There is a historical pattern of overinvestment in a first bubble leading up to a crash, followed by a second wave which exploits the now-cheap capital assets and actually does fairly well. You can see this in railroads, real estate, telecommunications infrastructure at various points from telegraph to telephones to fiber, and arguably financial capital markets themselves when new investment vehicles open up.
The point of this is that second-wave investments often look a lot like the first, but with much higher-quality real capital associated with them (eg, gold mines that actually produce at least some gold, vs. the gold-exploration firms of the first wave).
Combine it with basically zero-opportunity-cost money dumped into the financial sector by the fed and it's a recipe for perhaps-inflated valuations, but mostly in the context of investments in actual assets. You might see very low returns for an indeterminate time, but large negative returns are something else.
TLDR: There's a difference between banks buying and selling fundamentally profitable financial investments to each other at inflated nominal values, and sinking large amounts of money into unprofitable real assets.
How many people does it take to start a ski resort? Three. One to buy all the land, go broke, and declare bankruptcy. The second to do all the paperwork, permits, go broke, and declare bankruptcy. Then a third to buy all that and start a ski resort.
As soon as I read the first ten words I started thinking telecom. Much of our current boom is based on the wasteful infrastructure spending of the last bubble.
Usually a good indication of an actual bubble is that nobody believes it's a bubble. When you have the average man on the street thinking this is the new wave and we're all guaranteed to get rich off software companies, then it may be a bubble. Right now it seems like there's a healthy skepticism in the general public.
The economy has been so crappy that people are crossing their fingers and pretending a bubble doesn't exist even though deep down they know it does. After all, it can't get any worse, right? It's like people who have terminal cancer and are otherwise rational skeptics who decide to pursue alternative therapy. Hope, even false hope, is a powerful thing.
"A recent Bloomberg survey of Wall Street investors, analysts and traders who use the company’s financial data terminals found that the majority thought Internet and social media stocks were at or near unsustainable levels.
Roughly half said that the bubble was here or soon would be."
It's not really significant, because there aren't many people involved in this bubble. If the startup scene in SV gets cut in half, it's going to hurt locally, but the broader economy won't go into recession. In addition, should some VC funds go bust, it won't trickle much to the average consumer.
The problem with the dotcom bubble and the housing bubble was that laypeople were very much involved (everything was IPOing and everyone was jumping in), and so were their retirement funds and their debt levels. The US economy lives and dies by the consumer.
> It's not really significant, because there aren't many people involved in this bubble. If the startup scene in SV gets cut in half, it's going to hurt locally, but the broader economy won't go into recession. In addition, should some VC funds go bust, it won't trickle much to the average consumer.
You're missing the plot. There are numerous asset bubbles today and they are all being fueled by the same source (the central banks).
It is unlikely (although possible) that the current "tech bubble" will pop on its own. It is more likely that it will pop at roughly the same time as the others when the massive experiment in monetary policy we have seen since 2008 comes to an end. The bursting of many of these asset bubbles will have a devastating impact on the broader economy, and the fact that numerous bubbles are bursting at the same time will only exacerbate the situation.
Timing, of course, is uncertain. The day of reckoning could come tomorrow, or it could come a decade from now. The disturbing thing is that the longer this goes on, the more painful the impact.
A bursting of the current tech bubble will be fairly significant for those of us in the tech industry, e.g. many of the users of this site.
When the dot-com bubble burst investors didn't just get scared away from companies with weak fundamentals - they got scared away from all types of tech investments. So it won't just be the groupons and zyngas that get burned - the amazons and apples and googles will drop in value too.
And those questionably sustainable startups are soaking up a lot of the supply of young techies, keeping salaries high. The seller's market we tech employees currently enjoy won't last for ever.
Still, markets can remain irrational for a very long time under the right conditions. Or perhaps Snapchat really is the future of communications and I'm just too old to recognize it.
Compared to the dot-com era, companies are raising negligible sums. Maybe you can get $2M for a failure, but you're not seeing pre-traction companies raising $300M. Similarly, every IPO we've seen has been of a company which actually has real value. Facebook is already profitable and Twitter is seeing real revenue.
Even the Snapchats of the world have a lot more going for them than their dot-com cousins: people actually use them.
Many financial assets are currently at high valuations compared to fundamental indicators and historical ratios. Due to QE and other unusual post-crisis effects there is simply a huge amount of excess capital in the financial markets. Combine that with low-to-negative real interest rates and it is no surprise that a lot of risky seem overvalued (benchmarked to a world with normal money supply and interest rates).
i think the main difference between now and 1999 is that software really is eating the world. 1999 jumped the gun a little bit. but to me there is no upper limit on just how much work software will be able to do for us going forward, now that the infrastructure is in place to support such a transformation. i think there is a lot of hype, but unlike in 1999, when nobody was sure what the value of the internet actually was, it's based on a central fact: the world of the future will be operated by software.
i'm sure there will be booms and busts but i don't think they will be nearly as severe as in 1999.
Furthermore, I'd say the world of software has diversified greatly beyond what we had in 1999. Social media companies with no revenue may experience a bubble pop, but I don't see that being an issue for VCs, whose portfolio contains completely different kinds of tech companies like Uber or Liquid Robotics for example.
I think this is one of the best points. The environment is different.
Why are "apps" companies taking off? Because Google, Microsoft, and Apple are actively selling billions of phones to customers. These customers, in turn, fuel the app market. This is not a "bubble". These are consumers buying real products with real value, making companies real money. This isn't a "potential" type of deal, this is happening and fuels some of the biggest companies.
Why are companies like Google making money through advertising and why are other sites using Google's ad system to make a ton of cash too? Because there's a market for it. People visit the internet, they see ads, they click on them and buy. Products and money gets exchanged. Amazon is in on the deal too because, guess what? People buy products from their site.
Now, why is Snapchat and Pinterest so highly valued when they make 0 revenue (albeit Pinterest having tried the affiliate game for a short amount of time)? Because of the existing markets and companies that can profit on their products. Pinterest is already trying out revenue models, how? Affiliate programs where people click on pretty pictures of something or the other, buy the product and pinterest makes cash. Nothing magical about it. Snapchat will be harder to monetize but could "easily" be purchased and used as yet another product for a company to capitalize on and get someone trapped in their ecosystem. See facebook about instagram. Same deal.
I'm not as familiar with the dot-com bubble as others but seeing revenue happening because people are moving to more of an online world rather than an offline one makes sense. People buying products, purchasing subscriptions to entertainment, buying subscriptions to useful utilities (eg. dropbox) makes sense. Ad companies fueling online advertising to get people to buy shit or subscribe, makes sense. Companies that profit on having users and engaging those users while advertising for companies that sell products, makes sense.
The amount of borrowed money on the stock market as a percentage of GDP recently reached an all time high. And with institutional interest rates as low as they are, money is cheap, and it's flowing into tech. In fact, one could make the case that the entire global economy is being propped up by central banks.
And there's no denying that the price of snapchat is bat shit insane. Plus look at facebook, running out of ideas, losing touch with the youth, desperately trying to buy up burgeoning competition. This is characteristic of the sector as a whole.
Ultimately, the old rules always apply -- companies without revenue, that continue to spend at a deficit, cannot go on forever, it's as simple as that in the long run. So, given that there are a lot of companies that fit that, either they must figure out how to monitize effectively or they'll eventually fail. I'm not sure where the controversy is in that. Now, the second issue is whether the valuations are correct -- and, again, I'd say that the old economic rules still apply. It doesn't matter what your company does, valuation comes from how much it can grow real equity through real earnings. Anything else is just overzealous investment.
So, yes, there's a bubble. But the more interesting question is, how much will it hurt when it bursts or deflates? That's the better question, IMHO, and that's one I don't see being quite so cut and dried.
Or maybe the values are inflated because we're in the middle of a currency war with all the central banks in the world trying to devalue their currency harder than the competition?
[+] [-] fiatmoney|12 years ago|reply
The point of this is that second-wave investments often look a lot like the first, but with much higher-quality real capital associated with them (eg, gold mines that actually produce at least some gold, vs. the gold-exploration firms of the first wave).
Combine it with basically zero-opportunity-cost money dumped into the financial sector by the fed and it's a recipe for perhaps-inflated valuations, but mostly in the context of investments in actual assets. You might see very low returns for an indeterminate time, but large negative returns are something else.
TLDR: There's a difference between banks buying and selling fundamentally profitable financial investments to each other at inflated nominal values, and sinking large amounts of money into unprofitable real assets.
[+] [-] sliverstorm|12 years ago|reply
How many people does it take to start a ski resort? Three. One to buy all the land, go broke, and declare bankruptcy. The second to do all the paperwork, permits, go broke, and declare bankruptcy. Then a third to buy all that and start a ski resort.
[+] [-] mathattack|12 years ago|reply
[+] [-] nostrademons|12 years ago|reply
[+] [-] 9oliYQjP|12 years ago|reply
[+] [-] cup|12 years ago|reply
Disclaimer: I own some.
[+] [-] bdcs|12 years ago|reply
"A recent Bloomberg survey of Wall Street investors, analysts and traders who use the company’s financial data terminals found that the majority thought Internet and social media stocks were at or near unsustainable levels. Roughly half said that the bubble was here or soon would be."
[+] [-] cylinder|12 years ago|reply
The problem with the dotcom bubble and the housing bubble was that laypeople were very much involved (everything was IPOing and everyone was jumping in), and so were their retirement funds and their debt levels. The US economy lives and dies by the consumer.
[+] [-] 7Figures2Commas|12 years ago|reply
You're missing the plot. There are numerous asset bubbles today and they are all being fueled by the same source (the central banks).
It is unlikely (although possible) that the current "tech bubble" will pop on its own. It is more likely that it will pop at roughly the same time as the others when the massive experiment in monetary policy we have seen since 2008 comes to an end. The bursting of many of these asset bubbles will have a devastating impact on the broader economy, and the fact that numerous bubbles are bursting at the same time will only exacerbate the situation.
Timing, of course, is uncertain. The day of reckoning could come tomorrow, or it could come a decade from now. The disturbing thing is that the longer this goes on, the more painful the impact.
[+] [-] michaelt|12 years ago|reply
When the dot-com bubble burst investors didn't just get scared away from companies with weak fundamentals - they got scared away from all types of tech investments. So it won't just be the groupons and zyngas that get burned - the amazons and apples and googles will drop in value too.
And those questionably sustainable startups are soaking up a lot of the supply of young techies, keeping salaries high. The seller's market we tech employees currently enjoy won't last for ever.
Still, markets can remain irrational for a very long time under the right conditions. Or perhaps Snapchat really is the future of communications and I'm just too old to recognize it.
[+] [-] morgante|12 years ago|reply
Compared to the dot-com era, companies are raising negligible sums. Maybe you can get $2M for a failure, but you're not seeing pre-traction companies raising $300M. Similarly, every IPO we've seen has been of a company which actually has real value. Facebook is already profitable and Twitter is seeing real revenue.
Even the Snapchats of the world have a lot more going for them than their dot-com cousins: people actually use them.
[+] [-] alextingle|12 years ago|reply
[+] [-] rwissmann|12 years ago|reply
[+] [-] Aqueous|12 years ago|reply
i'm sure there will be booms and busts but i don't think they will be nearly as severe as in 1999.
[+] [-] malandrew|12 years ago|reply
[+] [-] antjanus|12 years ago|reply
Why are "apps" companies taking off? Because Google, Microsoft, and Apple are actively selling billions of phones to customers. These customers, in turn, fuel the app market. This is not a "bubble". These are consumers buying real products with real value, making companies real money. This isn't a "potential" type of deal, this is happening and fuels some of the biggest companies.
Why are companies like Google making money through advertising and why are other sites using Google's ad system to make a ton of cash too? Because there's a market for it. People visit the internet, they see ads, they click on them and buy. Products and money gets exchanged. Amazon is in on the deal too because, guess what? People buy products from their site.
Now, why is Snapchat and Pinterest so highly valued when they make 0 revenue (albeit Pinterest having tried the affiliate game for a short amount of time)? Because of the existing markets and companies that can profit on their products. Pinterest is already trying out revenue models, how? Affiliate programs where people click on pretty pictures of something or the other, buy the product and pinterest makes cash. Nothing magical about it. Snapchat will be harder to monetize but could "easily" be purchased and used as yet another product for a company to capitalize on and get someone trapped in their ecosystem. See facebook about instagram. Same deal.
I'm not as familiar with the dot-com bubble as others but seeing revenue happening because people are moving to more of an online world rather than an offline one makes sense. People buying products, purchasing subscriptions to entertainment, buying subscriptions to useful utilities (eg. dropbox) makes sense. Ad companies fueling online advertising to get people to buy shit or subscribe, makes sense. Companies that profit on having users and engaging those users while advertising for companies that sell products, makes sense.
[+] [-] krallja|12 years ago|reply
Fact check, please. It's extremely unlikely that Pinterest has $0 revenue, given how much advertising appears on the site.
[+] [-] area51org|12 years ago|reply
Is that really happening right now? Hundreds of companies have wildly inflated prices? Scores, even?
Or is this just a case of a few companies making the news recently?
[+] [-] master_shake|12 years ago|reply
And there's no denying that the price of snapchat is bat shit insane. Plus look at facebook, running out of ideas, losing touch with the youth, desperately trying to buy up burgeoning competition. This is characteristic of the sector as a whole.
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] incongruity|12 years ago|reply
So, yes, there's a bubble. But the more interesting question is, how much will it hurt when it bursts or deflates? That's the better question, IMHO, and that's one I don't see being quite so cut and dried.
[+] [-] ovb|12 years ago|reply
Really? Every couple days I hear someone use a construction along the lines of "when this bubble pops". Maybe I hang out with a lot of angsty people.
[+] [-] etherael|12 years ago|reply
[+] [-] brudgers|12 years ago|reply
[+] [-] sunseb|12 years ago|reply