Issue 103

About those record high asset prices

Delivered on 08 March 2021 by Justin Pyvis. About a 3 min read.

It's not just cryptocurrencies, houses and equities. Venture capital (VC) has also gone ballistic, fuelled by record low interest rates and stimulus as far as the eye can see:

A record amount of VC dry powder is propelling prices higher. VC funds amassed $70.9 billion last year as low interest rates and a sharp rebound in tech stocks attracted institutional investors looking to back the next Airbnb or Zoom. The cash surplus means young companies, particularly in hot sectors like fintech and social media, are raising a similar amount for Series A rounds as they might have in the past but at higher valuations.
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These deals demonstrate how venture investors are increasingly willing to overlook some conventional growth benchmarks like sales or even user growth. When Andreessen Horowitz won a competitive deal to lead the Series A round for social audio app Clubhouse last year at a $100 million valuation, the app only counted a few thousand users.

Baked into these high prices are investor expectations that users and eventually revenue will follow.
Startup pre-investment valuations are at record highs

The Bank for International Settlements (BIS) released its March 2021 Quarterly Review last week. It noted that:

Such [low] interest rates reduce corporates' debt servicing costs and encourage economic activity, thus leading to higher expected profits and ultimately higher equity valuations. Moreover, if low interest rates are the symptom of accommodative monetary policy that seeks to reduce the likelihood of steep losses on the equity market, then they would go hand in hand with low risk premia and, thus, high valuations. Overall, to the extent that corporate profitability and investors' attitude to risk are predicated on monetary policy, stock valuations would respond strongly to news about this policy.

With interest rates at zero and 'accommodative monetary policy' expected to continue indefinitely, virtually any valuation can be justified. Combine that with gigantic fiscal stimulus and you get a recipe for disaster when the fiscal impulse eventually fades at the same time as economies open up post-coronavirus and inflation starts threatening those lofty valuations.

Global stimulus as at June 2020.
As at June 2020. The United States will be much higher now following the $1.9 trillion Biden stimulus.

A use for crypto?

Apparently you can sell tweets:

Jack Dorsey, the billionaire co-founder and CEO of Twitter, a man who stans bitcoin right on his Twitter bio, is attempting to sell his very first tweet as an NFT [non-fungible token] — a digital good that lives on the Ethereum blockchain.
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As you would rightly expect, bidding is already north of $80K. As of Saturday morning, the highest offer for Dorsey’s tweet was $2 million, from tech entrepreneur Justin Sun. By Saturday evening, the high bid was $2.5 million.

Remember CryptoKitties? This is basically the same concept, with people buying and selling "a digital certificate of the tweet, unique because it has been signed and verified by the creator".

Now buying a tweet is silly – all you're getting is bragging rights from your Silicon Valley buddies (which is apparently worth a few mil to these people). The company known as Twitter Inc still owns the tweet. However, blockchain-based NFTs do have real world potential. For example, one day you might be able to use them to secure property titles, which given their trustless nature could eventually replace less efficient government systems as society's formal register of property and land information.

Consumers always pay

France and Spain recently imposed a digital tax on profits. In response, "Google has told customers that it will raise the rates for advertisements on its French and Spanish platforms by two percent from May", to "...cover a part of the cost of conforming to laws concerning taxes on digital services in France and Spain".

There is no free lunch. When a tax is levied, it has to be paid – but not necessarily by the people or organisations on which it is levied. Frequently new taxes will flow down to consumers through higher prices, which in this case are the businesses that rely on Google for advertising (advertising accounts for the majority of Google's revenue). Those businesses will have to respond either by reducing the amount of advertising they buy or by raising their prices as well.

France and Spain's 'Google tax' is a tax on their own businesses and consumers – not Google.


Issue 103: About those record high asset prices was compiled by Justin Pyvis and delivered on 08 March 2021.