Peter Thiel Says Just About Everything Is Overvalued, Not Just Tech

http://www.bloomberg.com/news/articles/2016-04-12/founders-fund-s-thiel-doesn-t-think-tech-sector-is-in-a-bubble

by Jerry2 • 10 years ago

68 73 10 years ago

bloomberg.com

marvinalone• 10 years ago

"Maybe we should try to look at places outside Silicon Valley."

Don't be silly, Peter. There are no places outside Silicon Valley.

TaylorGood• 10 years ago

What are vintage Porsche's...

riprowan2• 10 years ago

In 2009 the USA embarked on a radical strategy of creating base money at a previously unheard-of rate:

http://imgur.com/MjdJNbz

Basic Econ 101 tells us that inflating the base money supply should eventually result in higher nominal prices for goods and services.

Meanwhile the basket of goods and services used to measure inflation has remained mostly flat, meaning "low inflation", ensuring that the Fed can continue its cheap-money strategy, while also helping the government minimize its expenditures by keeping cost-of-living adjustments to a minimum.

Meanwhile, as Peter points out, investment and speculative assets have increased wildly in value. Fortunately for the wealthy, these are not considered part of the "basket of goods and services" used to calculate inflation.

It's almost as if the very wealthy have more money than they know what to do with, and cannot find enough rational places to invest it. It's almost as if none of this wealth is "trickling down."

It's almost as if there is a disconnect between the economy that the very wealthy live in, and the economy that the rest of us live in.

williamscales2• 10 years ago

Is there a way that wealth could trickle down? Are there investments that the very wealthy could pursue that would reflect in the broader economy? Or am I misunderstanding.

When the cost of goods and services eventually rises, will that result in a rebalancing of where the wealth is flowing?

scotty794• 10 years ago

It's not wealth. It's just money. Trickling it down would just cause inflation. Just take a look what money trickling down through IT companies did to SF housing market.

wodenokoto• 10 years ago

They could invest in higher salary :)

ajuc• 10 years ago

Wealth is trickling down. It's just trickling from poor people in developed countries to poor people in developing countries. And it's a good thing. Why should poor people in developed countries be priviledged?

Meanwhile rich people in develoepd and developing countries make tons of money on the differences between the poor, decreasing them in the process.

smitherfield• 10 years ago

If the economy you live in is software development (and/or, the SF Bay Area), you've seen quite a bit of trickle-down since 2009.

ricksplat• 10 years ago

I've been getting a good bit of trickle-down since the late 90s at least .. but that's not the point.

When you talk about trickle-down, you're talking about the economy as a whole not just a specialised sector with a scarcity of skills ... if anything the value we create "trickles up" because half the time it's hard to see benefit to the man on the street.

Effective economic policy is not just about me having loads of money. It's about not seeing your friends and family having to struggle; your friends having to emigrate; cuts to services for the sick & elderly, and a spiralling cycle of fucking the poor.

sgt1014• 10 years ago

I thought that software development created wealth - how does it relate to trickle down?

ftlio2• 10 years ago

Corporate balance sheets are good on the debt front. Corporate cash stockpiles are high. Meanwhile Average Joe is carrying a lot of debt and no cash. I know wages would lag behind the curve as they always do, but doesn't Average Joe (especially young Average Joe) stand to gain from an ensuing high inflation scenario?

fauigerzigerk• 10 years ago

Only if Average Joe's debt is fixed rate and his skills are valuable enough to demand a raise.

damptowel• 10 years ago

Basic Econ 101 is wrong. See http://www.sciencedirect.com/science/article/pii/S1057521914...

cperciva• 10 years ago

It's almost as if none of this wealth is "trickling down."

It definitely trickled down to resource economies. Without the influx of cheap capital, "unconventional oil" like shale and oil sands would never have gotten off the ground.

xbmcuser• 10 years ago

I think the US is under a double whammy. Republicans call for trickle down economics but at the same time they have opened the bottom up to unregulated and slave labour. So the money doesn't trickle down. It just flies to the lowest rung of the ladder skipping the middle where the US middle and lower middle class lives and goes abroad.

riprowan2• 10 years ago

Great point - in the USA, wealth doesn't "trickle down" it "leaks out"

bbcbasic• 10 years ago

The velocity of money also matters. You can create a quadrillion dollars and stick it in a bank account and it never moves. That is not inflationary.

sgt1014• 10 years ago

One example of this is mechanical watches.

My wife is a photographer and buys glossy magazines as a part of getting inspired, so I picked up a Vanity Fair special on watch movements a few days ago and thumbed through it. I was struck by the fact that the shots of watches weren't accompanied by prices so I typed "tourbillon" into google. I got 5 returns in the "shopping" banner, with prices ranging from £380,000 to $22.

One of the things I learned from the Vanity Fair article, which is pretty obvious, is that the patents on automatic watch movements have all expired. New designs are not, by in large, technical innovations, the patents on them protect novel arrangements with novel aesthetic characteristics. Therefore if you have a little cnc machine or a 3d printer you can make a movement for pennies and sell with the comfort of IP protection. The gold and gems on a watch are worth ~£10k, leaving ~£360k as margin.

Staggering.

tribaal• 10 years ago

While you are right, I feel compelled to point out that mechanical luxury watches are expensive not because of IP (they expired long ago, as you point out), but because they are:

1. Assembled by hand (in Switzerland, for the most famous brands, where labour isn't cheap)

2. Made of precious material, as you pointed out.

3. Require a lot of R&D and design to develop (fitting movements and complications in each model's unique case is a hard problem).

4. Very limited numbers of them are produced (mostly because of 1.). It's common for watches to be unique.

5. Come with an "eternal" warranty (they will fix my dead grandpa's watch for free, forever).

So while having a CNC and a 3d printer, making a wearable watch to the same specs will be quite a challenge.

dethswatch• 10 years ago

a little cnc machine or a 3d printer you can make a movement for pennies

you need to do a little more research on what goes into even assembling the movement, much less the manufacturing, etc.

panarky• 10 years ago

That's a dramatic chart with a steep rise in 2009. However, that only tells part of the story.

The monetary base doesn't affect asset prices and consumer prices if it just sits there doing nothing.

Bank reserves with Federal Reserve Banks match your chart during the same time, showing that this money is just sitting with banks, not in the real economy [1].

Consequently, the velocity of money declined steeply at the same time [2].

[1] https://research.stlouisfed.org/fred2/series/WRESBAL

[2] https://research.stlouisfed.org/fred2/series/M2V

cylinder• 10 years ago

It's interest rates, simple as that. Asset price = Cash flows / required rate of return ...

prostoalex2• 10 years ago

The QE money was used to purchase various debt instruments, which means that every dollar originating from Federal Reserve is expected to bring that dollar back to the Federal Reserve when the underlying security matures. It will bring slightly more, as there are interest payments between the time of purchase and the maturity date.

That money does not stay in the system forever. It's slowly reaching the maturity date one security at a time, with the created money being erased. Unfortunately, we have no further visibility into Fed's portfolio, duration of securities, percentage of defaults, etc.

toomuchtodo2• 10 years ago

The QE money was used to purchase various debt instruments

That money went into inflating housing and the securities market. It did nothing to help the economy, and only helped distort prices of those assets.

jgalt212• 10 years ago

investment and speculative assets have increased wildly in value

I would say that is only true for real estate and government bonds[1]. Most other asset classes are only only slightly overvalued. For example, on a PE basis, the SP500 is only slightly rich. I am not commenting on pre-IPO start-ups because I cannot make heads or tails of them and saying they are rich feels knee-jerk to me even though most of them to me seem like pie in the sky valuations.

[1] non-government bonds have been under pressure since Q4 of last year and many of them are at attractive yield spreads (certainly when you consider defaults in the US are largely negligible outside of out and gas)

Havoc5• 10 years ago

If the bubble is in cash, illiquid startup investments may be a place to hide.”

How can a bubble be "in cash"?

AnthonyMouse2• 10 years ago

If people are holding cash because they don't know what to invest it in then it's like it doesn't exist. It doesn't move through the economy. If something worth buying came along then the cash would come out of the mattress and into the economy, which would pop the cash bubble (i.e. cause high inflation).

akvadrako• 10 years ago

To me this suggests that cash can be considered part of the "almost everything" that is overvalued. Yet since value is always relative, the concept is probably just not an accurate reflection of reality, i.e. economics is bullshit.

jamesblonde• 10 years ago

People hold cash in periods of deflation and negative interest rates. Just what we have in Europe now.

leg1002• 10 years ago

Why would cash being invested "cause high inflation"?

Inflation depends on a number factors, whether it be productivity, supply, unemployment, etc, or how that cash is being spent. If it's being invested, who's to say it isn't in capital goods, thereby reducing cost of goods?

Havoc5• 10 years ago

Thanks. I can see the logic, but don't see that mechanism leading to anything that resembles a bubble in the normal sense of the word.

scotty794• 10 years ago

Imagine there is incredible amount of cash but it's not used. Cash seems still valuable. Overvalued even when you compare its percieved value with the value it would have when all that dormant cash would hit the market.

leg1002• 10 years ago

I reckon it's a pithy statement the finance news is prone to making, and requires further elaboration.

It's clear to us all when one says there is a bubble in housing, but this doesn't make much sense, and may well on further elaboration be found to be nonsense!

If one were to be treating cash an as investment, i.e. in a savings account, then one would think a cash bubble would be where you're getting a relatively good return, and were the bubble to burst, the return would collapse. That's clearly not the case now: cash returns little or a loss (interest - inflation).

And in terms of its value, rather than its return, well it's been losing value there too, relative to stocks and housing. So hard to see a bubble there either.

elcapitan• 10 years ago

News sites that automatically play videos once I load them are also definitely overvalued.

Havoc5• 10 years ago

Yeah sitting on cash at the moment because I suspect the market will crash the second I move it into stocks. :(

kspaans2• 10 years ago

Market timing is very rarely a winning strategy. If you are investing for the long term, don't worry about market fluctuations (remember that many stocks and funds will still pay you a dividend!) . If you don't like seeing a big dip in your net worth, spread your buying out over many months to dollar-cost-average it.

Havoc5• 10 years ago

Market timing is very rarely a winning strategy.

Not really trying time time it per se, but this just feels like a particularly bad time to move a lump sum into stocks. Quite a few big names seem to think a crash is due soon:

http://thesovereigninvestor.com/exclusives/80-stock-market-c...

I can dollar cost average it I guess...but would prefer if the market just gets it over with and crashes.

eulji• 10 years ago

This is so true. Especially SW is overvalued and undervalued at the same time.

c280726• 10 years ago

It's almost as if people value different things.

ucaetano3• 10 years ago

He's welcome to put his money where his mouth is.

If he's confident everything is overvalued, a big short on the market would be easy money.

Or maybe he's just trying to convince everyone that assets are overvalued, so he can buy them at a lower price.

As usual, follow the money. He's looking to actively invest $1.3Bi in tech firms, which shows that he doesn't believe his own bullshit.

scotty794• 10 years ago

Either everybody except him overvalues assets or Peter overvalues cash.

Since he's a smart guy and can't possibly believe that he's right and everybody's wrong he spends his apparently overvalued cash despite of what he feels.

ucaetano3• 10 years ago

You can believe that you're right, everybody is wrong but will eventually find out, and therefore you should place a risk-weighted bet on that.

It would be like most hedge funds: "I believe assets are overpriced, so I've shorted them".

He's doing the opposite: "I believe assets are overvalued, so I'm buying them".

This isn't even bullshitting, is blatantly lying.

WalterBright• 10 years ago

One of my favorite pronouncements is "corporations are dominated by short term thinking, sacrificing the long term for next quarter's results" by people who are unwilling to bet their own money shorting stocks.

asddddd• 10 years ago

Shorting an overvalued asset is only smart if you believe it has peaked.

stickfigure2• 10 years ago

"The market can stay irrational longer than you can stay solvent"

ucaetano3• 10 years ago

Indeed, that's why you shouldn't put all your eggs on it, but if you have reliable info that an asset is overvalued, you should not hold back from placing a risk-weighted bet on it.

eddd2• 10 years ago

If everything is overvalued, nothing really is. To me, it is not a bubble but inflation.

andy_ppp3• 10 years ago

But there is no inflation, right? Right?

eddd2• 10 years ago

There is, but printing money and giving it to investors creates inflation in assets that can be bought by them. Once money flows throught credit/banks to the entire market (already happening) you have price raises in pretty much everything. Stuff you buy on credit (education, housing, cars, consumer goods etc.) are getting more expensive as well. Does it matter? For people with savings in currency - yes (middle class?). People without savings can fight for raises as unions and rich people hedge against dollar already.

wmil• 10 years ago

I think that there is just a huge market for risky but non-crooked investments.

Overseas markets are excellent for making money. Less regulation, lower salaries, etc. But the downside to a less overbearing government is that it's fairly easy for people with government connections to run off with your investment money if you're not watching.

Western nations are just safer places to passively invest money.

andy_ppp3• 10 years ago

Maybe the value of property and investments has remained static (has intrinsic value) and the value of money has plummeted. That would be the expectation from printing loads of money right?

collyw• 10 years ago

Is that not the same thing viewed from a different angle?

andy_ppp3• 10 years ago

I just think it makes more sense to me to see it this way; then you can say holding onto investments that will be popular for the rich or the price of Bitcoin should go up in this model. It also implies there is no asset bubble despite people repeatedly saying it, instead there is too much cash/cash is worth too little.

justsaysmthng• 10 years ago

I'd say we're in a bubble of talking about bubbles.

Financial press is so boring and unreliable. One day there's a deep crisis and China is collapsing and oil will never come back and the honeymoon is over and a week later things are back to normal, growth is good and.. what the heck ?

Of course everything is in a bubble, but doesn't that mean that there's no point in mentioning it, because it's part of normality ?

Muted2• 10 years ago

Warren Buffett has also talked about this in numerous interviews. He says that it really depends on what interest rates will do in the future that will determine whether stock prices are currently high. If they stay the way they are now for a while (close to zero, and even negative in some countries), stock prices are not high. The reason for this is that interest rates act like gravity on stock prices. If interest rates go to zero, P/E ratios can go to infinity. Mathematically this can be seen by looking at DCF or NPV analysis where you divide by the discount rate, which is highly correlated with the interest rate. Take for instance a security that yields $C/year in perpetuity. The NPV of that security is NPV=C/r. As the interest rate r approaches 0, the NPV goes to infinity and hence has infinite value. This means that it is ok to pay a very large amount for the security, since you can't get a better return anywhere else.

But of course the question is, will interest rates remain low? Basic economics would tell us the answer is no, because the FED and ECB have pumped billions and billions of dollars/euros in the economy on a monthly basis meaning the supply of money has greatly increased and hence the value should drop and lead to inflation and hence higher interest rates. But this clearly hasn't happened (yet) and I haven't really found anyone who has a good explanation. Warren Buffett, Charlie Munger and Bill Gates all expected this would of already happened a while ago. (TV interview on CNBC)

simo73• 10 years ago

Right just replied the same. It's about the interest rates prevailing in the market.

But I do believe that there was and still is a lot of overvaluation in tech even after discounting at low interest rates.

lucozade• 10 years ago

That's not how PV is calculated. It's C/(1+r) where r is the rate between now and the time of the cashflow. When rates are zero, it just means that the cashflow is worth today the same as it'll be when it's paid. As rates increase, the PV of that cashflow reduces.

Also, although base rates are around zero, long term interest rates are higher. True they're not high by historic standards but you still get some discounting for cashflows beyond the short term.

Muted2• 10 years ago

NPV = SUM_t Rt/(1+i)^t (wikipedia). This is similar to your formula. If Rt=constant for all t and t is infinite (hence in perpetuity), the formula simplifies to what I have. More info can also be found here: http://www.investopedia.com/walkthrough/corporate-finance/3/...

simo73• 10 years ago

You are missing the time in the formula, should be: (1+r)^t.

When t --> inf, it becomes r.

simo73• 10 years ago

The point which everybody seems to be missing (Thiel included) is that "overvalued" or "undervalued" is never in absolute but should always be relative to interests rates.

If you have low interests rates like now many crazy valuations are actually not so crazy (well in tech they are crazy anyway but outside of tech not so much).

That's because the cost opportunity of employing 1€ in equity is very low since debt is giving you little. All the future cash flows therefore get just a small discounting factor.

Peter Thiel Says Just About Everything Is Overvalued, Not Just Tech

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