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It's hard to take this article seriously. People get rich now from companies because multiples have been artificially pushed higher by low interest rates. If t

It's hard to take this article seriously. People get rich now from companies because multiples have been artificially pushed higher by low interest rates. If that weren't the case, the top 100 would still likely be dominated by heirs. All that's changed is the Fed is manipulating the market more now than before, and that's benefiting growth stocks and fund managers of growth stocks... among other things.

deleted 6y ago
[deleted]
Taek 6y ago
The games we've played with money have pushed valuations to a point of being nearly meaningless. There are people who own a billion dollars of stock/crypto, and then there are people who own multiple yachts, multiple mansions, sports teams, factories, etc. The thing that bothers me the most about paper wealth is that not all of it can be exited. The economy may say that there are 500 new billionaires, but if all 500 of them try to buy a fleet of yachts at the same time, their divestment would crash (rug pull) their entire wealth. Anyone who already owns a fleet of yachts is in a completely different category from someone who owns nominally the same value in paper.
- robjan 6y ago
  Thing is you don't even need to liquidate in order to get that yacht. Many are taking low interest loans collateralised against these paper assets.
- globular-toast 6y ago
  Exactly. At the end of the day there is only so much stuff to go around and we're pretty much at the limit of what people actually want. If a billionaire wakes up twice as rich tomorrow is he immediately going to buy a bigger mansion? Another car? Another yacht? More expensive food? Realistically he's unlikely to really want anything else. Billionaires have essentially infinite wealth. They can have whatever they want. But if one of them one day decided what they really want is a B52 bomber or an entire neighbourhood I think the limits of that wealth would become apparent. I think what we're seeing is the limits of possibility. There are more billionaires than ever because they're all essentially at the limit. People like me are rich. I own a car with leather seats and air conditioning. I have my own home cinema. What do they have that I don't? A bigger car? A better home cinema? Who cares?
  - jedberg 6y ago
    > What do they have that I don't? The ability to do whatever they want whenever they want. If they want to see a live show in another country, they can get front row seats and be there. If they want to talk to the President, they can. If they want a new law that benefits their business, they can make a few calls and get that done.
  - giantrobot 6y ago
    A billionaire (or a sufficiently wealthy millionaire), along with their family, has practically unlimited agency. You don't. Their wealth is also self perpetuating. A billionaire can spend 1% of their wealth hiring well compensated professionals to manage their wealth and keep it growing. Just the fact a billionaire has their wealth means they have access to influence and opportunities you will never have. Even someone with a mere hundred million in wealth only needs a 1% yearly return to have a million dollars a year. Even that paltry amount would allow them to live better than anyone you or I know.
AnimalMuppet 6y ago
True, low interest rates push multiples higher. That's one factor increasing valuations, and it's a factor PG didn't mention. > If that weren't the case, the top 100 would still likely be dominated by heirs. Baloney. A (relatively) large number of people would still be getting really rich from startups. They might not be getting quite as rich - say, less rich by a factor of 2 or 4. > All that's changed is the Fed is manipulating the market more now than before, and that's benefiting growth stocks and fund managers of growth stocks... among other things. Yes, that has changed. No, that is not all that has changed. Far from it.
motbob 6y ago
If you look at nominal interest rates, yeah. Real interest rates haven't been particularly lower post-1980 than pre-1980. Sure, high interest rates pre-1980 built wealth passively, but periods of high inflation also destroyed wealth passively.
sharemywin 6y ago
Technology has changed things. Amazon generates twice as much revenue per employee as Walmart. So the bottom line is Tech can sell a hell of lot more of china's stuff per American worker than old retail.
- Sohcahtoa82 6y ago
  I think that has less to do with technology and more to do with how much simpler it is to ship things out of about 100 distribution centers than it is to sell products from a few thousand brick-and-mortar stores.
NovemberWhiskey 6y ago
>If that weren't the case, the top 100 would still likely be dominated by heirs. Do you believe that because you think that heirs are likely to hold their wealth in cash, bonds or in other assets that haven't been "artificially pushed higher by lower interest rates?" It seems to me that if wealth of any kind is invested well, it's likely to generate exactly those same higher returns; the source of the wealth is kinda irrelevant, no?
- 6gvONxR4sf7o 6y ago
  Heirs will probably be diversified. Their returns will be about average. Founders will win bigger and lose bigger, so when you only look at the top top top winners, those outliers will be outlierier. Wider variance means higher highs and lower lows.
edouard-harris 6y ago
> People get rich now from companies because multiples have been artificially pushed higher by low interest rates. No — this is not correct. In reality, multiples are driven by the company's growth rate, minus the prevailing interest rate. And while it's true that interest rates are historically low, the growth rates of today's successful companies are high enough that increasing the interest rate (from ~0% to, say, 5%) wouldn't really have a big effect on valuations. As an example, note that Slack's 2020 revenue was around $1B, which represents an approximately 94% YoY increase over its 2019 revenue [1]. At 0% interest rates, that gets them a (very roughly) 10x valuation multiple. At a moderate-high 5% interest rate, their real growth rate drops to 94% - 5% = 89% YoY. One can argue that this should drop their multiple from 10x to maybe something like 9x. That drop is not nothing, but the reality is that it represents little more than a rounding error on the founder's wealth. PG's point is that growth rate is by far the dominant factor in valuations. He correctly ignores interest rates in the essay because (barring out-of-band hyperinflation) their magnitude is too small to have a material effect on the conclusion. [1] https://www.macrotrends.net/stocks/charts/WORK/slack-technologies/revenue https://www.macrotrends.net/stocks/charts/WORK/slack-technol...
1001101 6y ago
The Fed funds rate was 21.5% in June 1982. Negative real rates in 2020. Equity models that discount future earnings to a risk-free rate are going to spit out significantly different numbers in each regime.

deleted 6y ago

[deleted]

Taek 6y ago

The games we've played with money have pushed valuations to a point of being nearly meaningless. There are people who own a billion dollars of stock/crypto, and then there are people who own multiple yachts, multiple mansions, sports teams, factories, etc. The thing that bothers me the most about paper wealth is that not all of it can be exited. The economy may say that there are 500 new billionaires, but if all 500 of them try to buy a fleet of yachts at the same time, their divestment would crash (rug pull) their entire wealth. Anyone who already owns a fleet of yachts is in a completely different category from someone who owns nominally the same value in paper.

robjan 6y ago
Thing is you don't even need to liquidate in order to get that yacht. Many are taking low interest loans collateralised against these paper assets.
globular-toast 6y ago
Exactly. At the end of the day there is only so much stuff to go around and we're pretty much at the limit of what people actually want. If a billionaire wakes up twice as rich tomorrow is he immediately going to buy a bigger mansion? Another car? Another yacht? More expensive food? Realistically he's unlikely to really want anything else. Billionaires have essentially infinite wealth. They can have whatever they want. But if one of them one day decided what they really want is a B52 bomber or an entire neighbourhood I think the limits of that wealth would become apparent. I think what we're seeing is the limits of possibility. There are more billionaires than ever because they're all essentially at the limit. People like me are rich. I own a car with leather seats and air conditioning. I have my own home cinema. What do they have that I don't? A bigger car? A better home cinema? Who cares?
- jedberg 6y ago
  > What do they have that I don't? The ability to do whatever they want whenever they want. If they want to see a live show in another country, they can get front row seats and be there. If they want to talk to the President, they can. If they want a new law that benefits their business, they can make a few calls and get that done.
- giantrobot 6y ago
  A billionaire (or a sufficiently wealthy millionaire), along with their family, has practically unlimited agency. You don't. Their wealth is also self perpetuating. A billionaire can spend 1% of their wealth hiring well compensated professionals to manage their wealth and keep it growing. Just the fact a billionaire has their wealth means they have access to influence and opportunities you will never have. Even someone with a mere hundred million in wealth only needs a 1% yearly return to have a million dollars a year. Even that paltry amount would allow them to live better than anyone you or I know.

AnimalMuppet 6y ago

True, low interest rates push multiples higher. That's one factor increasing valuations, and it's a factor PG didn't mention. > If that weren't the case, the top 100 would still likely be dominated by heirs. Baloney. A (relatively) large number of people would still be getting really rich from startups. They might not be getting quite as rich - say, less rich by a factor of 2 or 4. > All that's changed is the Fed is manipulating the market more now than before, and that's benefiting growth stocks and fund managers of growth stocks... among other things. Yes, that has changed. No, that is not all that has changed. Far from it.

motbob 6y ago

If you look at nominal interest rates, yeah. Real interest rates haven't been particularly lower post-1980 than pre-1980. Sure, high interest rates pre-1980 built wealth passively, but periods of high inflation also destroyed wealth passively.

sharemywin 6y ago

Technology has changed things. Amazon generates twice as much revenue per employee as Walmart. So the bottom line is Tech can sell a hell of lot more of china's stuff per American worker than old retail.

Sohcahtoa82 6y ago
I think that has less to do with technology and more to do with how much simpler it is to ship things out of about 100 distribution centers than it is to sell products from a few thousand brick-and-mortar stores.

NovemberWhiskey 6y ago

>If that weren't the case, the top 100 would still likely be dominated by heirs. Do you believe that because you think that heirs are likely to hold their wealth in cash, bonds or in other assets that haven't been "artificially pushed higher by lower interest rates?" It seems to me that if wealth of any kind is invested well, it's likely to generate exactly those same higher returns; the source of the wealth is kinda irrelevant, no?

6gvONxR4sf7o 6y ago
Heirs will probably be diversified. Their returns will be about average. Founders will win bigger and lose bigger, so when you only look at the top top top winners, those outliers will be outlierier. Wider variance means higher highs and lower lows.

edouard-harris 6y ago

> People get rich now from companies because multiples have been artificially pushed higher by low interest rates. No — this is not correct. In reality, multiples are driven by the company's growth rate, minus the prevailing interest rate. And while it's true that interest rates are historically low, the growth rates of today's successful companies are high enough that increasing the interest rate (from ~0% to, say, 5%) wouldn't really have a big effect on valuations. As an example, note that Slack's 2020 revenue was around $1B, which represents an approximately 94% YoY increase over its 2019 revenue [1]. At 0% interest rates, that gets them a (very roughly) 10x valuation multiple. At a moderate-high 5% interest rate, their real growth rate drops to 94% - 5% = 89% YoY. One can argue that this should drop their multiple from 10x to maybe something like 9x. That drop is not nothing, but the reality is that it represents little more than a rounding error on the founder's wealth. PG's point is that growth rate is by far the dominant factor in valuations. He correctly ignores interest rates in the essay because (barring out-of-band hyperinflation) their magnitude is too small to have a material effect on the conclusion. [1] https://www.macrotrends.net/stocks/charts/WORK/slack-technologies/revenue https://www.macrotrends.net/stocks/charts/WORK/slack-technol...

1001101 6y ago

The Fed funds rate was 21.5% in June 1982. Negative real rates in 2020. Equity models that discount future earnings to a risk-free rate are going to spit out significantly different numbers in each regime.