpful to someone who wants to get a better understanding of the issue:
"In order to raise rates, the US would probably have to either confiscate a lot of assets (which would harm its international status as the cleanest dirty shirt), raise taxes, raise retirement ages, implement means testing on medicare + social security, and cut military pensions/VA expenses. There is no real solution that does not involve provoking some sort of major crisis, so it is much easier for everyone to keep the carnival going as long as possible until something snaps internationally. The federal government can't afford even a slight rise in rates without having an immediate cash flow crisis."
They could demand immediate taxes(30 years retroactive) on all those offshore banks that slick corporations and rich boys like to hide money. If the
banks hesitate; send in the the Boys. It might be the first
honest war we have had in awhile? Oh yea, and immediately
default on the Chinese debt. Wow--I sound like my father?
I am ashamed of wealthy Americans who skip out on taxes though. They like to blame the poor, but it's the guy's who
don't get a regular check who hide money. I remember this
Harris dude who bragged about his Caymen Island trips in the
80's.
You can't legally selectively default on debt; see the ongoing Argentinian "pari passu" saga as documented by FT blogs. Doing it illegally is basically hanging out a "we're now a rogue state lol" banner in New York to welcome businesses.
Having said that, I'm in favour of politely but firmly squashing the tax haven states. There is some work in this area but it's very slow.
Can you offer a good book on that coherently explains US federal monetary policy? You have a good handle on what's going on. I still don't quite understand it.
No, you have to read maybe 10+ books at a minimum plus a lot of other stuff.
I would start from federalreserve.gov and go from there. There's also an educational site set up by the Fed here: www.federalreserveeducation.org/about-the-fed/structure-and-functions/
Once you get it straight from the horse, you can go out from there. When people ask me this question I start there, because it has official authority and is usually more direct than other more opinionated sources. If you talk about it from sources other than the Fed most of the time you'll get a lot of incredulity because the system is counter-intuitive.
I second the EconTalk podcasts. I've been listening to them for over 5 years. They are hour long interviews on a wide variety of subjects. The host, Russ Roberts, does a great job of letting the guest get his or her point across even when you suspect he disagrees. The tone is polite and non-confrontational. It is more about accurately presenting a position than debating, although there is some point/counter-point.
I cannot exaggerate how much I've learned from EconTalk. Plus, there's even an episode with Paul Graham about ycombinator and startups:
ZIRP (zero interest rate policy) means that money is near worthless to financial institutions that can run the carry trade on Treasuries, or other carry trades involving foreign exchange. VCs manage money for those guys, along with pensions and other enormous concentrations of capital.
What you want are equity stakes (control) of productive assets. The cash that you use for that is not that useful except to normal suckers like you and I who need to hand over a bunch of paper tickets every month to the landlord, the grocer, and the government. The guys who issue the tickets are generally above those concerns, but they still need to get a return on their capital.
I would rather own stock than a pile of green tickets. Stock is, again, just another kind of ticket, but they're more expensive tickets that grant you rights to a productive asset. It is a safe bet to dump your green tickets into speculation because, while the speculation may work out, you know for a fact that those tickets are going to depreciate.
You will not see interest rates go up if the Fed can help it, because to do so would provoke an immediate fiscal crisis. Bubbles result from rational allocations of funds based on a certain set of assumptions. It is a good assumption that the US government will not permit rates to rise as long as there is zero public appetite for a major reduction in government spending. Once that reality changes, the structures that rely upon that environmental state will either need to adapt or will fail.
Startup-land is a greenhouse arrangement that thrives so long as the temperature remains high. When the guy who owns the greenhouse cuts the power, most of those plants are gonna die. If you want to be resilient to that risk, you must leave the hothouse. However, the hothouse plants have a lot more access to capital in the near term, so it is rough to compete with them directly. That is the trouble with bubbles: you can't really escape their effects by being 'prudent,' because low interest rates make prudence imprudent.
In order to raise rates, the US would probably have to either confiscate a lot of assets (which would harm its international status as the cleanest dirty shirt), raise taxes, raise retirement ages, implement means testing on medicare + social security, and cut military pensions/VA expenses. There is no real solution that does not involve provoking some sort of major crisis, so it is much easier for everyone to keep the carnival going as long as possible until something snaps internationally. The federal government can't afford even a slight rise in rates without having an immediate cash flow crisis.