We’re in a Bubble, That’s Not Disputable …

Moderator here: This originally appeared as an answer to a posted question. I thought it was worthy of larger audience and discussion.

Look, kids, listen to grandpa here. I’m old enough to know people who lost huge amounts of money in 1999-2001, and know a few people now in retirement age who ended up semi-retired on account of the last tech bubble.

We’re in a bubble and the market is overheated. That’s not disputable. That doesn’t mean we don’t have a few good years left before lean times set in. Fools tend to call peaks early and often.

There’s three factors at play, at least.

First, there’s this thing called the “magazine indicator” from back when people used to print stuff on paper, OMFG, barbaric amirite? Anyway the magazine indicator was wall street jargon that said if a major publication ran a cover story about how “Market to soar indefinitely” or “stocks never to recover” it usually meant the opposite would happen. Talk of a bubble right now means we’re probably just starting to enter the overheating phase. Fools call bubbles and busts early and often–saavy players don’t call either, they just adopt an appropriate strategy. You can still go broke doing that, too.

Second, like it or not, we live in a capitalist economy subject to periodic business cycle downturns in all industries. Profit maximization runs headlong into profitability, or vice versa, at some point. This can’t be escaped until a damn world-historical change in economic structures. The last time that happened was when European and Asian feudalism went out of style so don’t hold your breath. Who knows, thought, maybe global warming makes the next 20 years look like Zardoz.

Lastly, and more practical, the money that’s in tech now is almost entirely the pocket change of large capital management firms. Tech is where smart money went after houses went out of style a few years ago. The economics of start-ups are pretty simple: make small (to a capital mgmt co.) investments on long-shot odds, IOW, high-risk acceptable-losses money. This class of capital will always be available, it just might be harder to get. Every day on this site people moan about how some “risk averse” guy decided that a cockamamie business model was too risky even for his mad money. Right now, there’s plenty of insane ideas still getting funded.

Investors and even larger conglomerate companies like startups because it lets them effectively outsource cost centers like R&D. I think that trend will continue. It doesn’t mean it won’t get a bubble-popping, just that we’ll likely see the basic model (Big Money gives some dollars to a bunch of 25-year-olds who only have macbooks and a prayer)

  • I think Andreessen made pointed remarks on why we’re not in a bubble through twitter the other week. Basically looking back at the market in the 2000 bubble, everything was trading at ridiculous PE ratios, now if you look at the market that isn’t the case. The unicorn club metrics and multiples are in line with all the current tech giants, whose multiples have drastically been traded down since 2000 bubble. The big difference is the startup economy related to seed investors.

    There are tons of them now after exits from facebook/twitter/etc. So lots of seed money floating around, but series A money is tight because the venture funds are still raising similar sized funds in aggregate to what they were in say 2008. Everyone and their mother has been claiming a bubble for the past 5 years. Most data shows that bubbles come every generation, 30-40 years. Early 30s, late 70s, early 2000s, and likely the next will be in 2030+ if the trend continues.

  • “Who knows, thought, maybe global warming makes the next 20 years look like Zardoz.”

    I loughed for two hours with this. You definitely gave away your age here.

  • Actually I disagree.

    It’s a few “chosen ones” who skim off the top on IPO day (almost all of them are down double-digits since 1st trading day) and other “chosen ones” from the same tribe who play money-go-round between the 10 or so successful tech founders, VC firms who need exists and whom these founders owe favors (hence ridiculous valuations), and return-seeking pension fund managers. But both things do not involve broader Wall Street.

    We’ve already seen corrections of 20 – 60% for some select internet stocks, but it had no consequences for broader Wall Street.

    What’s much more consequential is an interest rate increase of 1 or 2%, or gasp return to normal 6-8%. The money-go-round will become a game of musical chairs.

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