Examining the New Bubble

abb_road writes "Whether or not we're in the midst of another boom-bust cycle in technology is a matter of fierce debate. BusinessWeek discusses what constituted that last bubble and looks at current trends to see if we're on the verge of a new one. From the article: 'The Great Bubble of the late '90s shaped a generation of Internet entrepreneurs and investors much as the Great Depression shaped a generation of economizers in the mid-20th century. 'The bubble generation is much more attuned to the fact that things can get really out of hand,' says Bill Burnham, a former partner at Mobius Venture Capital. 'There's a level of caution that has been ingrained.'"

Comments

Oh, puh-*leese*!

[RobertB-DC]

The Great Bubble of the late '90s shaped a generation of Internet entrepreneurs and investors much as the Great Depression shaped a generation of economizers in the mid-20th century.

Since my own existence only dates back some 40 years, I can't claim firsthand experience of the Great Depression, but comparisons between the Dot-Com Bust and the Great Depression are so overblown that it ain't even funny. From the usual suspects:

Almost all countries were affected; the worst hit were the most industrialized, including the United States, Germany, Britain, France, Canada, Australia, and Japan. Cities around the world were hit hard, especially those based on heavy industry. Construction virtually halted in many countries. Farmers and rural areas suffered as prices for crops fell by 40-60%. Mining and lumbering areas were perhaps the hardest hit because demand fell sharply and there was little alternative economic activity.

I guess it's to be expected, though. We're supposedly in this War on Terror, but so far, I haven't been asked to participate in a single Meatless Tuesday. Where do I go to get my ration cards, anyway?

People love bubbles

[syphax]

I didn't RTFA yet, but I had to react to:

'The bubble generation is much more attuned to the fact that things can get really out of hand,'

If this is true, it'll last another 5-10 years before we forget all lessons learned (correct or not) and return to business as usual. Our species is really good at self-deception, group-think, extrapolation forecasting, and greed, with varying results. We deluded ourselves regarding tulips, electronics, radio, the internet, and who knows how many other bubbles; we will do so again.

For a couple very good talks on the self-deception issue (somewhat OT), listen to Robert Trivers and Nassim Taleb

Re:People love bubbles

[Ugmo]

Our species is really good at self-deception, group-think, extrapolation forecasting, and greed, with varying results.

I'd say we are best at greed. I remember in 1998-1999 myself and other people saying that it was a bubble and there would be a major correction or crash and I am no financial genius. What happened was that people who were financial geniuses knew it was a bubble but figured they could get out at the last minute and still make a killing. Meanwhile, they kept telling everyone else it wasn't a bubble in order to get everyone else to put their money in the market and sustain the bubble a little longer. They managed to keep things going for years after it was obvious that it was unsustainable. A lot of those financial geniuses came out smelling like roses while us schlubs lost money.

What is worse than the people losing money is that the market is in a sort of exhausted state with no direction. People have no where to put their money except into real estate, driving those prices up into another bubble. A real estate bubble was the last phase of Japan's economy after it's boom in the 1970's and 1980's before it went into the never ending slide/doldrums that it is in today. There needs to be investment into something that creates new ideas, new wealth and new real growth not new McMansions and impotence cures for aging baby boomers.

Fields where investment would be nice but probably won't happen:
Alternate fuels, Safe nuclear fission power plants or practical fusion.

Something else that won't happen:
Reorganize our entire suburban sprawl into small tightly integrated cities with housing next to workplace and markets. This would limit the need for cars to go everywhere. If people walked more we would have less need for a hydrogen car, or electric car or any kind of car. It would probably also help with the obesity epidemic, asthma epidemic caused by air pollution and all the health problems that go with it.

Really pie in the sky would be:
Cheap space flight, space elevator, asteroid mining and orbital solar power plants.

These would not be bubbles because something that would be productive and self sustaining would come from the investment, not a burst of activity and spending that leads nowhere.

Eh, it may not be that different

[Moraelin]

Thing is, the last bubble was a lot more complex than pure stupidity. A lot of it was dishonesty, and a lot of the rest is that special kind of stupidity-from-pure-greed that makes people "invest" in pyramid schemes and the like. The knowledge that, yes, it can't possibly go on for ever, but hoping that it would last just long enough for _you_ to get your pay-off at the expense of others.

E.g., for the greed part, don't assume that all investors were unable to learn that those "internet companies" tend not to last. But that was ok. They didn't plan to hold onto that stock for ever. They planned to buy some "my_cat_photos.com" site at cents per share, hype it to insane values, then sell right before the company crashes and burns and let someone else take the loss.

(And those in the most profitable position were the stock analysts, some of which had no remorse in telling their clients "buy!" while they told their own agents "sell!" I.e., they were in a position to _create_ a bubble around a company, and profit from it.)

A lot of the hyping dot-com stock you may have read fell basically in this category, and partially in the dishonesty one. It's not that those people were too stupid to see that a company without income can't survive. They were hoping _you_ would be stupid enough to believe them and help them pump up the share price. When they proclaimed an income-less and busines-plan-less new economy, well, the money making part of that economy was actually very present in their mind: it was the stock market. Namely hoping that some other dolt would buy the pumped up shares before they crash and burn.

And a lot of the posing, posturing and seemigly illogical behaviour of the dot-coms actually fit that hype-and-dump pattern. Now _some_ of the company owners may have blown money on gazillions of employees, Ferraris and buying football teams just out of stupidity. ("Look, ma! I'm someone! I can throw money out the window just like the rich guys!") But for a lot of them and for some VCs this simply constituted a kind of behaviour they could pump before they dump. It could be hyped as a young, dynamic, fast-growing company that's poised to take over the world. At the rate they're growing, they'll soon be the next Microsoft, and you'll be sorry that you didn't buy their shares when they were cheap! The fact that the only "fast growing" part were the expenses, well, they hoped you wouldn't notice that.

E.g., for the dishonesty part, one of the things that started the bubble was... advertising money. See, in the early day of the Internet web sites had maybe one ad banner on the main page, and some of us even clicked on them. And ad rates were based on this in more than one way. I.e., not only did the advertiser only count on paying for 10,000 or 100,000 views of that ad, but they also counted on the relatively high return on that investment, since people hadn't been yet buried in obnoxious ads and desensitized to them.

But in true "tragedy of the commons" fashion, someone figured that they could rake in twice the money if they put two ads on their site. Or 10x the money if they put an ad banner on each page. Some went as far as to imagine a site which would have a tiny content frame in the middle, while the rest of the screen would be filled by wall-to-wall ads. I know I've actually worked for one.

Some were even less honest than that, and also generously inflated their page view statistics. If you believed them, some sites had millions of pages (and thus ad views) served per month, even though they were barely more than someone's blog site. And not even the blog site of someone famous.

So basically what started the bubble was the idea that "hey, looky, we can make a bunch of cash by defrauding the advertisers!" Except that in the resulting 3-way con-war between websites, ad providers, and the companies paying for the ads (with the ad providers trying hard to cheat _both_ the webmasters and the paying customers), the prices per ad dropped like a rock, making that gold mine a

Re:Dude, you've missed a lot of bubbles

[kiatoa]

Personally, it feels like something's got to give.

Maybe. However since bubbles are really a sort of cross between a pyramid scheme and a lottery the only people who are hurt are those who are not paying attention. Case in point: we sold our house at or near the peak and we are now renting. There is a pretty good chance that when we buy at the bottom we will have made 30% or more. Only people who are buying right now when all indicators suggest that prices haven't reached the bottom will be hurt. I.e. paying attention pays off! Look at basic forces. House values historically grow at 1-2% a year over the long term. If prices grow faster than that there had better be a very strong driving force or - its a bubble. Now, if you detect a bubble early and can afford the risk by all means take advantage of the idiots but be aware that what you are doing requires impecable timing or you can be severly burned!

The house bubble was created by FED policy (follow the links at http://www.patrick.net/housing/crash.html#links) but I think there is a deeper problem. Our taxation methodolgy is fundamentally broken. The solution (IMHO) - the Georgist "one tax". NOTE: That is NOT a flat tax.