Though Unicorns Are on Parade, Negative Yields Are Here to Stay

It's 1999 all over again. According to a Bloomberg article, 2019 is the biggest year on record for the amount of money raised in US IPOs, roughly double the yearly average since 1999. The total is a staggering $80 billion. While Wall Street may see this as cause for celebration, IPO peaks tend to occur near major market tops. As the article notes, "both 1999 and 2007 were unusually strong years for IPOs that were swiftly followed by bear markets and economic downturns."

Indeed, it is a record year. Leading the money-losing IPO parade is Uber with an annual loss of $1.8 billion, one of the largest on record. Lyft closely follows with an annual loss of -$911 million. The saying "It's Probably Overpriced" will never be more relevant than with the IPOs of these unicorns. And the valuations? Uber is aiming for $100 billion.

It's raised over $24 billion already in private and venture capital. Lyft in comparison seems small, approximately $4.7 billion. Though size may seem relative, Uber and Lyft each will have raised more venture capital than any other US startup that has ever gone public. For reference, Amazon raised $8 million in venture capital before going public in 1997, while posting a $31 million loss. From 1997-1999, Webvan had one of the largest accumulated venture capital funds with $700 million. It was bankrupt by 2001.

What is the cause of bubble 2.0? There is no single cause, but different layers of causes, all interrelated. The most direct cause is reflexivity. The agents in a market respond to prices, and their behaviors in turn affect the environment around them. The hunger for yield has driven asset prices up, and others seeing those making money join in. The layer under that is the liquidity surplus in private capital. Flush with cash, venture capital and private equity firms provided funding to keep these severely unprofitable companies alive. The underlying layer is simply the widespread artificially low interest rate that drives this market inefficiency. The longer that rate stays low, the more these inefficiencies compound, and it eventually it spirals out of control.

And after a while, people forget that all that glitters isn't gold. With Wall Street fixated on newly public US companies, the investor class is increasingly ignoring the warning signs that the economy is flashing overseas in Europe. Industrial production has been falling at the fastest pace since the financial crisis in multiple Eurozone countries, from Germany to Italy to Spain to France. The global stock of negative yielding debt has surged to the highest level since 2017. According to the Bloomberg Barclays Index, it has climbed from below 6 trillion in October to 9 trillion dollars. In January, only 13 euro corporate bonds had negative yields, that number is now 64.

According to the IHS Markit BME Germany Manufacturing PMI, new orders have posted their steepest drop since April 2009. Manufacturers' backlogs of work fell for the 7th straight month and at the faster rate since mid 2009. As real interest rates rise, the first cards to fall in the economy will be the capital intensive industries. But unicorns aren't immune, and their investors most certainly aren't either.

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