The Era That Has Followed "The Big Short" May Be Known As "The Big Stack"
|Nov 17, 2017|
Many startups in the post “Big Short” years have been launched — you could call this current period the era of the “Big Stack”. This era has witnessed a Cambrian explosion of startup ventures. The Big Stack has two parents: Quantitative Easing’s steroidal impact on Big Money (which then had to go hunt for yield and return anywhere and everywhere) and the collapse in costs of all the soft/hard-ware inputs which used to cost a fortune during the exuberant creation of Internet 1.0 and TMT networks.
In the past, startup “bros” had to buy a lot of hardware, software and make sure they were connected to a telecom central office to get up and running — and the easy part was hiring someone to build a bespoke website with the phrase “dot com” or perhaps a timely prefix including “e-“, “inter” or “net” buried in the URL. Now, middle-schoolers can be their own dev-ops, spin up an instance on a virtual machine and have easy access to an ecosystem of software, scripts and code that can stand-in as features that used to be handled by hardware. And if the entrepreneur getting his grind on needed any bespoke code, there’s an army of talent at the ready, from interns to full-stack commandos, who can jump in, build, test and break their way to a fundable iteration.
I have read about how “quiet” the broad equity indices have been but I think volatility has been happening away from our immediate line of sight, in past-the-corner-of-your-eye sections of the economy. This volatility may be found in areas including the disruption of retail incumbents and in the nature of money itself. As each year of the Big Stack era passed, retail defined by brick-and-mortar metrics like same-store sales began to be overshadowed by media coverage devoted to “death of retail” stories (e.g. abandoned retail malls). Just the other day, another multi-billion dollar record was posted within the span of 24 hours thanks to a secular holiday co-opted by Big Stack platform Alibaba for China’s “Singles Day”. While this was going on, at the same time in the world of money, startup capital is being raised to the tune of 9 to 10 figures within hours courtesy of crypto-asset fundraising — bypassing old school “road shows” and homage being paid at offices of venture capitalists and angel investors. Big Stack means big sums being exchanging hands within hours while bypassing old Big Money incumbents. White papers are the new “no/low doc mortgages”.
But the old school of old Big Money still dominates. Dowagers still keep the financial world spinning. Leviathan (and QE) has extended its grace to the four corners of the global markets and animal spirits are found everywhere — risk-taking heralds sent to every counting and gambling house on the planet. Outside the volatile futuristic corners of unicorn-on-demand-land and crypto-space, sleepy Mr. Market has sleepwalked his way onto a rocket-plane perched on top of the Big Stack. That plane has ascended to rarefied heights where volatility like the air itself has become thin. The height is terrifying, and it is scary to look down but the plane keeps climbing. In fact, Mr. Market appears to have broken free of orbit and is headed for parts unknown. How could it possibly get any more amazing?
World Equity Market Cap keeps on climbing. Old school investments still tell new new thing crypto to hold its beer.
BUT WAIT, there’s MOAR:
The “FANG”, or “FAAMG”, our generation’s answer to “Nifty Fifty”, now has its own futures contract and some wonder what is the point of such a financial instrument. Well, at least David Einhorn, if he wishes to continue resisting what has been a relentless incoming tide of centi-billion dollar waves, can continue to pursue a value-reversion short on some of the biggest glamour stocks of all time. When the likes of Ackman, Crispin Odey and Mark Hart have relented in their respective shorts, however, it’s a bit tempting to say Mr. Einhorn should cover and join the party but then didn’t Stanley Druckenmiller fall prey to this 15+ years ago too, throwing off hair shirt and tucking into the same story stocks the youngsters at his trading desk were feasting on?
It’s humbling to be reminded that yesterday’s hotness becomes a footnote on wikipedia soon enough.
— 13D Research (@WhatILearnedTW) November 15, 2017
The “FANG” futures contract has company for there is also a bitcoin futures contract coming as well. The timing couldn’t be more appropriate. One grey eminence, Leo Melamed, who helped create financial futures-trading and take the Chicago pits from onions to options, assured that this over-the-counter confection will tame just about the most volatile asset ever seen. Another grey eminence, Thomas Peterffy, founder of Interactive Brokers, however is scared of this financial stripling being let off the chain. He warned that margin calls would be the ultimate reward awaiting for brokers intrepid enough to carry the trades. Mr. Peterffy issued a letter of caution, as follows:
Most inconvenient for those who would discount Mr. Peterffy there is recent and annoyingly relevant news. I just read that there is an issue with one of the underlying exchanges associated with the prospective bitcoin futures contract;s CME CF Bitcoin Real Time Index. “Early Days” is the phrase I keep using when I write about the “new new thing”, and that includes annoying details which get in the way of glittering narrative.
One random thought about these new instruments of ebullience which came to my mind: Christmas is coming and that makes me think about Dickens and his book, “A Christmas Carol”. The second of the three spirits who took part in a yuletide intervention for one Ebenezer Scrooge’s acquisitive addiction problems, “Spirit of Christmas Present” revealed underneath his robes two tiny horrors, a boy named “Ignorance” and girl named “Want”. With the help of these two wretches, this Christmas spirit wanted to give Mr. Scrooge a heads-up warning about the folly of his situation.
I wonder if there isn’t also among the pantheon of the free market’s animal spirits an entity who bears not yuletide greetings but market lessons and warnings meant to save us from ourselves. I am giving this animal spirit a long-winded name of “Animal Spirit of Markets Future Past“. And just like the Spirit of Christmas Present, this Animal Spirit is harboring a pair of cautionary charges underneath its robes. Clutching to the legs of Mr. Animal Spirit is a boy named “This Time Is Different” and a girl called “FOMO”.* For if anything is plain to see, very little is different each time something “new” bursts onto the scene but the majority of punters are running after the new new thing like mad, terrified of being left behind, not knowing if the leader they are following is headed right off a cliff or straight down into a ravine.
“Beware them both, and all of their degree, but most of all beware this boy, for on his brow I see that written which is Doom unless the writing be erased.”
FANG futures are the dumbest thing I’ve seen yet in this bull market, and I’ve seen GoPro trade at 100.
— Downtown Josh Brown (@ReformedBroker) November 8, 2017
What are FANG futures trading in Bitcoin terms? Asking for a friend…
— Andrew Thrasher, CMT (@AndrewThrasher) November 9, 2017
Moving past the idea of tiny terrors of portents latched onto the legs of spirits, I wanted to highlight some real world cautionary events in crypto-space, including: More mishaps for the Parity crypto “wallet”, wherein an inexperienced programmer managed to inadvertently cut off access to at least about $150M USD of ethereum, a rival crypto currency to bitcoin, effectively sending the assets into limbo — unless another “exception” is made in the form of a “fork”. Here’s a link to post which might be helpful for those interested.
Having already experienced a similar crises (and this is not Parity’s first hiccup), it appears that another rescue (a la “DAO”) is not forthcoming and a variety of ventures may have effectively lost millions raised in recent months. The other cautionary tale in recent days also included the bizarre coda to the Mt. Gox bankruptcy — which was the failure of one of the first prominent bitcoin exchanges. Creditors were to be recompensed in Yen instead of bitcoin and Mt.Gox’s founder, Mark Karpeles, would receive the remaining value of the estate. As a result of bitcoin’s explosion in value, Mr Karpeles is due to receive proceeds of about the same value that the Musical.ly app is being acquired for — roughly 800 to 900M USD. Mr. Market has a dark sense of humor.
Because MtGox creditors are being credited back in Yen at $400 BTC price, they are getting none of the recent BTC gains while their coins are locked up. Whereas Mark Karpeles will become a billionaire from all this. Quite disgusting TBH.
— Charlie Lee [LTC] (@SatoshiLite) November 10, 2017
I mentioned how there was a wide and varied menagerie of startups that sprung forth courtesy of the Big Stack. Here is an example of one bright-eyed wild-child, barely a toddler’s age at 3 years, who is about to give its parents a financial exit about 10 digits long. Musical.ly is being bought out for about a $1B USD by a Chinese platform. Lip-syncing videos on the fly on one’s phone would not have been possible without the Big Stack. A billion dollars for communal karaoke but we all have seen the wonders of pivots and busdev magic before. Just look at this ingenue startup’s older unicorn siblings.
Am I worried? Yes, and no. What comes in the short run is scary. What will follow in the long run is awesome. For every Tezos debacle, there is a potential Square or Overstock that will turn the mysterious into something mainstream.
One funny contrast between these two futures contracts: “FANGs” are the fruit of a long cycle and crypto is the seed for the next cycle. In between, however, things can get shaky and scary. But what to do from the vantage of many risk-takers/speculators? I will break my rule on prediction and quote one potential scenario from Eric Peters: “The next cleanse will be sharp, deep, fast, and will feel like the end of the world, but it won’t be. It’ll slow economic growth for sure, but 18 months later we’ll be back near the highs.” I like the usage of my favorite time frame — 18 months and hopefully if Mr. Peter’s scenario is right, the Big Stack’s crackup won’t hurt too much.
But before that happens, let’s admire this image of a Da Vinci painting of Jesus. It just sold for $450+M USD — a record. Mr. Animal Spirits is somewhere smiling.
— Christie’s (@ChristiesInc) November 16, 2017
November 16, 2017