11 ms·

It's called malinvestment, and it's tied to monetary policy. When the central bank churns out money, the lower interest rates discourage banks from lending, mak

by pitaj 8y ago

It's called malinvestment, and it's tied to monetary policy. When the central bank churns out money, the lower interest rates discourage banks from lending, making it harder for small businesses to collect capital that way. The lower interest rates simultaneously drive investment from bonds into the stock market and real estate. Look up Business Cycle Theory

solotronics 8y ago
Is it bad though? I would think new innovative services would be a better place for money to go compared to sticking into some long term bond. At least this way a bunch of people get jobs and servers/compute/CPU/whatever get bought. For every Uber there are dozens if not hundreds of Slack/Splunk/Softlayer type companies that end up with some of that money and employ people. This is somewhat related to how I perceive the economy of China working. Whenever I visit there I marvel at all the infrastructure projects and you realize it doesn't need to "make money" over there. The government just decides what to build and loans itself money to get it done.
- ABCLAW 8y ago
  >Is it bad though? Yes. Hence the 'mal' part. Investment should be going towards enterprises which produce actual value. If the only way you can produce value is by throwing away money through predatory pricing, then you aren't creating value. And so without any value to create, eventually you blow up and lose a bunch of people their money. When enough people lose enough money, people stop lending their money so freely and the business cycle starts the contraction phase. Now good enterprises have trouble getting capital, so they delay purchasing all of those cool servers/computers/whatevers. Since the companies selling those things now receive less orders, they order less from their suppliers, etc. Suppliers go under. People lose their jobs. People without jobs spend less, which kills demand further. Fuck. etc. If it helps to have a misleadingly simplified 1 phrase summary: you can think of malinvestment as taking money from workable enterprises in the future and funnelling it into shitty enterprises now.
  - afarah 8y ago
    Of course they're creating value, Uber and the like is of great value for its users. The service is merely being subsidized by investors who believe in such practice. Is it a bad investment? Maybe, their investors did not think so and they were free to compare it with other options you deem obviously better, considering you're even saying Uber and the like are stealing these other business would-be money...
    - roenxi 8y ago
      If they aren't making a profit they aren't creating value. They are destroying some value and transferring other value from investors to customers. The difference here is when you add everything up you have less, when for a good investment the total should go up. In principle, in a fair market economy, that is OK because someone has to take the risk of being wrong about what is a good idea. The concern being voiced is that monetary policy is diverting resources away from people who are known to make good long term decisions and towards people who have access to loans from the central bank. At some point the people who are borrowing money can't pay it back and the losses are revealed - not in and of itself a problem; those responsible take the hit. But in the mean time, the people who would have used the resources more sensibly to build infrastructure or sustainable logistics chains havn't been because they weren't being given the time of day by the markets. The worry is that a dropping tide lowers all ships. If value is being systematically destroyed and the cause is government incentives then the potential for that to crop up in unexpected places is quite high. I'm always tempted to link monetary policy to the themes of pension issues, low real wage growth, poor infrastructure and rising inequality seen in the US.
      - generated 8y ago
        It is possible to create value and not profit. Economic value exceeds or matches market value. Market value drives revenue. Profit is a function of revenue and cost. These are well defined terms; please be careful saying things like "If they aren't making a profit they aren't creating value." It detracts from your otherwise strong argument. If that line were true, non-profit organizations wouldn't exist.
- pitaj 8y ago
  In addition to what the other reply said, it's bad because - it's inefficient wasted energy and capital - it causes bubbles which eventually pop, resulting in booms and busts - it pulls resources away from other opportunities
  - digitaltrees 8y ago
    It’s not bad if the short term losses lead to long term monopolies. You might not believe that WeWork will ever be a monopoly, or achieve positive unit economics, but that is the bet. In some ways, the ability to focus on such long term strategy is an excellent example of markets functioning rationally rather than a short term profit optimization that leads to long term stagnation.
    - cimmanom 8y ago
      It may not be bad for the investor if that’s be outcome, but it sure is bad for the market and the consumer.
      - digitaltrees 8y ago
        I totally agree. Monopolies are destructive. Markets to work with monopolies; there is no competition to allow for optimal price discover that matches supply and demand. I am just reacting against the urge to blame monetary policy and government itself. I find this to be a common response that keeps being disproven and yet doesn't go away. I am definitely not a fan of Uber, Amazon, and the like. I really don't like this model that is being pursued in much of SV. I understand Peter Thiel and others reason for wanting monopolies; it is rational from the perspective a firm and investors, but it is highly irrational from the perspective of that firm within society, and an investor as a citizen within a country. The more monopolies exist the smaller the economic pie will be over time. The more they concentrate resources to extract outsized profits, the less space there is for innovative startups. The more they abuse pricing power, the less customers they have.
        nilskidoo 8y ago
deleted 8y ago
[deleted]
digitaltrees 8y ago
This does not explain why VCs are willing to invest in business models tha light cash on fire for growth in the hope of reaching a dominant market share and establishing a moat around the business. VCs believe in network effects, VCs believe monopolies are worth burning cash to achieve, VCs believe operating businesses can achieve what software businesses like google and Facebook achieved. Question their belief but don’t blame monetary policy or government for a clear investment thesis driven by private actors that is based on prior success of similar models. Banks lending to small businesses, hire interest rates, tighter monetary policy would not change current VCs investment thesis or make them any less willing to pursue these models.
- roenxi 8y ago
  > This does not explain why VCs are willing to invest in business models tha light cash Lyft just IPOd with a market cap of ~20 billion on net income of minus 1 billion that is part of a 3-year down trend. If monetary policy is causing inflated stock prices (and it isn't causing consumer inflation, so it probably is pooling in asset markets) then it seems quite rational for a VC to invest in Lyft for the sole purpose of having a stock to float without paying any attention to the other details. The evidence there is simply having a ticker and buzz is more valuable than details like returns and profits. Lyft is basically employing its customers to make its revenue look good. It is difficult to see how they will translate that into a good idea.
  - trhway 8y ago
    >Lyft is basically employing its customers to make its revenue look good. " ... then you're a product" 2.0. Somewhat similar to the role of a patient in the medical business - ie. the role of gauge boson mediating the insurance-provider field interaction.
  - digitaltrees 8y ago
    So you’re saying that VCs are investors in private companies with a 10 to 12 year path to going public because...”low interest rates”? And that monentary policy is a larger driver of their investment decisions than a belief that there is a credible path to building a viable business? I think that is confusing second and third order considerations with first order considerations that actually drive investors choices. Perhaps monetary policy affects the macro environment by making investment money available, but each investment is a micro decision by one firm, driven by a thesis. I find it hard to believe that investors think monetary policy is an important basis for betting on Lyft or the like. That’s like say “I won’t start a company unless tax rates are lower”. No one does that, no one cares, maybe we care later. But when you’re thinking about the founding decisions paying taxes is several orders removed from: product, team, financing, revenue, break even etc.
goatgate 8y ago
But these companies are funded by VCs. The cause is more a function of wealth inequality. The ultra-wealthy have so much money that they only need 1/100 to be a gusher. If there wasn't so much capital consolidated in the hands of so few, this model wouldn't work as you need an ungodly amount of money to sustain 99 failures. Investments should be more constrained by real balance sheets and the needs of real people. There is a ton of waste on this billionaire's roulette wheel.
- darawk 8y ago
  > The cause is more a function of wealth inequality. The ultra-wealthy have so much money that they only need 1/100 to be a gusher. It has nothing to do with wealth inequality. Whether you're pooling $100 from a million people, or $20 million from 5, the economics of venture capital are the same. Wealth inequality has nothing to do with this. The purpose of venture capital (for investors) is diversification. It is an uncorrelated, positive (hopefully) return stream. Investors want to combine uncorrelated return streams as much as possible, due to the AM-GM inequality. The geometric mean of a series with a given arithmetic mean is higher when that series is less volatile.
  - olefoo 8y ago
    It does have a relationship to wealth inequality. On the one hand you have money seeking returns and getting caught up in zero and negative sum games while doing so. On the other you have a lack of small investors with lower risk tolerance. Both of these are results of wealth inequality.
    - darawk 8y ago
      > On the one hand you have money seeking returns and getting caught up in zero and negative sum games while doing so. This happens to retail investors all the time. > On the other you have a lack of small investors with lower risk tolerance. Both of these are results of wealth inequality. Citation needed. Retail investors buy all kinds of risky shit. You can do all of these same things with retail investors money. You don't need any wealth inequality whatsoever to explain venture capital.

by pitaj 8y ago

solotronics 8y ago

Is it bad though? I would think new innovative services would be a better place for money to go compared to sticking into some long term bond. At least this way a bunch of people get jobs and servers/compute/CPU/whatever get bought. For every Uber there are dozens if not hundreds of Slack/Splunk/Softlayer type companies that end up with some of that money and employ people. This is somewhat related to how I perceive the economy of China working. Whenever I visit there I marvel at all the infrastructure projects and you realize it doesn't need to "make money" over there. The government just decides what to build and loans itself money to get it done.

ABCLAW 8y ago
>Is it bad though? Yes. Hence the 'mal' part. Investment should be going towards enterprises which produce actual value. If the only way you can produce value is by throwing away money through predatory pricing, then you aren't creating value. And so without any value to create, eventually you blow up and lose a bunch of people their money. When enough people lose enough money, people stop lending their money so freely and the business cycle starts the contraction phase. Now good enterprises have trouble getting capital, so they delay purchasing all of those cool servers/computers/whatevers. Since the companies selling those things now receive less orders, they order less from their suppliers, etc. Suppliers go under. People lose their jobs. People without jobs spend less, which kills demand further. Fuck. etc. If it helps to have a misleadingly simplified 1 phrase summary: you can think of malinvestment as taking money from workable enterprises in the future and funnelling it into shitty enterprises now.
- afarah 8y ago
  Of course they're creating value, Uber and the like is of great value for its users. The service is merely being subsidized by investors who believe in such practice. Is it a bad investment? Maybe, their investors did not think so and they were free to compare it with other options you deem obviously better, considering you're even saying Uber and the like are stealing these other business would-be money...
  - roenxi 8y ago
    If they aren't making a profit they aren't creating value. They are destroying some value and transferring other value from investors to customers. The difference here is when you add everything up you have less, when for a good investment the total should go up. In principle, in a fair market economy, that is OK because someone has to take the risk of being wrong about what is a good idea. The concern being voiced is that monetary policy is diverting resources away from people who are known to make good long term decisions and towards people who have access to loans from the central bank. At some point the people who are borrowing money can't pay it back and the losses are revealed - not in and of itself a problem; those responsible take the hit. But in the mean time, the people who would have used the resources more sensibly to build infrastructure or sustainable logistics chains havn't been because they weren't being given the time of day by the markets. The worry is that a dropping tide lowers all ships. If value is being systematically destroyed and the cause is government incentives then the potential for that to crop up in unexpected places is quite high. I'm always tempted to link monetary policy to the themes of pension issues, low real wage growth, poor infrastructure and rising inequality seen in the US.
    - generated 8y ago
      It is possible to create value and not profit. Economic value exceeds or matches market value. Market value drives revenue. Profit is a function of revenue and cost. These are well defined terms; please be careful saying things like "If they aren't making a profit they aren't creating value." It detracts from your otherwise strong argument. If that line were true, non-profit organizations wouldn't exist.
pitaj 8y ago
In addition to what the other reply said, it's bad because - it's inefficient wasted energy and capital - it causes bubbles which eventually pop, resulting in booms and busts - it pulls resources away from other opportunities
- digitaltrees 8y ago
  It’s not bad if the short term losses lead to long term monopolies. You might not believe that WeWork will ever be a monopoly, or achieve positive unit economics, but that is the bet. In some ways, the ability to focus on such long term strategy is an excellent example of markets functioning rationally rather than a short term profit optimization that leads to long term stagnation.
  - cimmanom 8y ago
    It may not be bad for the investor if that’s be outcome, but it sure is bad for the market and the consumer.
    - digitaltrees 8y ago
      I totally agree. Monopolies are destructive. Markets to work with monopolies; there is no competition to allow for optimal price discover that matches supply and demand. I am just reacting against the urge to blame monetary policy and government itself. I find this to be a common response that keeps being disproven and yet doesn't go away. I am definitely not a fan of Uber, Amazon, and the like. I really don't like this model that is being pursued in much of SV. I understand Peter Thiel and others reason for wanting monopolies; it is rational from the perspective a firm and investors, but it is highly irrational from the perspective of that firm within society, and an investor as a citizen within a country. The more monopolies exist the smaller the economic pie will be over time. The more they concentrate resources to extract outsized profits, the less space there is for innovative startups. The more they abuse pricing power, the less customers they have.
      - nilskidoo 8y ago

deleted 8y ago

[deleted]

digitaltrees 8y ago

This does not explain why VCs are willing to invest in business models tha light cash on fire for growth in the hope of reaching a dominant market share and establishing a moat around the business. VCs believe in network effects, VCs believe monopolies are worth burning cash to achieve, VCs believe operating businesses can achieve what software businesses like google and Facebook achieved. Question their belief but don’t blame monetary policy or government for a clear investment thesis driven by private actors that is based on prior success of similar models. Banks lending to small businesses, hire interest rates, tighter monetary policy would not change current VCs investment thesis or make them any less willing to pursue these models.

roenxi 8y ago
> This does not explain why VCs are willing to invest in business models tha light cash Lyft just IPOd with a market cap of ~20 billion on net income of minus 1 billion that is part of a 3-year down trend. If monetary policy is causing inflated stock prices (and it isn't causing consumer inflation, so it probably is pooling in asset markets) then it seems quite rational for a VC to invest in Lyft for the sole purpose of having a stock to float without paying any attention to the other details. The evidence there is simply having a ticker and buzz is more valuable than details like returns and profits. Lyft is basically employing its customers to make its revenue look good. It is difficult to see how they will translate that into a good idea.
- trhway 8y ago
  >Lyft is basically employing its customers to make its revenue look good. " ... then you're a product" 2.0. Somewhat similar to the role of a patient in the medical business - ie. the role of gauge boson mediating the insurance-provider field interaction.
- digitaltrees 8y ago
  So you’re saying that VCs are investors in private companies with a 10 to 12 year path to going public because...”low interest rates”? And that monentary policy is a larger driver of their investment decisions than a belief that there is a credible path to building a viable business? I think that is confusing second and third order considerations with first order considerations that actually drive investors choices. Perhaps monetary policy affects the macro environment by making investment money available, but each investment is a micro decision by one firm, driven by a thesis. I find it hard to believe that investors think monetary policy is an important basis for betting on Lyft or the like. That’s like say “I won’t start a company unless tax rates are lower”. No one does that, no one cares, maybe we care later. But when you’re thinking about the founding decisions paying taxes is several orders removed from: product, team, financing, revenue, break even etc.

goatgate 8y ago

But these companies are funded by VCs. The cause is more a function of wealth inequality. The ultra-wealthy have so much money that they only need 1/100 to be a gusher. If there wasn't so much capital consolidated in the hands of so few, this model wouldn't work as you need an ungodly amount of money to sustain 99 failures. Investments should be more constrained by real balance sheets and the needs of real people. There is a ton of waste on this billionaire's roulette wheel.

darawk 8y ago
> The cause is more a function of wealth inequality. The ultra-wealthy have so much money that they only need 1/100 to be a gusher. It has nothing to do with wealth inequality. Whether you're pooling $100 from a million people, or $20 million from 5, the economics of venture capital are the same. Wealth inequality has nothing to do with this. The purpose of venture capital (for investors) is diversification. It is an uncorrelated, positive (hopefully) return stream. Investors want to combine uncorrelated return streams as much as possible, due to the AM-GM inequality. The geometric mean of a series with a given arithmetic mean is higher when that series is less volatile.
- olefoo 8y ago
  It does have a relationship to wealth inequality. On the one hand you have money seeking returns and getting caught up in zero and negative sum games while doing so. On the other you have a lack of small investors with lower risk tolerance. Both of these are results of wealth inequality.
  - darawk 8y ago
    > On the one hand you have money seeking returns and getting caught up in zero and negative sum games while doing so. This happens to retail investors all the time. > On the other you have a lack of small investors with lower risk tolerance. Both of these are results of wealth inequality. Citation needed. Retail investors buy all kinds of risky shit. You can do all of these same things with retail investors money. You don't need any wealth inequality whatsoever to explain venture capital.