
Disruptions: If It Looks Like a Bubble and Floats Like a Bubble… - 001sky
http://bits.blogs.nytimes.com/2013/11/24/disruptions-if-it-looks-like-a-bubble-and-floats-like-a-bubble/
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fiatmoney
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.

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sliverstorm
That's like that joke;

 _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._

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fuzzythinker
Sounds very much like what people say about Nobunaga, Hideyoshi, and Tokugawa
;)

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nostrademons
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.

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9oliYQjP
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.

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mtrimpe
I think it's the other way around.

Because the economy is so crappy money is flowing into the one area which
still has the (perceived) possibility of a significant positive return on
investment.

Unfortunately, like markets tend to do, that's been raising the
prices/valuations to levels at which few investors will be actually able to
get market beating returns on investment.

If I'm right then this market is indeed experiencing an artificially high
demand, but the dynamics make it more likely to simply have it dry up
eventually rather than having it pop (like a bubble would.)

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cylinder
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.

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7Figures2Commas
> 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.

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marvin
I hear this claimed again and again, and I've never understood what people are
saying. Why will a reduction in money printing cause a stock market crash? And
why doesn't the intense money printing today cause a large amount of
inflation? None of these two things make sense to me.

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jacques_chester
Share prices are based on the last price paid. If there's a constant supply of
new money from "nowhere", it's easy to keep bidding up the prices of existing
assets.

Put another way: the effect of $80 billion / month doesn't have to be $80
billion / month. It can be the effect of using that $80 billion to drive up
the prices of existing assets. If I have cheap money and feel like Example
Company Inc is worth bidding from $100 to $500, even if I only buy a few
percent of the company, I just quintupled its headline value.

That's the argument. I think it's a little simplistic that the "only" reason
for the current bubble is US Federal Reserve policy, insofar as bubbles can
form without an inflationary monetary policy. But it's not totally
unreasonable to assume that it's playing a contributory role. It can certainly
make any bubble a more bigger and frothier bubble.

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jbooth
Whether federal reserve policy is blowing up a software bubble has more to do
with who gets the money than with the fact that money is being printed.

Hyperinflation's been around the corner for 5 years now. Obviously the
doomsayers (and classical economics) are failing to account for some massive
deflationary pressures. If current policy gets us <1% inflation, it stands to
reason that normal policy would have us in a deflationary state.
Hyperinflation is not about to show up and wreck everything.

But as far as who gets the money.. there's certainly the possibility that
capital's being allocated in a suboptimal way due to banks getting the money,
as opposed to I dunno, public works programs or handing out $100 bills on the
street. (IMO fed policy-makers would be fine with the latter two, but they're
less politically palatable in some sick way)

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jacques_chester
Australia's Federal Government did a one-off $900 handout at the start of the
GFC. Later studies showed that it was mostly diverted into paying off credit
cards, so it didn't actually have the stimulatory effect that was hoped for.

The problem with the blunt instruments of monetary and fiscal policy is ...
they're blunt. And usually come with nasty side-effects. Again, in Australia,
the Reserve Bank has been steadily pushing interest rates down to try and get
our dollar to fall. They're not having much luck in that department, but they
_have_ kicked up a surge in Sydney house prices due to record low mortgage
rates.

As for there being a _software_ bubble, I think there is such a thing,
separately from any effects of US monetary policy. But I also expect that
monetary policy is making it more spectacular. The S&P 500 has been surging
ahead of other economic indicators, that's usually a sign that there's a lot
of money swirling around looking for somewhere to go.

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jbooth
I definitely agree that there's money swirling around looking for somewhere to
go.

We're kind of in no-mans-land for political economy punditry on this one --
nobody knows how the hell to explain the current situation, Econ 101 is
totally insufficient.

I'm inclined to think that with the unemployment rate and stagnant wages for
the bottom 80% of income earners, coupled with all this extra money swirling
around, we need to find a way to connect the two, ramp up demand, get a
positive cycle started that way. No idea how to do that, though.

As far as whether there's a software bubble.. I dunno. Maybe there's a VC
bubble, because of the aforementioned money, but I think twitter would be
getting investment while being unprofitable in most economies that have a
facebook to point at.

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morgante
This graph of VC funding is probably the best evidence I know that we're not
in a bubble: [http://gigaom.com/2013/10/18/how-has-vc-funding-changed-
sinc...](http://gigaom.com/2013/10/18/how-has-vc-funding-changed-
since-1995-charts/)

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.

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alextingle
Yeh, but is Dropbox _really_ worth $8 billion?? It's a web-site plus some hard
drives!

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benmccann
Is McDonald's really worth $100 billion?? It's some guys making hamburgers!

Valuation is based on a whole host of things including revenue, brand
recognition, distribution, customer acquisition costs, customer retention
rates, switching costs, growth, etc. You could start a Dropbox competitor and
have none of those. The business matters far more in valuing the company than
how hard it is to replicate the product. It's much easier to make a hamburger
as well as McDonald's than it is to make a business as good as theirs.

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alextingle
McDonalds' revenue in 2012 was US $27 billion. Dropbox's was US $200 million.
Certainly there's a lot of potential upside in Dropbox, but it's risky too -
their business could easily be disrupted by unexpected developments.
McDonald's is pretty much safe as houses.

So yes, I think the question stands - is Dropbox _really_ worth 10% of
McDonalds?

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rwissmann
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).

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Aqueous
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.

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malandrew
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.

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krallja
> Six months ago, Pinterest was valued at $2.5 billion. Today, it is valued at
> $3.8 billion — and no revenue there, either.

Fact check, please. It's extremely unlikely that Pinterest has $0 revenue,
given how much advertising appears on the site.

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area51org
A real bubble means an epidemic of companies being overvaluated.

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?

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master_shake
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.

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incongruity
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.

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ovb
"In Silicon Valley, pointing out this sort of thing is considered a bit
impolite."

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.

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etherael
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?

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brudgers
Duck typing has its limitations.

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sunseb
Almost everything is a bubble right now (thanks to the FED's money printing) !
Check this website : [http://www.zerohedge.com/](http://www.zerohedge.com/)

