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It's interesting. Everyone keeps saying how there's this neverending waterfall of cheap money with nowhere to go, but in non-software industries it feels like t

It's interesting. Everyone keeps saying how there's this neverending waterfall of cheap money with nowhere to go, but in non-software industries it feels like there's a heavy dearth of capital. Want to start a new small business as an electrician or plumber? A manufacturing startup? A boutique hardware studio? Those kinds of businesses cannot promise returns orders of magnitudes higher than the investment with a straight face like software companies somehow can, and it seems like they are ignored because of the comparative risk/reward ratio. But jeez, this is one fairly specific industry hoovering up all of this cheap money in our economy. While vast swaths of our economy remain gated behind enormous barriers of regulatory capture and capital investment. What's going on?

hhahsdfuy 9y ago
Same thing as usual: Short term over long term investing. More specifically, effort flocks to where the action is. It's not in plumbing, and local small biz. It's easier and less time consuming to invest in tech. The models are all well developed, and understood. The human networks established. The pipeline for tech investment is a well oiled machine. And we'd rather get in and out easy. Shorter turn arounds than figure out the pipeline for other areas. Path of least resistance. Leads to the economy as a whole being saddled with issues that look a lot like Buffet's institutional imperative, or Goodhart's law, IMO. No political will to change. This is what unfettered free markets look like. Pool it all wherever the owner class makes the most easy money. Fuck everything else.
roymurdock 9y ago
There are 2 ways to earn profit in the equity markets: dividends and capital gains. Dividends, or excess capital returned to investors, generally require the business to have a stable profits/revenue streams. Capital gains, or selling your equity for more than your purchase price, generally require nothing more than functional equity markets and investors with excess capital speculating on growth industries. Software is a growth industry where products can take hold and explode almost overnight, given software's scalability and the current availability of compute and networking infrastructure. This move from investing based on present fundamentals (dividend) vs. theoretical future potential (capital gains) is puzzling some "value investors" that have relied on P/E (price to earnings) ratios to inform decisions in the past: https://www.bloomberg.com/news/articles/2017-06-08/goldman-sachs-mulls-death-of-value-investing-after-losing-decade https://www.bloomberg.com/news/articles/2017-06-08/goldman-s... There's plenty of capital to go around, but everyone is trying to beat the very low returns you can get on safe, theoretically "risk-free", assets, and they want to do it as quick as possible. You do that by investing early in software, and waiting for the IPO or acquisition from entrenched players. The real question is - who is left holding the bag when banks start to write the value of their equity holdings down? A lot of pension/retirement/index funds might have a lot less to return to their clients once central banks start to tighten monetary policy and reverse QE by selling bonds back on the market and raising short term interest rates.
FiatLuxDave 9y ago
I see it too. Here in Cape Canaveral, we don't have a tech industry. Sure, we build plenty of rockets and electronics, and we have a lot of coders, but you won't see much javascript and we don't have a single VC firm. From a finance perspective, we just aren't tech. If you want to start a rocket company or land a rover on the moon, you'd better know someone on Sand Hill Road. As far as I can see, the issue is this: the Fed is trying to apply a macroeconomic loosening of the money supply to fight the deflation from the financial crisis. For political reasons, the old school Keynesian method of borrowing for more government spending can't be used. So, they are maintaining low rates to try to jumpstart the economy. Unfortunately, this money has to enter the economy through a financial system which is geographically imbalanced. So, we get inflation in SF, and NY, less inflation in cities with less finance industry, and deflation in much of the rest of the country. This seems to be the big economic issue of our time in the developed world. Why we have two economies, and the financial system isn't arbitraging this difference away, I'm not sure. I recall reading an economist (Harold Innis maybe?) who warned about the centralizing effects of a Keynesian inflationary theory. Anyone know more about this?
- justforFranz 9y ago
  Regarding the two economies. Yes, we have a demand-side economy that's starved for capital because it's not sexy and other reasons (finance doesn't scale well). And we have a supply-side economy that's based on capital funding to the exclusion of actual, real demand from customers. A central problem in the demand-side economy is that labor has no pricing power. While this sparked political revolt in the form of Trump's and Sanders's candidacies, little seems to actually be accomplished on solving this central problem. Consequently, companies living in supply-side world are kidding themselves if they think they can sell anything to actual people who earn a living. There's a lot of simplification in what I wrote, but the point about labor having no pricing power holds. And to a lesser degree if the supply-side economy actually gives a damn about having a reliable floor of demand, they could find it in customers who have jobs that pay enough to drive demand. I'm seeing this happen to a great degree in Southern California's apartment market. Rents keep increasing, but the incomes in the area don't justify the increases.
- justforFranz 9y ago
adventured 9y ago
> But jeez, this is one fairly specific industry hoovering up all of this cheap money in our economy That's not actually happening. VC capital for tech / Internet / software start-ups is a hilariously trivial fraction of capital invested into the US economy and an even smaller fraction of the cheap money sloshing around. Most of the cheap money in the US economy has gone back into the stock market and real-estate. Raise interest rates to historical norms if you want to know just how much cheap money is in real-estate right now ($10+ trillion?). The over-valuation just on Google and Amazon right now amounts to a minimum of several hundred billion dollars. Apple's earnings and sales have fallen, rather than climbed, and their market cap expanded by hundreds of billions of dollars for absolutely no good reason other than money is desperately chasing returns due to the Fed's hyper low rates for the better part of a decade. By itself that over-valuation amount, on just Amazon and Google, is more than all the capital invested by VCs into tech start-ups over the span of years. But it goes far beyond tech companies in the stock market, it's every company. McDonald's hasn't grown for years - they're sporting a 27 PE ratio with zero growth for five years. Their overvaluation alone matches the total VC put into tech companies in a given year. Why did their stock go up 50% in the last two years, while their business contracted? Cheap money.

hhahsdfuy 9y ago

Same thing as usual: Short term over long term investing. More specifically, effort flocks to where the action is. It's not in plumbing, and local small biz. It's easier and less time consuming to invest in tech. The models are all well developed, and understood. The human networks established. The pipeline for tech investment is a well oiled machine. And we'd rather get in and out easy. Shorter turn arounds than figure out the pipeline for other areas. Path of least resistance. Leads to the economy as a whole being saddled with issues that look a lot like Buffet's institutional imperative, or Goodhart's law, IMO. No political will to change. This is what unfettered free markets look like. Pool it all wherever the owner class makes the most easy money. Fuck everything else.

roymurdock 9y ago

There are 2 ways to earn profit in the equity markets: dividends and capital gains. Dividends, or excess capital returned to investors, generally require the business to have a stable profits/revenue streams. Capital gains, or selling your equity for more than your purchase price, generally require nothing more than functional equity markets and investors with excess capital speculating on growth industries. Software is a growth industry where products can take hold and explode almost overnight, given software's scalability and the current availability of compute and networking infrastructure. This move from investing based on present fundamentals (dividend) vs. theoretical future potential (capital gains) is puzzling some "value investors" that have relied on P/E (price to earnings) ratios to inform decisions in the past: https://www.bloomberg.com/news/articles/2017-06-08/goldman-sachs-mulls-death-of-value-investing-after-losing-decade https://www.bloomberg.com/news/articles/2017-06-08/goldman-s... There's plenty of capital to go around, but everyone is trying to beat the very low returns you can get on safe, theoretically "risk-free", assets, and they want to do it as quick as possible. You do that by investing early in software, and waiting for the IPO or acquisition from entrenched players. The real question is - who is left holding the bag when banks start to write the value of their equity holdings down? A lot of pension/retirement/index funds might have a lot less to return to their clients once central banks start to tighten monetary policy and reverse QE by selling bonds back on the market and raising short term interest rates.

FiatLuxDave 9y ago

I see it too. Here in Cape Canaveral, we don't have a tech industry. Sure, we build plenty of rockets and electronics, and we have a lot of coders, but you won't see much javascript and we don't have a single VC firm. From a finance perspective, we just aren't tech. If you want to start a rocket company or land a rover on the moon, you'd better know someone on Sand Hill Road. As far as I can see, the issue is this: the Fed is trying to apply a macroeconomic loosening of the money supply to fight the deflation from the financial crisis. For political reasons, the old school Keynesian method of borrowing for more government spending can't be used. So, they are maintaining low rates to try to jumpstart the economy. Unfortunately, this money has to enter the economy through a financial system which is geographically imbalanced. So, we get inflation in SF, and NY, less inflation in cities with less finance industry, and deflation in much of the rest of the country. This seems to be the big economic issue of our time in the developed world. Why we have two economies, and the financial system isn't arbitraging this difference away, I'm not sure. I recall reading an economist (Harold Innis maybe?) who warned about the centralizing effects of a Keynesian inflationary theory. Anyone know more about this?

justforFranz 9y ago
Regarding the two economies. Yes, we have a demand-side economy that's starved for capital because it's not sexy and other reasons (finance doesn't scale well). And we have a supply-side economy that's based on capital funding to the exclusion of actual, real demand from customers. A central problem in the demand-side economy is that labor has no pricing power. While this sparked political revolt in the form of Trump's and Sanders's candidacies, little seems to actually be accomplished on solving this central problem. Consequently, companies living in supply-side world are kidding themselves if they think they can sell anything to actual people who earn a living. There's a lot of simplification in what I wrote, but the point about labor having no pricing power holds. And to a lesser degree if the supply-side economy actually gives a damn about having a reliable floor of demand, they could find it in customers who have jobs that pay enough to drive demand. I'm seeing this happen to a great degree in Southern California's apartment market. Rents keep increasing, but the incomes in the area don't justify the increases.
justforFranz 9y ago

adventured 9y ago

> But jeez, this is one fairly specific industry hoovering up all of this cheap money in our economy That's not actually happening. VC capital for tech / Internet / software start-ups is a hilariously trivial fraction of capital invested into the US economy and an even smaller fraction of the cheap money sloshing around. Most of the cheap money in the US economy has gone back into the stock market and real-estate. Raise interest rates to historical norms if you want to know just how much cheap money is in real-estate right now ($10+ trillion?). The over-valuation just on Google and Amazon right now amounts to a minimum of several hundred billion dollars. Apple's earnings and sales have fallen, rather than climbed, and their market cap expanded by hundreds of billions of dollars for absolutely no good reason other than money is desperately chasing returns due to the Fed's hyper low rates for the better part of a decade. By itself that over-valuation amount, on just Amazon and Google, is more than all the capital invested by VCs into tech start-ups over the span of years. But it goes far beyond tech companies in the stock market, it's every company. McDonald's hasn't grown for years - they're sporting a 27 PE ratio with zero growth for five years. Their overvaluation alone matches the total VC put into tech companies in a given year. Why did their stock go up 50% in the last two years, while their business contracted? Cheap money.