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More money than anyone imagined: an explanation for why the bubble never burst

193 points by Balgair 7y ago

dv_dt 7y ago
With both the Fed and ECB considering interest rate cuts due to slowing economy indicators it seems an odd time to declare that bubble is ok.
atemerev 7y ago
OK, when there are articles like that, it’s finally time to sell. :)
- abakker 7y ago
  right? just tempting fate.
- 01100011 7y ago
  I exited most of my US ETFs and mutual funds about 3 weeks ago. Bad timing, I think...
  - turk73 7y ago
    I don't get why people do this. Why do you think paying taxes on all those sales is a good idea? Just create an asset allocation and re-balance 1-2x a year and stop trying to time the market because unless you have insider info, you're just being stupid.
navigatesol 7y ago
>If there was a bubble and it were to burst, kitchen-table investors might scarcely notice, unlike in the late 1990s. When bubbles burst the average person doesn't lose because the market plunges. The average person has little money in the market. They lose because themselves, friends, family and neighbors lose their jobs.
- entropea 7y ago
  Wait are you saying the employee's also have risk?
- scarface74 7y ago
  It depends, the dot com bust didn’t have a widespread affect for most people - not even tech people who were working for profitable companies.
  - entropea 7y ago
    People weren't anywhere near as dependent on technology the first time.
    - scarface74 7y ago
      Just like during the dot com bust in 2000, if it happened again, it wouldn’t be the profitable companies with a solid business. It would be the unprofitable startups living off of VC funding and public companies with easy access to debt markets that would be hurt. Public companies like Uber, Tesla, and even Netflix. If those companies went belly up, it would inconvenience people but wouldn’t have far reaching affects outside of the west coast - much like what happened last time. The major profitable tech companies would keep humming along. Last time Microsoft didn’t miss a beat and Apple was still on the rise. They had their first profitable quarter in years in 2001. This time, I doubt Facebook, Amazon, Apple, Google, or Microsoft would hurt too much.
      - entropea 7y ago
        There are still a lot of companies relying on AWS, Azure, various CDN's that could see major financial impact from a lot of their customers going under. This has tentacles reaching everywhere, everything wasn't so reliant on each other back then.
  - pessimizer 7y ago
    The dot com bust had a massive effect, and still represents the historical peak of black wealth in the US. It was mitigated for some people by an immediate bubble in housing, but that bubble only benefited people who owned houses when it started, meaning none of the people who were wiped out by dot com. Black wealth steadily decreased during the entire housing bubble. Black wealth is interesting in and of itself, but it's also interesting as an isolated population who we know had virtually no family wealth 100 years ago. If you want to know if an economy is only benefiting the already wealthy, look at black people.
dehrmann 7y ago
What the article fails to mention is just how much tech has changed people's lives in the past decade. People spend more time staring at their smartphones, order more through Amazon, are more likely to take an Uber or rent an Airbnb, etc. With tech companies being a much bigger part of people's lives, it's only natural that the industry will be more valuable. My only real fear right now is what happens when funding contracts, and how much of the growth in the sector is a synergistic circle jerk? Is Amazon only worth a lot because of AWS, and only because AWS makes a big chunk of its revenue off startups?
- diab0lic 7y ago
  I don't have any numbers so this is a genuine question: Is a big chunk of AWS revenue from startups? My intuition says most startups have small cloud footprints unless they're dealing with massive scale.
  - luckylion 7y ago
    I'd assume they have small footprints as well, but there's a lot of them. A lot of tiny feet will still make an impact.
    - filoleg 7y ago
      Even a lot of large tech companies with insanely complex infrastructure run on AWS. Just talking about EC2 alone, you can see that Netflix, Twitch, LinkedIn, and Facebook run AWS [0]. I am aware that the info is from last year and is a tiny bit outdated (LinkedIn is migrating to Azure; FB doesn't use AWS for everything they do; etc.), but the general sentiment still shows that even tech giants tend to resort to using outside cloud providers. 0. https://www.quora.com/Who-are-the-top-10-Amazon-AWS-customers/answer/Michael-Pollack-13 https://www.quora.com/Who-are-the-top-10-Amazon-AWS-customer...
      - luckylion 7y ago
        Sure, I wasn't arguing that they don't, I was just saying that even though startups tend to have small footprints, the sheer amount of them makes them a large segment. Similarly to how no consumer has as close to as many cars UPS does but the whole delivery industry is dwarfed by the amount of cars consumers in total have.
olivermarks 7y ago
This reads eerily like the articles about endless money right before the massive dot com crash
lordnacho 7y ago
The scope of the article is too small to see the real cause. Look around, there's a bubble in everything. There's literally trillions of dollars of debt yielding below zero. There's entire currency yield curves that are under zero. That's right, not just the short terms like a year or two. But decades out. Tech firms may be doing well but valuations are still quite high for a lot of things by traditional measures. And there's the influence of cental bank purchases that we don't know when will end or restart.
- sjg007 7y ago
  >There's literally trillions of dollars of debt yielding below zero. There's entire currency yield curves that are under zero. That's right, not just the short terms like a year or two. But decades out. Can you provide a citation or a more detailed explanation?
  - phyalow 7y ago
    Here you go: https://www.reuters.com/article/switzerland-bonds/swiss-50-yr-yield-falls-below-0-entire-swiss-curve-now-negative-idUSL8N24Q31B https://www.reuters.com/article/switzerland-bonds/swiss-50-y...
  - Excel_Wizard 7y ago
    Euro bond rates are below 0 nominal for maturities up to 15 years: https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_area_yield_curves/html/index.en.html https://www.ecb.europa.eu/stats/financial_markets_and_intere... I don't have data on the quantities of these bonds outstanding, but trillions is almost certain. There are many other bonds that are still above 0 yield nominal, but which are below 0 real yield due to inflation.
    - blevin 7y ago
      Barclays Global Agg bond index includes $13T USD of negative yield bonds. And Swiss bonds have negative yields out to 50 years.
  - 7y ago
Alex3917 7y ago
I don't understand the argument that the tech industry is becoming mature and is just being propped up by foreign investment. Right now 3 of the 5 biggest tech companies are basically: high school yearbooks, blockbuster, and taxis. Do we really think these are the most valuable industries in the world, and not just the things that happened to be easy to make with the tech that existed 10 - 20 years ago?
- empath75 7y ago
  Facebook is a nearly omniscient surveillance system, not a yearbook.
- rhacker 7y ago
  Well unfortunately yes those are some of the most valuable industries in the world - it's way beyond yearbooks - it is the potential of replacing ALL communication to people you know. It's not just blockbuster's killer but potentially a company that will own/control the distribution of all entertainment. and the last one isn't just taxis but the potential to be (with sound competition) a possible future replacement of car ownership altogether. I'm not saying they have a great chance of making it that far, but yes, that's why people invest in them.
- mdorazio 7y ago
  "High school yearbooks" is really "social engagement", "blockbuster" is really "film and television distribution", and "taxis" is really "personal transportation". Each of those industries is absolutely massive, so the dominant player in each industry, regardless of technology or decade, is going to be a financial juggernaut.
jfengel 7y ago
Some of it may just be the general economy. We've had a very long expansion that has been surprisingly general. It was considered slow growth, and the Fed is still talking about cutting rates as if a recession were in the offing, following very reasonable indicators. The S&P's P/E ratio (a decent measure of it's over-priced-ness) is around 20, a bit high but not ridiculous. The tech-heavy NASDAQ, however, is at 45. For comparison it was at 29 before the last big crash. The NASDAQ P/E is always speculative. People often bid up companies with low current earnings but expecting future earnings. That got very silly during the 90s tech bubble, where it would require profits of the entire world economy to justify some of those prices. But 45 suggests that we're due for a market crash. It's textbook irrational exuberance, and the whole economy is in a weird place. All signs point to a pending crash, and at least some of the companies that the article is talking about will fail. But we've been talking about that pending crash for half a decade now, and it's still not here.
- thorwasdfasdf 7y ago
  We keep waiting and waiting for these companies to finally start making a profit. And those companies keep making up new narratives about how those profits are coming soon. Are we in a new age? Is there a chance investors will keep waiting forever? In a age where interest rates are near permanently 0 and people invest in bitcoin ( a currency that has no real value other than the faith people have in it ~ as a store of value), perhaps people will keep investing tesla, uber, etc even if profits never really come.
  - jfengel 7y ago
    Bizarrely, investors sometimes do seem to be content to wait forever. Surely AMZN, with it's P/E ratio, isn't a startup any more. They're making a ton of money, but not 80-years-to-recoup-your-investment money. They're investing a lot, but these investments would have to quadruple their profits to get the price back into justifiable range. Apple, meanwhile, steadfastly maintains a P/E under 20. Investors seem OK as long as there's a new generation of investors to sell to when they retire. Everybody is content with the fiction because somehow the economy keeps chugging along at its tolerable 2-3%. You can short the overpriced thing all you want, but you're gonna run out of cash waiting for it to fall. Got me. I keep expecting this long, slow boom to end and reset everything. I've been expecting it for a decade. So what the hell do I know.
the_watcher 7y ago
> Facebook spent $20 billion on WhatsApp and Instagram; Microsoft spent $26 billion on LinkedIn and $7.5 billion on GitHub. Deals such as these were possible only because those acquiring companies were themselves so very profitable. Instagram had $0 revenue when acquired. WhatsApp had some revenue, but was not profitable IIRC. EDIT: misread the line, above comment rescinded.
- howlingfantods 7y ago
  "acquiring companies" not "acquired companies"
  - the_watcher 7y ago
    Oops, misread the line.
- magicnubs 7y ago
  > because those acquiring companies were themselves so very profitable. The quote says that the acquiring companies were profitable, not the acquired companies.
  - the_watcher 7y ago
    Fair enough, misread that line.
hogFeast 7y ago
A key constituent of almost every "bubble" (massively overused term) is a long period where everyone laughs at the doubters. Contrary to popular understanding, almost every major bubble has been reported as such before the fact. When Bitcoin was running up, everyone said it was a bubble. Read issues of the Economist from 04/05, they even had a cover story on the housing bubble. Before 2001, we had "irrational exuberance" (and the Fed choosing to cut rates into a boom). Before inflation in the 1970s, read minutes from the Fed...literally three or four years before multiple board members said: "There is going to be significant inflation". Before multiple currency crises in Britain through the 1960/70s, again BoE was telling govt: "If you continue you will cause inflation and devalue" (amazingly, one prime minister was actually responsible for both devaluations in this period). Go back even further, I read a paper about the Bicycle Bubble in Britain in the 1870s...again, lots of press about how it was a bubble. It isn't hard. These aren't "black swans". This is human nature, it never changes. Because something is not happening now, does not mean it can never happened (incidentally, when these things do pop...you usually have a year plus to get out...humans are slow). The amount of self-important puffery going on in tech is somewhat unique (the people involved are unusually insufferable) but it will burst. No path to profitability for most tech companies, most will go to zero. This has happened with every innovation, every capital cycle since the early 19th century. Again: not hard. Also: it isn't just tech. It is technology innovation plus the most short-sighted practice of monetary policy in history. What is happening in Europe and Japan is staggeringly dumb (I am glad I will live to see the fallout from this group of self-appointed "experts" using all this massive intellect to drive the economy off a cliff).
- MegaButts 7y ago
  The joke goes "economists correctly predicted 10 of the last 2 recessions." You can always retroactively find predictions to match reality, but that doesn't mean you have much ability to figure out how much they're guessing more than anyone else at the time. Hindsight is 20/20. I've been reading about how the economy is going to crash next year for 5 years. Of course it seems inevitable that it will crash, but I'm not convinced anyone can predict when. And I'm not sure how many people can predict why.
  - 7y ago
swalsh 7y ago
I wonder if being aware of the bubble also led to changes. From what I understand, it's just not normal today for companies to get funding without any real proof of a market. The juicero's, and magic leap's of the world aren't the norm, they're true unicorns of their own. The average tech company today needs to show real users, and revenue before they can reasonably expect investment. That's not even to mention that startups seem different today then they did in 2010. Back then it seemed like people would say "what if we took this new tech, and combined it with this existing industry". All those combinatrics have been tried, so I think a very large number of new businesses are not necessary "new" but rather "better". Which is kind of easier to do since the market already exists. It narrows the number of unknown unknowns.
- galkk 7y ago
  Look at Zume Pizza. Their fund raising seems insane.
  - nradov 7y ago
    Softbank seems to be just throwing money away lately. https://www.crunchbase.com/organization/zume-pizza#section-funding-rounds https://www.crunchbase.com/organization/zume-pizza#section-f... According to reviews the pizza isn't even that great.
    - 01100011 7y ago
      I tried it. Slightly better than frozen. Also, while I was excited to hear about their new, eco-friendly pizza box, my pizza arrived inside a single-use, large mylar bubble wrap sleeve. It would take a lot for me to try them again.
pontifier 7y ago
Wiley Coyote can run across a gap if he just refuses to look down. There's probably a game theory explanation for what's going on. Nobody wants to be the first to look down... If the train is running you want to stay aboard. On the other hand, you certainly don't want to be left holding the bag.
thorwasdfasdf 7y ago
This so called bubble isn't tech at all. This is the everything bubble caused by excessively low interest rates, held down by the government for inappropriately long periods of times. Sure, 0% may have been justified in the wake of the 2008 crash, for maybe a year or two, but not 10+ years!! People shouldn't be surprised that SOOO much money is sloshing around looking for increasingly risky returns when interest rates have been 0 for so long. And here we are, at barely 2.5% (far below where it should be) and the fed is already considering rate cuts even though we're in the biggest bull market. This article is doing the world a great disservice by trying to blame the tech industry without even once mentioning the real reason: excessively low interest rates forced on us by the Fed. And it's not just the Fed, other 1st world countries are doing the same thing. They're all following the call of Keynesian economics: Keep the party drunk as long as you can by refilling the punch bowl. By creating every incentive in the world to separate people from their money as quickly as possible in a hopeless attempt to spur money flow, ultimately resulting in increasingly risky investments.
- apta 7y ago
  > without even once mentioning the real reason: excessively low interest rates forced on us by the Fed. No. The real reason is that interest (usury) exists in the first place. It is prohibited in Islam, Christianity, and Judaism for a reason. And I wouldn't be surprised if it were also prohibited in other religions. An economic system that relies on usury is exploitative and predatory. The rich get reacher with basically no risk on their part, and the poor are left to struggle. Eventually the cycle completes and the entire system crashes as we've seen it happen many times now.
- lkrubner 7y ago
  "the fed is already considering rate cuts even though we're in the biggest bull market" Inflation is extremely low, so the Fed should consider cutting rates. Lower rates means lower unemployment, which should eventually lead to higher wages. As a model for what the Fed rate should be, assume that it should always be 0% plus whatever amount is needed to limit inflation. Since inflation has been low and stable, the rate should remain close to 0%. After all, we should want a world where unemployment goes low enough that wages eventually go up. And, it is important to notice, in today's world, even an unemployment rate of 3.6% has not been low enough to cause the kinds of wage gains that were normal for most of the 20th Century. If wages aren't rising and if inflation is low, then the Fed should be pushing the rate back toward 0%. The lower the rate, the easier it is for entrepreneurs to get money, to build a business, and thus to stimulate economic activity, and if enough entrepreneurs do so, then presumably unemployment will eventually go down to whatever level is needed to raise wages.
pwinnski 7y ago
Will this article be remembered like the book Dow 36,000[0]? Only time will tell, but I would be nervous about suggesting a bubble had "disappeared" rather than the media losing focus on it. [0] https://en.wikipedia.org/wiki/Dow_36,000 https://en.wikipedia.org/wiki/Dow_36,000
Animats 7y ago
Be afraid. Be very afraid. When you see articles like this, it's time to worry. “Stock prices have reached what looks like a permanently high plateau,” - Prof. Irving Fisher, economist at Yale, October 16, 1929. "The Federal Reserve is not currently forecasting a recession." - Ben Bernanke, Federal Reserve chair, Jan. 10, 2008.
- bagacrap 7y ago
  Fwiw I don't think the fed chairman should ever say "we're about to enter a massive recession," do you?
  - Animats 7y ago
    The job of the Federal Reserve, is "to take away the punch bowl just as the party gets going." - William Martin, head of the Fed in the 1960s.
munificent 7y ago
> More broadly, the tech dura-bubble has coincided with a continued boom in corporate profits that has lifted valuations and increased the sums spent on mergers and acquisitions throughout the whole economy. How much of this is because of tax changes? In other words, how much of this essentially represents a wholesale migration of wealth to corporations and the rich at the expense of reduced services for the poor?
deleted 7y ago
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sytelus 7y ago
One insight in the article is the financial sources that keep the startup scene in sillicon valley going. These are investors from China, sovereign funds and massive entities like SoftBank In addition big tech with their growing war chest have ever more reasons to buy startups. All these financial sources have prevented bubble burst like in 2000 when revenues were expected post IPOs. Now you can just keep going with ever higher valuations for years. It occurs to me that these financial sources are also why it’s so hard to duplicate SV elsewhere: this massive niagras of funding don’t exist in Paris or Austin or even London at the scale they do in SV.
apo 7y ago
This article cites foreigners and big techs as the source of money without much to back it up. We know that in its institutional panic the US Fed pumped trillions of dollars into the economy in the form of QE 1-3: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... Central banks around the world have followed the US lead in a coordinated effort to pump up the volume and avoid currency appreciation against the dollar. The Fed for its part is now done with its feeble attempts to draw down its balance sheet. The only reasonable conclusion is that more QE will be on tap at the first hint of either deflation or economic weakness. This created the everything bubble we now face. Prices have become so distorted that it's impossible to value anything or even rationally discuss the end of the cycle. The entire episode is without precedent and will probably end in an unprecedented way.
notadoc 7y ago
There's still plenty of time for a burst, but it'll reach far beyond tech. Super low interest rates have created a ton of speculation globally in virtually all asset markets. This time is probably not different.
opportune 7y ago
Misinformed article. The reason the tech bubble never burst is that 1) The largest tech businesses are actually hugely profitable. The only way they could burst is getting regulated or disrupted out of existence 2) Relative to other industries, bay area tech employees in the right employers are getting paid huge amounts leading to the largest creation of wealth perhaps of all time. This only looks like a bubble to people outside the industry because they don't understand how much this large group of people is making. 3) Yes there is still a lot of venture capital (some foreign, and most of that being biased towards only recent years) chasing large returns in a low interest rate economy, but that is only because of people chasing more #1s. And new hugely profitable businesses are still being made, like Square or Shopify or the yet-to-IPO Airbnb It's not the acquihires. That only affects a small (relatively) number of people compared to the hundreds of thousands of very well compensated engineers at FAANG and smaller companies.
starchild_3001 7y ago
Something is a bubble if its future discounted cash flows cannot cover its current valuation. Can the author please make a rigorous case by looking at actual numbers (e.g. her predicted valuation 5-10 years ago vs now.. or analyze a few companies today). Or can she please refrain from writing such general, alarmist and meaningless articles?
chachachoney 7y ago
The digital economy is predicated on actual users and actual ad impressions --- the growth and effectiveness of both have proven to be grossly misrepresented. That's the bubble which is in imminent danger of popping, and at some point, it will.
debug_op 7y ago
I'd like to hear everyone's thoughts on this... Over the last 10 years there has been a massive increase in the money supply and a huge inflation in financial assets, but not much inflation in the sorts of goods and services that average people spend their money on. So, riffing on these results, what if the treasury printed enough money to wipe away the debt of every US citizen, either paying off loans on people's behalf or just giving money to people and encouraging them to pay off their loans? Because loans are quoted in nominal dollar amounts this would eliminate everyone's loan balances. The money used to pay off the loans would then be invested, because creditors are generally institutions and institutions tend to invest in financial assets. The net result would be an elimination of the debt of all citizens, inflation in financial assets, but steady consumer goods and services prices. The downside of this is that income inequality increases, with institutions and holders of financial assets getting a massive transfer of wealth, but the upside is that we get rid of everyone's debt. What am I missing?
- shkkmo 7y ago
  I mean, that's basically just a twist on the idea of printing money to fund Basic Income... with a possible bias towards people in debt?
- jacques_chester 7y ago
  It would set up incredible moral hazard. Folks would take on enormous debts and then lobby for another round of that debt repayment. Having set the precedent and given how incredibly popular it would be politically, it would likely happen again. The net effect would be a spiral of inflation.
sytelus 7y ago
One of the interesting phenomena is that this boom is more specific to US and if you go in rest of the world people will often tell you how their economy sucks and things are in in down trend. In US, the stock prices have indeed grown in same order as earnings which is surprising because how are all these companies magically show such huge growth for almost a decade now but elsewhere this is not the case. One possibility is that lots of US growth come from winning market share abroad.
wahern 7y ago
> All that capital from institutional investors, sovereign wealth funds, and the like has enabled start-ups to remain private for far longer than they previously did, raising bigger and bigger rounds. This misses the forest for the trees. These investors have so much money because the global economy has exploded over the past 20 years. Saudi Arabia has money to spend because it's selling oil like crazy--oil revenues began to explode after 2000. See https://tradingeconomics.com/saudi-arabia/government-revenues https://tradingeconomics.com/saudi-arabia/government-revenue... I didn't even know about Saudi Arabia's increased revenue, but I knew I could find data like that as it's a consequence of the monumental revolution in global wealth. It's not just China. The economies of Africa and Latin America have exploded over the past twenty years. Similarly, since 2000 most Asian economies began following the trajectory of the so-called Asian Tigers before them. I've posted it elsewhere, but some reports from a few years ago projected over $300 trillion (trillion!) in global assets floating around, exclusive of real estate and capital equipment valuations (though some of that wealth shows up as securities). That dwarfs interventions like QE that everybody loves to bring up, which even if you account for the inflationary effect still only amounts to a small fraction of global assets. If you don't appreciate the fundamentals for this explosion in cash then you'll be waiting forever for the other shoe to drop. Keep in mind that the global economy has been depressed since 2008-2010. Indeed, that's one reason there's so much cash parked in the U.S. But when the global economy picks up there'll be even more cash, so even if countries begin reallocating cash elsewhere, that doesn't necessarily mean a substantial drop in absolute terms in the U.S. The U.S. has a significantly diminished position in global trade, relatively speaking. We may be the biggest trading partner for most countries, but most countries are also trading globally, so being the "biggest" partner for each country doesn't mean we dominate the global economy in the way we once did. Similarly, the complex global supply chain means the emphasis on bilateral accounting fails to appreciate how the underlying flows work and thus how the fundamental global economic engine operates. The only "bubble" is in the U.S., and while we may see a correction any day now, it's not going to be cataclysmic. Not unless we make it so.
- zzzzzzzza 7y ago
  home price vs income ratio is higher in taipei than any city in us, and that's just one example
bawana 7y ago
The fed is holding down inflation rates because wages have stagnated. Can you imagine what would happen in this country if there was inflation in the face of the corporate abuse we are suffering with wages that are effectively the same as 1970?
deleted 7y ago
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m3kw9 7y ago
It won’t burst unless there is an Extraordinary cascading event that triggers a waves and waves of selling. Like lots and lots of nasty financial news
dredds 7y ago
"Being a giant sponge for salable personal information makes for good business, it turns out." That's the real backstory here; anonymity, tor, silkroad, and the darkweb, were thus widely demonized 'cos they're explicitly bad for mass-harvesting of people's private information for advertisers and other nefarious causes. Bulk info that proved very profitable in the wrong hands. A huge tech-bubble built upon enforced transparency of people's real identities, private interests, and personal activity.

193 points by Balgair 7y ago

With both the Fed and ECB considering interest rate cuts due to slowing economy indicators it seems an odd time to declare that bubble is ok.

atemerev 7y ago

OK, when there are articles like that, it’s finally time to sell. :)

abakker 7y ago
right? just tempting fate.
01100011 7y ago
I exited most of my US ETFs and mutual funds about 3 weeks ago. Bad timing, I think...
- turk73 7y ago
  I don't get why people do this. Why do you think paying taxes on all those sales is a good idea? Just create an asset allocation and re-balance 1-2x a year and stop trying to time the market because unless you have insider info, you're just being stupid.

navigatesol 7y ago

>If there was a bubble and it were to burst, kitchen-table investors might scarcely notice, unlike in the late 1990s. When bubbles burst the average person doesn't lose because the market plunges. The average person has little money in the market. They lose because themselves, friends, family and neighbors lose their jobs.

entropea 7y ago
Wait are you saying the employee's also have risk?
scarface74 7y ago
It depends, the dot com bust didn’t have a widespread affect for most people - not even tech people who were working for profitable companies.
- entropea 7y ago
  People weren't anywhere near as dependent on technology the first time.
  - scarface74 7y ago
    Just like during the dot com bust in 2000, if it happened again, it wouldn’t be the profitable companies with a solid business. It would be the unprofitable startups living off of VC funding and public companies with easy access to debt markets that would be hurt. Public companies like Uber, Tesla, and even Netflix. If those companies went belly up, it would inconvenience people but wouldn’t have far reaching affects outside of the west coast - much like what happened last time. The major profitable tech companies would keep humming along. Last time Microsoft didn’t miss a beat and Apple was still on the rise. They had their first profitable quarter in years in 2001. This time, I doubt Facebook, Amazon, Apple, Google, or Microsoft would hurt too much.
    - entropea 7y ago
      There are still a lot of companies relying on AWS, Azure, various CDN's that could see major financial impact from a lot of their customers going under. This has tentacles reaching everywhere, everything wasn't so reliant on each other back then.
- pessimizer 7y ago
  The dot com bust had a massive effect, and still represents the historical peak of black wealth in the US. It was mitigated for some people by an immediate bubble in housing, but that bubble only benefited people who owned houses when it started, meaning none of the people who were wiped out by dot com. Black wealth steadily decreased during the entire housing bubble. Black wealth is interesting in and of itself, but it's also interesting as an isolated population who we know had virtually no family wealth 100 years ago. If you want to know if an economy is only benefiting the already wealthy, look at black people.

dehrmann 7y ago

What the article fails to mention is just how much tech has changed people's lives in the past decade. People spend more time staring at their smartphones, order more through Amazon, are more likely to take an Uber or rent an Airbnb, etc. With tech companies being a much bigger part of people's lives, it's only natural that the industry will be more valuable. My only real fear right now is what happens when funding contracts, and how much of the growth in the sector is a synergistic circle jerk? Is Amazon only worth a lot because of AWS, and only because AWS makes a big chunk of its revenue off startups?

diab0lic 7y ago
I don't have any numbers so this is a genuine question: Is a big chunk of AWS revenue from startups? My intuition says most startups have small cloud footprints unless they're dealing with massive scale.
- luckylion 7y ago
  I'd assume they have small footprints as well, but there's a lot of them. A lot of tiny feet will still make an impact.
  - filoleg 7y ago
    Even a lot of large tech companies with insanely complex infrastructure run on AWS. Just talking about EC2 alone, you can see that Netflix, Twitch, LinkedIn, and Facebook run AWS [0]. I am aware that the info is from last year and is a tiny bit outdated (LinkedIn is migrating to Azure; FB doesn't use AWS for everything they do; etc.), but the general sentiment still shows that even tech giants tend to resort to using outside cloud providers. 0. https://www.quora.com/Who-are-the-top-10-Amazon-AWS-customers/answer/Michael-Pollack-13 https://www.quora.com/Who-are-the-top-10-Amazon-AWS-customer...
    - luckylion 7y ago
      Sure, I wasn't arguing that they don't, I was just saying that even though startups tend to have small footprints, the sheer amount of them makes them a large segment. Similarly to how no consumer has as close to as many cars UPS does but the whole delivery industry is dwarfed by the amount of cars consumers in total have.

olivermarks 7y ago

This reads eerily like the articles about endless money right before the massive dot com crash

lordnacho 7y ago

The scope of the article is too small to see the real cause. Look around, there's a bubble in everything. There's literally trillions of dollars of debt yielding below zero. There's entire currency yield curves that are under zero. That's right, not just the short terms like a year or two. But decades out. Tech firms may be doing well but valuations are still quite high for a lot of things by traditional measures. And there's the influence of cental bank purchases that we don't know when will end or restart.

sjg007 7y ago
>There's literally trillions of dollars of debt yielding below zero. There's entire currency yield curves that are under zero. That's right, not just the short terms like a year or two. But decades out. Can you provide a citation or a more detailed explanation?
- phyalow 7y ago
  Here you go: https://www.reuters.com/article/switzerland-bonds/swiss-50-yr-yield-falls-below-0-entire-swiss-curve-now-negative-idUSL8N24Q31B https://www.reuters.com/article/switzerland-bonds/swiss-50-y...
- Excel_Wizard 7y ago
  Euro bond rates are below 0 nominal for maturities up to 15 years: https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_area_yield_curves/html/index.en.html https://www.ecb.europa.eu/stats/financial_markets_and_intere... I don't have data on the quantities of these bonds outstanding, but trillions is almost certain. There are many other bonds that are still above 0 yield nominal, but which are below 0 real yield due to inflation.
  - blevin 7y ago
    Barclays Global Agg bond index includes $13T USD of negative yield bonds. And Swiss bonds have negative yields out to 50 years.
- 7y ago

Alex3917 7y ago

I don't understand the argument that the tech industry is becoming mature and is just being propped up by foreign investment. Right now 3 of the 5 biggest tech companies are basically: high school yearbooks, blockbuster, and taxis. Do we really think these are the most valuable industries in the world, and not just the things that happened to be easy to make with the tech that existed 10 - 20 years ago?

empath75 7y ago
Facebook is a nearly omniscient surveillance system, not a yearbook.
rhacker 7y ago
Well unfortunately yes those are some of the most valuable industries in the world - it's way beyond yearbooks - it is the potential of replacing ALL communication to people you know. It's not just blockbuster's killer but potentially a company that will own/control the distribution of all entertainment. and the last one isn't just taxis but the potential to be (with sound competition) a possible future replacement of car ownership altogether. I'm not saying they have a great chance of making it that far, but yes, that's why people invest in them.
mdorazio 7y ago
"High school yearbooks" is really "social engagement", "blockbuster" is really "film and television distribution", and "taxis" is really "personal transportation". Each of those industries is absolutely massive, so the dominant player in each industry, regardless of technology or decade, is going to be a financial juggernaut.

jfengel 7y ago

Some of it may just be the general economy. We've had a very long expansion that has been surprisingly general. It was considered slow growth, and the Fed is still talking about cutting rates as if a recession were in the offing, following very reasonable indicators. The S&P's P/E ratio (a decent measure of it's over-priced-ness) is around 20, a bit high but not ridiculous. The tech-heavy NASDAQ, however, is at 45. For comparison it was at 29 before the last big crash. The NASDAQ P/E is always speculative. People often bid up companies with low current earnings but expecting future earnings. That got very silly during the 90s tech bubble, where it would require profits of the entire world economy to justify some of those prices. But 45 suggests that we're due for a market crash. It's textbook irrational exuberance, and the whole economy is in a weird place. All signs point to a pending crash, and at least some of the companies that the article is talking about will fail. But we've been talking about that pending crash for half a decade now, and it's still not here.

thorwasdfasdf 7y ago
We keep waiting and waiting for these companies to finally start making a profit. And those companies keep making up new narratives about how those profits are coming soon. Are we in a new age? Is there a chance investors will keep waiting forever? In a age where interest rates are near permanently 0 and people invest in bitcoin ( a currency that has no real value other than the faith people have in it ~ as a store of value), perhaps people will keep investing tesla, uber, etc even if profits never really come.
- jfengel 7y ago
  Bizarrely, investors sometimes do seem to be content to wait forever. Surely AMZN, with it's P/E ratio, isn't a startup any more. They're making a ton of money, but not 80-years-to-recoup-your-investment money. They're investing a lot, but these investments would have to quadruple their profits to get the price back into justifiable range. Apple, meanwhile, steadfastly maintains a P/E under 20. Investors seem OK as long as there's a new generation of investors to sell to when they retire. Everybody is content with the fiction because somehow the economy keeps chugging along at its tolerable 2-3%. You can short the overpriced thing all you want, but you're gonna run out of cash waiting for it to fall. Got me. I keep expecting this long, slow boom to end and reset everything. I've been expecting it for a decade. So what the hell do I know.

the_watcher 7y ago

> Facebook spent $20 billion on WhatsApp and Instagram; Microsoft spent $26 billion on LinkedIn and $7.5 billion on GitHub. Deals such as these were possible only because those acquiring companies were themselves so very profitable. Instagram had $0 revenue when acquired. WhatsApp had some revenue, but was not profitable IIRC. EDIT: misread the line, above comment rescinded.

howlingfantods 7y ago
"acquiring companies" not "acquired companies"
- the_watcher 7y ago
  Oops, misread the line.
magicnubs 7y ago
> because those acquiring companies were themselves so very profitable. The quote says that the acquiring companies were profitable, not the acquired companies.
- the_watcher 7y ago
  Fair enough, misread that line.

hogFeast 7y ago

A key constituent of almost every "bubble" (massively overused term) is a long period where everyone laughs at the doubters. Contrary to popular understanding, almost every major bubble has been reported as such before the fact. When Bitcoin was running up, everyone said it was a bubble. Read issues of the Economist from 04/05, they even had a cover story on the housing bubble. Before 2001, we had "irrational exuberance" (and the Fed choosing to cut rates into a boom). Before inflation in the 1970s, read minutes from the Fed...literally three or four years before multiple board members said: "There is going to be significant inflation". Before multiple currency crises in Britain through the 1960/70s, again BoE was telling govt: "If you continue you will cause inflation and devalue" (amazingly, one prime minister was actually responsible for both devaluations in this period). Go back even further, I read a paper about the Bicycle Bubble in Britain in the 1870s...again, lots of press about how it was a bubble. It isn't hard. These aren't "black swans". This is human nature, it never changes. Because something is not happening now, does not mean it can never happened (incidentally, when these things do pop...you usually have a year plus to get out...humans are slow). The amount of self-important puffery going on in tech is somewhat unique (the people involved are unusually insufferable) but it will burst. No path to profitability for most tech companies, most will go to zero. This has happened with every innovation, every capital cycle since the early 19th century. Again: not hard. Also: it isn't just tech. It is technology innovation plus the most short-sighted practice of monetary policy in history. What is happening in Europe and Japan is staggeringly dumb (I am glad I will live to see the fallout from this group of self-appointed "experts" using all this massive intellect to drive the economy off a cliff).

MegaButts 7y ago
The joke goes "economists correctly predicted 10 of the last 2 recessions." You can always retroactively find predictions to match reality, but that doesn't mean you have much ability to figure out how much they're guessing more than anyone else at the time. Hindsight is 20/20. I've been reading about how the economy is going to crash next year for 5 years. Of course it seems inevitable that it will crash, but I'm not convinced anyone can predict when. And I'm not sure how many people can predict why.
- 7y ago

swalsh 7y ago

I wonder if being aware of the bubble also led to changes. From what I understand, it's just not normal today for companies to get funding without any real proof of a market. The juicero's, and magic leap's of the world aren't the norm, they're true unicorns of their own. The average tech company today needs to show real users, and revenue before they can reasonably expect investment. That's not even to mention that startups seem different today then they did in 2010. Back then it seemed like people would say "what if we took this new tech, and combined it with this existing industry". All those combinatrics have been tried, so I think a very large number of new businesses are not necessary "new" but rather "better". Which is kind of easier to do since the market already exists. It narrows the number of unknown unknowns.

galkk 7y ago
Look at Zume Pizza. Their fund raising seems insane.
- nradov 7y ago
  Softbank seems to be just throwing money away lately. https://www.crunchbase.com/organization/zume-pizza#section-funding-rounds https://www.crunchbase.com/organization/zume-pizza#section-f... According to reviews the pizza isn't even that great.
  - 01100011 7y ago
    I tried it. Slightly better than frozen. Also, while I was excited to hear about their new, eco-friendly pizza box, my pizza arrived inside a single-use, large mylar bubble wrap sleeve. It would take a lot for me to try them again.

pontifier 7y ago

Wiley Coyote can run across a gap if he just refuses to look down. There's probably a game theory explanation for what's going on. Nobody wants to be the first to look down... If the train is running you want to stay aboard. On the other hand, you certainly don't want to be left holding the bag.

thorwasdfasdf 7y ago

This so called bubble isn't tech at all. This is the everything bubble caused by excessively low interest rates, held down by the government for inappropriately long periods of times. Sure, 0% may have been justified in the wake of the 2008 crash, for maybe a year or two, but not 10+ years!! People shouldn't be surprised that SOOO much money is sloshing around looking for increasingly risky returns when interest rates have been 0 for so long. And here we are, at barely 2.5% (far below where it should be) and the fed is already considering rate cuts even though we're in the biggest bull market. This article is doing the world a great disservice by trying to blame the tech industry without even once mentioning the real reason: excessively low interest rates forced on us by the Fed. And it's not just the Fed, other 1st world countries are doing the same thing. They're all following the call of Keynesian economics: Keep the party drunk as long as you can by refilling the punch bowl. By creating every incentive in the world to separate people from their money as quickly as possible in a hopeless attempt to spur money flow, ultimately resulting in increasingly risky investments.

apta 7y ago
> without even once mentioning the real reason: excessively low interest rates forced on us by the Fed. No. The real reason is that interest (usury) exists in the first place. It is prohibited in Islam, Christianity, and Judaism for a reason. And I wouldn't be surprised if it were also prohibited in other religions. An economic system that relies on usury is exploitative and predatory. The rich get reacher with basically no risk on their part, and the poor are left to struggle. Eventually the cycle completes and the entire system crashes as we've seen it happen many times now.
lkrubner 7y ago
"the fed is already considering rate cuts even though we're in the biggest bull market" Inflation is extremely low, so the Fed should consider cutting rates. Lower rates means lower unemployment, which should eventually lead to higher wages. As a model for what the Fed rate should be, assume that it should always be 0% plus whatever amount is needed to limit inflation. Since inflation has been low and stable, the rate should remain close to 0%. After all, we should want a world where unemployment goes low enough that wages eventually go up. And, it is important to notice, in today's world, even an unemployment rate of 3.6% has not been low enough to cause the kinds of wage gains that were normal for most of the 20th Century. If wages aren't rising and if inflation is low, then the Fed should be pushing the rate back toward 0%. The lower the rate, the easier it is for entrepreneurs to get money, to build a business, and thus to stimulate economic activity, and if enough entrepreneurs do so, then presumably unemployment will eventually go down to whatever level is needed to raise wages.

pwinnski 7y ago

Will this article be remembered like the book Dow 36,000[0]? Only time will tell, but I would be nervous about suggesting a bubble had "disappeared" rather than the media losing focus on it. [0] https://en.wikipedia.org/wiki/Dow_36,000 https://en.wikipedia.org/wiki/Dow_36,000

Animats 7y ago

Be afraid. Be very afraid. When you see articles like this, it's time to worry. “Stock prices have reached what looks like a permanently high plateau,” - Prof. Irving Fisher, economist at Yale, October 16, 1929. "The Federal Reserve is not currently forecasting a recession." - Ben Bernanke, Federal Reserve chair, Jan. 10, 2008.

bagacrap 7y ago
Fwiw I don't think the fed chairman should ever say "we're about to enter a massive recession," do you?
- Animats 7y ago
  The job of the Federal Reserve, is "to take away the punch bowl just as the party gets going." - William Martin, head of the Fed in the 1960s.

munificent 7y ago

> More broadly, the tech dura-bubble has coincided with a continued boom in corporate profits that has lifted valuations and increased the sums spent on mergers and acquisitions throughout the whole economy. How much of this is because of tax changes? In other words, how much of this essentially represents a wholesale migration of wealth to corporations and the rich at the expense of reduced services for the poor?

deleted 7y ago

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sytelus 7y ago

One insight in the article is the financial sources that keep the startup scene in sillicon valley going. These are investors from China, sovereign funds and massive entities like SoftBank In addition big tech with their growing war chest have ever more reasons to buy startups. All these financial sources have prevented bubble burst like in 2000 when revenues were expected post IPOs. Now you can just keep going with ever higher valuations for years. It occurs to me that these financial sources are also why it’s so hard to duplicate SV elsewhere: this massive niagras of funding don’t exist in Paris or Austin or even London at the scale they do in SV.

apo 7y ago

This article cites foreigners and big techs as the source of money without much to back it up. We know that in its institutional panic the US Fed pumped trillions of dollars into the economy in the form of QE 1-3: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... Central banks around the world have followed the US lead in a coordinated effort to pump up the volume and avoid currency appreciation against the dollar. The Fed for its part is now done with its feeble attempts to draw down its balance sheet. The only reasonable conclusion is that more QE will be on tap at the first hint of either deflation or economic weakness. This created the everything bubble we now face. Prices have become so distorted that it's impossible to value anything or even rationally discuss the end of the cycle. The entire episode is without precedent and will probably end in an unprecedented way.

notadoc 7y ago

There's still plenty of time for a burst, but it'll reach far beyond tech. Super low interest rates have created a ton of speculation globally in virtually all asset markets. This time is probably not different.

opportune 7y ago

Misinformed article. The reason the tech bubble never burst is that 1) The largest tech businesses are actually hugely profitable. The only way they could burst is getting regulated or disrupted out of existence 2) Relative to other industries, bay area tech employees in the right employers are getting paid huge amounts leading to the largest creation of wealth perhaps of all time. This only looks like a bubble to people outside the industry because they don't understand how much this large group of people is making. 3) Yes there is still a lot of venture capital (some foreign, and most of that being biased towards only recent years) chasing large returns in a low interest rate economy, but that is only because of people chasing more #1s. And new hugely profitable businesses are still being made, like Square or Shopify or the yet-to-IPO Airbnb It's not the acquihires. That only affects a small (relatively) number of people compared to the hundreds of thousands of very well compensated engineers at FAANG and smaller companies.

starchild_3001 7y ago

Something is a bubble if its future discounted cash flows cannot cover its current valuation. Can the author please make a rigorous case by looking at actual numbers (e.g. her predicted valuation 5-10 years ago vs now.. or analyze a few companies today). Or can she please refrain from writing such general, alarmist and meaningless articles?

chachachoney 7y ago

The digital economy is predicated on actual users and actual ad impressions --- the growth and effectiveness of both have proven to be grossly misrepresented. That's the bubble which is in imminent danger of popping, and at some point, it will.

debug_op 7y ago

I'd like to hear everyone's thoughts on this... Over the last 10 years there has been a massive increase in the money supply and a huge inflation in financial assets, but not much inflation in the sorts of goods and services that average people spend their money on. So, riffing on these results, what if the treasury printed enough money to wipe away the debt of every US citizen, either paying off loans on people's behalf or just giving money to people and encouraging them to pay off their loans? Because loans are quoted in nominal dollar amounts this would eliminate everyone's loan balances. The money used to pay off the loans would then be invested, because creditors are generally institutions and institutions tend to invest in financial assets. The net result would be an elimination of the debt of all citizens, inflation in financial assets, but steady consumer goods and services prices. The downside of this is that income inequality increases, with institutions and holders of financial assets getting a massive transfer of wealth, but the upside is that we get rid of everyone's debt. What am I missing?

shkkmo 7y ago
I mean, that's basically just a twist on the idea of printing money to fund Basic Income... with a possible bias towards people in debt?
jacques_chester 7y ago
It would set up incredible moral hazard. Folks would take on enormous debts and then lobby for another round of that debt repayment. Having set the precedent and given how incredibly popular it would be politically, it would likely happen again. The net effect would be a spiral of inflation.

sytelus 7y ago

One of the interesting phenomena is that this boom is more specific to US and if you go in rest of the world people will often tell you how their economy sucks and things are in in down trend. In US, the stock prices have indeed grown in same order as earnings which is surprising because how are all these companies magically show such huge growth for almost a decade now but elsewhere this is not the case. One possibility is that lots of US growth come from winning market share abroad.

wahern 7y ago

> All that capital from institutional investors, sovereign wealth funds, and the like has enabled start-ups to remain private for far longer than they previously did, raising bigger and bigger rounds. This misses the forest for the trees. These investors have so much money because the global economy has exploded over the past 20 years. Saudi Arabia has money to spend because it's selling oil like crazy--oil revenues began to explode after 2000. See https://tradingeconomics.com/saudi-arabia/government-revenues https://tradingeconomics.com/saudi-arabia/government-revenue... I didn't even know about Saudi Arabia's increased revenue, but I knew I could find data like that as it's a consequence of the monumental revolution in global wealth. It's not just China. The economies of Africa and Latin America have exploded over the past twenty years. Similarly, since 2000 most Asian economies began following the trajectory of the so-called Asian Tigers before them. I've posted it elsewhere, but some reports from a few years ago projected over $300 trillion (trillion!) in global assets floating around, exclusive of real estate and capital equipment valuations (though some of that wealth shows up as securities). That dwarfs interventions like QE that everybody loves to bring up, which even if you account for the inflationary effect still only amounts to a small fraction of global assets. If you don't appreciate the fundamentals for this explosion in cash then you'll be waiting forever for the other shoe to drop. Keep in mind that the global economy has been depressed since 2008-2010. Indeed, that's one reason there's so much cash parked in the U.S. But when the global economy picks up there'll be even more cash, so even if countries begin reallocating cash elsewhere, that doesn't necessarily mean a substantial drop in absolute terms in the U.S. The U.S. has a significantly diminished position in global trade, relatively speaking. We may be the biggest trading partner for most countries, but most countries are also trading globally, so being the "biggest" partner for each country doesn't mean we dominate the global economy in the way we once did. Similarly, the complex global supply chain means the emphasis on bilateral accounting fails to appreciate how the underlying flows work and thus how the fundamental global economic engine operates. The only "bubble" is in the U.S., and while we may see a correction any day now, it's not going to be cataclysmic. Not unless we make it so.

zzzzzzzza 7y ago
home price vs income ratio is higher in taipei than any city in us, and that's just one example

bawana 7y ago

The fed is holding down inflation rates because wages have stagnated. Can you imagine what would happen in this country if there was inflation in the face of the corporate abuse we are suffering with wages that are effectively the same as 1970?

deleted 7y ago

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m3kw9 7y ago

It won’t burst unless there is an Extraordinary cascading event that triggers a waves and waves of selling. Like lots and lots of nasty financial news

dredds 7y ago

"Being a giant sponge for salable personal information makes for good business, it turns out." That's the real backstory here; anonymity, tor, silkroad, and the darkweb, were thus widely demonized 'cos they're explicitly bad for mass-harvesting of people's private information for advertisers and other nefarious causes. Bulk info that proved very profitable in the wrong hands. A huge tech-bubble built upon enforced transparency of people's real identities, private interests, and personal activity.