Tech Bubble? What Tech Bubble?

HughPickens.com writes: Conor Dougherty writes in the NYT that the tech industry's venture capitalists — the financiers who bet on companies when they are little more than an idea — are going out of their way to avoid the one word that could describe what is happening around them: Bubble. "I guess it is a scary word because in some sense no one wants it to stop," says Tomasz Tunguz. "And so if you utter it, do you pop it?" In 2000, tech stocks crashed, venture capital dried up and many young companies were vaporized. Today, people see shades of 2000 in the enormous valuations assigned to private companies like Uber, with a valuation of $41 billion, and Slack, the corporate messaging service that is about a year old and valued at $2.8 billion in its latest funding round. A few years ago private companies worth more than $1 billion were rare enough that venture capitalists called them "unicorns." Today, there are 107 unicorns and while nobody doubts that many of tech's unicorns are indeed real businesses, valuations are inflating, leading some people to worry that investment decisions are being guided by something venture capitalists call FOMO — the fear of missing out.

With interest rates at historic lows, excess capital causes investment bubbles. The result is too much money chasing too few great deals. Unfortunately, overcapitalizing startups with easy money results in superfluous spending and dangerously high burn rates and investors are happy to admit that this torrid pace of investment has started to worry them. "Do I think companies are overvalued as a whole? No," says Sam Altman, president of Y Combinator. "Do I think too much money can kill good companies? Yes. And that is an important difference."

Comments

Who cares if it kills companies?

[msobkow]

What ticks me off is not that bubbles kill companies, but that bubbles kill retirement plans because of all the greedy "analysts" betting on a "sure thing."

Uber not worth $41 billion ...

[gstoddart]

There is no way Uber is worth $41 billion.

That's a ridiculous number trumped up by idiots in the stock market who have overvalued a tech company.

Unicorns indeed. Uber is a tech company with an app, they sure as hell don't have that as a sensible valuation based on revenues or assets.

So every company Uber is going to buy with a stock swap? The stock owners should sell off and run, because they're being bought with funny money -- like when AOL bought Time Warner.

Increasingly I think the stock market is full of drooling idiots who think they're playing the lottery -- because that's the only sensible explanation for these ridiculous valuations. And, yes, this is exactly like the .com era -- a complete lack of common sense about the valuation of things because people desperately want them to be huge.

Of course, the problem is by the time the bubble bursts it's only the little guys who were hoping to pick up some scraps still holding onto the stock, because all the wealthy people and institutions have gotten out and run because they know damned well it's overvalued.

Then it's just finding suckers to take the overvalued stock off your hands.

Re: Tech Replace Mines

[Required Snark]

Stock Buybacks are driving stock prices.

One big source of demand for stocks in recent years has come from companies buying back their own shares. These buybacks have not just provided extra demand — they have decreased the total supply of shares available. So the buybacks have shifted the supply-demand balance and helped drive stock prices higher.

All these buybacks, which have ranged between $75 billion and $159 billion a quarter for the past four years, have provided a steady flow of demand for shares. As the chart below shows, the buybacks have not been offset by new share issuance, so they have modestly reduced the total supply of shares available for S&P 500 companies. The number of shares outstanding is now lower than it was back in 2005, almost 10 years ago.

This is a direct effect of low interest rates. Companies are taking out loans for the buybacks

Another big source of cash for buybacks, however, has been debt. As the chart below shows, companies have been borrowing like mad in recent years. And they have been using lots of the cash they borrow to buy back their stock.

Why are they doing this? Because high stock prices disproportionally favor the top level executives. The get stock at a discount (stock options) and can game the tax code for lower taxes as well. It's a legal way to loot their companies.

Why are rates so low? Because the previous generation of corporate criminals wrecked the world economy with their greed. Low interest is the way that governments are trying to regrow their economies.

Now governments all over are giving free money to the same group of people (and even the same individuals) who caused the damage in the first place with these near zero interest rates. (For example, the US Federal fund rate for the big lenders is 0.25%.)

Stock buybacks don't grow the economy. There is a direct relationship between the sky high stock market and the long delayed general recovery outside the stock market.

This effectively redistributes wealth upward. The rich get richer at the expense of everyone else.

It's also another bubble. Whenever rates do go up there will be another crash. And given recent history, it will end up turning into another way of stealing from the poor to give to the rich.

it depends

[MrKaos]

Consider that venture capitalists invest in the exit, not in you having a great time building a great idea into a great company with great people.

Then consider 1915-1965 had innovations like penicillin, the auto mobile, aircraft, the space race, and that 1965-2015 has had the IC and internet as really defining innovations then from that perspective the rate of innovations is on the decline.

All the new "inventions" I can think of that are available to the masses are all designed to improve something that already exists to get people to consume more efficiently. I think this is directly attributable to patent and copyright laws preventing long term economic growth that comes from innovating new things which is the longer term fall out from activities conducted by the music industry and patent trolls. IT is just the most obvious sufferer.

Until the X and Y generations (or N-generation for those born *after* the invention of the internet) start taking political power from the Baby Boomer's we are going to be stuck in 1950's thinking. And that's not to say some Baby Boomers aren't capable of 21st century thinking, it's just that there isn't enough of them to make a political difference.

I'm convinced that humanity is on the verge of some spectacular innovations, like long carbon nano-tubes, genetic and nano engineering. However all of these ideas pale in comparison to the idea that we can change something as simple as the laws that maintain the status quo.

So this cycle of bubble and burst will continue whilst the engines of innovation are suppressed. Who knows when it will burst or deflate - just be ready when it does.

Re:Last time we saw crazy market valuations,

[LostMonk]

What will it take to get reform?

Blood on the streets. Lots of it.