4 ms·

There is a crazy amount of dry powder in the U.S. financial system. A lot of the money printed during the pandemic is just sitting there, growing at ever-higher

by rcme 4y ago

There is a crazy amount of dry powder in the U.S. financial system. A lot of the money printed during the pandemic is just sitting there, growing at ever-higher risk-free interest rates.

boringg 4y ago
Quick reminder here. Money sitting at banks in “risk free” interest rates is losing money in real terms. There arent a lot of good investments in the market right now especially when adding inflation costs. I highly doubt your described situation exists.
- celestialcheese 4y ago
  I don't know about pandemic checks causing this, but VC's have a huge amount of undeployed capital from the boom of 20/21. https://www.theinformation.com/articles/venture-firms-290-billion-dry-powder-is-about-to-revive-startup-funding https://www.theinformation.com/articles/venture-firms-290-bi... There's a lot of money specifically allocated to venture funds that needs to be deployed.
- rcme 4y ago
  It's only losing money in "real terms" if you use CPI. Given that VCs aren't buying cars and televisions, that's not an appropriate measure of inflation to use. Tech valuations have been falling, so the assets purchased by VCs (equity in tech companies) is deflationary.
  - boringg 4y ago
    Walk me through this. How is money losing buying power not related to this? 3% gain on something that cant buy as much in the future is still a loss. It is relavent
    - rcme 4y ago
      VC money is not losing buying power. Think about it like this: what is inflation, exactly? It's actually pretty hard to measure and the answer depends on what you're spending your money on. The Fed uses CPI as a proxy for inflation as felt by the average consumer. CPI uses a basket of goods and services as a measure, but really it's just an estimate. For instance, CPI might be 6.5% YoY, but if you run a restaurant, where food is a major expense, you're feeling inflation at something like 10% YoY. Now let's consider VCs. Like a restaurant, VCs spend money in a way that doesn't align with the basket of goods / weighting used for CPI. VCs spend most of their money on equity in tech companies. Equity in tech companies has actually gotten cheaper. Here is a concrete example: Stripe was valued at $95 billion in 2021. In order to buy 1% of Stripe, you'd need to spend $950 million. Now, Stripe is valued at $60B. You can buy 1% of Stripe for only $600 million. That's deflationary.
      - boringg 4y ago
        You haven't gone through the full thought experiment. I agree tech valuations have imploded. This is a function of equity being predicated on expected returns in the future. Many reasons for tech valuations imploding - part of them -> cost of salaries to match CPI and cost trimming from other companies as inflation hits their bottom line and product sales aren't as robust. In your example the valuations are on the private market and do not replicate what the public market would pay for them because the expectations on returns are out of whack with reality. VCs bought into their own hype and started thinking that they would get absolutely bonkers returns on companies that have no ability to get the returns required to drive those valuations. This reality is because all of a sudden there is interest rates in the market and other returns elsewhere to be gained and that interest free money is gone. VCs might have better buying power of what portion of a company they can buy however the expected returns are no longer in the same ballpark as they were. As a function of inflation their exit from investments looks far worse than it did a short time ago. However what VCs are buying is future returns not necessarily company size. So if you can buy more of a company on lower returns it isn't far different from less of a company on higher returns.
        rcme 4y ago
  - majormajor 4y ago
    VCs are in a particular sort of situation though where those assets getting cheaper strongly impairs their way of producing returns for their investors. Depending on when valuations start to slide, and whether or not they ever start to accelerate like they did at the latter half of the last decade, they could get called in to a lot of hard conversations about "if you're not using my money, give it back." If you're a VC you want to be raising new funds from your investors for the next wave of startups, you don't want to be unable to find promising investments for your current funds. You're not gonna be able to raise again in the future in that case. AKA a "zombie."

by rcme 4y ago

There is a crazy amount of dry powder in the U.S. financial system. A lot of the money printed during the pandemic is just sitting there, growing at ever-higher risk-free interest rates.

boringg 4y ago

Quick reminder here. Money sitting at banks in “risk free” interest rates is losing money in real terms. There arent a lot of good investments in the market right now especially when adding inflation costs. I highly doubt your described situation exists.

celestialcheese 4y ago
I don't know about pandemic checks causing this, but VC's have a huge amount of undeployed capital from the boom of 20/21. https://www.theinformation.com/articles/venture-firms-290-billion-dry-powder-is-about-to-revive-startup-funding https://www.theinformation.com/articles/venture-firms-290-bi... There's a lot of money specifically allocated to venture funds that needs to be deployed.
rcme 4y ago
It's only losing money in "real terms" if you use CPI. Given that VCs aren't buying cars and televisions, that's not an appropriate measure of inflation to use. Tech valuations have been falling, so the assets purchased by VCs (equity in tech companies) is deflationary.
- boringg 4y ago
  Walk me through this. How is money losing buying power not related to this? 3% gain on something that cant buy as much in the future is still a loss. It is relavent
  - rcme 4y ago
    VC money is not losing buying power. Think about it like this: what is inflation, exactly? It's actually pretty hard to measure and the answer depends on what you're spending your money on. The Fed uses CPI as a proxy for inflation as felt by the average consumer. CPI uses a basket of goods and services as a measure, but really it's just an estimate. For instance, CPI might be 6.5% YoY, but if you run a restaurant, where food is a major expense, you're feeling inflation at something like 10% YoY. Now let's consider VCs. Like a restaurant, VCs spend money in a way that doesn't align with the basket of goods / weighting used for CPI. VCs spend most of their money on equity in tech companies. Equity in tech companies has actually gotten cheaper. Here is a concrete example: Stripe was valued at $95 billion in 2021. In order to buy 1% of Stripe, you'd need to spend $950 million. Now, Stripe is valued at $60B. You can buy 1% of Stripe for only $600 million. That's deflationary.
    - boringg 4y ago
      You haven't gone through the full thought experiment. I agree tech valuations have imploded. This is a function of equity being predicated on expected returns in the future. Many reasons for tech valuations imploding - part of them -> cost of salaries to match CPI and cost trimming from other companies as inflation hits their bottom line and product sales aren't as robust. In your example the valuations are on the private market and do not replicate what the public market would pay for them because the expectations on returns are out of whack with reality. VCs bought into their own hype and started thinking that they would get absolutely bonkers returns on companies that have no ability to get the returns required to drive those valuations. This reality is because all of a sudden there is interest rates in the market and other returns elsewhere to be gained and that interest free money is gone. VCs might have better buying power of what portion of a company they can buy however the expected returns are no longer in the same ballpark as they were. As a function of inflation their exit from investments looks far worse than it did a short time ago. However what VCs are buying is future returns not necessarily company size. So if you can buy more of a company on lower returns it isn't far different from less of a company on higher returns.
      - rcme 4y ago
- majormajor 4y ago
  VCs are in a particular sort of situation though where those assets getting cheaper strongly impairs their way of producing returns for their investors. Depending on when valuations start to slide, and whether or not they ever start to accelerate like they did at the latter half of the last decade, they could get called in to a lot of hard conversations about "if you're not using my money, give it back." If you're a VC you want to be raising new funds from your investors for the next wave of startups, you don't want to be unable to find promising investments for your current funds. You're not gonna be able to raise again in the future in that case. AKA a "zombie."