Palko pointed me to one of these stories about a fraudulent online business that crashed and burned. I replied that it sounded a lot like Theranos. The conversation continued:
Palko: Sounds like all the unicorns. The venture capital model breeds these things.
Me: Unicorns aren’t real, right?
Palko: Unicorns are mythical beasts and those who invest in them are boobies.
Me: Something something longer than something something stay solvent.
Palko: That’s good advice for short sellers, but it’s good to remember the corollary: the market can become rational faster than you can get out.
Good point.
How long does it take to get out – one click?
“the market can become rational faster than you can get out” is somewhat analogous to the Chinese coulee story in that it’s a myth used to support a belief. The main difference is that the “faster than you can get out” is demonstrably false, while there’s no way to know for sure if the coulee story is true. To be in a position where you can’t get out in five seconds, you’d probably need to be on another planet, where the travel time of the communication signal becomes a factor.
chipmunk, are you a bot?
No, you are incorrect. In general, pre-IPO companies, like Ozy, are privately traded and require board approval to get out. In addition, matching to a willing buyer is difficult since finances are not publicly disclosed or readily available and there are no market makers.
Seems like a semantic issue. If there are no market makers and very low liquidity, is there a market?
I mean technically, there is always a market for anything but that isn’t really what is meant by the original quote. It refers to more of a crowd rather than a single or few counterparties.
Also:
Yep, when you see censorship and authoritarian directives from on high it is a sign to stay away.
By this logic, there is no market for real estate or houses.
The real estate market is huge though, involving billions of people. Houses aren’t fungible like shares, so the market for any given house may only have a small group of people involved.
I dunno, there is probably a gradient of small to large markets where crowd behaviour becomes more relevant.
“The story of Ozy became so viral so fast because it highlighted the worst parts of every industry in America: naive investors throwing money at poorly run companies, digital media outlets faking their numbers and over-zealous startup founders toeing the line between dishonesty and delusion.”
Yet I review stocks every single day; I hold a number of ecommerce companies; and I’ve never heard of this “viral” company until now.
Somebody:
when people say things like
““The market can become rational faster than you can get out””
the term “The Market” generally doesn’t refer to a highly restricted market for angel and ground floor investors. But I like how Andrew frequently uses statements like this to shade “the market” in the common sense so he can then say “oh, that’s not what I meant, I mean int his highly restrictive sense hidden in my link”. Sure ya did.
Chipmunk:
I have no idea what you’re talking about when you say, “I like how Andrew frequently uses statements like this to shade ‘the market’ in the common sense so he can then say ‘oh, that’s not what I meant, I mean int his highly restrictive sense hidden in my link’.”
Maybe you’re talking about someone else named Andrew. Otherwise, it’s a bit rude of you to say that I “frequently” do something that I never do.
It was quite clear to me what was being referred to given the references to Theranos and VC funding. But hey, some people are better at picking up on context than others.
This:
Makes no sense at all though. The definition of “the market” you’re using of “highly liquid, heavily traded public exchanges” is much more restrictive.
A lot of people have money trapped in cryptocurrency right now because while in theory transactions can happen quickly, in practice there are too few buyers and any substantial sale causes a price dive.
IMHO, if something is bought and sold there is a market for it. The problem is that the markets for many kinds of things don’t have the properties of eg. the market for shares of Bank of Montreal or sacks of rice. If you want to make big profits, you probably want to invest in one of these things with a small or slow market, because people who are smarter, better trained, and more resourced than you have put a lot of effort into finding the right price for those big stocks and commodities. Saying that markets are only markets with certain properties sounds like a No True Scotsman.
“If you want to make big profits, you probably want to invest in one of these things with a small or slow market”
This is a common misconception. It’s one reason most investors loose money. It goes along with the mistaken idea that you have to go big on the “ground floor” to make money.
Crypto and stocks are clearly different situations. I don’t know anything about crypto except that it’s a scam.
But the logic of buying small amounts of cryptocurrency was the same logic as buying real estate or stocks or startup equity in a bubble: let the bubble carry the nominal price higher, then sell out before the crash to realize your gains. The problem is always how to get out if the bubble bursts too early because everyone else is trying to sell at the same time.
I am sure that some Theranos or Ozy investors suspected the company was a scam but thought they could find a greater fool.
Not necessarily disagreeing, but would you say crypto is more or less of a scam than US treasuries? It is all over the news that unless they can raise new debt they can’t pay off the old debt. Which is the definition of a ponzi scheme.
I guess you can say if you tell people that is what you are doing it is no longer a scam. It seems to me humans love creating and participating in ponzis, it is probably evolutionarily advantagous in some way.
Anon,
It’s not that the government can’t pay off the debt unless it issues new debt; it’s that the alternatives are even worse. For instance, the government could cut spending by a huge amount while keeping taxes the same or raising them. Or it could simply print the money (literally or virtually). The former would cause an immediate, huge recession; the latter would cause immediate, huge inflation.
I’m not saying you don’t have a point, just that it’s not true that the government _must_ issue new debt in order to pay off old debt.
The distinction is that the government has a second income stream through taxes. So while a ponzi scheme must grow until it runs out eligible investors and collapses, as long as the tax base grows quickly enough government debt does not have to collapse. In fact, the government can run a substantial deficit every single year while the debt shrinks in real terms — see the history of the UK’s debt to GDP ratio.
Ok, but in reality the debt floor gets raised over and over, which is paying earlier investors with money from later investors.
https://en.wikipedia.org/wiki/History_of_the_United_States_debt_ceiling
Hypothetically the gov could raise money for that in other ways, but same for Bernie Madoff. He could have made a few actually good trades, but didn’t.
The debt ceiling is guaranteed to be raised over and over even if the debt shrinks in real terms just because it’s a fixed number and there’s inflation over time. It’s exactly the same as stock market indexes “soaring” or “dropping” by “record breaking amounts” every 6 months — the fluctuations operate on a percentage basis. It’s theater designed to generate headlines, same as how the debt ceiling is just a piece of political theater.
What really matters is debt-GDP ratio since tax income is a fraction of GDP. Debt GDP ratio is going higher in the US right now, but it goes fluctuates a lot more and has reached much higher values in many economies before declining without incident. The government doesn’t need to make any really exceptional calls, GDP just needs to grow by a couple percent in real terms year over year to outpace the deficit. The government is making a lot of money on taxes right now, and its tax base has grown like that many times in the past.
Would we still have inflation if the national debt was decreasing? I think the opposite. Reducing debt = reducing the money supply. Maybe private debt would increase to compensate though.
p = mv/q
Anoneuoid
Really? The equation of exchange (MV=PQ)? I am an economist but not a macro economist (in fact, I was not promoted once for refusing to teach macro since I didn’t believe any of it), but I don’t see how that static equation can get you reducing debt implies reducing inflation. First, I don’t necessarily see how reducing debt and reducing the money supply are equivalent in your thinking. Then, I don’t buy the constancy of V and Q that would make that equation work. The closest I can get to your statement is that reducing government debt happens because of increased taxation and/or reduced government spending, either of which might cause a slowdown in economic activity thereby possibly reducing inflation. A lot of ifs in that chain of logic.
Well, where do you think inflation comes from?
Either the money in the market for those items increases, the supply decreased, or the money is being spent more frequently. It is a pretty basic concept. Of course in reality you have various lags and dynamics like the Cantillon effect to deal with.
Then the next question, how do you increase the money supply? The answer in our system is giving out loans, ie creating more debt. Eg, the fed buys treasuries and uses various methods (lowering interest rates) to convince commercial banks to loan more freely.
And the OP is explicitly about venture capital investing in companies which they think will rapidly increase in value. Those are not publicly traded stocks, and California VCs form a dense social network, so once bad news about a company enters the network it spreads rapidly (see the run on Silicon Valley Bank)
I did a fair amount of stock investing for a a year or so. I could issue a sell order in the time it took to boot a laptop, sign on to my online brokerage, and submit the order, but It would be fast work to get the sale done by the next day. Automated, computerized, algorithmic trading maybe. The average investor, no way. Heck, it took me ten minutes to issue this comment.
JimV:
I trade several times a month. By the time I check the execution price – a second or less – the order has almost always executed. Once a great while it takes a minute or two.
Just to be clear, we’re not talking about the time it takes to conduct the actual transaction; we’re talking about the time it takes a retail investor to become aware of the implosion and make the decision to get out and then make the transaction. That can easily be a matter of hours or even days.
Recent history has shown us that there’s nothing apocryphal about bag holders.
Bubble dynamics work both ways. Yes, markets can stay irrational longer than you can stay solvent. And yes, the market can become rational faster than you can get out. In the simplest model, prices are composed of two factors, “fundamentals” and interactive expectations, where the second generates the bubble: actors have an incentive to buy in to acquire the temporary gains from other actors having an incentive to buy in etc. The complexities have to do with the inflection points at the outset and conclusion of the bubble. Well, many of you know this.
The point I’m trying to make is that both pitfalls result from the same process. If you are guided only by fundamentals and commit to a position that is sustainable only if fundamentals prevail, the bubble can wipe you out. And if you commit to a position that is sustainable only if the bubble dynamic persists, its end can wipe you out. The first is somewhat slow-acting and requires the actor to refrain from changing strategy. The second is near-instantaneous and has a musical chairs aspect: if it isn’t you left holding the bag it will be someone else. I like that the conversation in the OP implicitly connected the two wipeouts.
Related to all this, I just saw “Margin Call” for the, I think, fourth time last week. What a great movie! It just gets better and better. Of course, the bubble popping scenario is only tenuously related to what actually happened in 2008; it was concocted for dramatic purposes. But that speech by Jeremy Irons toward the end as he chows down in the executive dining room is a killer.
Thumbs also up on “Margin Call”. I’ve seen it at least three times and was just thinking of watching again. A nephew I recommended it to complained that it wasn’t as authentic about the financial crisis as “The Big Short”. True, it is not a documentary, it is a drama, more about corporate politics than the specifics of the financial crisis.
Exactly, shorting bubbles and going long are both dangerous.
And another thumb up for “Margin Call.” Perhaps not realistic but still excellent.
Also check out Wolf of Wall Street and Boiler Room. When I was in financial services, I heard about a company showing the the 2nd film to trainees.
I haven’t seen the Big Short but I’m a big fan of the book.