

The Next Bubble - Don't Get Fooled Again - grellas
http://steveblank.com/2011/06/15/the-next-bubble-dont-get-fooled-again/

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ebiester
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
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
What could it possibly mean for all assets to be overpriced? What could they
be overpriced relative to?

~~~
JanezStupar
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.

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yaakov34
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.

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callmeed
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
This is true regardless of impending bubble or not.

~~~
Ixiaus
Yes, but more accentuated in a bubble.

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mprovo1
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
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.

~~~
staticshock
This discussion came up recently in a Planet Money episode
([http://www.npr.org/blogs/money/2011/05/20/136403092/the-
tues...](http://www.npr.org/blogs/money/2011/05/20/136403092/the-tuesday-
podcast-we-sold-gold)).

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
That blew my mind. The professor even told the students it was happening as it
was happening and the bubble wouldn't deflate.

~~~
khafra
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.

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arethuza
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.

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dschoen
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
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
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.

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freshfunk
Click through to the debate and read Horowitz' side:
<http://www.economist.com/debate/days/view/710>

He has some pretty compelling graphs and arguments for his position!

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Shenglong
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
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.

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

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sabat
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?

~~~
MaysonL
We are in the beginning phase of what might end up being a humongous bubble.
Angel investment valuations[prices] are up, IPOs are starting to take off. But
it isn't totally crazy yet, and it may never get there.

As Brad DeLong says these days: it isn't a Great Recession anymore, it's a
Little Depression. (And could get worse before it gets much better).

------
chailatte
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.

~~~
yaakov34
I can be a pessimist with the best of them, but this is just panic-mongering.

\-- The US would be insane to default; their debts are mostly internal, and in
their own currency, which they can just inflate. Unpleasant for Americans,
whose pensions and savings are going to be worth a lot less, but this is how
you pay for living beyond your means. If they need to change some technical
rule, they will find a way of doing that, rather than default on debts and
cause chaos.

\-- Unlike Iceland, which physically lacked the money to pay its debts, Greece
simply doesn't want to cut its government spending by 10% and pay its
creditors. They are a sovereign nation, so nobody can force them to. Fine.
After they default, and the financing gets cut off anyway, they will have to
cut spending even more. Maybe after other nations will see how that works out
for them, they will think twice about not paying debts that they voluntarily
took on. Or maybe not. But let's not start hyperventilating about an Austrian
default just yet.

\-- China has had two decades of solid economic growth. Make that fantastic
economic growth. I am not talking about numbers on paper, it's growth measured
in concrete and steel and food. They'll live through a correction if they have
to.

~~~
carsongross
\-- "Just inflate" Oh, is that all? Turned out pretty nicely for Argentina,
didn't it?

\-- Unlike Iceland, Greece will taco the Euro, and bring down a bunch of Euro
banks.

\-- China is to the Greater Depression as the U.S. was to the original Great
Depression: the exporter that is going to get totaled. I'm optimistic on the
other side of the coming valley, but they are going to have a heck of a
reckoning when all the bad debts and malinvestment come to a head. I don't
expect the current government to survive unless they are extremely brutal and
extremely lucky.

~~~
yaakov34
>> "Just inflate" Oh, is that all? Turned out pretty nicely for Argentina,
didn't it?

Argentina defaulted. It turned out to be a disaster, which, for them, may have
been unavoidable. Why would the US want this?

>> Unlike Iceland, Greece will taco the Euro, and bring down a bunch of Euro
banks.

Yeah, sure, we're all moving to the workhouse because Euro banks stand to lose
40 billion euros from a Greek default (this is the "haircut" being proposed).
In an economy of 13 trillion euros a year. After Greece finishes digging out
from its default disaster (remember, plenty of their debt is internal), maybe
others will think twice. Or maybe not. I don't have the gift of prophecy, but
I am betting pretty strongly against the whole Eurozone of 400 million people
turning into a boarded-up wasteland.

If you want to counsel panic, put some numbers on it - what exactly will one
Euro buy in five years, and where will the stock markets be (boarded up,
maybe)? Then let's see if you're willing to invest your money accordingly.

~~~
yaakov34
By the way, if you want to see my predictions in numbers for the next 5 years,
here they are:

1\. The Euro will appreciate against the dollar, because the US will have to
issue a lot of currency to bail out local and state governments in the next 5
years. I am guessing a Euro will buy about 2 dollars then (edit: come to think
of it, probably more. The US will print a lot of money).

2\. The stock markets will not be boarded up, and will be trading at roughly
at the levels of today (+ inflation). I don't see tons of profit there, given
panicky investors, but the fundamentals are more than sound enough to prevent
a total collapse. It's not like the market is trading at insane P/E ratio.

3\. Almost all private and public debts will be paid. There are funds to do
this, and the political pressure to make good on debt will be overwhelming.
There may be a Greek default, and the Spanish real estate debts will have to
be restructured too, but not at a crippling loss to the whole Eurozone - there
is not enough money invested to "taco the Euro".

Yes, my money and my mouth are in the same exact place.

~~~
carsongross
1) I think the Euro will not be recognizable in five years, so I hesitate to
guess where whatever the Euro is (if it still exists at all) will be. I'm
expecting that current Euro holders will see depreciation of their purchasing
power unless they are very nimble.

2) I expect the S&P to retest and break the previous lows. Russell Napier has
a target of 400, which sounds plausible to me.

3) Not a chance. Productive capacity has been hollowed out in exactly the
economies that have taken on the most debt, so the debt can't be repaid in any
meaningful way. When you start penciling in future obligations or, heaven
forfend, "investments" in "derivatives" made by our friends in the big pension
funds... No way. I believe we are at the end of the public/private debt ponzi
scheme. It could end in hyperinflation or in deflation. I expect deflation.

My money is kind of where my mouth is: a straddle of startup investments and
cash/PMs.

Hey, I could be wrong, right?

~~~
yaakov34
By the way, I've always wanted to ask someone who buys gold/silver as a hedge
against economic collapse - are you physically holding it in your house, or
what? If your gold is just 1s and 0s in some database which say that you own
some gold, why do you think you will be able to get it after the "Big One"?
Your bank or brokerage may have to give it to some creditor who is in line
before you. And there are precedents for the government just confiscating it,
or forcing you to "sell" it at the price they set. So what's the plan?

~~~
carsongross
We've established that you think I'm crazy. Granting that, how do you think I
would answer your questions?

