Just because the bubble hasn't burst yet, doesn't mean we're not actually in a bubble. That line of reasoning irks me a bit, but still, it is laughable how the imminent bursting of the bubble has been predicted for nearly a decade.
Which brings up the interesting problem that, in theory, we can never be sure it is or is not a bubble unless we look at the behavior in the limit as t -> infinity. One problem with gauging things in the universe (or in the economic sense, the fundamentals in order to value something) is that we will likely never have the tools to do it in the "real" sense.
But the term bubble, at least when used by the media, also seems to have a connotation of bursting in the near future. If someone told me tech was in a bubble, but the pop wouldn't be for another century, I would not define it as a bubble. Even if the future pop was enormous.
It's probably better to think of bubbles as the accumulation of unsustainable behavior.
Obviously we aren't able to predict a few months into the future, let alone a hundred years, so it's hard to definitively say whether current behavior is sustainable for a hundred years or not.
It's much more reasonable/believable to say that current behavior is unsustainable for 1, 5, or 10 years.
What if the century long bubble concluded with a pop that resulted in total economic collapse? I'm not suggesting that is likely, just that the defining characteristic of a bubble seems to be the magnitude of the fallout after the pop, not the span of time leading up to the pop.
Investors, especially those of public companies, are known to be short sighted. Typical investors would never call it a "bubble" if they felt the pop wasn't for another decade, let alone a century.
Perhaps both the magnitude and the time leading up to it are of equal importance.
The housing bubble lasted a long time, even when people in 2004 were sounding the alarm bells. It kept going. A bubble bursting doesn't mean everything is getting wiped out, and it's nothing to fear...just something to hedge against. It does hurt people, and that's unfortunate, but it has to happen. It might even put me out of a job, I hope not, but it's very possible.
Yet as much as it hurts, it has to, and will happen. Doesn't mean it will be as bad as 2008, but it's part of the business cycle. I don't think there's any denying that valuations have gotten way out of hand, especially in the private equity and VC world. But trying to call a top is just as hard as calling a bottom, if it were easy policy decisions would be easy.
It's a "creative destruction" within the capital markets. Gets the dumb money out...funds businesses that actually make money and builds upon the rubble on a stronger, firmer foundation.
That assumes the Fed can make the economy grow with the flip of a switch, and that it could contain contagions. I'm all for taking away the Fed's discretionary powers, I think that would smooth the business cycle, but it would not eliminate it. Recessions can occur naturally.
It hasn't lasted ten years. The last one ended with the great recession, and was of course never a bubble of the scale of the dotcom bubble. This latest semi-bubble (ie extremely elevated valuations) - caused solely by the Fed's hyper low interest rate policies pushing up all asset prices - is far more similar to 2005-2007 than 1999. The pre great recession semi-bubble in tech was also caused by asset inflation from bad Fed policy mistakes.
It's also why this latest bubble / not-bubble was popped by the first Fed moves toward hiking rates. All the panic around unicorn blood in the street started exactly in line with the Fed's moves to hike rates (nice coincidence eh). And it's also why the stock market has struggled to move higher since the Fed's QE program ended (sideways for ~19 months now). If the Fed hikes rates (which they won't in any meaningful way), it'll continue to deflate all elevated asset prices.
My wife showed me a video earlier of some kids laying under a trampoline, and on top of the trampoline was balloon slowing filling with water. The kids are giggling because they know what's going to happen, they just don't know when: the balloon will pop and they'll get soaked. But the balloon continues to fill with water until it's almost the size of the trampoline top itself. It seems likes it's taking forever to fill, and the balloon is much larger than anyone in the video expected. Maybe it won't pop...and then it finally does. The inevitable happens and the kids are soaked.
I don't think the argument is whether we are or are not in a bubble. It seems pretty clear that a bubble is filling around us (whether that is a slow or quick fill is a personal point if view). The argument really should be how long do we continue to risk getting soaked versus staying dry (keeping our investments). I think some are finding a solution by removing themselves from the equation and taking their investment dollars elsewhere. And that singular act, if/when it starts to exponentially grow, will ultimately decide the timing of the burst.
I'm uncertain if this is true. The market is the market is the market. The value of a company is what investors believe it to be. In tech, unlike an industry like lets say, Automobiles, this "worth" is very difficult to quantify. Tech companies can be scaled to near infinity (Apple) or go to zero with one wrong move. Investors are placing their bets.
Whatever industry replaces "tech" as the next great revolution (perhaps AI?) will have "bubbles" orders of magnitudes greater than what we're seeing now. If you think we're in a bubble now, which we very well could be (I'm unsure), just wait for the future.
one could argue there was a kind of bubble of the American middle/working-class from say 1945 through the 80's/90's. and that this bubble has been deflating since, through a combination of Mexican labor immigration (both legal and non), off-shoring of jobs to China/India/etc, and the increasing automation of software and hardware whose benefits disproportionately flow towards the capitalists and the highly technical specialists like programmers. That would be a kind of bubble which lasted a half century. Period where that segment of American was "over-valued" relative to otherwise comparable people who happened to be born in other countries around the world.
But by that logic if global warming throws us back into a pre-industrial age, we could call the entire period from the industrial revolution until now a bubble. Or we could go even bigger and say if all of humanity happens to die out due to some self-created catastrophe, humanity was the bubble.
It's housing prices in Flint, Michigan. It hit a peak of $172K in 2005. By 2011 it was $106K, or about the same price as in late 1995. Currently it is at $140K, which is essentially the price in 2000. Assuming it goes at its current rate, I guess it will be about the year 2020 before it recovers to its 2005 high.
Now, it's not really fair to call this a "bubble" since externalities are at fault. However, if you look at the increase (1.6x in 10 years) against an inflation rate of 3% (1.3x), you can see that housing was over valued during that period. I'm pulling the inflation rate from http://www.usinflationcalculator.com/inflation/historical-in..., and if anything overestimating it.
If you look at today's price it has a multiplier of 1.3 from the 1995 price, so it is still slightly undervalued, but should catch up to inflation in the next few years.
My point is that despite the credit crunch being the underlying cause of the crash, the market had been growing at nearly twice inflation for 10 years. 11 years after the crash the market is still recovering and it will be a couple of years before you get to reasonable prices. So you can go a very long time before unsustainable growth will collapse. This leads to a very, very long time for recovery.
I live in Japan. It is 2016. The market still has not recovered from 1992. If the world ever gets into an energy crunch, I think we might well look at the last 50 years or so as being a "bubble".
How does a house gain value? You can renovate it (real growth), or you can hold on to it and hope that someone will pay more for it. People don't think about it, but houses are relatively liquid assets. Let's pretend they are tulips, just for fun.
Imagine that you bought some tulips and just by hanging on to them for a while, you can realise a profit. This would be cool because everyone could put all their spare money into tulips and then turn around and sell them for a profit. Because the price of tulips keep going up (and people want to spend some of their gains on other things), eventually people will be able to buy less and less of them. However we might be able to raise salaries so that people can afford these tulips endlessly. In this way the inflation rate will exactly match the increase in price in tulips.
If we can't raise salaries to match the increase in the price of tulips, eventually people will be priced out of the tulip market and demand will dip. This will cause the price to fall. If people start to think, "Hey wait a minute. I'm not guaranteed to make a profit with these tulips after all", the price can fall a lot. If people start realising that they need to take a loss on their tulips so that they can afford to eat today, the price can tumble. How far can it fall? Mostly it depends on how clever people were for keeping the tulip bubble going. The more clever they were, the worse the potential fall. Essentially, it is likely to fall to the point at which the price of tulips escaped from inflation -- because it is a liquid asset and the need for tulips hasn't increased substantially over that time period.
Demand can influence the price of houses (and obviously did in Flint), but the degree to which the market dropped was a result of how overcooked the housing market was. Beware. Flint was never as overcooked as some markets are and people were never as clever about keeping the values high as some markets are.
Can a bubble last 10 years or more and then wipe out all of those gains? Absolutely. I only picked Flint because young people are likely to have heard of the problems there. You could also look at the housing market in London in 1991/1992.
Can the tech bubble burst and wipe out 10 years of gains? Sure. No problem. That's the only way I could interpret the person's question, "Can a bubble that has lasted 10 years still be called a bubble?" Definitely.
To be more mathematical, your property is the house plus the land under it.
People will not pay more for the house than replacement value. If you keep it in good order, you can keep that value up.
The land can't be `replaced'. So for pricing we look at the whole future income stream discounted to today's dollars at some appropriate interest rates.
That income stream is, yes, basically what other people are willing to pay to use that piece of land.
What people can afford to pay for rent is basically what's left over after they paid other things. You can see it as an auction. That's why land values in silicon valley are so high. (Exacerbated by the fact that local regulation there makes it almost impossible to substitute capital for land, ie you can't build up.)
But it's also very important to understand that there is a ceiling. There will be a point at which Silicon Valley startups will stop increasing salaries. People will no longer be able to buy a house. Demand will drop and so will prices. If this occurs at the same time interest rates rise, people will not be able to afford to renew their mortgage and the house of cards will tumble. If the prices are really high and nobody has paid off any of the capital on their properties (as in London in 1991/92 and Tokyo where people had multi-generational mortgages), people will not be able to afford to sell because they owe more than they can sell the house for. But they will be forced to sell because they can't afford the new mortgage. There will be a rash of personal bankruptcies and unless someone steps in, very, very nasty things will happen. In London, the Japanese bought up the land (ironically just before their bubble burst). In Tokyo the government stepped in.
I don't know when, but everything is lined up "nicely". Ridiculously low interest rates, sky high prices, insane salaries. Even if SV companies move to a cheaper location to save on salaries it could trigger the collapse. Seriously not looking forward to a time when the fed raises interest rates to protect a falling dollar... Etc.
That's why I am in favour of taxing land values (as a proxy for unearned land rent), and the central bank targeting nominal GDP levels.
The former policy dampens land price bubbles and raises taxes in the most economically efficient way possible; the latter avoids real shocks in one part of the economy taking the whole house of cards down.
Ideally, no single company would then be too big to fail.
I know nothing about the day trading culture, but do you see a lot of addicted/problem gamblers in that space? I imagine for the good ones it's a bit like a casino, but you've also got an edge based on whatever information you have available.
That was the whole point of day trading. You hold something that's going up because it's going up, with no consideration of the underlying value. And you try to be the first one out the door when the party's over.
I'm guessing for the VC and wealthy, it is the "house money effect" If you made $100M on your first company, you can afford to risk $10M hear and there.
More than 50% (I think 60% if still the same) of investment money isn't people trading stocks. It's 401k plans and other retirement and investment vehicles. People with money just want to try and earn money on that money. Many with 401k plans and stock options can't even really trade. The second fear kicks in the market it will fall as always does. I just realized something interesting.
1988 - housing market bubble S&L scandal etc. market crashed.
1998-1999 - dot com bubble burst.
2008 - Housing and lending crashes economy.
Seems like the most major events in the markets crashing have been coming every ten years or so. Markets crash and it's called a bubble after but, it's all fueled by media events, fear and then panic selling.
More than 50% (I think 60% if still the same) of investment money isn't people trading stocks. It's 401k plans and other retirement and investment vehicles.
Those people typically aren't investing in startups
They report $4.2 billion in tech start-up stocks purchased by mutual funds. The total amount of money in mutual funds in the US has increased by an average of $500 billion dollars per year for the past 15 years.
At that rate, tech start-up stocks will never even make up 1% of the fund.
I'm betting I could find articles arguing against being in a bubble (like @sama’s) from each of those years as well. There will likely be a deflationary period in tech in the next decade, worse than the small recession we witnessed at the transition between 2015-2016. But I don't think tech is so separate from other market sectors anymore, so it won't (IMO) be a tech-specific thing, just a normal market cycle.
The Microsoft LinkedIn acquisition seems to have positively signaled investor confidence, in spite of calls that the sky is falling. Whatever odds there were for a "bubble burst" are probably lessened by this purchase.
That's true. Even during the dotcom bubble, internet incumbents used their high valuations to leverage questionable acquisitions. Yahoo's purchase of Broadcast.com for over $5B being the most notable example.
Well, that is the problem with people predicting the future: they may be correct on fundamentals but the world is a chaotic place and predicting just when something will happen, even if it is likely to happen in the future, is a bad bet.
I personally believe that the current economic regime, requiring constant growth (and large growth) for health is not sustainable. Am I willing to bet on when the next big economic crash will occur? No.
If the intended insinuation of this essay is that somehow there aren't a bunch of seriously over-valued companies out there, or that there isn't a long-overdue downturn on the way, then I'm afraid I can't bring myself to agree.
People young enough to have never been through a downturn in their professional career are usually in denial right up until the moment it happens. And the people who try to call the bubble early, as funny as it may be to make fun of them as is being done here, are usually the ones who have been through it before, see it coming early, and try to warn everyone, even though no one ever listens (too busy enjoying the party!)
That's what happened to me. I got into a very good position in my career.. and then it crashed. I'm more skilled than I've ever been, but finding work that matches my (broad) skillset is almost impossible because I'm either over qualified, or the job is far too specific. It's very strange to experience, so I've been working on freelance work for the past 6 months now.
Year-ago-me wouldn't have believed it. Bubbles suck, and the current tech industry reminds me of my own experiences - Pop.
Sure - I work mostly in finance with linux/devops/app support/programming experience. I becm senior linux admin position by the time I was 27 after some very interesting work at some HFT companies. Low latency tuning, monitoring, resolved many outages, etc. At one point, the owner of an HFT company came up to me and asked me to fix the latency issues that were causing the company to fail, which I did in a couple days. Problem was, I never really got any chance to learn the core linux tools like bind, etc since they weren't really ever relevant. So, when I got a position at a traditional linux shop without knowing the core utilities, I was viewed as completely inexperienced and nobody really took me seriously. It was very strange to go from being treated as a rockstar generalist to go to the opposite. The company decided my experience wasn't really valid and moved me from the linux team to the devops team after I did a user audit for a subpoena by FINRA really, really well well. That role ended up just meaning "troubleshoot why X trader's trade didn't receive Y price." all day, which wasn't what I was hired to do. Instead of doing that, I wrote a bunch of tools to interface with the infrastructure. Emails explaining the tools were entirely ignored and even made fun of, so I left. On my last day, I demoed a tool I wrote that dynamically built json output for all application environments which was loved, despite it being ignored 10 times in the past. Lesson there was that presentation is often significantly more important than the work itself.
When I tried to get a new position later on, everybody was expecting cloud and web development experience, which is experience I don't have. Insistence that it was within reason to learn cloud utilities never worked, even with experience building tools to build vmware instances in bulk. For the positions that I was qualified for, I found myself having more knowledge than the interviewers, so I gave off an unintentional arrogant vibe. For example for a job I was really interested in, I got dinged for my answer to the question, "How do you print all open sockets?" for answering "lsof -i". Apparently netstat was the only acceptable answer. That sort of thing happens all the time, and interviewers do NOT like to be corrected - the number of senior admins who don't know how file handles work is asinine.
It got very, very tiring very quickly and I just kind of gave up. I'm now working in building up investigative journalist and data analysis experience to get out of the linux field. It's going pretty well, but there's little money in it so far. If that doesn't work, a few interesting positions in infrastructure security are in the pipe.
Thanks for the answer! Interesting to hear what you're doing now, as it's something I've been eyeing myself. Aside from money, do you find interesting opportunities/problems to look into?
(one recent little example of what made me think of this was the scene in the documentary Spotlight where the journalist analyze volumes of data on priests' assignments and whatnot - all by hand. I couldn't help but think it'd be so much easier to OCR the pages and analyze the data with some basic scripting.)
-Sued the mayor of Chicago for his phone records and won. Still working on it, but I met up with a journalist to discuss last Monday.
-Doing HFT systems tuning as freelance (pays the bills, too).
-Submitted a major infrastructure bug to comcast. Talked to their CISO and everything.
-Did the same for Northwestern, but with less followthrough.
-Learned a bit of R, significantly improved my python, did a bunch of random silly projects.
-Made a proof of concept for a domestic violence shelter finder for a hackathon. Just handed off the code to a few junior coders to ride with.
-Made a minecraft 3d printer print a png mural by pulling from github in-game. Limited myself to only using textures in the game without color transformations. Became a really hard problem, since the 'pixels' used by the printer don't move. Learned more than I'd thought from that project.
>And the people who try to call the bubble early, as funny as it may be to make fun of them as is being done here, are usually the ones who have been through it before, see it coming early, and try to warn everyone, even though no one ever listens (too busy enjoying the party!)
First, someone is always "calling the bubble". At the bottom of the housing market there were people screaming that it was going to keep dropping. People have been calling the tech market a bubble for literally decades. And conversely, there are always people claiming that we're nowhere near the top, even when we are. It's not useful to listen because the reality is that no one really knows. If you think we're the top of a bubble, then cash out and be happy with your superiority.
Second, what are you, as an employee, going to do if you think the tech bubble is going to pop? Sure, you should be saving, but you should do that anyway. You shouldn't be over invested in tech, but that's also always true. What meaningful steps should you take if you believe a tech bubble is about to pop that you should not take anyway?
Isn't it common in SV to accept jobs paying lower than market value in exchange for equity? Presumably, if one thinks the bubble is about to pop, they should avoid those jobs in detriment to offers from "safer" big companies.
I think this is probably in the list of "think you (shouldn't) do anyway". If you're a normal employee with a small amount of equity, the reality is that you are overwhelmingly likely to not cash in big even in the event of a successful exit. If you're being paid in large part with equity, then you're probably being underpaid, not a great decision in any market.
But you're right that knowing a bubble is about to pop might certainly dissuade many people from entering this kind of risky, lopsided employment deal.
After Twilio filed for IPO, someone wrote a "here's what Hacker News said about Twilio," which only focused on the hilarious-in-hindsight but negative comments about the startup (https://news.ycombinator.com/item?id=11786464). Naturally, it got massive retweets from venture capitalists who espouse the haters-gonna-hate attitude.
As dang notes in that other comment thread, this kind of argument doesn't look at the other side at all: there have been some seriously shady dealings going on with unicorn startups. IPOs are failing. And let's not get started on Theranos.
Not to mention all of the unicorns supposedly worth billions that aren't IPOing. Because IPOing would finally let the public decide what they are worth (it would be a harsh wakeup call for a lot of them). Instead we're stuck with their VC cronies stuffing self-serving valuations down everyone's throats.
By the way, I too am worth 2.5 billion dollars. What?! You want me to prove it?! Get off my lawn!
>By the way, I too am worth 2.5 billion dollars. What?! You want me to prove it?! Get off my lawn!
While I agree with the first part of what you wrote, when it comes to this I can say:
You don't need to prove it (and those unicorns didn't prove it either). You just need to be able to get some millions of dollars on your 2.5 billion self-valuation, and you'll be as good as them.
>You just need to be able to get some millions of dollars on your 2.5 billion self-valuation
Mathematically speaking you just need to get someone to give you a single dollar in exchange for 1/2500000000 of 100% ownership, meaning that 100% is theoretically worth $2.5 billion.
Say their are two companies. 'Georges Growers' and 'Dave's Dilly Daddlers'.
I give 'Dave's Dilly Daddlers' $100,000 for 10% of the company. But with the condition that if it's valuation ever falls below 1 millions dollars I get 20% equity, and if the company goes bust I get paid back before any other investors, and I get the title to the founders house.
I also give 'Georges Growers' a $100,000 for 10%. But with no conditions, I'm just buying a portion of the company.
Are both of these companies worth 1 million dollars? In some sense yes, but in a much more meaningful sense no. And many recent deals have been closer to the former than the latter.
Sam's take on bubble talk from his Hard Tech is Back post said it best:
>Leave the Medium thought pieces about when the stock market is going to crash and the effect it’s going to have on the fundraising environment to other people—it’s boring, and history will forget those people anyway. There has never been a better time to take a long-term view and use technology to solve major problems, and we’ve never needed the solutions more than we do right now
Well, unless your life plan is to start a Hard Tech business that will require 5 years of funding before anyone takes it seriously.
Then this is is kinda like telling a soldier about to deploy to Afghanistan that they don't need Kevlar because it's never been a better time to bring democracy to the middle-east.
Markets can stay irrational for longer than you can remain solvent. Just because the bubble hasn't burst, doesn't mean we are not in one. Of course the converse is also true, just because the market has been going up doesn't mean it will go down. It will be interesting to see what happens if the Fed ever raises the interest rates.
The thing is that the nature of speculation is to generate bubbles. Every financial market is a bubble, financial products are always overvalued (relatively to their current earnings) because people believe they will be worth even more in the future. The real question that needs to be answered is: when will the bubble pop? AFAIK there's no scientific way to answer that question.
Yes and no. Speculation creates bubbles when people overestimate but not when they underestimate.
Financial products are definitely not always overvalued either. Accounting was created so that we can properly evaluate what a company's overall value discounted for future earnings and they are pretty accurate (accounting was never my favorite subject so that can probably be better defined)
Just to be contrarian, if you were to say "we're in a HIV-cure-research bubble!", and it never happened until a reliable cure was found, thereby simultaneously making huge amounts of money and forcing every business to pivot, you'd be wrong.
Over the last 16 years we've seen several boom/bust cycles in speculative markets driven by interest rates.
First the bursting of the first tech bubble. Then Greenspan's housing bubble in 2001-2007. Then interest rates were held abornmally low, for 80 months straight, which is something that the world has _never_ seen.
Would we have seen this tech boom if interest rates had been say 5% and capital had somewhere else to flow?
I'm pretty wary of "The music hasn't stopped playing, so it can't possibly be a bubble" arguments. Lets watch what happens as rates go up and venture backed tech has to compete with other returns.
"Markets can remain irrational longer than you can remain solvent"
Or perhaps the more apt way of putting this in our times is:
"Multiples will be crazy high as long as central banks keep interest rates crazy low"
Rather than thinking about this in terms of bubbles I think it's fair to say that the probability of getting very high ten year returns on the US stock market at these valuations is low. The problem is there's no other asset that will give you the chance of a better return. That's no coincidence.
Apple's P/E is 10.85 according to Yahoo Finance. That's low given current interest rates.
EDIT: The average Nasdaq P/E is 22.55 ... This is historically high but is ~4.4% vs. the 10 year treasury being 1.61% (and I say that painfully as I attempted to go short at one point). That is basically the story right there.
> Multiples will be crazy high as long as central banks keep interest rates crazy low
I have no idea how earnings multiples wound up with their pay-offs in the denominator. (Since it makes stupid things look bigger, and by default, anecdotally, most people agree bigger is better, I'm going to blame investment bankers.)
Thinking of a 22.55 P/E as a 4.4% E/P, i.e. 2 percentage points above the 30-year's 2.4% [1] is hugely clarifying. (I personally prefer the Shiller CAPE [2] for long-term broad-market assessments. It sits at 25.93, i.e. a 3.9% yield or 1.4 percentage points over the 30-year.)
I totally agree. Companies price is directly related to future expected cashflows. Its perfectly rational to discount future cash flows by the interest rate. If no one in the economy wants to spend money, its not as expensive to borrow it.
I don't think the bubble is just going to "burst". I think the rapid growth in technology is real. The market may correct itself some, like it is right now (particularly with investors), but I don't think there is going to be a great tech apocalypse.
I don't think the bubble thing is true for our time, nor it will be in the near future, it's just tech has become more competitive than ever. I am too young to know exactly the circumstance surrounding the last .dot com bubble when did it happen ... but I guess, it could have happened, the VC had not seen the full potential of the internet back then...
I can't buy the notion, that we will or ever see a bubble ... it's just ups and lows just about anything in life ... because at this point and in future internet is too larger to be vulnerable to it.
But that said, there is a little room left, for developers living in the mom's basement., and that's truly sad.
> I don't think the bubble thing is true for our time, nor it will be in the near future, it's just tech has become more competitive than ever.
No disrespect meant, but this kind of thinking is exactly how bubbles happen and everything gets out of kilter. Like people who believe house prices will go up forever, so they leverage up - it's irrational exuberance (to quote Alan Greenspan). But eventually this imaginary money that people believed to exist, actually didn't, because the human beings that needed to work N hours to produce that wealth haven't actually been alive long enough to do it. And boom, it all resets.
I actually think one of the key tells for being in a bubble is so many people denying we're in a bubble. The talk of it alone is enough to spread fear and doubt. That moves markets. All that is needed is an 'event' that confirms the fears, and boom. It could well be a failed IPO.
Who knows? Not I. I was one of the idiots that bought lastminute.com shares.
Where are you making that point? I don't see it, what I see are a number of comments denying that a) we're in a bubble, b) we'll ever be in a bubble, because Internet.
> I don't think the bubble thing is true for our time
> nor it will be in the near future, it's just tech has become more competitive than ever
> I can't buy the notion, that we will or ever see a bubble
> because at this point and in future internet is too larger to be vulnerable to it.
The 2008 bubble was caused by fraud, what is the current bubble caused by? Most people are saying we are in a bubble because all of these companies that are making 0 dollars are worth extremely large amounts of money. Everybody is aware that these companies aren't making money however and still believe the company is worth an insane amount of money.
If everyone is willfully deluding themselves and see nothing wrong with it, for what reason do we believe that it will change in the future and that the bubble will pop? And the current situation is different from the 2008 crash in that people know what they are buying into, companies that don't make money, and they don't care.
When valuation changes cause widespread insolvency, imo.
That was possible in 2008 because household debt levels combined with the subprime scams create underwater households that could no longer keep up with payments.
Who would become insolvent when tech stock valuations change?
the internet boom (and I mean boom not bubble) started to flicker in 94, gathered steam in 95, and really got going by 96. Saying that was the time to bail out, before 97 98 or 99? I would not say that Greenspan "called" it.
bubbles are caused by collective overinvestment; that means that a lot of the ideas can be good ideas: if everybody else also doesn't invest in them at the same time. It's a bit of tragedy of the commons, it's the collective knowledge that's lacking in individual decisions.
I think there's a case to be made that bubbles result in malinvestment, that is, you end up building capability to produce goods and services for which there isn't enough demand to support that capability. It's inefficient.
When a bubble bursts we collectively look around and think "What is it that we really need?"
Note that overleveraged companies tend to outcompete more conservative ones in the short term, they just have more weight to throw. And if enough of them go down at the same time, the resulting slump won't do decent investors any good either.
Note that overleveraged companies tend to outcompete more conservative ones in the short term, they just have more weight to throw. And if enough of them go down at the same time, the resulting slump won't do decent investors any good either.
What the hell is Sam talking about? Quoting people from 2007-2008 saying we were in a bubble then as if nothing was wrong at the time? 2008/2009 was only partly insane because of tech, but it was an INSANE time: VCs were too scared to ask their LPs for cash because they knew the capital calls would fall short. Dealflow utterly halted for 6 months, and took another year after that to get back to something that felt productive. We were absolutely in a bubble then.
Using bubble-quotes from that era as evidence that we're not in a bubble now is absolutely preposterous.
> 2008/2009 was only partly insane because of tech,
Its easy to provide all kinds of justification in hindsight or "after the crash". If you were a "happy investor" sitting on top of January 2008 crash, I bet the last thing in your mind will be "someone is insane". Its only because the crash happened just after that and so now you have the liberty to say "INSANE TIME".
Its the same economic cycle happening right now. I don't know when the DOW/NASDAQ is going to crash and how many points, but I do know that almost no one can anticipate it right on top of the price chart, and say "Hey look, this move will now cause an economic recession". It always happens after the fact!
Valuations have been questionable but that alone does not mean we are in a bubble. I'd rather we looked at the amount of funding that has been raised and the amount loss to gauge whether we're in a bubble.
the fact that there are very few tech ipos is probably the best indication that there is a bubble in common stock valuations of private companies, which would not be supported by public markets. Why? because public markets have many sophisticated players who can easily sell short and private markets don't.
It seems like it was just yesterday that everyone was arguing the Facebook valuation from Microsoft's investment was impossible to ever live up to.
$15 billion. They'll do half that in net income in the next four quarters.
Interestingly the $125 per user figure quoted on the Gigaom article (the $15 billion valuation divided by their daily actives or total users at the time), is now more like $195 per user (1.68 billion daily actives with $328b market cap).
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A startup with seed money is in a complete different position from Uber/Pinterest.
Obviously we aren't able to predict a few months into the future, let alone a hundred years, so it's hard to definitively say whether current behavior is sustainable for a hundred years or not.
It's much more reasonable/believable to say that current behavior is unsustainable for 1, 5, or 10 years.
Perhaps both the magnitude and the time leading up to it are of equal importance.
Yet as much as it hurts, it has to, and will happen. Doesn't mean it will be as bad as 2008, but it's part of the business cycle. I don't think there's any denying that valuations have gotten way out of hand, especially in the private equity and VC world. But trying to call a top is just as hard as calling a bottom, if it were easy policy decisions would be easy.
It's a "creative destruction" within the capital markets. Gets the dumb money out...funds businesses that actually make money and builds upon the rubble on a stronger, firmer foundation.
See eg http://www.economist.com/blogs/freeexchange/2011/10/monetary...
It's also why this latest bubble / not-bubble was popped by the first Fed moves toward hiking rates. All the panic around unicorn blood in the street started exactly in line with the Fed's moves to hike rates (nice coincidence eh). And it's also why the stock market has struggled to move higher since the Fed's QE program ended (sideways for ~19 months now). If the Fed hikes rates (which they won't in any meaningful way), it'll continue to deflate all elevated asset prices.
If my watch always says it's 3:22, regardless of whether it is or not, does that mean it's never 3:22?
I don't think the argument is whether we are or are not in a bubble. It seems pretty clear that a bubble is filling around us (whether that is a slow or quick fill is a personal point if view). The argument really should be how long do we continue to risk getting soaked versus staying dry (keeping our investments). I think some are finding a solution by removing themselves from the equation and taking their investment dollars elsewhere. And that singular act, if/when it starts to exponentially grow, will ultimately decide the timing of the burst.
Whatever industry replaces "tech" as the next great revolution (perhaps AI?) will have "bubbles" orders of magnitudes greater than what we're seeing now. If you think we're in a bubble now, which we very well could be (I'm unsure), just wait for the future.
It's housing prices in Flint, Michigan. It hit a peak of $172K in 2005. By 2011 it was $106K, or about the same price as in late 1995. Currently it is at $140K, which is essentially the price in 2000. Assuming it goes at its current rate, I guess it will be about the year 2020 before it recovers to its 2005 high.
Now, it's not really fair to call this a "bubble" since externalities are at fault. However, if you look at the increase (1.6x in 10 years) against an inflation rate of 3% (1.3x), you can see that housing was over valued during that period. I'm pulling the inflation rate from http://www.usinflationcalculator.com/inflation/historical-in..., and if anything overestimating it.
If you look at today's price it has a multiplier of 1.3 from the 1995 price, so it is still slightly undervalued, but should catch up to inflation in the next few years.
My point is that despite the credit crunch being the underlying cause of the crash, the market had been growing at nearly twice inflation for 10 years. 11 years after the crash the market is still recovering and it will be a couple of years before you get to reasonable prices. So you can go a very long time before unsustainable growth will collapse. This leads to a very, very long time for recovery.
I live in Japan. It is 2016. The market still has not recovered from 1992. If the world ever gets into an energy crunch, I think we might well look at the last 50 years or so as being a "bubble".
Edit: fixed inflation rate link
Imagine that you bought some tulips and just by hanging on to them for a while, you can realise a profit. This would be cool because everyone could put all their spare money into tulips and then turn around and sell them for a profit. Because the price of tulips keep going up (and people want to spend some of their gains on other things), eventually people will be able to buy less and less of them. However we might be able to raise salaries so that people can afford these tulips endlessly. In this way the inflation rate will exactly match the increase in price in tulips.
If we can't raise salaries to match the increase in the price of tulips, eventually people will be priced out of the tulip market and demand will dip. This will cause the price to fall. If people start to think, "Hey wait a minute. I'm not guaranteed to make a profit with these tulips after all", the price can fall a lot. If people start realising that they need to take a loss on their tulips so that they can afford to eat today, the price can tumble. How far can it fall? Mostly it depends on how clever people were for keeping the tulip bubble going. The more clever they were, the worse the potential fall. Essentially, it is likely to fall to the point at which the price of tulips escaped from inflation -- because it is a liquid asset and the need for tulips hasn't increased substantially over that time period.
Demand can influence the price of houses (and obviously did in Flint), but the degree to which the market dropped was a result of how overcooked the housing market was. Beware. Flint was never as overcooked as some markets are and people were never as clever about keeping the values high as some markets are.
Can a bubble last 10 years or more and then wipe out all of those gains? Absolutely. I only picked Flint because young people are likely to have heard of the problems there. You could also look at the housing market in London in 1991/1992.
Can the tech bubble burst and wipe out 10 years of gains? Sure. No problem. That's the only way I could interpret the person's question, "Can a bubble that has lasted 10 years still be called a bubble?" Definitely.
To be more mathematical, your property is the house plus the land under it.
People will not pay more for the house than replacement value. If you keep it in good order, you can keep that value up.
The land can't be `replaced'. So for pricing we look at the whole future income stream discounted to today's dollars at some appropriate interest rates.
That income stream is, yes, basically what other people are willing to pay to use that piece of land.
What people can afford to pay for rent is basically what's left over after they paid other things. You can see it as an auction. That's why land values in silicon valley are so high. (Exacerbated by the fact that local regulation there makes it almost impossible to substitute capital for land, ie you can't build up.)
I don't know when, but everything is lined up "nicely". Ridiculously low interest rates, sky high prices, insane salaries. Even if SV companies move to a cheaper location to save on salaries it could trigger the collapse. Seriously not looking forward to a time when the fed raises interest rates to protect a falling dollar... Etc.
That's why I am in favour of taxing land values (as a proxy for unearned land rent), and the central bank targeting nominal GDP levels.
The former policy dampens land price bubbles and raises taxes in the most economically efficient way possible; the latter avoids real shocks in one part of the economy taking the whole house of cards down.
Ideally, no single company would then be too big to fail.
http://www.economist.com/blogs/freeexchange/2015/04/land-val...
http://www.economist.com/blogs/freeexchange/2011/10/monetary...
They make money off deals, so bubble or not, it's a bonus.
1988 - housing market bubble S&L scandal etc. market crashed.
1998-1999 - dot com bubble burst.
2008 - Housing and lending crashes economy.
Seems like the most major events in the markets crashing have been coming every ten years or so. Markets crash and it's called a bubble after but, it's all fueled by media events, fear and then panic selling.
Those people typically aren't investing in startups
http://www.nytimes.com/2015/03/23/business/dealbook/tech-mon...
At that rate, tech start-up stocks will never even make up 1% of the fund.
MSFT has a P/E of 38, for example
If I had to guess, I think we'll see a lot of M&A activity at some very high prices from other companies that are richly valued.
I personally believe that the current economic regime, requiring constant growth (and large growth) for health is not sustainable. Am I willing to bet on when the next big economic crash will occur? No.
People young enough to have never been through a downturn in their professional career are usually in denial right up until the moment it happens. And the people who try to call the bubble early, as funny as it may be to make fun of them as is being done here, are usually the ones who have been through it before, see it coming early, and try to warn everyone, even though no one ever listens (too busy enjoying the party!)
Year-ago-me wouldn't have believed it. Bubbles suck, and the current tech industry reminds me of my own experiences - Pop.
When I tried to get a new position later on, everybody was expecting cloud and web development experience, which is experience I don't have. Insistence that it was within reason to learn cloud utilities never worked, even with experience building tools to build vmware instances in bulk. For the positions that I was qualified for, I found myself having more knowledge than the interviewers, so I gave off an unintentional arrogant vibe. For example for a job I was really interested in, I got dinged for my answer to the question, "How do you print all open sockets?" for answering "lsof -i". Apparently netstat was the only acceptable answer. That sort of thing happens all the time, and interviewers do NOT like to be corrected - the number of senior admins who don't know how file handles work is asinine.
It got very, very tiring very quickly and I just kind of gave up. I'm now working in building up investigative journalist and data analysis experience to get out of the linux field. It's going pretty well, but there's little money in it so far. If that doesn't work, a few interesting positions in infrastructure security are in the pipe.
</rant>
(one recent little example of what made me think of this was the scene in the documentary Spotlight where the journalist analyze volumes of data on priests' assignments and whatnot - all by hand. I couldn't help but think it'd be so much easier to OCR the pages and analyze the data with some basic scripting.)
Just to name some..
-Working on the IT infrastructure and one of the 5 or so founders of a 160p LAN party.
-Data analysis of Chicago parking tickets: https://plot.ly/~red-bin/6.embed
-Sued the mayor of Chicago for his phone records and won. Still working on it, but I met up with a journalist to discuss last Monday.
-Doing HFT systems tuning as freelance (pays the bills, too).
-Submitted a major infrastructure bug to comcast. Talked to their CISO and everything.
-Did the same for Northwestern, but with less followthrough.
-Learned a bit of R, significantly improved my python, did a bunch of random silly projects.
-Made a proof of concept for a domestic violence shelter finder for a hackathon. Just handed off the code to a few junior coders to ride with.
-Made a minecraft 3d printer print a png mural by pulling from github in-game. Limited myself to only using textures in the game without color transformations. Became a really hard problem, since the 'pixels' used by the printer don't move. Learned more than I'd thought from that project.
..It's fun. :)
First, someone is always "calling the bubble". At the bottom of the housing market there were people screaming that it was going to keep dropping. People have been calling the tech market a bubble for literally decades. And conversely, there are always people claiming that we're nowhere near the top, even when we are. It's not useful to listen because the reality is that no one really knows. If you think we're the top of a bubble, then cash out and be happy with your superiority.
Second, what are you, as an employee, going to do if you think the tech bubble is going to pop? Sure, you should be saving, but you should do that anyway. You shouldn't be over invested in tech, but that's also always true. What meaningful steps should you take if you believe a tech bubble is about to pop that you should not take anyway?
But you're right that knowing a bubble is about to pop might certainly dissuade many people from entering this kind of risky, lopsided employment deal.
After Twilio filed for IPO, someone wrote a "here's what Hacker News said about Twilio," which only focused on the hilarious-in-hindsight but negative comments about the startup (https://news.ycombinator.com/item?id=11786464). Naturally, it got massive retweets from venture capitalists who espouse the haters-gonna-hate attitude.
As dang notes in that other comment thread, this kind of argument doesn't look at the other side at all: there have been some seriously shady dealings going on with unicorn startups. IPOs are failing. And let's not get started on Theranos.
By the way, I too am worth 2.5 billion dollars. What?! You want me to prove it?! Get off my lawn!
While I agree with the first part of what you wrote, when it comes to this I can say:
You don't need to prove it (and those unicorns didn't prove it either). You just need to be able to get some millions of dollars on your 2.5 billion self-valuation, and you'll be as good as them.
Because they did that.
Mathematically speaking you just need to get someone to give you a single dollar in exchange for 1/2500000000 of 100% ownership, meaning that 100% is theoretically worth $2.5 billion.
PRESS RELEASE: 37SIGNALS VALUATION TOPS $100 BILLION AFTER BOLD VC INVESTMENT https://signalvnoise.com/posts/1941-press-release-37signals-...
I give 'Dave's Dilly Daddlers' $100,000 for 10% of the company. But with the condition that if it's valuation ever falls below 1 millions dollars I get 20% equity, and if the company goes bust I get paid back before any other investors, and I get the title to the founders house.
I also give 'Georges Growers' a $100,000 for 10%. But with no conditions, I'm just buying a portion of the company.
Are both of these companies worth 1 million dollars? In some sense yes, but in a much more meaningful sense no. And many recent deals have been closer to the former than the latter.
Whose throats? The other VC "cronies" who are buying shares at those prices?
Source?
>Leave the Medium thought pieces about when the stock market is going to crash and the effect it’s going to have on the fundraising environment to other people—it’s boring, and history will forget those people anyway. There has never been a better time to take a long-term view and use technology to solve major problems, and we’ve never needed the solutions more than we do right now
Back to work!
[1]http://blog.samaltman.com/hard-tech-is-back
Then this is is kinda like telling a soldier about to deploy to Afghanistan that they don't need Kevlar because it's never been a better time to bring democracy to the middle-east.
Financial products are definitely not always overvalued either. Accounting was created so that we can properly evaluate what a company's overall value discounted for future earnings and they are pretty accurate (accounting was never my favorite subject so that can probably be better defined)
First the bursting of the first tech bubble. Then Greenspan's housing bubble in 2001-2007. Then interest rates were held abornmally low, for 80 months straight, which is something that the world has _never_ seen.
Would we have seen this tech boom if interest rates had been say 5% and capital had somewhere else to flow?
I'm pretty wary of "The music hasn't stopped playing, so it can't possibly be a bubble" arguments. Lets watch what happens as rates go up and venture backed tech has to compete with other returns.
Or perhaps the more apt way of putting this in our times is: "Multiples will be crazy high as long as central banks keep interest rates crazy low"
Rather than thinking about this in terms of bubbles I think it's fair to say that the probability of getting very high ten year returns on the US stock market at these valuations is low. The problem is there's no other asset that will give you the chance of a better return. That's no coincidence.
Apple's P/E is 10.85 according to Yahoo Finance. That's low given current interest rates.
EDIT: The average Nasdaq P/E is 22.55 ... This is historically high but is ~4.4% vs. the 10 year treasury being 1.61% (and I say that painfully as I attempted to go short at one point). That is basically the story right there.
I have no idea how earnings multiples wound up with their pay-offs in the denominator. (Since it makes stupid things look bigger, and by default, anecdotally, most people agree bigger is better, I'm going to blame investment bankers.)
Thinking of a 22.55 P/E as a 4.4% E/P, i.e. 2 percentage points above the 30-year's 2.4% [1] is hugely clarifying. (I personally prefer the Shiller CAPE [2] for long-term broad-market assessments. It sits at 25.93, i.e. a 3.9% yield or 1.4 percentage points over the 30-year.)
[1] https://www.treasury.gov/resource-center/data-chart-center/i...
[2] https://en.wikipedia.org/wiki/Cyclically_adjusted_price-to-e...
[3] http://www.multpl.com/shiller-pe/
Same way as with miles per gallon.
and in the larger market this has been a fairly anemic bull market, there still isn't a whole lot of froth outside of silicon valley.
I can't buy the notion, that we will or ever see a bubble ... it's just ups and lows just about anything in life ... because at this point and in future internet is too larger to be vulnerable to it.
But that said, there is a little room left, for developers living in the mom's basement., and that's truly sad.
No disrespect meant, but this kind of thinking is exactly how bubbles happen and everything gets out of kilter. Like people who believe house prices will go up forever, so they leverage up - it's irrational exuberance (to quote Alan Greenspan). But eventually this imaginary money that people believed to exist, actually didn't, because the human beings that needed to work N hours to produce that wealth haven't actually been alive long enough to do it. And boom, it all resets.
I actually think one of the key tells for being in a bubble is so many people denying we're in a bubble. The talk of it alone is enough to spread fear and doubt. That moves markets. All that is needed is an 'event' that confirms the fears, and boom. It could well be a failed IPO.
Who knows? Not I. I was one of the idiots that bought lastminute.com shares.
> I don't think the bubble thing is true for our time
> nor it will be in the near future, it's just tech has become more competitive than ever
> I can't buy the notion, that we will or ever see a bubble
> because at this point and in future internet is too larger to be vulnerable to it.
If everyone is willfully deluding themselves and see nothing wrong with it, for what reason do we believe that it will change in the future and that the bubble will pop? And the current situation is different from the 2008 crash in that people know what they are buying into, companies that don't make money, and they don't care.
When valuation changes cause widespread insolvency, imo.
That was possible in 2008 because household debt levels combined with the subprime scams create underwater households that could no longer keep up with payments.
Who would become insolvent when tech stock valuations change?
bubbles are caused by collective overinvestment; that means that a lot of the ideas can be good ideas: if everybody else also doesn't invest in them at the same time. It's a bit of tragedy of the commons, it's the collective knowledge that's lacking in individual decisions.
If it is indeed a bubble, is there anything positive that will result from it bursting?
When a bubble bursts we collectively look around and think "What is it that we really need?"
Ohh, makes sense. Thanks for putting that in a clear way. So, while it's painful, you could say bubbles bursting is healthy...
Whenever I try to say that around friends I come off as malevolent. I'll use your words next time.
Using bubble-quotes from that era as evidence that we're not in a bubble now is absolutely preposterous.
Its easy to provide all kinds of justification in hindsight or "after the crash". If you were a "happy investor" sitting on top of January 2008 crash, I bet the last thing in your mind will be "someone is insane". Its only because the crash happened just after that and so now you have the liberty to say "INSANE TIME".
Its the same economic cycle happening right now. I don't know when the DOW/NASDAQ is going to crash and how many points, but I do know that almost no one can anticipate it right on top of the price chart, and say "Hey look, this move will now cause an economic recession". It always happens after the fact!
I guess they don't want to risk duplicating lastminute.com
Only question is when it pops.
$15 billion. They'll do half that in net income in the next four quarters.
Interestingly the $125 per user figure quoted on the Gigaom article (the $15 billion valuation divided by their daily actives or total users at the time), is now more like $195 per user (1.68 billion daily actives with $328b market cap).