3 ms·
Oh, man, does anyone else remember getting 5% interest on savings accounts? What a golden age.
by a8da6b0c91d 12y ago
Oh, man, does anyone else remember getting 5% interest on savings accounts? What a golden age.
- VLM 12y agoThis is insightful when you look at something like Facebook's financials. So $200B valuation on $12B of gross revenue but profit varies around zero and last quarter was 1/2B aka almost exactly 1% annualized rate of return. Better than my local credit union savings account, but riskier. Probably a reasonable valuation. Governments will collapse if interest rates ever return to normal, so they probably won't. But its interesting to see how cheap capital or "value" is when interest rates approach zero. If interest rates were 20% like 1980 and you needed 25% to get investors to even sniff, that would drop facebooks valuation from $200B to about $4B to maintain that 25% return. That's quite a haircut. Low interest rates result in a margin-like whip when revenues drop. Say revenue dropped a billion at FB. That would drop profit by half and if interest rates remain constant, risk constant etc, that would collapse the price by half. And thats a less than 10% decline in revenue. Ouch. So one effect of low interest rates is making valuation/price very sensitive to small revenue changes. This will make things exciting.