Bubble Bubble on the Wall, Which is the Biggest Bubble of Them All?

by the Curmudgeon


All Asset Classes in Bubbles (which always burst):

We're not the only one who thinks all asset classes (except for Gold and Precious Metal Equities) are in huge bubbles.  AngelList's CEO Naval Ravikant believes all asset classes, from startup investments to stocks and beyond, are in a huge bubble and will soon fall in price.   

Naval recently told attendees at the 500 Startups Conference in San Francisco that he believes the likelihood of the current economic climate being a bubble is an 8 on a 10 point scale.

"Many central banks around the world are printing a lot of money, and that money is trying to find a home," Ravikant told 500 Startups founding partner Dave McClure.

"It's a global liquidity bubble," Mr. Ravikant said. "Every asset class is vulnerable right now."

That prompted McClure to quip, "Then we don't have to outrun the bear, we just have to outrun all the other asset classes. Are we better or worse than the others?"

"Maybe the bear eats all of them," Ravikant shot back.


Privately Funded Startups and Unicorns:

For quite some time, the CURMUDGEON has strongly believed the biggest asset bubble is in privately funded companies that make no tangible products you can hold or touch.   They provide software services or apps that run on what IDC calls the 3rd Platform (some combination of Mobile, Cloud, Big Data/Analytics and Social Media).  The overwhelming majority of unicorn's (startups with valuations north of $1B) in that category.   We analyzed some of those in this blog post  written in April 2015.

From 2014 onward, venture capital-backed tech companies have pulled in a total of 22 financing rounds sized $500M or more, including ten already this year. The cumulative amount raised in these rounds was $17.5B.  That represents explosive growth compared to the 2010 to 2013 period, when there were just four financings that were $500M+, which cumulatively raised $4.2B. That means there were five times more $500M+ financings from 2014 to-date than in the previous four years put together.  Is that a bubble or a "growth spurt?"  :-}}

Now some of the large startup investments are moving off shore.  As the number of unicorn companies valued at $1B and higher in the U.S. rises, nearly 8 out of every 10 of Tiger Global, Coatue Management and Digital Sky Technologies’ aggregate first-time investments this year are going to companies outside the U.S., according to a CB Insights analysis of new vs. follow-on deals. 

In particular, hedge fund Tiger Global Management, which has previously invested in Redfin, Thumbtack, AvantCredit and Credit Karma among others in the U.S., added zero new portfolio investments state-side thus far in 2015. Instead, Tiger has concentrated its new investments into a wave of Indian tech startups ranging from Grofers (delivery) to MoonFrog Labs (mobile gaming) and CultureAlley (language learning).  Tiger is in talks with NestAway Technologies Private Limited and Zo Rooms to invest $10-15 million in each firm, according to multiple people aware of the developments.

A staggering 82% of Tiger’s new investments this year have been in India and at the early-stage — 71% of which have come at the Series A. It’s worth mentioning that the well-known hedge fund is reportedly leading a first-time investment into U.S. on-demand delivery service Postmates.

When looking at the geographic breakdown, half of the 22 venture funding rounds of $500K or more since 2014 went to international companies including a combined six financings for now-merged Chinese car-hailing apps Kuadi Dache and Didi Dache, as well as Indian eCommerce service Flipkart. The US $500M+ rounds are anchored by four Uber financings, as no other US company has more than one $500M round.

China Stocks:

Meanwhile, Marketwatch.com columnist Howard Gold writes that the Shanghai Composite index is in bubble territory again, having recently topped 5,000 after plummeting 70% in 2008 to just 1,700. 

China bulls are counting on China’s central bank to keep cutting rates. It already has reduced them three times in the past six months, while the Chinese government has eased trading restrictions on foreign investors.   Those moves have awakened "animal spirits" which has powered the Shanghai Index 150% higher in the past 12 months. Shenzhen and other mainland markets with riskier, more speculative stocks have nearly tripled.

Chinese investors don’t seem to have learned from their mistakes in the last bubble.  Does that sound familiar?  Have U.S. investors learned anything from the DOT COM bubble or the 2008-2009 mortgage meltdown/financial crisis?  Do you think China investors are sophisticated and experienced?

The Economist cited a study that said more than two-thirds of China investors left school before the age of 15.

The Economist notes that the Chinese economy has depended disproportionately on borrowing in recent years.  Total debt has jumped from about 150% of GDP in 2008 to more than 250% today.  "More equity financing is needed to diversify the mix of corporate funding, and to take the pressure off a banking system that is weighed down by bad loans".  A stock market crash might deter China regulators from pressing ahead with more market-based policies, according to the prestigious UK based magazine.

Meanwhile, the so-called “smart money” is cashing in its chips: Morgan Stanley and BNP Paribas recently turned bearish on Chinese stocks.  Jonathan Garner, Morgan Stanley’s chief Asia and emerging markets strategist, downgraded China stocks for the first time in more than seven years, citing “the weakest corporate profits since 2009.” “We’d like to recommend taking some profits,” he told Bloomberg.

Global Fixed Income: Three Voices

1.     In a recent blog post titled: Is the bond market ‘bubble’ ready to burst?  Barry Glassman writes that "the bond market, and therefore investors, have greater risk to rising interest rates now more than ever (before)."  Mr. Glassman cites three reasons for the increased risk of higher intermediate and long term interest rates:

·       Duration is the longest in history

·       Yields are close to their lowest levels in history

·       The yield buffer is the lowest in history

2.     Like the Curmudgeon, David Stockman has long called attention to the Fed induced corporate bond bubble and financial engineering to prop up stock prices.  In a recent blog post he wrote:

“Today American businesses are borrowing like never before—-but the only thing being liquidated is their own equity capital. That’s because trillions of debt is being issued to fund financial engineering maneuvers such as stock buybacks, M&A and LBOs, not the acquisition of productive assets that can actually fuel future output and productivity.”

“Needless to say, central bank financial repression is responsible for this destructive transformation of capital market function. It has made the after-tax cost of debt tantamount to free for big cap corporations——while fueling equity market bubbles that makes stock repurchases and other short-term financial engineering maneuvers irresistible to stock option obsessed inhabitants of the C-suites.”

3.     Michael Pento has long called the U.S. Treasury market the biggest bubble of all time.  Lately, he's focused on Europe's credit bubble as per this June 1, 2015 blog post. 

"For the first time in its country's history, Portugal sold 6 month T-bills at a negative yield. The 300 million euros ($333 million) worth of bills due in November 2015 sold at an average yield of minus 0.002%. A negative yield means investors buying these securities will get back less money from the government than they paid when the debt matures.  To put this in perspective, the 10 year note in Portugal now yields just 2.38%, down from 18% a mere three years ago. Back in 2012, creditors grew wary of the countries referred to as PIIG's (Portugal, Ireland, Italy and Greece) and their ability to pay back the massive amounts of outstanding debt. Consequently, creditors drove interest rates dramatically higher to reflect the added risk of potential defaults."

We end this piece with Pento's closing June 1st closing comments: 

"Central Banks around the globe have cranked up their bubble machines and are pointing them directly at the bond market. The Portuguese Central Bank has managed to engineer negative yields even though the nation has a positive rate of inflation and has become basically insolvent. In fact, the international bond bubble is vastly more pervasive and baneful than the NASDAQ and Real Estate bubbles combined. Therefore, when the bubble in bonds finally bursts, at least for a while, there will be very few places to hide outside of cash and owning hedges to plummeting equity and bond prices. And hopefully then we will all, with the perfect clarity of hindsight, acknowledge that allowing a small unelected cartel of market manipulators the power to distort markets to such a degree was a completely stupid idea."

Till next time....


The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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