Provingxetentcy: Making Fast Money

Submitted by Bo Peng

Making The Last Use Of Reserve Currency Status

I suspect many in the mainstream academia haven't realized what QE2 is.
It is the last use of the dollar's reserve currency status, intended or
otherwise.

In a fiat currency system, inflation should be the
only risk, because fighting deflation should be trivial -- just print
money. This is a fundamental advantage of a fiat system over the old
gold standard. Unfortunately for the US, the dollar's reserve status
means the geopolitical border is not the dam holding the water as in
other countries. As Fed pours in more water, it leaks right out to
lowlands (good investment destinations) all over the world. Given the
current economic prospects in the world, the result is that QE2 cannot
stoke inflation in the US, but causes very unwelcome interference in
exactly the other places in the world where inflation is a big concern.

It's small wonder all the growth EM economies are engaging in the low-grade currency war of capital control.
To them, this is a defensive war for survival against the invading army
of dollars. If the low-grade war proves insufficient, they would
escalate the defensive posture. They have to.

Another
consequence, intended or not, of QE2 + reserve status is that all growth
economies are under tremendous pressure of currency appreciation. Some
may be able to resist it and muddle through until an easier day; others
will have to cave in, therefore caught in the catch 22 of either raging
inflation or shrinking economy, or both. And, of all the growth
economies, China arguably has the most capacity and strongest political
will to resist appreciation. In such a scenario, if the intended target
of Fed's fury is China, as hinted not so subtly by Bernanke, "collateral damage" would once again be the main theme, as has been in all recent offensives launched by the US.

In
summary, Fed's dogged efforts in stoking inflation have caused and will
continue increasing the risk of bringing all growth EM economies to a
halt, significantly increasing policy risks in the rest of the world as
each country tries desperately to deal with the capital tsunami, and all
the while with huge doubt in whether it could reach its domestic goal
of stimulating employment and housing. In other words, Fed is screwing
the world for a slim chance of helping the US economy.

This is
emphatically NOT a moral criticism. But it does represent a significant
abandonment of the responsibilities on Fed's part as the issuer of world
reserve currency.

Let's go back a little in history. Right on
the heels of WWII victory, in 1944 US dictated Bretton Woods that
established the dollar as a proxy for gold in the free world. The
"proxy" part was only convenience, of course, as to be expected and
proven by Nixon in 1971. The arrangement made sense: the US would
provide security blanket, and the rest of free world would pay for it by
accepting and holding the green paper printed by the US. It's the same
idea as gangs collecting protection fee in NY, no cynicism intended.

Fast
forward to Berlin Wall collapse. Now the fundamental premises of the
dollar's reserve status were gone. Europeans quickly realized this
change and created the Euro; why should they continue paying for
protection when there's nothing to protect against? The US has made
numerous fantastic efforts in creating threats (by "creating" I don't
necessarily mean create; often times you just have to doze off for a
second and the enemy will help you out): perpetual terrorism, WMD in
Iraq, perpetual war in Iraq and Afghanistan/Pakistan, Iran, North Korea,
China, even Somali pirates (now it gets really pathetic). But none of
them could ever live up to the high expectations set by USSR.

After
10+ years of trying, it's become clear that this is futile. Nothing
works; none of those idiots could do it. But with the reserve currency
status comes its responsibilities. Win-win is BS-BS; there's no free lunch after all. The time has come to end Bretton Woods II.

Now Zoelick's surprise proposal of a new gold standard makes perfect sense.

With
QE2 the Fed is saying: Ah fuck it, you don't like USD as the reserve
currency? Well guess what? We don't like it, either. So let's drop it
and from now on it's every man on his own. Good luck.

Good luck everybody. We all need it.

Le Web 10 host Loic Le Meur just finished his on-stage interview with Alexander Tamas, Partner at one of the most watched technology investment firms on the planet, DST / Mail.ru Group.

That’s quite a presence you have: Groupon, Zynga, Facebook and … Twitter?

Not Twitter (smiles).

What is DST?

The firm originated in Russia, grew out of social networking company called Mail.ru, and at some point we started making international investments. Facebook was our first one.

How big is your stake in Facebook now?

It’s hard to say, we’ve made some straightforward investments and then we bought as many shares from early employees and investors as possible. We’ve definitely invested more than $500 million in total though.

So Facebook was your first investment – how did that come about?

Well, we owned and ran a social network in Russia, but the dynamics there were different, we were actually ahead of most social sites. Every single one of our countries became really big. So, we knew there was money in it, and we realized quickly that it was only a matter of time for Facebook to become really large worldwide.

Did you lead the Mail.ru Group IPO as well?

Yes, that was last month.

Is it the biggest tech IPO in Europe to date?

In the past few years, yes. The initial market valuation was about $6 billion, we’re now at roughly $8 billion.

So when’s the Facebook IPO planned?

I don’t have any comments on that (smiles).

Do you sit on the Facebook board?

No we actually don’t, but we obviously have good relationships with management and other board members. our perspective is that it’s entirely possible to be a major investor in a company without being on the board, as long as you have an open dialogue with the people in charge.

You got in late, what was Facebook’s valuation at the time?

We got in at a $6.5 billion valuation. It’s difficult to say what the valuation is now – although I can tell you the secondary market ones are based on limited information and generally not super accurate.

We haven’t purchased Facebook shares in quite some time though.

The Zynga investment came after Facebook?

Yes.

Why haven’t they been acquired yet?

If you’re a founder of company like Zynga, with fast growth and massive revenues, it only makes you wealthy on paper, right. So you used to have two choices: sell or take it public. Now, companies can get liquidity early on, so it takes the pressure of.

We invested $150 million in Zynga, but we didn’t disclose at what valuation.

So Groupon was almost sold …

I can’t comment on the rumors, but I can tell you that they’re going for it. They realize they have something special and there’s a lot of potential for Groupon to become a generation-defining company. They’re shooting for the stars.

By the way, I’m always amazed when people discuss valuations of private companies without actually knowing the financials. The truth is most people can’t say whether investments come cheap or expensive, as commentators. It all depends on how you measure growth, and most people tend to think linearly.

When we invested in Groupon, they sold 4 million groupons, a month later it was 25% more. The potential was obvious. They’ll hit 20 million groupons sold next week.

How does a startup get an investment deal out of DST? Is Twitter big enough, as an example?

It’s definitely an interesting company, but there are more. What we look at is that you have to be on a path to become a clear leader in your segment, companies that could theoretically go public today. We want to know all companies, but we focus our investments on those with long-term sustainability.

You know, we’re not an early-stage investor. We’re really small, with no people on the ground. So we can’t really help companies when they’re just getting started, apart from writing a check, and that’s not what we want. There are many more capable firms for that.

So startups should give you a call when they hit a $1 billion valuation?

Not really, we’ll also talk to you if you’re clearly on a path to becoming a $1 billion company down the line.

What about Foursquare?

There are lots of opportunities for them, they’re seeing good growth, so it could become a really interesting company for sure.

You’re (sort of) a European fund – why don’t you invest more here?

Groupon, Zynga and Facebook really just happened to be US companies, we look all over the world for companies. We tick boxes, and we can do that anywhere.

Many of the startups in Europe for some reason want to sell out early. That’s not what we’re looking for. There aren’t enough role models here, so less confidence.

Do you look at Asia, more specifically India, China and Japan?

It’s definitely a geography we’re looking at. We know a lot of the companies there already.

What’s your advice for young entrepreneurs?

Not many people have the opportunity to really change the world. If you have an urge to build something that could, don’t focus on the money, but the legacy you’ll leave behind.

It’s a once-in-a-lifetime opportunity to build a generation-defining company, so I applaud people for shooting for the stars. It’s a much more rewarding thing than doing it for the money.

I mean, look at Le Web, it’s not just about the money right, it’s also the community, helping out startups throughout Europe.

Loic: yes, we actually got a few offers, but we’re not looking at that right now.

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Thursday, December 9, 2010

Making Fast Money

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