Imho, the OP is entirely looking over the fact that many successful exits happen because a few BigCo's who are making real money on real products (ads for your local hairdresser) are so desparate for good software people that they'll do talent acquisitions.
If that wasn't happening, i'd call it a bubble. But the BigCo's are making money. Real money, not ponzi investment hype nonsense. As long as these companies stay profitable, there's no bubble.
I think.
But hey, I'm just a programmer, no economist. Of whom there's not a shortage, by the way.
If the idea is that BigCo's who desperately need programmers are throwing cash at people in an attempt to get them, then what the OP is describing as a bubble is just a massively inefficient fad recruiting technique.
There is absolutely no reason why so many non-programmers should be getting so rich helping programmers find jobs at BigCo's. Strictly speaking the economy might demand this sort of money with this recruitment technique so economically it might be sound, but it seems to me there is a good deal of room here for disruption....
This isn't a problem with hiring. For crying out loud, the founders of these companies aren't looking for jobs, they're founding companies. Larger companies are drooling over their customers, their products, and their people. There is a big difference.
My interpretation is that OP is not arguing that BigCo's aren't currently making money.
Instead he's saying that the amount of resources being pumped into the ecosystem (financing, incubators, startups) is significantly larger than what is required.
That the market as a whole won't grow fast enough to satisfy the needs of all the investment capital being deployed.
I think the OP misses that it's like this not only in the tech sector, but many others. With the fed more than doubling the monetary base in the last couple years, that new money has to go somewhere... It goes into blowing bubbles.
Technically the Fed hasn't actually doubled the money in circulation, it has mostly just printed dollars to prop up bad assets. So the bubble there already inflated, and now the Fed is just refusing to let it pop and deflate (which it should).
Hmm. Maybe if the economy inflates at differing rates it's not just because of monetary policy?
It's hard to reason about inflation because different goods do tend to inflate at differing rates. Perhaps we should measure the change in inflationary rates before and after some specific event.
A part of the reason that these larger companies are having to resort to acquisitions as a hiring mechanism for good programmers is because the bubble is encouraging good programmers to leave larger corporate environments to either start their own startups or join their peers at their startups. The bubble investment environment is allowing non-profitable companies to pay large salaries for engineers that they couldn't otherwise afford. The sheer amount of money feeding into this startup bubble is inducing this at a massive scale, driving up the price of programmers across industries.
Talk of overvaluation when based on anecdotal isolated evidence is unbecoming of HN. Please, if this is serious conversation, someone compile a valid statistical sample of indicators.
The money quote: "In an effort to bring more suckers in, they just passed a law that makes it legal to pimp these startups to people who don't know anything. You will be able to take their investment by swiping a credit card. Probably using a $4 billion valuation Square dongle for an iPhone. ... It just doesn't matter if the businesses are any good, not to satisfy the bubble. As long as more suckers are coming in."
It seems that every author that writes about being in a bubble thinks that they are the only ones that can see it.
ignoring the fact that everyday an article hits front page of HN talking about being in a bubble and no one can see it.
So when everybody is saying that nobody is seeing the signs of a bubble does that mean that we are in a bubble?
The justifications for why we aren't in a bubble has been evolving over time. I remember when the reason that we weren't in a bubble is because none of the companies involved were publicly traded, and therefore a failure/depression wouldn't affect the average Joe. Now that we're seeing companies with astronomical valuations reaching for IPOs, I don't see this argument trotted out much anymore.
Here's an idea. If you think it's a bubble then get on it as fast as you can as there's clearly money to be made and cash in as soon as possible or whenever it is you think the bubble is going to burst.
Sorry. I guess I've read too many articles recently about it being a bubble. I even agree, just not care very much.
I have no opinion whether this is a bubble or not. Just one thing:
This is not a Ponzi Scheme.
Get your definition of Ponzi Schemes right, please. Ponzi Schemes are a specific type of fraud, not to be generalised to everything that relies on superficially similar principles.
I believe that by 'Ponzi Scheme' he's referring to the idea that you can sell growth in users to investors. E.g. "We're not profitable, but we're growing by 100k users per week!" The idea being that the only 'value' you have is in user growth, and once that slows down then you're sunk. While this might not technically be a Ponzi Scheme, it has some similarities to one.
What about founders that cash out during an investment round, ala Groupon?
Right from the wikipedia:
"A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation"
Wikipedia's definition is a bit problematic because it doesn't explain why it is fraudulent, and leaves out the precise elements that make it fraudulent. Namely: promising a non-existent return and the ability to refund, and secretly doing so by refunding (as a central party) old members.
Note that Wikipedia later in the article does clarify some of these points. To quote:
- In a Ponzi scheme, the schemer acts as a "hub" for the victims, interacting with all of them directly. In a pyramid scheme, those who recruit additional participants benefit directly. (In fact, failure to recruit typically means no investment return.)
- A Ponzi scheme claims to rely on some esoteric investment approach and often attracts well-to-do investors; whereas pyramid schemes explicitly claim that new money will be the source of payout for the initial investments.
In the case of Groupon founders cashing out, that was even publicly announced, and quite certainly not fraudulent in itself.
Honest question: Who cares if it's a bubble? If you aren't going to act on the opinion/information, it might not be worthy of your time, attention and focus. "Watch out! Bubble!" conversations generally just raise our anxiety without being actionable.
While I agree there's a bubble and that the recent JOBS act has the potential to turn things into a frenzy (see Taibbi: http://www.rollingstone.com/politics/blogs/taibblog/why-obam... ), I'm not sure I agree it's near the scale of the mortgage derivative bubble. The mortgage mess involved trillions of dollars across the entire global economy, and set back the entire middle class when it popped (along with destroying and pushing to the brink of destruction some of the biggest financial institutions in the world).
It's not really a bubble. It's more of a gold rush. A new way to get rich has opened up, and it's not clear who will succeed and who will fail. So people rush in and stake claims.
The other factor is that there has been a huge loss of faith in Wall Street. The SEC and ratings agencies don't seem to be able to do their job in the face of increasingly complex financial products being brought to market.
I think that a lot of investors prefer losing their money on a crazy idea that failed to losing money to fraud.
"We don't have a mechanism to, as a society, say let's not go all the way with this bubble"
Yes we do. You can short stocks. It's like placing a bet that the stock will go down in the future.
If this is a bubble, and you know that eventually certain companies behaving this way are gonna tank -- then you can bet right now that way and earn a big payout if that's the case.
> If this is a bubble, and you know that eventually certain companies behaving this way are gonna tank -- then you can bet right now that way and earn a big payout if that's the case.
"Markets can remain irrational a lot longer than you and I can remain solvent." -- John Maynard Keynes
That is: if you short a stock (leaving aside that you cannot short non-public stock) and it continues to go up you will need to continue adding money to your account to cover your accumulating losses. If it goes up high enough and you don't have enough collateral your position is closed and you are broke.
It is not enough just to identify a bubble you also have to call the top with a reasonably degree of accuracy.
That's not how I'd identify a bubble. Then again, I'm not an economist.
If you look at past bubbles, there's a pretty obvious pattern. A financial boondoggle is used to build a giant mass of capital. The financial boondoggle collapses, but those who profited (massively) from the boondoggle pay only a nominal fine to maintain the appearance of punishment. The capital that was built up in the last boondoggle is used to get the ball rolling on the next one.
If you want to know about how bubbles form, I think you're better off learning about confidence scams than you are economics. As with many things, the difference between a businessman and a con man isn't black & white. We're talking shades of grey here. If I were tasked with finding the next bubble, I'd trace the people responsible, rather than looking broadly at the market in an attempt to identify swells of capital without much perceived value.
The subprime lending bubble to build up a giant mass of capital, the financial crisis collapse, the banks and funds who pimped the MBS paid a nominal fine to maintain the appearance of punishment, that capital is now flowing to VC funds?
A bubble is the overvaluation of an asset class, or merely...inflation. "Inflation is always and everywhere a monetary phenomenon."
And another way: The value of any asset as evinced by its price is merely the willingness and ability of someone to pay for it.
If you accept the EMH, then you understand we are incapable of seeing the big picture. Something can be valuable to your neighbor without being valuable to you. At the same time, if you do not know when to sell an asset, or know whom to sell it to, then you are a fool to buy it just because the price has risen for the last three weeks.
Economics is not accounting. It does not prescribe value.
skylan_q: taking a step back, I'm being a bit liberal with the traditional use of inflation. Inflation is generally reserved for the 'general' price level. I don't believe we are capable of determining the 'general' price level, and the conflicts over various measures of inflation, what to include and how to modify it year to year, to my mind is evidence that it is not wholly agreed upon that we are capable of measuring it.
So I assume you are suggesting that a bubble is when an industry is out of sync with the general economy, in terms of pricing and/or growth. I would argue that that is not critical to the notion of a bubble. A bubble is overvaluation of an asset class. To restrict it with dis-coordination would mean a bubble could not occur during hyper-inflation.
A bubble is the overvaluation of something. Overvaluation can only occur if there is surplus value in the market that's not needed in other places. Surplus value means there's more money in circulation than the market needs - That's inflation.
Prices get bid up, but price inflation is different from inflation. Price inflation is the increase in prices brought about through the auction mechanism. But in our circumstances, we get economy-wide price increases because of increases in the total stock of money.
Price inflation causes money to lose value, so we can't really say there is an overvaluation simply because prices have increased. It could very well be the case that valuation hasn't drastically changed at all, but newer, cheaper money is flooding in which causes price inflation.
Is a home overvalued just because the bank determines it is not safe to offer a mortgage on it? Only to the bank. If I have cash and am willing to pay that amount, the home is reasonably valued/priced.
Most of the "printed money" that has been generated by the Fed since 2008 has gone to the financial sector shrinking their balance sheets by something like $3.5 TRILLION (as opposed to the Fed expanding the balance sheet by $1.5TT). That's deflationary. The Fed has been on the gas since 2008 to maintain the price level.
As far as the bubble in "tech", it's a misallocation of resources. This is what happens in all the hot sectors (Tech in 1999, Housing in 2005, Tulips in 1700). There's a lot of money chasing returns that are no longer availabe. So they look for riskier assets. It's not that there are no valuable tech companies, just that there aren't enough valuable tech companies. But everyone thinks they've got a winner.
Bubbles are hard to predict, hard to stop and hard not to participate in. But one thing I learned from the real estate crash: you don't take advice about the bubble from realtors.
If that wasn't happening, i'd call it a bubble. But the BigCo's are making money. Real money, not ponzi investment hype nonsense. As long as these companies stay profitable, there's no bubble.
I think.
But hey, I'm just a programmer, no economist. Of whom there's not a shortage, by the way.