
Yes it's a bubble, so what? - tfehring
https://www.researchaffiliates.com/en_us/publications/articles/668-yes-its-a-bubble-so-what.html
======
humanrebar
> At the end of January 2018, the seven largest-cap stocks in the world were
> all tech fliers: Alphabet, Apple, Microsoft, Facebook, Amazon, Tencent, and
> Alibaba.

Arguably we're just bucketing companies poorly. "Tech" isn't a commodity,
clientele, or business model.

We don't group companies based on the fact that they notably have physical
storefronts. Otherwise H&M, Ford, H&R Block, and McDonald's would all be in
the "brick and mortar" sector.

If the trend is "software is eating the world", it stands to reason that the
market will be more and more "tech" over time.

~~~
LMYahooTFY
"Tech" is a colloquial term that I wouldn't think needs much explanation on
HN.

As far as I've ever heard, "Brick and Mortar" has never referred to an
industry. It's just an adjective for business that has a store front on a
street. And we actually do group them in this regard, it simply isn't relevant
all of the time.

~~~
sp332
The point is that Facebook and Amazon are not really in the same industry
either.

~~~
LMYahooTFY
They're not all within the "Technology Sector"?

I understand the nuance, and Amazon is a black swan that we could debate
endlessly.

Isn't the more relevant consideration here how they're categorized in
market/investment terms?

~~~
UncleMeat
One sells products to consumers and has a massive cloud platform.

One is a social networking application that makes its money selling ads.

They both employ a lot of software engineers and have big datacenters but it
becomes increasingly less meaningful to bucket them together.

------
robocat
"Tesla has been an excellent example of a micro-bubble. Tesla’s current price
is arguably fair if most cars are powered by electricity in 10 years, if most
of these cars are made by Tesla, if Tesla can make those cars with sufficient
margin and quality control and can service the cars properly, and if Tesla can
raise additional capital sufficient to cover a $3 billion annual cash drain
and another billion to service its debt."

~~~
tvural
Financial projections will undervalue Tesla because they are very different
from other car companies - they are a monopoly with gigantic barriers to entry
on many fronts. Other carmakers could copy some features of Tesla's cars, but
they can't easily copy the multi-billion-dollar factories that make other
features possible. They have better engineers than other car companies and a
culture that works them harder. They avoided the dealership system and built
their own stores. Elon Musk's PR stunts and Twitter feed are a much more
effective method of advertising than the TV and Internet ads other car
companies use.

~~~
nvarsj
> They have better engineers than other car companies

Huh... Quality of Teslas by most accounts is terrible. Not to mention the
recent scandals over autopilot safety. Not sure where you got that idea.

~~~
0xFFC
I have never been in any Teslas car. But I am so curious about this:

>Quality of Teslas by most accounts is terrible

Can you elaborate a little bit about this?

~~~
nvarsj
Peruse Tesla owner forums and reddit. The model 3 in particular has quality
issues on brand new cars. Compare it to buying a Honda or Toyota - you're not
going to have the kinds of problems described.

~~~
NickM
Well of course you're going to see people post about issues they're having if
you look on forums. Nobody goes out of their way to look on forums and make
posts sharing their frustration over the lack of problems they have with their
car.

~~~
nvarsj
I've been on Honda and Toyota forums in the past, and there was nothing like
"my car panels are misaligned fresh out of the factory".

~~~
NickM
Come on, I'm trying to be scientific about this and you're just going to swing
in with a rude, ad hominem argument about "Tesla fanboys"? Claiming that Tesla
having bad QC is "common knowledge" doesn't somehow insulate you and your
friends from stuff like confirmation bias.

And to address your other point, if you search the web for panel alignment
issues on Honda or Toyota cars there seem to be plenty of those out there as
well.

~~~
nvarsj
Fair enough! My main point was it's not clear that engineers at Tesla are
better than those elsewhere. Even if all car companies are terrible. The other
biases are my own, and are purely anecdotal based on my own experience and
what others tell me. I'll leave it to other people with more time to do a
scientific comparison.

------
tim333
One of the best thinkers on bubbles I've come across is Jeremy Grantham
[https://qz.com/111094/this-fund-tracks-36-bubbles-
and-33-hav...](https://qz.com/111094/this-fund-tracks-36-bubbles-and-33-have-
completely-popped/)

He's ambivalent at the moment - thinks it'll go up more but probably fall in
the future. [http://www.cityam.com/278218/jeremy-grantham-predicted-
last-...](http://www.cityam.com/278218/jeremy-grantham-predicted-last-two-
bubbles-warns-stock)

~~~
sveme
> He's ambivalent at the moment - thinks it'll go up more but probably fall in
> the future.

He'll always be right with this assessment.

~~~
refurb
Exactly. I'm going to make a brave prediction that "the market will drop, then
go up again and drop again."

It's called a business cycle!

~~~
harry8
Too specific, you've ordered your predictions. Best to keep it to "The market
will fluctuate"

------
joe_the_user
What are the problems with bubbles if investors can be cushioned from their
worst effects when they occur?

The two main problems are mis-allocation of resources and maldistribution of
wealth (investors don't worry where their capital goes and investment becomes
a more significant source of wealth than work). Both of these problems are
very much in evidence today.

~~~
thisisit
> What are the problems with bubbles if investors can be cushioned from their
> worst effects when they occur?

I don't think both can be mutually exclusive. For a bubble to occur investors
have to be irrationally exuberant. If they are more prudent and cushion
themselves from the worst effects then we might not have a bubble, ever.

~~~
crdoconnor
>I don't think both can be mutually exclusive. For a bubble to occur investors
have to be irrationally exuberant.

Not necessarily. They could just be thinking that everybody else is
irrationally exuberant.

c.f.
[https://en.wikipedia.org/wiki/Keynesian_beauty_contest](https://en.wikipedia.org/wiki/Keynesian_beauty_contest)

------
tfehring
Interesting article I found in FT Alphaville's Further Reading section from
yesterday [0]. The narrative around the likes of Tesla and cryptocurrencies is
likely a tired one to many HN readers, but the broader narrative and arguments
made by the authors make up for it.

I did not contribute to this article and am not affiliated with the authors in
any way.

[0] Registration required:
[https://ftalphaville.ft.com/2018/04/24/1524552922000/Further...](https://ftalphaville.ft.com/2018/04/24/1524552922000/Further-
reading/)

------
peterburkimsher
Suppose the article is correct, and all but one or two of the top tech
companies will underperform over the next decade. What about the companies
that fail? Some will be bought out, others will liquidate. Business entities
will cease to exist.

Code I write is protected by an Intellectual Property clause in my contract.
The company owns everything. If the company is gone, can I release my code?

Everyone is using git, and many companies use private Github repos. In the
same way that copyright expires after a length of time, could Github
automatically release code as open-source when companies go bankrupt? I just
wish the progress won't all be lost when the bubble bursts.

~~~
dragonwriter
> Code I write is protected by an Intellectual Property clause in my contract.
> The company owns everything. If the company is gone, can I release my code?

Generally, the company or it's assets will be sold. Unless your contract
specified that such a transfer releases your code (and it probably doesn't),
the new owner will have the same rights as the firm that actually employed you
had. Even if the firm is liquidated, that is likely to involving auctioning of
assets, including IP portfolios.

~~~
m_eiman
What if nobody buys anything at the auction?

~~~
rwmj
This is an interesting question because it's what has happened to a lot of old
software. It's especially problematic for old games that people want to play
on emulators - at the point where these companies went bust it didn't seem as
if the game "IP" had any value.

Anyway what definitely _doesn 't_ happen (at least in any western country) is
that the software becomes "abandonware" or copyright somehow disappears. The
copyright will be owned by someone for many more years, even if that person or
entity is impossible to trace.

~~~
roel_v
"Anyway what definitely doesn't happen (at least in any western country) is
that the software becomes "abandonware" or copyright somehow disappears. The
copyright will be owned by someone for many more years, even if that person or
entity is impossible to trace."

I actually wrote my bachelor's thesis for my law degree on this exact topic
(it was titled, roughly translated from Dutch, 'Intellectual property in
bankrupcty'). What you're saying is not correct (well, depends a bit on how
you define 'correct').

Under Dutch law (and I have reasons to believe it's very similar in many other
civil law jurisdictions), what happens is that in bankruptcy (of a
corporation, it's different when a natural person dies or goes into
bankruptcy) the liquidator will take over and try to sell any assets, the
proceeds of which will be used to pay out the creditors. Often software (and
other intellectual property rights) is either forgotten about or no buyer can
be found for it. When the liquidator thinks he has sold everything worthwhile
and after a judge's OK, the corporation ceases to exist. When the IP wasn't
sold, it essentially becomes 'owned' by nobody.

However, if it turns out that that remnant IP is worth something, a creditor
can ask a judge to re-open the bankruptcy proceedings so that the IP can still
be transferred. The exact grounds for this are a bit complicated and refined
by case law, but for current purposes it's sufficient to say that this can
only happen as long as any material claim be made by a creditor; most claims
would expire after 5 years (there are nuances in when this period is 'reset'
and so on).

So essentially, after this period, there is nobody owning this IP. Whether
that constitutes 'abandonware' depends on how one defines that term because
it's not a legal concept, but after that period there is nobody who can make
any claims on anyone using such IP.

Of course in practice it will seldom be so clear cut; for example if (in the
highly hypothetical case that) you build a $100mm company out of the orphan IP
from a company that had part of its assets bought by another company, someone
at some point will probably try to claim that they bought the IP as part of
those assets.

Then there is another quirk in Dutch law, which might have been 'fixed' a few
years ago (there was talk about it when I wrote the thesis but haven't kept up
with whether it actually made it into law). IP, as long as it was created and
not bought by the entity going into bankruptcy, was not part of the assets a
liquidator could sell to pay creditors with. So there was some part of the IP
the liquidator couldn't sell, nor even transfer if he wanted to! This
essentially meant that any such IP became 'open' in the sense that nobody
could lay claim to it in a court of law. For software, this basically boiled
down to the fact that whoever was in the position to copy the source code and
destroy any backups, could become the effective 'owner' of it! (There are many
pitfalls and traps, I think it would require a programmer with extensive
knowledge of the history of the company and the software, and with a law
degree or at least deep knowledge of the law beyond reading up for a weekend,
to pull this off; but the first part is more common than you'd think, and for
the second part one could work with a lawyer).

In my research, I have found several cases where the lawyers, liquidators,
banks and judges involved clearly didn't know the details of the law and
parties could have made 100's of thousands or millions (of Euros or guilders -
cases like this have been going back for a long time) had they known. I even
looked into a few cases to see if there was any money to be made there by
buying any 'dormant' IP and/or claims, and there might have been - but it
would take significant investments to check, so I didn't/don't think it would
be a viable business, certainly not for a risk-averse software/law nerd like
myself.

------
cft
Don't you find these sliders "Your continued use of this site acts as your
consent to the use of these cookies pursuant to the Research Affiliates Cookie
Policy. " annoying as hell? Am I going to read it and close the page before
reading the article? Or will I read the article, memorize the domain name and
then never come back because they use cookies? Is that what GDPR will be in
practice: good intentions but absurd results?

------
tabtab
A company's "value" is different these days. People use Facebook (FB) because
others are using it, and they know others are using it. Consumers go there
because either everyone else goes there, or they THINK everyone else goes
there. If the collective "know" shifts for whatever reason, the value can drop
quick, regardless of how many buildings FB owns or how many employees FB has.

The market "value" of a company is less tied to physical stuff and tangible
property. It's more tied to collective perceptions, and these perceptions can
shift like the wind for real or fake reasons (misperceptions), including sheer
fads. Too many economic models count physical or tangible property to "value"
a company. Instead, the "value" is virtual: in people's heads.

And it's circular: if an AI company convinces investors they are great,
investors put more money in, allowing them to do better things than AI co's
who can't dazzle the crowd. And that could swap if this year's loser happens
upon a better dazzle story.

------
cryptonector
It's important to note that stock markets provide some shielding from
inflation in countries experiencing hyperinflation. If you look at places like
Argentina, or Venezuela, you'll see that those with the means to do so use the
stock market to shield value or even extract it (i.e., evade capital controls)
via ADRs traded locally _and_ on the NYSE. I don't know if Zimbabwe had
companies listed on the NYSE, so I don't know if this scheme was used there.

The government always allows this for a simple reason: most of the people
doing this are its friends and family.

------
adventured
US corporate earnings are set to plausibly increase by 45% for 2018-2020.

So whether this market should be very concerning in regards to being a bubble,
much depends on if it keeps going up as earnings rise so quickly. If the
market goes sideways or generally produces a mediocre return instead, the
market's PE ratio will fall dramatically in just three years. The S&P 500 PE
will drop from 25 today, to something closer to 14-16. We're now six months
into a sideways market despite a massive increase in earnings (which was
likely priced in ahead of time).

------
kakwa_
It's quite funny to just search "nasdaq index" on google, then switch to "Max"
and see the graph.

You see a quite step growth starting February/March 2016 that doesn't seem
completely rational.

Also lately, you have a kind of plateau with some hiccups.

I've the feeling that the bubble will burst withing a year, and next year or
two, most tech companies valuations will be halved. But it's only a feeling,
I've no deep rational behind it.

------
tim333
I was a bit torn on crypto as someone from a value investing background.

My conclusion was to punt on the stuff - where else can you buy something and
sell it for 10x within the year? - but to cash out a good chunk of the
winnings so if they go to zero I'll have the cash. So far so good.

I regard the nuttiness as a bit of a make hay while the sun shines situation.

~~~
ACow_Adonis
Where else? I can think of several places. Vegas is the first that comes to
mind. But I'm guessing that like most "punters" and participants in a bubble,
you perceive the downside risks to not be equivalent...

~~~
tim333
I think the odds are more in your favour with crypto.

------
textmode
"7\. One aspect of bitcoin-related energy consumption that won't disappear so
easily is the residual carbon footprint left by bitcoin mining, which is
currently dispensing as much CO2 a year as 1,000,000 transatlantic flights."

------
cs702
This is a great, well-written piece, worth reading in its entirety. Here are a
few passages that will be of interest to the HN community:

 _...Let’s begin by offering a definition of the word “bubble.” We all hear
the word thrown around carelessly and often, but it lacks a formal definition.
Let’s try. Ockham’s Razor guides us: Keep it simple. We define a bubble as a
circumstance in which asset prices 1) offer little chance of any positive risk
premium relative to bonds or cash, using any reasonable projection of expected
cash flows, and 2) are sustained because investors believe they can sell the
asset to someone else for a higher price tomorrow, with little regard for the
underlying fundamentals._

 _At the beginning of 2000, the 10 largest market-cap tech stocks in the
United States, collectively representing a 25% share of the S &P 500
Index—Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun, Qualcomm, and
HP—did not live up to the excessively optimistic expectations. Over the next
18 years, not a single one beat the market: five produced positive returns,
averaging 3.2% a year compounded, far lower than the market return, and two
failed outright. Of the five that produced negative returns, the average
outcome was a loss of 7.2% a year, or 12.6% a year less than the S&P 500._

 _Reasonable observers can disagree, but we believe we are experiencing a tech
bubble, based on our relatively rigorous definition of the term. At the end of
January 2018, the seven largest-cap stocks in the world were all tech fliers:
Alphabet, Apple, Microsoft, Facebook, Amazon, Tencent, and Alibaba. Never
before has any sector so dominated the global roster of largest market-cap
companies. At the peak of the tech boom, four of the top seven companies by
market cap were in the tech sector, and at the peak of the oil bubble, five of
the top seven were in the energy sector. Only the Japanese stock market’s
bubble at yearend 1989 has matched today’s tech sector dominance of the global
market-capitalization league tables.9 Not only do we have the FANGs, we have
FANG+ futures, affording investors a chance to buy the world’s trendiest tech
stocks with almost no collateral, and the list is amended quarterly to make
sure only the trendiest are on the list._

 _Can all of the seven tech highfliers [Alphabet, Apple, Microsoft, Facebook,
Amazon, Tencent, and Alibaba] collectively succeed to sufficiently justify
their $4.3 trillion combined market capitalization at yearend 2017? Nothing is
impossible, but this outcome is implausible. Sure, some of the new tech giants
are at valuation multiples that are not extravagant, but several sport
startling multiples—and all trade at levels that require robust continued
growth. These companies are at war—in some cases directly with one another—for
market share, competing for the same eyeballs, and are facing a growing risk
of regulatory constraints._

 _Our purpose in this article is not to prove that current conditions
represent a bubble. Reasonable people may reach the opposite conclusion. After
all, some level of cash flow expectations can justify any price. It’s a matter
of subjective judgment as to whether such lofty cash flow expectations are
sensible, implausible, or preposterous. Considering all the caveats required
to support current prices, we think tech stocks are at the implausible stage
in their collective market value, with some individual stocks (and most
cryptocurrencies) at the preposterous level. We believe tech stocks are in
another bubble, with the potential to impact investable asset classes far
beyond the tech sector, albeit not as extreme as the 1999–2000 bubble, labeled
by many “the mother of all bubbles.”_

Highly recommended if you're interested in the subject.

------
arisAlexis
cryptocurrencies are not another asset class but a potential new financial and
social system.

------
aosmith
Did someone pay to have this written? Seems sketchy IMHO.

~~~
tehsauce
The section on "companies in the top 10 decade to decade" seemed to be a very
weak argument to me. Reminded me of reasoning sometimes used by cryptocurrency
investors "it crash 3 times and recovered, therefore it's guaranteed to do the
same in the future".

But other than that, what seems sketchy?

~~~
koalala
What to you seems wrong with that extrapolation? As there's no real precedent
to look at for cryptocurrencies, all we have at the moment is their short
history to adjust our beliefs with. Is there some other view on the
fundamentals of cryptos that you're incorporating in your thought process?

For a more pragmatic look on Bitcoin which i've been using see
www.alfaquotes.com, they calculate fundamental value by dividing total cost of
hardware and power needed to mine 6 months worth of bitcoin by the amount
mined, so just the cost basis for miners.

I agree that Bitcoin has been superseded feature-wise by other cryptos, but
seems to be a functioning e-gold right now.

------
aerovistae
Reads like a hit job on Tesla, to me.

~~~
kgwgk
There is one single paragraph on Tesla, less than 5% of the article. And it's
just an example where several others could have been used instead.

~~~
aerovistae
It's the only company mentioned by name in their Key Points at the top, and
then it's one of the first things they talk about, and is the only company
they talk about in detail.

To you, that's by chance and doesn't mean anything.

To me, it's because the piece was written with Tesla in mind-- the piece was
designed as a vehicle for an opinion on Tesla, disguised as an article about
bubbles.

~~~
autokad
tesla is the poster child for a bubble, so I do not think this alone is
evidence as a hit article on tesla.

To me, best case scenario is Tesla sells more cars than Ford. What does that
mean for the stock? as the case with all stocks with this kind of hyper PE
ratio, the stock has to go into no growth territory for like a decade as its
earnings grow to match its stock price.

that means the best possible case for tesla stock is that it will stop growing
for about 10 years, bouncing around the same price.

~~~
aerovistae
guess we'll see.

------
grosjona
I have a suspicion that bubbles can only exist when media is centralized.
Today's media is too decentralized to create the wave of panic that is
necessary to burst a bubble. There will always be some people somewhere who
didn't get the news and who still believe that x has value and will be happy
to buy when they see a price drop...

Also, the fear of missing out among millenials is stronger than their fear of
losing everything.

~~~
autokad
Media can create a bubble, but more often then not they are just chasing it.

As far as bubbles cant pop now, well we just had the crypto pop.

~~~
nrhk
Lol it has not truly popped yet, it will climb higher and crash even harder
for the next five years until the tech matures and people have a better idea
of what's achievable.

