I've been working for a startup that recently exited it seems to be common knowledge in the startup community( and everywhere else? ) that a recession is just around the corner. I'm definitely not an expert in economics but these are just the pieces I've put together.
From what I've heard/read the recession will primarily affect stock pricing and available investment assets. Many startups feel that if they don't exit now they will never have the opportunity or will have to exit with much lower numbers. This seems like a strong driver of exits.
It seems nearly everyone always believes that a recession, big disaster slowdown, market crash, Etc is "right around the corner." And for the last 10 years they have been wrong in the macro sense :-).
That said, this was from the article: "Many of the tech companies that listed shares in the U.S. were based in China, including some of the largest IPOs of the year, such as online-entertainment services company iQIYI Inc. and Chinese e-commerce company Pinduoduo Inc."
The Chinese economy is reacting in all sorts of ways to its new larger size, pressure from the US in trade wars, and pressure at home to spread some of the prosperity around. If you take all of the Chinese companies out of the list, the IPO statistic is unremarkable.
What I find most interesting is the Unicorn do or die issue. Which is that many may find it impossible to go to the private equity trough again, that bubble does seem to have deflated. Valuations aside, when you have raised over a billion dollars that is real money that somebody is going to miss it if you just roll up the carpets and go home.
It felt to me that the collapse of Theranos woke up a lot of 'stupid' money (that is money from people who are investing in a fad but without research). And those folks have said, "Hmm, ok now I'd like to sell my equity in this company you guys say is worth $X, that means you will pay me $Z for my stake right?" Only to find it doesn't work that way, there are no buyers, no liquidity as they say, for those preferred shares. But they can vote and they can tell the CEO, you're not getting another penny from us, we'd like to sell our shares. And that leaves the public markets as the investor of last resort.
So it does feel like a Unicorn reckoning is to be had. Where companies will have to prove that a cruel and unemotional market will agree with their lofty valuations. They won't all make it over that hump. As the Vikings might say, "There will be songs sung about these days."
==It seems nearly everyone always believes that a recession, big disaster slowdown, market crash, Etc is "right around the corner." And for the last 10 years they have been wrong in the macro sense :-).==
This isn't accurate, you are implying that people have been calling for a recession since before the last recession ended in June 2009. That doesn't pass the smell test.
==Where companies will have to prove that a cruel and unemotional market will agree with their lofty valuations.==
The claim that the market is "unemotional" is laughable. If that were the case everything would be properly valued based on the exact same criteria. For example, Elon Musk saying something controversial doesn't change the underlying business fundamentals of TSLA, but it sure moves the stock price. An "unemotional" market wouldn't react to an expected Fed action like they are right now (S&P down 2.1%).
I don't even know if we have ever passed recession, I kept thinking we only managed to delay the recession we were suppose to have in 2008/2009. Ok Stocks may be doing great, there many be more company making money and asset prices are way up. But wages had never caught on.
It’s the share that’s being traded. It doesn’t matter whether it represents reality. All that matters is that the guess about whether it appreciates or depreciates is correct.
> It seems nearly everyone always believes that a recession, big disaster slowdown, market crash, Etc is "right around the corner." And for the last 10 years they have been wrong in the macro sense :-).
What?
Every western economy seems to have a recession every decade or so.
It's been common knowledge since the end of the last recession that a recession is just around the corner. It's always common knowledge that a recession is just around the corner.
It's a non falsifiable position because if a recession doesn't happen for another 5 years, they'll just say that 5 years was what they mean by just around the corner.
While saying "it's around the corner" isn't terribly useful, hosts of indicators such as incoming increases in interest rates and stagnating wages support the expectation, and these warning signs have increased over the last two years.
Not for nothing, but why can’t the Fed just keep the base interest rates low forever? Inflation doesn’t seem to go up very much at all. It seems almost as if the FED by raising interest rates creates the very credit crunch that it later helps alleviate. Has anyone run models of what happens if the Fed just keeps the interest rates low forever and lets the market price each loan?
> Not for nothing, but why can’t the Fed just keep the base interest rates low forever?
Low interest rates are basically propping up the finance industry. The cheap money that banks can borrow from the Fed is not going to end up at yours truly, it will only end up in investment shenanigans. In addition, low interest rates also kill savings for poor(er) people - this is something that's a real problem in the European Union right now. Banks offer their customers sometimes negative rates on their savings, and no "conventional" savings accounts hit even inflation percentages which means both poor people and "rich-ish" (=not poor, not rich enough to be able to risk money on the stock markets, but rich enough that their banks charge negative interest) effectively lose money.
I didn't think negative rates hit "consumer" accounts yet? Just Government issued bonds and "institutional" instruments. But my data is about ~18 months old.
Ray Dalio has a really cool book about this. I'm just starting it myself but I think it would help explain a lot of the questions in this thread. He has a FREE pdf which you can download to any eReader, or you can buy the hardcopy.
The short of it is interest rates are a tool used by the Fed to attempt to control the rate at which people and institutions take on debt. Too much debt = recession. Too little debt = recession. I'm greatly oversimplifying here but Ray does a fantastic job explaining things. If anyone wants to dig in deep I highly, highly recommend you read this book.
Sidenote: If you buy one of Dalio's books (Big Debt Crises or Principles) before the end of the year, Dalio will send you a $25 gift card to use towards a charity of your choice.
Wages are hardly stagnating - by the numbers, they hit a 9-year high last month [1], and anecdotally, I'm finally hearing non-tech people saying "Dude, just find another job and get a big raise." The unemployment rate is lower than it's been since Nixon took office. [2][3]
Interest rates are a bit worrisome - historically the Fed has a tendency to overshoot and cause a recession, and do so 2-3 years after the rate hikes go through. If they didn't hike at all, we'd end up with the mother of all bubbles, though.
To learc83's point - the last time I can remember when people didn't think a recession was imminent was 1998-2000, when everybody was talking about the "New Economy" and how profits didn't matter anymore and insane stock valuations would be justified by productivity increases going forward. That was a helluva bubble. Then from 2001-2003 we actually were in recession, 2004-2007 smart money was predicting the coming CDO/housing/hedge fund crash, 2008-2009 the crash happened, 2010-2011 everyone was talking about a double-dip, 2011-2014 was the "jobless recovery" and talk about how the sectors that were destroyed in 2009 were permanently dead and tech was the one bright spot in the economy, 2014-2015 was the seed funding/delivery startup/sharing economy bubble, 2015-2016 was a tech slowdown as that bubble popped, and 2017-2018 was all about how Trump was about to ruin the economy (hasn't happened yet, who knows about later?). In the process, we've had bubbles in dot-coms, housing, derivatives, hedge funds, Web 2.0 startups, mobile apps, accelerators, delivery startups, West Coast real estate, and cryptocurrencies, all of which have amounted to a large transfer of wealth from those who followed the news to those who make the news.
A nine year high: ie. they still haven't fully recovered since the last recession. And your source doesn't doesnt appear to take into account CPI increases over the same period.
The post I'm replying to is arguing about interest rates & wage growth over the past 2 years. I'm pointing out that this is false for wage growth over that time period.
If you want to discuss how structural changes in the economy have let capital fuck over labor, that's a different conversation. That trend has been going on since before I was born, though, and the takeaway I learned from it, before even entering the workforce, was "Build capital."
> The post I'm replying to is arguing about interest rates & wage growth over the past 2 years. I'm pointing out that this is false for wage growth over that time period.
And like I said, your citation doesn't take I to account increases in CPI.
It doesn't matter if they're getting more Uncle Sam Fun Bucks, if those Fun Bucks are worth less than they gained.
> If you want to discuss how structural changes in the economy have let capital fuck over labor, that's a different conversation.
Nah, they're pretty related.
> That trend has been going on since before I was born, though, and the takeaway I learned from it, before even entering the workforce, was "Build capital."
It's next to impossible to build capital if you're not being paid a living wage to start with, and your real wage growth is negative.
FedEx just posted a terrible quarter and oil just dropped below $50/barrel. To your point, lots of macro indicators [1] flashing red right now that a slowdown is in progressive. I’d bet money (already have technically with SPX puts) that when you look back 6 months from now (the only way to properly asceetain when a recession has started), you’ll see it’s started.
>> The US is doing great. The rest of the world not so much.
These are going to be famous last words. The US is going to be doing horribly over the next decade, precisely because of how "great" the last decade has been. If I borrowed (or pseudo-borrowed a.k.a "printed money" because of reserve currency status) a trillion dollars and enjoyed a commensurate lifestyle, neither my awesome lifestyle nor the fact that there have been a lot of suckers to sponsor it is any indication of what the future will hold.
Soon, US will not be able to borrow any more money and sustain its quality of life. Potential lenders will spurn them: "Why, so you can borrow the money to sponsor your lavish lifestyle, and then turn around and conduct trade wars and actual wars with us? No thank you!"
China will probably do worse, because its greatest borrower, and source of economic prosperity, is going to massively default.
In comparison, this correction will mean the rest of the world is probably going do better, unless they foolishly allow themselves to be dragged into a war which one of these countries will almost certainly start as a last resort to placate any internal discontent.
The US debt load isn't particularly high, the ability to print money isn't directly tied to reserve currency status, and selling US debt doesn't work in the way your comment suggests that it does.
In addition to negative rates, the US gave out money in every way they could, including "helicopter" money - just sending everyone a check. And they did it quickly with immediate impact.
Europe let the crises drag on for years, with questions about whether Greece, Portgual and Ireland would even stay in the euro. 0% now is much too little, far too late.
Wow, you weren't kidding. The Fed dropped the funds rate down to nearly zero by December 2008.[1] It took the European Central Bank until June 2014 to bring their interest rate down to the same level.[2] They even had a couple rate hikes in the interim.
Aphorisms aside, yield curve inversion is rare. Public companies with P/S ratios of 30 are (were?) rare. Odds favor lower returns from invested capital. The tech sector is running heavily on invested capital.
^^^This guy/gal gets it. The 10-2 treasury yield spread is currently at 0.16 and has been steadily falling since the beginning of 2014. Since the 1950s, every time the 10-2 spread dipped below zero, a recession followed within two years.[1]
The Fed just announced another rate hike less than an hour ago and have indicated that there will be two more rate hikes in 2019.[2] As the federal funds rate continues to rise, the yield curve will continue to flatten.
The 10-2 treasury yield spread looks like a good indicator, with the exception of 1994/1995.
In 1995 there were fears of a recession due to the Fed increasing rates further: "Indeed, if there is a risk to what is generally seen as a solid if not glowing outlook for the stock market this year, it is that in its effort to rein in growth, the Fed might push interest rates too high, forcing the economy into recession." [1]
The Fed put the brakes on raising the Fed Funds rate in 1995 [2]. Subsequently from 1995 - 2001 the S&P 500 index went from 465 to 1425 [3]. I wonder what made 1995 different than 2018. Being in tech, one obvious thing leaps out which is increased investment in capital related to the commercialization of the Internet, the dot com boom and bubble [4]. In 2018, is there a new opportunity to spur growth again, or will 2018 be another 2006, 2000, 1989, etc?
The crash has already begun, a global recession will follow after but that won't be till later next year. We're in a correction and entering a bear market.
Stocks like Amazon and Apple have lost up to 30% in the last few months, and Nasdaq has seen steep declines since the summer. So yes, earlier this year was a good time to IPO. Talking about exiting now with an IPO is definitely a little late, and I pity companies like Uber which have one scheduled for next year.
I think Uber is uniquely positioned to weather a recession, its business has counter-cyclical properties... in a recession when people are losing jobs, it's easier to hire drivers and induce demand via lower prices. That stands in opposition to ad-based tech companies which seem to be hyper-cyclical.
ad-based tech companies which seem to be hyper-cyclical
I agree ad-based tech companies are going to be really hurt by this recession. So Facebook, Twitter and Google will suffer, but particularly Facebook and Twitter may not survive the next few years. Smaller tech companies based on affiliate or advertising revenue won't stand a chance.
I disagree that Uber is uniquely positioned to weather a recession. IMO they are too early - when we reach self-driving cars this type of company will be able to expand globally and prosper, but Uber is too early to do that, they're going to have to keep trying to make money with a huge host of freelance drivers and all the problems they bring (regulatory, cost, unions etc).
They just raised $2 Billion on a 120B valuation, but they're still losing huge amounts of money per year. Uber lost $1 billion in the third quarter 2018. Those are astronomical losses, that's around $4B a year. I don't think they have any chance of hitting a profit in a recession, they may survive, but they're going to squander huge amounts of money to do so.
Disagree on google & facebook suffering. They are both too ingrained in our lives and sitting on significant cash reserves. Sure I expect RSU based pay to take a nose dive though.
Facebook has 44 billion in cash, Google has > 100B.
I don’t use them, perhaps I’d feel differently if I did, but they seem very vulnerable to me given their revenue is ad based and they have massive credibility and reputational problems amongst both advertisers and readers. Google has a broader base but are still vulnerable as the money comes from ads, and that can dry up quickly.
Thanks for the figures, maybe they are too big to fail at this point. I’ll be interested to see how they weather the coming downturn and multiple scandals.
Another way to say this is, "Uber invested billions in expansion in Q3 2018". Uber is known to be profitable in almost all its mature markets. Rideshare will still exist, even if it consolidates to a single app, so you'd have to convince me Lyft or some other app would win over Uber before you can convince me Uber is going to go bankrupt. I can see Uber pulling out of non-mature markets that it isn't making headway in.
Perhaps. On the other hand, the more price sensitive someone is about using Uber, the more of a luxury good it probably is for them.
If you have no real option but to use Uber (Lyft/taxi/etc.) then you'll probably have to suck it up and pay what it costs, at least up to a point. If you have alternatives like public transit and walking, those will likely still be cheaper which may be important in a downturn.
You're also right, I think meant cycle-resistant, not counter-cyclical. In a recession, Uber will hurt along with most companies, just not as much as ad-based ones.
Lots of newly IPO'd tech companies during the last Dotcom bubble survived through it and eventually grew to be prominent companies today. Many of their share prices were down >80% in the years afterwards, but the cash raised through IPOs were crucial to help them survive and expand. An exit via IPO now is better than trying to do a founding round in the middle of a recession when you are low on cash again.
> Lots of newly IPO'd tech companies during the last Dotcom bubble survived through it and eventually grew to be prominent companies today.
Do you have a list? I know some survived, but my understanding (and I have not actually compiled a list, so I'm not claiming to be certain) is that the overwhelming majority were wiped out and only a handful survived.
48% of dot-com companies founded after 1996 survived until at least 2004.
My own incomplete knowledge of these companies include Amazon and Ebay, as well as a handful of Chinese tech companies such as NetEase, Sohu, and Sina.
VCs have been saying that for years. It won't always be this way, and we will almost certainly will have a recession in the "near future", but whether that's 10 weeks or 10 years away is the real question.
It's kind of their job, no? You wouldn't expect to hear a VC say "Hey, here's a term sheet, but no rush - get back to us when you feel like it, there's always plenty of money later."
"Recession is just around the corner" is VC-speak for "Offer available while supplies last! Hurry, operators are standing by!"
This reminds me of the Mortgage Broker Scene in The Big Short where they interview two brokers. It's their job yet they are contributing in spite of consequences.
> it seems to be common knowledge in the startup community( and everywhere else? ) that a recession is just around the corner.
Is it based on gut feeling or something else? Because there has been talk of recession since the last recession. People talking about how the last recession is going to become bigger and bigger.
And while stock and other assets form the bigger outer picture where people can see the recession that is not the complete picture. One of the biggest things happens during recession is risk aversion.
So, people stop investing in risky assets like stocks and riskier stuff like equity in startups are worse off. This has a knock on effect where companies have less money to spend on stuff. So, they cut down on spending which then affects projects, jobs etc.
That said, we don't really have a strict metric to actually gauge if recession has arrived. Some believe in looking at oil prices while others at fiscal deficits.
I personally believe in Michael Burry's (from The Big Short) interpretation of recession. In his 2006 letter he said:
Take (the company) Nordstrom, a higher-end
retailer benefiting from most every macro trend
today. Its 11,5% pre-tax margin in 2005 surpassed
10% for the first time since the company went
public in 1971, and its margins rose from 1,5% to
greater than 7% in the last four years. Net income
is five times what it was in 2001, and return on
equity rose nearly fourfold. Similar stories abound,
though not necessarily to all to this degree.
If this is not a peak in a dramatic debt-fueled
economic boom, well, it certainly looks like one.
We are seeing something similar happen right now. But it certainly doesn't mean that recession is just around the corner, rather it is slowly coming.
It's not "recession around the corner" as a main driver. Market is great now, but that will change when they interest rates go up, hence people wanna catch this boat before it sails.
Market is great now? It's been going down steadily for several months, is nobody paying much attention aside from active investors? Today SPY just busted through it's 52 week low.
A model isn't a crystal ball, it is a way of formally describing something using mathematics. A model could tell you that a specific set of conditions that preceded a recession have occurred again. One example of this would be an inverted yield curve.[1]
A recession is when an economy declines for at least six months.[2] I guess the best predictor of a recession is 5.5 months of negative growth.
You probably missed the word "obvious" in my comment. I was just saying that if economists don't predict a recession, then the chances are pretty low that parent-poster could successfully predict one based on intuition only.
> I'm sure economists/data-scientists have models for that, and if there would be any obvious sign, we would know it by now.
There certainly are people with models. The problem is there are way more occurrences of people using some model to say a crash is imminent than there are crashes.
There seems to always be fear mongering by people who benefit from the "opportunities" created by the suffering of those most vulnerable whenever there is a sufficient amount of fear, uncertainty, and doubt pumped into the public mind to create an economic pull back. Or maybe they are Russian agents attempting to attack the US economy? Either way, the best advice is generally: don't read the comments, there's too much toxicity, manipulation, and disinformation
Am I misremembering or was there really an article few months back that a lot of tech unicorns prefer private money over public and hence deny public a chance to make money via stock market.
I think the bubble is ending. They want to convert their phantasy money into cold hard cash from retail investors (aka "suckers") before it's too late.
The interesting thing about the rush is that they're already too late. They're going to have to accept mediocre exits (versus prior expectations), or abandon their IPO plans.
The growing weakness in the IPO markets can be seen eg in the recent Softbank IPO. Globally synchronous growth has become a globally synchronous melt (from housing in Australia & Canada, to EU growth forecasts, to China, and US forecasts eg FedEx today, to commodity markets). Junk stocks like Blue Apron have already burned to the ground. GrubHub has been chopped in half. Facebook is already sporting a value stock-like ~16 forward PE (imagine what it might fetch in a recession, 12 times earnings?).
There are dozens of prominent, younger tech stocks that face a very painful valuation reckoning soon. What are Spotify, Workday, Box, Dropbox, ServiceNow, Twitter, et al worth if you drain all the froth from the market? Is Shopify's billion in sales really worth a $15b market cap, or more like $5b? Is PayPal's modest growth really worth ~50 times earnings, or half that? Trillions in paper wealth are about to be vaporized and all it took was 2.x% interest rates. Welcome to Japan, where rates can never again be allowed to rise because of the debt load (both corporate and fed govt), and the stuck-in-the-mud debt model guarantees perpetually slow growth as the debt eats away at your capital available for productive purposes (just 1/4 annually of our public debt interest cost now would repair all of our infrastructure over a decade, instead we're stuck forever paying for the wildly irresponsible spending from the last ~14 years; 25-50 years from now, that debt will all still be sitting there eating the budget, and or American wealth via currency debasement to paper over it gradually).
And that public debt interest doesn't even include unfunded defined benefit pension and OPEB (other post employment benefits, e.g. retiree healthcare). I would expect more toll roads, higher taxes, less services, and means testing for social security and medicare.
This is pretty much it, a desperate attempt to leave the bag with the public before these companies that aren't profitable run out of money during a bear market.
From what I've heard/read the recession will primarily affect stock pricing and available investment assets. Many startups feel that if they don't exit now they will never have the opportunity or will have to exit with much lower numbers. This seems like a strong driver of exits.