Take this as uninformed speculation (read: I'm not willing to spend the 6 hours pulling together the citations I need for this argument), but it seems to me that some of this bubble is a response to current investing conditions.
Everyone is concerned that we're moving into a second dip, possibly worldwide depression. With the problems with the Euro, Europe isn't an appealing place to invest. the BRIC countries are often risky investments due to government interference, and would be hit extremely hard with a worldwide depression. The American stock market is volatile, and seems maxed out right now.
Yet people are worried about gold and other inflation hedges as well. It has exploded, but is risky as a primary investment vehicle. Real Estate is a bad hedge because its values are still above what seems to be market value. Bonds aren't safe if there are a series of defaults.
Thus, there are no "safe" vehicles for money. However, these social tech companies grew in a recession, so seem less risky than their objective risk profiles would indicate. The bubble, then, may be relative to other investments, not because of their own inherent value.
In short, when safe (relatively) investments look risky, risky investments look less risky in comparison.
I don't see how you can compare this to the housing bubble/crisis. The real estate market contains trillions of dollars (everyone's money participates in it one way or another), and some of the worst stuff, like bad mortgages, was amplified and leveraged by firms using it as collateral.
Here, we're talking about a $9 billion valuation for LinkedIn, and that's just a valuation, they sold off something like 20% of the shares, so actually only $1 billion or $2 billion changed hands. In other words, the leverage here works to reduce the economic impact. Who cares about this, other than the people holding these shares? The percentage of the world's capital being invested at these insane valuations is very, very small. Meanwhile, there are tons of undervalued companies in everything from shipping to construction and energy. I think we're not looking at a depression just yet, at least not based on a few dumb valuations for no-substance "social" companies.
Assuming we're in a bubble, from a startup founder perspective, it seems like the smart thing to do (to me, at least) is either:
1) Look at the companies and business models that survived the first dot-com bubble (amazon, ebay, priceline, eharmony, etc.) and start analogous companies that can get to profitability
OR
2) Start something in a hot space and get acquired ASAP or do a funding round that let's you take money of the table. And then don't spend the money
I wonder if awareness + the experience that we had just 10 years ago is going to limit the size of this bubble. 10 years is a very short time it's the same sector.
I know for one thing, I had my lesson 10 years ago, my dad had his lessons investing in Nortel Networks and most of my friends learned a lot about bubbles in 2000. The pain of losing that much money is still there.
There are always people that haven't lost enough in the previous bubbles and the allure of getting a huge return in only 1 or 2 years is greater than life. I'm sure a lot of people recognize that evaluations are already inflated, but feel confident that they'll get out before the bubble explodes.
They interviewed an economist who ran a simple experiment: he created a market for the students in his class with a VERY predictable security (it paid a pre-established dividend N times, and then stopped.) And yet speculative bubbles invariably formed and crashed.
It feels like it's similar to the "guess a number between 0 and 100 that's 2/3 of the average person's guess" game. In the real world, you don't win by doing the most rational thing; you win by succesfully modeling the other players.
Still with all that knowledge I'm afraid it's almost impossible to slow down group dynamics (and that's all this is) to a point where everybody doesn't get hurt - again. People are going to try to outsmart the bubble, probably even accelarting it. Human nature, I guess. Still sucks. :)
I think you could get a lot of mileage out of taxation.
Increase the short-term capital gains rate to -- say -- 50%, add in an shorter-term capital gains rate of 75% for gains inside a month, and just for good measure top it all off with a super-short-term rate of 90% for gains inside of a day.
And to balance the equation, maybe make a longer-term capital gains and drop the capital gains rate on investments lasting more than 5 years to 5% or so. (Or, heck, just inflation-index them.)
I feel the realization rate of most investments in the tech sector are already understood. If there's a bubble, it'll just be a function of poor investing, rather than poor understanding.
I agree. Afraid it won't matter, because ultimately it's going to affect the entire industry and make it almost impossible for startups that just happen to be in the right place at the wrong time to get funding.
- Greece is about to default any minute now. After that, Ireland/Portugal/Spain/Austria/Italy will soon follow.
- Japan is suffering -5% GDP per year
- China is starting to have internal riots in major cities because of high inflation. Also, lots of their high flying companies are starting to be investigated for fraud. Thus the recent 30-40% drops in their stock prices.
- US is about to default technically by not raising their debt ceiling.
All signs point to the second dip in the global economic depression.
I can be a pessimist with the best of them, but this is just panic-mongering.
-- The US would be insane to default; their debts are mostly internal, and in their own currency, which they can just inflate. Unpleasant for Americans, whose pensions and savings are going to be worth a lot less, but this is how you pay for living beyond your means. If they need to change some technical rule, they will find a way of doing that, rather than default on debts and cause chaos.
-- Unlike Iceland, which physically lacked the money to pay its debts, Greece simply doesn't want to cut its government spending by 10% and pay its creditors. They are a sovereign nation, so nobody can force them to. Fine. After they default, and the financing gets cut off anyway, they will have to cut spending even more. Maybe after other nations will see how that works out for them, they will think twice about not paying debts that they voluntarily took on. Or maybe not. But let's not start hyperventilating about an Austrian default just yet.
-- China has had two decades of solid economic growth. Make that fantastic economic growth. I am not talking about numbers on paper, it's growth measured in concrete and steel and food. They'll live through a correction if they have to.
-- "Just inflate" Oh, is that all? Turned out pretty nicely for Argentina, didn't it?
-- Unlike Iceland, Greece will taco the Euro, and bring down a bunch of Euro banks.
-- China is to the Greater Depression as the U.S. was to the original Great Depression: the exporter that is going to get totaled. I'm optimistic on the other side of the coming valley, but they are going to have a heck of a reckoning when all the bad debts and malinvestment come to a head. I don't expect the current government to survive unless they are extremely brutal and extremely lucky.
>> "Just inflate" Oh, is that all? Turned out pretty nicely for Argentina, didn't it?
Argentina defaulted. It turned out to be a disaster, which, for them, may have been unavoidable. Why would the US want this?
>> Unlike Iceland, Greece will taco the Euro, and bring down a bunch of Euro banks.
Yeah, sure, we're all moving to the workhouse because Euro banks stand to lose 40 billion euros from a Greek default (this is the "haircut" being proposed). In an economy of 13 trillion euros a year. After Greece finishes digging out from its default disaster (remember, plenty of their debt is internal), maybe others will think twice. Or maybe not. I don't have the gift of prophecy, but I am betting pretty strongly against the whole Eurozone of 400 million people turning into a boarded-up wasteland.
If you want to counsel panic, put some numbers on it - what exactly will one Euro buy in five years, and where will the stock markets be (boarded up, maybe)? Then let's see if you're willing to invest your money accordingly.
By the way, if you want to see my predictions in numbers for the next 5 years, here they are:
1. The Euro will appreciate against the dollar, because the US will have to issue a lot of currency to bail out local and state governments in the next 5 years. I am guessing a Euro will buy about 2 dollars then (edit: come to think of it, probably more. The US will print a lot of money).
2. The stock markets will not be boarded up, and will be trading at roughly at the levels of today (+ inflation). I don't see tons of profit there, given panicky investors, but the fundamentals are more than sound enough to prevent a total collapse. It's not like the market is trading at insane P/E ratio.
3. Almost all private and public debts will be paid. There are funds to do this, and the political pressure to make good on debt will be overwhelming. There may be a Greek default, and the Spanish real estate debts will have to be restructured too, but not at a crippling loss to the whole Eurozone - there is not enough money invested to "taco the Euro".
Yes, my money and my mouth are in the same exact place.
1) I think the Euro will not be recognizable in five years, so I hesitate to guess where whatever the Euro is (if it still exists at all) will be. I'm expecting that current Euro holders will see depreciation of their purchasing power unless they are very nimble.
2) I expect the S&P to retest and break the previous lows. Russell Napier has a target of 400, which sounds plausible to me.
3) Not a chance. Productive capacity has been hollowed out in exactly the economies that have taken on the most debt, so the debt can't be repaid in any meaningful way. When you start penciling in future obligations or, heaven forfend, "investments" in "derivatives" made by our friends in the big pension funds... No way. I believe we are at the end of the public/private debt ponzi scheme. It could end in hyperinflation or in deflation. I expect deflation.
My money is kind of where my mouth is: a straddle of startup investments and cash/PMs.
By the way, I've always wanted to ask someone who buys gold/silver as a hedge against economic collapse - are you physically holding it in your house, or what? If your gold is just 1s and 0s in some database which say that you own some gold, why do you think you will be able to get it after the "Big One"? Your bank or brokerage may have to give it to some creditor who is in line before you. And there are precedents for the government just confiscating it, or forcing you to "sell" it at the price they set. So what's the plan?
I'm going to add this thread to Google Bookmarks, and revisit it in 5 years (does HN keep threads for this long? It should). Unless, of course, there will be no Google and no Hacker News and no internet in 5 years.
Don't know about S&P 500, I'm not about to invest anything in the US, what with Bernanke about to "ease" his printing press into third freaking gear.
- US: Semantics. US is already silently defaulting by massive printing its currency (thus devaluation of its debt). Regular citizens' social security, medicare, and savings are wiped out. Still points to economic depression.
- Europe: They all will default. If one country in EU doesn't pay its debt back, why should the other countries in EU pay theirs? Major banks in EU suffers massive loss of value. Still points to economic depression.
- China: Yes, they will go through a correction. However, since they packed 40 years of economic growth into 10 years, the correction will be brutal (oversupply in housing, capacity, human resources). Still points to economic depression.
-- There is a difference between a default on debts and inflation. People can live with inflation. A default on the freaking US treasury debt would be a disaster. Why would they do that, given that they absolutely don't have to? No, it's not the same thing.
-- Also, speaking of seeing everything larger and scarier than it is, you really need to remember how good life is for most Americans. Some of the economic hard-lack stories make pretty funny reading for someone outside the US. Americans have borrowed to finance some pretty extravagant spending, and the federal government is by far not the worst of it; browse Philip Greenspun's blog at http://blogs.law.harvard.edu/philg for some stories on state pensions. At some point, they will pay for this. This doesn't mean that Americans will be rooting through garbage and living on the street; the US still has the capacity to produce more than enough food and housing. Yeah, the spending binge will be over and it will be unpleasant.
-- Europe is not going to default on all its debts. That's a dumb move, and they know it. Argentina had essentially no economy for years after its default; no jobs, no banking, no credit, no business. Iceland is not exactly partying now after its bailout. I don't think they will be standing in line to join this club, and again, this is not a question of a lack of money; Greece has a spineless government and aggressive unions, and they simply don't want to pay up and expect a bailout which won't come, or at least won't be on pleasant terms.
-- China has immense reserves to enable it to live through a correction. You can do that in a (somewhat) planned economy.
Failing to raise the debt ceiling is not a US default. The US receives more than enough income to cover its debt service, which also has priority. Equating failure to raise the debt ceiling with a default is a political ploy that nobody seems particularly in a hurry to debunk as both sides thinks it serves their purpose; if we're really unlucky they'll turn it into a default for political points. What we don't have is enough income to also do everything else we want to do.
Some level of "default" via inflation I would agree with, though; it isn't "technically" default but it's certainly a way of unilaterally decreasing the amount of wealth the payoff of the debt entails and that certainly has many of the relevant characteristics of a default.
"Failing to raise the debt ceiling is not a US default. The US receives more than enough income to cover its debt service, which also has priority."
That's a Republican party talking point, not a fact.
Everyone knows that debt service has priority. They also know that it's non-trivial to just stop paying for other services, and that even if it were easy to do, it would be seen as a serious lapse of judgment by our creditors. You don't have to default to get hammered by rising interest rates on your debt; you merely have to look irresponsible enough to be a bad risk.
> They also know that it's non-trivial to just stop paying for other services, and that even if it were easy to do, it would be seen as a serious lapse of judgment by our creditors.
Huh? (Hint: it's poor form to disparage something as a Repub talking point and then recite a Dem talking point without providing any support. The fact that we're dueling with talking points doesn't make both of them false - evidence does.)
Every creditor I've encountered says "don't pay them/buy food/go on vacation/buy a new car, pay me".
Why would US' creditors be any different? Put it another way - do you really think "we're going to keep spending way beyond our revenues" is something that the US creditors view as a good thing? (It's not like we're spending on things that will produce future tax revenue.)
The "debt ceiling" is a self-imposed line of credit. How does increasing it make the US a better credit risk?
I ask because the lenders that I've dealt with looked at available credit and refused to loan if there was too much. Why? Because you might borrow and then be unable to repay their loans.
"The "debt ceiling" is a self-imposed line of credit. How does increasing it make the US a better credit risk?"
You (and the Republican party) are setting up a false dichotomy. The decision at hand is not "should we raise the debt limit today, or should we reduce the deficit?" We need to raise the debt limit in the short term, while also reducing the deficit in the long term, in a responsible way. Nobody is threatening to downgrade US debt tomorrow if we raise the debt ceiling, but there's a serious risk of it happening if we choose not to raise the limit.
Certain conservative politicians want to frame the debate as an immediate crisis because it's convenient for their political aspirations, not because refusing to raise the debt ceiling is an intelligent thing to do.
Actually, you were. (The credit rating agencies have govt monopolies. They're not disinterested parties. It also doesn't matter what they think because they're not lenders.)
> You (and the Republican party) are setting up a false dichotomy.
I'm not setting up a dichotomy at all. I asked a simple question, namely, how does increasing the US' line of credit make the US a better credit risk? I asked that question because that's your claim. I said nothing about the deficit.
As reducing the deficit "in a responsible way", which lender is saying "I won't loan money to the US govt because it's reducing its social security/military/medicare/medicaid spending?"
Seriously - I want names. Will China reduce its lending? How about you (assuming that you've been buying treasuries).
Yes, lenders care if you skip on repayments, but your argument assumes that they want to continue other spending. Some supporting evidence would be nice.
You seem to have trouble making an argument without using political references....
Given that lenders seem extremely willing[1], one might say almost desparate, to lend to the US government, there doesn't seem to be any fear by our creditors that we won't repay.
[1]Current 10-year T-bill rates around 3% per year mean that not borrowing as much as possible now seems downright stupid.
> Current 10-year T-bill rates around 3% per year mean
The fed is buying most of them now. The fed can keep doing that "forever", but that doesn't mean that our trading partners will keep selling us stuff cheap.
Yes, the US is doing better than many countries, but that's not the same as good.
> not borrowing as much as possible now seems downright stupid.
It depends on what you do with the money you borrow. Spending it on beer and skittles is different than investing it in something that will give a decent return, or even saving it as part of an interest rate prediction.
And yes, I objected when Bush pushed through his $1T prescription drug monstrosity and other things. That said, the last yearly deficit with a Repub congress was about the same as the current monthly deficit. Starting from Bush's hole, it seems silly to dig faster.
Per my other reply, the word "default" means something, and I think we should resist the temptation offered by politicians to turn it into the semantic equivalent of a synonym for "bad... financial... thingy..." and then rush to apply it haphazardly to everything faintly resembling someone not receiving money they think they have a claim to.
It may certainly be the case that our creditors would not take kindly to us ramming into the debt ceiling and hard-cutting off services. But if you fall into the "default/not-default" "bad thingy.../not bad thingy..." semantic trap, you're not looking at the real situation. Our creditors may not take kindly to us simply raising the debt ceiling indefinitely, either. Resist the false dilemma the politicians are trying to offer us by collapsing the domain of discourse like that; there's much more than just "raise it" and "not raise it".
You go ahead and tell that to the Social Security recipients whose money doesn't show up, or Pentagon contractors whose bills don't get paid, etc., etc.. Or people who get laid off in the second dip, after a few hundred thousand government workers get furloughed.
Tell them what? That the word "default" is not the correct word to apply to their situation, but instead they've been something closer to "laid off"? (I say "closer to" because historically they end up getting paid anyhow, just later; a hardship, yes, but "tell all the actively unemployed how much of a hardship that is".) They won't care, but I don't think it's for the reason you think.
I do not see how the fact that some people aren't going to be paid on time or possible at all requires us to apply the term "default" in a haphazard, nonstandard way. You don't "default" on a paycheck. It isn't a good thing, but it's something else.
2. like meredith whitney said on cnbc last week, partially servicing debt is a default, but the market doesn't think so. you can take haircut on coopon. Or delay coupon. All these are valid TDRs ( troubled debt restructuring) but is a TDR a default ? She posed a question - if senior citizen with a million in bonds is waiting for his coupon for meeting expenses, & you delay that coupon by a month, from his pov its a default, from mkt pov that's a restructuring.
3. Strongly agree with the rest of your thesis ie. Greece & PIGS will default. Hyperinflation in US is virtual certainity. Dunno about US technical default - we'll end up doing that from an accounting standpoint, but then get creative about the nomenclature.
This is something of a non sequitur. The debate is around the tech bubble not the various global financial crisis.
While one may affect the other, the debate is around the bubble.
You imply that the global economic situation may cause this bubble to burst or deflate. It actually tends to be the other way around. Hot markets can pull economies out of (or into) recession. The housing/internet markets contributed to the boom years during the Clinton era (and pulled us out of the recession of the 80s). Over-leveraged, cheap-money financial markets pulled us into one.
It may be the case that this next internet "bubble" helps bring us out of our current economic malaise.
Blank's argument doesn't completely hold up. Bubbles happen, but not all bubbles are created equal. The Big Bad One, from 1999, does not compare to whatever you want to call this one. The irrational exuberance exercised in that era was much, much greater and far less sane.
Yes, Linked In is/was overvalued. Same with Groupon and a handful of others. Color raised $40 million without a product (gads! no product before a venture round?). But we've been through this before, and not all the investors are going to be suckers. Color will not IPO. There will not be hordes of companies going public. John Q. Public Investor will not be directly affected. And the VCs are not solely investing in companies without products, business models, and income.
Pandora is profitable. Facebook is profitable (AFAIK). Twitter has figured out how to make money. Y-Combinator companies are being bought out not in a flurry of impulse and whim but because it makes business sense (e.g. Wufoo).
edit:
Steve Blank: No one doubts that social networks and web and mobile applications are reinventing commerce. Obviously, some of these companies will have hundreds of millions of customers, unprecedented revenue growth and great profits. Yet none of these companies have earned the valuations that they are receiving.
Block that kick! Mr. Blank is leaping from "there are some companies that have not earned these valuations" to "we are in a widespread bubble." That's my problem with this logic -- it's unjustified. We're still talking about a handful of overvalued companies. We're being way too sensitive. Bubble, maybe, but a tiny one. Not a really big one. Not one that's going to have any significant effect on the economy.
Oh, and Mr. Blank: the reason driving through Palo Alto is tough is because the Valley economy is in better shape than it was a year ago, not because of your tiny bubble. People are working again, but they're not all working for Color and Linked In.
edit 2:
Quote from an Economist commentor: The fact is that a bubble "in Tech", which was the debate topic looks highly unlikely just based on the fact that the success of the high-fliers hasn't started raising all boats. The market is still acting properly and choosing winners and losers, and the losers' shareholders would be the first to point that fact out.
Exactly. Those screaming "bubble" are looking at a skewed picture. "Hey, these five companies are overvalued!" Yes, but these X thousand companies are not. Why does that handful warrant so much attention, fear, uncertainty, and doubt?
We are in the beginning phase of what might end up being a humongous bubble. Angel investment valuations[prices] are up, IPOs are starting to take off. But it isn't totally crazy yet, and it may never get there.
As Brad DeLong says these days: it isn't a Great Recession anymore, it's a Little Depression. (And could get worse before it gets much better).
Everyone is concerned that we're moving into a second dip, possibly worldwide depression. With the problems with the Euro, Europe isn't an appealing place to invest. the BRIC countries are often risky investments due to government interference, and would be hit extremely hard with a worldwide depression. The American stock market is volatile, and seems maxed out right now.
Yet people are worried about gold and other inflation hedges as well. It has exploded, but is risky as a primary investment vehicle. Real Estate is a bad hedge because its values are still above what seems to be market value. Bonds aren't safe if there are a series of defaults.
Thus, there are no "safe" vehicles for money. However, these social tech companies grew in a recession, so seem less risky than their objective risk profiles would indicate. The bubble, then, may be relative to other investments, not because of their own inherent value.
In short, when safe (relatively) investments look risky, risky investments look less risky in comparison.