8 ms·

The Next Bubble - Don't Get Fooled Again

119 points by grellas 15y ago

mprovo1 15y ago
I wonder if awareness + the experience that we had just 10 years ago is going to limit the size of this bubble. 10 years is a very short time it's the same sector. I know for one thing, I had my lesson 10 years ago, my dad had his lessons investing in Nortel Networks and most of my friends learned a lot about bubbles in 2000. The pain of losing that much money is still there.
- bad_user 15y ago
  There are always people that haven't lost enough in the previous bubbles and the allure of getting a huge return in only 1 or 2 years is greater than life. I'm sure a lot of people recognize that evaluations are already inflated, but feel confident that they'll get out before the bubble explodes.
  - dschoen 15y ago
    Fully agree.
  - staticshock 15y ago
    This discussion came up recently in a Planet Money episode (http://www.npr.org/blogs/money/2011/05/20/136403092/the-tuesday-podcast-we-sold-gold http://www.npr.org/blogs/money/2011/05/20/136403092/the-tues...). They interviewed an economist who ran a simple experiment: he created a market for the students in his class with a VERY predictable security (it paid a pre-established dividend N times, and then stopped.) And yet speculative bubbles invariably formed and crashed.
    - jturn 15y ago
      That blew my mind. The professor even told the students it was happening as it was happening and the bubble wouldn't deflate.
      - khafra 15y ago
        It feels like it's similar to the "guess a number between 0 and 100 that's 2/3 of the average person's guess" game. In the real world, you don't win by doing the most rational thing; you win by succesfully modeling the other players.
arethuza 15y ago
What started the Mania phase in the last bubble, the Netscape IPO in mid '95? If so then we could have four or more years to the next Blow Off.
Shenglong 15y ago
I feel the realization rate of most investments in the tech sector are already understood. If there's a bubble, it'll just be a function of poor investing, rather than poor understanding.
- dschoen 15y ago
  I agree. Afraid it won't matter, because ultimately it's going to affect the entire industry and make it almost impossible for startups that just happen to be in the right place at the wrong time to get funding.
chailatte 15y ago
This will be a short bubble. - Greece is about to default any minute now. After that, Ireland/Portugal/Spain/Austria/Italy will soon follow. - Japan is suffering -5% GDP per year - China is starting to have internal riots in major cities because of high inflation. Also, lots of their high flying companies are starting to be investigated for fraud. Thus the recent 30-40% drops in their stock prices. - US is about to default technically by not raising their debt ceiling. All signs point to the second dip in the global economic depression.
- arethuza 15y ago
  The Asian Financial Crisis happened during the the last bubble: http://en.wikipedia.org/wiki/1997_Asian_financial_crisis http://en.wikipedia.org/wiki/1997_Asian_financial_crisis
  - chailatte 15y ago
    They were able to paper that crisis over by massive printing of currency. Not this time (look at the high inflation riots in China)
- nodata 15y ago
  How did Austria get into that list?
  - chailatte 15y ago
    Austria debt levels must get to safer ground - IMF http://www.reuters.com/article/2011/06/14/austria-economy-idUSVIF00007920110614 http://www.reuters.com/article/2011/06/14/austria-economy-id...
    - nodata 15y ago
      "IMF sees low risk of Austria losing AAA rating" http://www.reuters.com/article/2011/06/14/austria-rating-idUSVIF00008120110614 http://www.reuters.com/article/2011/06/14/austria-rating-idU... I still don't see how this puts them in the same category as Greece.
dschoen 15y ago
Still with all that knowledge I'm afraid it's almost impossible to slow down group dynamics (and that's all this is) to a point where everybody doesn't get hurt - again. People are going to try to outsmart the bubble, probably even accelarting it. Human nature, I guess. Still sucks. :)
- saalweachter 15y ago
  I think you could get a lot of mileage out of taxation. Increase the short-term capital gains rate to -- say -- 50%, add in an shorter-term capital gains rate of 75% for gains inside a month, and just for good measure top it all off with a super-short-term rate of 90% for gains inside of a day. And to balance the equation, maybe make a longer-term capital gains and drop the capital gains rate on investments lasting more than 5 years to 5% or so. (Or, heck, just inflation-index them.)
  - tatsuke95 15y ago
    Two problems: 1. There is zero political will (yet) to raise taxes. You will never get elected on a tax raising platform. 2. Increasing taxes means a decrease in aggregate demand, which will slow the economy -- an economy already in the doldrums. That's why it's such a precarious situation.
yaakov34 15y ago
I don't see how you can compare this to the housing bubble/crisis. The real estate market contains trillions of dollars (everyone's money participates in it one way or another), and some of the worst stuff, like bad mortgages, was amplified and leveraged by firms using it as collateral. Here, we're talking about a $9 billion valuation for LinkedIn, and that's just a valuation, they sold off something like 20% of the shares, so actually only $1 billion or $2 billion changed hands. In other words, the leverage here works to reduce the economic impact. Who cares about this, other than the people holding these shares? The percentage of the world's capital being invested at these insane valuations is very, very small. Meanwhile, there are tons of undervalued companies in everything from shipping to construction and energy. I think we're not looking at a depression just yet, at least not based on a few dumb valuations for no-substance "social" companies.
heyrhett 15y ago
He closes with: "For all of these reasons, I believe this House should vote in favor of the motion before it. " What does that mean?
- hexis 15y ago
  It's a part of formal debate procedure. This blog post was taken from a debate in The Economist magazine.
callmeed 15y ago
Assuming we're in a bubble, from a startup founder perspective, it seems like the smart thing to do (to me, at least) is either: 1) Look at the companies and business models that survived the first dot-com bubble (amazon, ebay, priceline, eharmony, etc.) and start analogous companies that can get to profitability OR 2) Start something in a hot space and get acquired ASAP or do a funding round that let's you take money of the table. And then don't spend the money
- freshfunk 15y ago
  This is true regardless of impending bubble or not.
  - Ixiaus 15y ago
    Yes, but more accentuated in a bubble.
freshfunk 15y ago
Click through to the debate and read Horowitz' side: http://www.economist.com/debate/days/view/710 http://www.economist.com/debate/days/view/710 He has some pretty compelling graphs and arguments for his position!
sabat 15y ago
Blank's argument doesn't completely hold up. Bubbles happen, but not all bubbles are created equal. The Big Bad One, from 1999, does not compare to whatever you want to call this one. The irrational exuberance exercised in that era was much, much greater and far less sane. Yes, Linked In is/was overvalued. Same with Groupon and a handful of others. Color raised $40 million without a product (gads! no product before a venture round?). But we've been through this before, and not all the investors are going to be suckers. Color will not IPO. There will not be hordes of companies going public. John Q. Public Investor will not be directly affected. And the VCs are not solely investing in companies without products, business models, and income. Pandora is profitable. Facebook is profitable (AFAIK). Twitter has figured out how to make money. Y-Combinator companies are being bought out not in a flurry of impulse and whim but because it makes business sense (e.g. Wufoo). edit: Steve Blank: No one doubts that social networks and web and mobile applications are reinventing commerce. Obviously, some of these companies will have hundreds of millions of customers, unprecedented revenue growth and great profits. Yet none of these companies have earned the valuations that they are receiving. Block that kick! Mr. Blank is leaping from "there are some companies that have not earned these valuations" to "we are in a widespread bubble." That's my problem with this logic -- it's unjustified. We're still talking about a handful of overvalued companies. We're being way too sensitive. Bubble, maybe, but a tiny one. Not a really big one. Not one that's going to have any significant effect on the economy. Oh, and Mr. Blank: the reason driving through Palo Alto is tough is because the Valley economy is in better shape than it was a year ago, not because of your tiny bubble. People are working again, but they're not all working for Color and Linked In. edit 2: Quote from an Economist commentor: The fact is that a bubble "in Tech", which was the debate topic looks highly unlikely just based on the fact that the success of the high-fliers hasn't started raising all boats. The market is still acting properly and choosing winners and losers, and the losers' shareholders would be the first to point that fact out. Exactly. Those screaming "bubble" are looking at a skewed picture. "Hey, these five companies are overvalued!" Yes, but these X thousand companies are not. Why does that handful warrant so much attention, fear, uncertainty, and doubt?
- deleted 15y ago
  [deleted]
- 15y ago
ebiester 15y ago
Take this as uninformed speculation (read: I'm not willing to spend the 6 hours pulling together the citations I need for this argument), but it seems to me that some of this bubble is a response to current investing conditions. Everyone is concerned that we're moving into a second dip, possibly worldwide depression. With the problems with the Euro, Europe isn't an appealing place to invest. the BRIC countries are often risky investments due to government interference, and would be hit extremely hard with a worldwide depression. The American stock market is volatile, and seems maxed out right now. Yet people are worried about gold and other inflation hedges as well. It has exploded, but is risky as a primary investment vehicle. Real Estate is a bad hedge because its values are still above what seems to be market value. Bonds aren't safe if there are a series of defaults. Thus, there are no "safe" vehicles for money. However, these social tech companies grew in a recession, so seem less risky than their objective risk profiles would indicate. The bubble, then, may be relative to other investments, not because of their own inherent value. In short, when safe (relatively) investments look risky, risky investments look less risky in comparison.
- JanezStupar 15y ago
  William Gross said in 2007 that everything he sees is in a bubble - that all assets across all markets are overpriced. There was no significant correction from then - thanks to ECB and FED, who decided to finance the perpetrators with even more credit.
  - DaniFong 15y ago
    What could it possibly mean for all assets to be overpriced? What could they be overpriced relative to?
    - JanezStupar 15y ago
      In (value?) investment asset prices are always reflected against expected future returns via increase of price or via dividends. Edit: So the assets are overpriced relative against their future returns.

119 points by grellas 15y ago

I wonder if awareness + the experience that we had just 10 years ago is going to limit the size of this bubble. 10 years is a very short time it's the same sector. I know for one thing, I had my lesson 10 years ago, my dad had his lessons investing in Nortel Networks and most of my friends learned a lot about bubbles in 2000. The pain of losing that much money is still there.

bad_user 15y ago
There are always people that haven't lost enough in the previous bubbles and the allure of getting a huge return in only 1 or 2 years is greater than life. I'm sure a lot of people recognize that evaluations are already inflated, but feel confident that they'll get out before the bubble explodes.
- dschoen 15y ago
  Fully agree.
- staticshock 15y ago
  This discussion came up recently in a Planet Money episode (http://www.npr.org/blogs/money/2011/05/20/136403092/the-tuesday-podcast-we-sold-gold http://www.npr.org/blogs/money/2011/05/20/136403092/the-tues...). They interviewed an economist who ran a simple experiment: he created a market for the students in his class with a VERY predictable security (it paid a pre-established dividend N times, and then stopped.) And yet speculative bubbles invariably formed and crashed.
  - jturn 15y ago
    That blew my mind. The professor even told the students it was happening as it was happening and the bubble wouldn't deflate.
    - khafra 15y ago
      It feels like it's similar to the "guess a number between 0 and 100 that's 2/3 of the average person's guess" game. In the real world, you don't win by doing the most rational thing; you win by succesfully modeling the other players.

arethuza 15y ago

What started the Mania phase in the last bubble, the Netscape IPO in mid '95? If so then we could have four or more years to the next Blow Off.

Shenglong 15y ago

I feel the realization rate of most investments in the tech sector are already understood. If there's a bubble, it'll just be a function of poor investing, rather than poor understanding.

dschoen 15y ago
I agree. Afraid it won't matter, because ultimately it's going to affect the entire industry and make it almost impossible for startups that just happen to be in the right place at the wrong time to get funding.

chailatte 15y ago

This will be a short bubble. - Greece is about to default any minute now. After that, Ireland/Portugal/Spain/Austria/Italy will soon follow. - Japan is suffering -5% GDP per year - China is starting to have internal riots in major cities because of high inflation. Also, lots of their high flying companies are starting to be investigated for fraud. Thus the recent 30-40% drops in their stock prices. - US is about to default technically by not raising their debt ceiling. All signs point to the second dip in the global economic depression.

arethuza 15y ago
The Asian Financial Crisis happened during the the last bubble: http://en.wikipedia.org/wiki/1997_Asian_financial_crisis http://en.wikipedia.org/wiki/1997_Asian_financial_crisis
- chailatte 15y ago
  They were able to paper that crisis over by massive printing of currency. Not this time (look at the high inflation riots in China)
nodata 15y ago
How did Austria get into that list?
- chailatte 15y ago
  Austria debt levels must get to safer ground - IMF http://www.reuters.com/article/2011/06/14/austria-economy-idUSVIF00007920110614 http://www.reuters.com/article/2011/06/14/austria-economy-id...
  - nodata 15y ago
    "IMF sees low risk of Austria losing AAA rating" http://www.reuters.com/article/2011/06/14/austria-rating-idUSVIF00008120110614 http://www.reuters.com/article/2011/06/14/austria-rating-idU... I still don't see how this puts them in the same category as Greece.

dschoen 15y ago

Still with all that knowledge I'm afraid it's almost impossible to slow down group dynamics (and that's all this is) to a point where everybody doesn't get hurt - again. People are going to try to outsmart the bubble, probably even accelarting it. Human nature, I guess. Still sucks. :)

saalweachter 15y ago
I think you could get a lot of mileage out of taxation. Increase the short-term capital gains rate to -- say -- 50%, add in an shorter-term capital gains rate of 75% for gains inside a month, and just for good measure top it all off with a super-short-term rate of 90% for gains inside of a day. And to balance the equation, maybe make a longer-term capital gains and drop the capital gains rate on investments lasting more than 5 years to 5% or so. (Or, heck, just inflation-index them.)
- tatsuke95 15y ago
  Two problems: 1. There is zero political will (yet) to raise taxes. You will never get elected on a tax raising platform. 2. Increasing taxes means a decrease in aggregate demand, which will slow the economy -- an economy already in the doldrums. That's why it's such a precarious situation.

yaakov34 15y ago

I don't see how you can compare this to the housing bubble/crisis. The real estate market contains trillions of dollars (everyone's money participates in it one way or another), and some of the worst stuff, like bad mortgages, was amplified and leveraged by firms using it as collateral. Here, we're talking about a $9 billion valuation for LinkedIn, and that's just a valuation, they sold off something like 20% of the shares, so actually only $1 billion or $2 billion changed hands. In other words, the leverage here works to reduce the economic impact. Who cares about this, other than the people holding these shares? The percentage of the world's capital being invested at these insane valuations is very, very small. Meanwhile, there are tons of undervalued companies in everything from shipping to construction and energy. I think we're not looking at a depression just yet, at least not based on a few dumb valuations for no-substance "social" companies.

heyrhett 15y ago

He closes with: "For all of these reasons, I believe this House should vote in favor of the motion before it. " What does that mean?

hexis 15y ago
It's a part of formal debate procedure. This blog post was taken from a debate in The Economist magazine.

callmeed 15y ago

Assuming we're in a bubble, from a startup founder perspective, it seems like the smart thing to do (to me, at least) is either: 1) Look at the companies and business models that survived the first dot-com bubble (amazon, ebay, priceline, eharmony, etc.) and start analogous companies that can get to profitability OR 2) Start something in a hot space and get acquired ASAP or do a funding round that let's you take money of the table. And then don't spend the money

freshfunk 15y ago
This is true regardless of impending bubble or not.
- Ixiaus 15y ago
  Yes, but more accentuated in a bubble.

freshfunk 15y ago

Click through to the debate and read Horowitz' side: http://www.economist.com/debate/days/view/710 http://www.economist.com/debate/days/view/710 He has some pretty compelling graphs and arguments for his position!

sabat 15y ago

Blank's argument doesn't completely hold up. Bubbles happen, but not all bubbles are created equal. The Big Bad One, from 1999, does not compare to whatever you want to call this one. The irrational exuberance exercised in that era was much, much greater and far less sane. Yes, Linked In is/was overvalued. Same with Groupon and a handful of others. Color raised $40 million without a product (gads! no product before a venture round?). But we've been through this before, and not all the investors are going to be suckers. Color will not IPO. There will not be hordes of companies going public. John Q. Public Investor will not be directly affected. And the VCs are not solely investing in companies without products, business models, and income. Pandora is profitable. Facebook is profitable (AFAIK). Twitter has figured out how to make money. Y-Combinator companies are being bought out not in a flurry of impulse and whim but because it makes business sense (e.g. Wufoo). edit: Steve Blank: No one doubts that social networks and web and mobile applications are reinventing commerce. Obviously, some of these companies will have hundreds of millions of customers, unprecedented revenue growth and great profits. Yet none of these companies have earned the valuations that they are receiving. Block that kick! Mr. Blank is leaping from "there are some companies that have not earned these valuations" to "we are in a widespread bubble." That's my problem with this logic -- it's unjustified. We're still talking about a handful of overvalued companies. We're being way too sensitive. Bubble, maybe, but a tiny one. Not a really big one. Not one that's going to have any significant effect on the economy. Oh, and Mr. Blank: the reason driving through Palo Alto is tough is because the Valley economy is in better shape than it was a year ago, not because of your tiny bubble. People are working again, but they're not all working for Color and Linked In. edit 2: Quote from an Economist commentor: The fact is that a bubble "in Tech", which was the debate topic looks highly unlikely just based on the fact that the success of the high-fliers hasn't started raising all boats. The market is still acting properly and choosing winners and losers, and the losers' shareholders would be the first to point that fact out. Exactly. Those screaming "bubble" are looking at a skewed picture. "Hey, these five companies are overvalued!" Yes, but these X thousand companies are not. Why does that handful warrant so much attention, fear, uncertainty, and doubt?

deleted 15y ago
[deleted]
15y ago

ebiester 15y ago

Take this as uninformed speculation (read: I'm not willing to spend the 6 hours pulling together the citations I need for this argument), but it seems to me that some of this bubble is a response to current investing conditions. Everyone is concerned that we're moving into a second dip, possibly worldwide depression. With the problems with the Euro, Europe isn't an appealing place to invest. the BRIC countries are often risky investments due to government interference, and would be hit extremely hard with a worldwide depression. The American stock market is volatile, and seems maxed out right now. Yet people are worried about gold and other inflation hedges as well. It has exploded, but is risky as a primary investment vehicle. Real Estate is a bad hedge because its values are still above what seems to be market value. Bonds aren't safe if there are a series of defaults. Thus, there are no "safe" vehicles for money. However, these social tech companies grew in a recession, so seem less risky than their objective risk profiles would indicate. The bubble, then, may be relative to other investments, not because of their own inherent value. In short, when safe (relatively) investments look risky, risky investments look less risky in comparison.

JanezStupar 15y ago
William Gross said in 2007 that everything he sees is in a bubble - that all assets across all markets are overpriced. There was no significant correction from then - thanks to ECB and FED, who decided to finance the perpetrators with even more credit.
- DaniFong 15y ago
  What could it possibly mean for all assets to be overpriced? What could they be overpriced relative to?
  - JanezStupar 15y ago
    In (value?) investment asset prices are always reflected against expected future returns via increase of price or via dividends. Edit: So the assets are overpriced relative against their future returns.