I guess it is a matter of terminology but I have to disagree on this one.
A bubble is all-pervasive and extreme. It represents a systematic investment mania where everything becomes surreal. People sell vast tracts of land for a prized tulip. Junk companies with nothing to offer but a vague concept about revolutionizing how this or that will be done owing to some new phenomenon such as the internet make serial stock offerings to the public and get hundreds of millions for a modest percent of their unproven company. Lenders pile on with countless real estate loans to unqualified borrowers secure in the belief that what are really worthless loans will make them huge profits because they can be packaged and disposed of through artificial securitized instruments and because housing prices will continue rise broadly for endless periods. All this begins to occur in endless and ever-expanding streams until, in the end, large numbers of people are sucked into the vortex.
In such cases, broad markets affecting an entire society are sent into a frenzy by which average people start both to get rich quick and to want to get rich quick. Large numbers of people leap in, therefore, in the hope of making fast money and abandon their common sense in the process. And when things go bust, this has a major systemic effect on the broader economy. A stock market that had reached stratospheric heights loses 70% of its value. A real estate market that had become so pricey as to make housing unaffordable for average buyers plummets to the depths, taking down people's savings en masse.
The current phenomenon represented by high valuations in parts of the startup world is more transient and limited. It has not affected the broader society at all, only an insular investment community. If it fell apart today in toto, it would leave a trail of victims within the VC and angel communities but would be felt scarcely at all in the broader economy, or at least would likely have no systemic impact.
Viewed from the standpoint of the broader society, I think what we are looking at here is a speculative frenzy affecting a comparatively narrow asset class. The prices of some startups have increased considerably. The prices of companies generally in the business world remain moderate, if not depressed. Is it a pricing frenzy within a particular segment of an asset class? Probably. Is it a bubble? No. Or at least not by historic definitions.
Again, I wouldn't disagree with a single specific point made in this piece, and the author as usual makes some astute observations. I would disagree about the terminology, though, and would say that we should reserve use of the term "bubble" for the sorts of massively dislocating events that it historically has come to represent.
This is a great point. To condense what you said a bit: the dot-com bubble followed the democratization of stock trading (which itself got a technological assist from the internet). Lots of people, myself included, who never bought a stock start using online trading accounts. The housing bubble followed the democratization of home buying. Lots of people who never had bought a house before (or a second or third house) start buying houses.
The question I've been asking for a while now: what's the next great financial innovation that's going to revolutionize access to some market to which average people don't currently have easy access?
Going to offer an answer to my own question: where's the next bubble?
My boring answer has always been: commodities. Yeah, ordinary people can buy and sell precious metals now. But wouldn't it be more convenient if you could just directly buy a nicely packaged product online (with no service premium) that represents whatever arbitrary commodity or commodity future (or whatever it is you trade) you desire? I'm sure this would do wonders for oil prices. All those gold trading services that advertise on cable seem to be a niche example of the phenomenon.
However, I just came across something which may offer a more interesting answer: bitcoin, or more generally, currency. I going by what I was just reading here:
There has been a recent democratization of web- and mobile-applications, has there not? It's super easy for me now to make an site with Rails to do x. Same goes for creating and publishing mobile applications. Anyone can now easily make and sell an iPhone app. When has this ever been possible? This is the current democratization, and I don't think it would be unrealistic to suggest it could lead to a bubble.
I think the overall point is that what we're currently engaged in isn't sustainable and the contraction is going to be painful when it hits in 6 months to a year once all the cheap money[0] dries up. There's a bubble within our asset class.
My question is: how does one short this phenomena?
A bubble is all-pervasive and extreme. It represents a systematic investment mania where everything becomes surreal. People sell vast tracts of land for a prized tulip. Junk companies with nothing to offer but a vague concept about revolutionizing how this or that will be done owing to some new phenomenon such as the internet make serial stock offerings to the public and get hundreds of millions for a modest percent of their unproven company. Lenders pile on with countless real estate loans to unqualified borrowers secure in the belief that what are really worthless loans will make them huge profits because they can be packaged and disposed of through artificial securitized instruments and because housing prices will continue rise broadly for endless periods. All this begins to occur in endless and ever-expanding streams until, in the end, large numbers of people are sucked into the vortex.
In such cases, broad markets affecting an entire society are sent into a frenzy by which average people start both to get rich quick and to want to get rich quick. Large numbers of people leap in, therefore, in the hope of making fast money and abandon their common sense in the process. And when things go bust, this has a major systemic effect on the broader economy. A stock market that had reached stratospheric heights loses 70% of its value. A real estate market that had become so pricey as to make housing unaffordable for average buyers plummets to the depths, taking down people's savings en masse.
The current phenomenon represented by high valuations in parts of the startup world is more transient and limited. It has not affected the broader society at all, only an insular investment community. If it fell apart today in toto, it would leave a trail of victims within the VC and angel communities but would be felt scarcely at all in the broader economy, or at least would likely have no systemic impact.
Viewed from the standpoint of the broader society, I think what we are looking at here is a speculative frenzy affecting a comparatively narrow asset class. The prices of some startups have increased considerably. The prices of companies generally in the business world remain moderate, if not depressed. Is it a pricing frenzy within a particular segment of an asset class? Probably. Is it a bubble? No. Or at least not by historic definitions.
Again, I wouldn't disagree with a single specific point made in this piece, and the author as usual makes some astute observations. I would disagree about the terminology, though, and would say that we should reserve use of the term "bubble" for the sorts of massively dislocating events that it historically has come to represent.