The unreality of economic rhetoric in 2011

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com, or follow me on Twitter.

Sarah Lacy says it very well:

There are a lot of other things to explain this. One explanation is that it’s the basic job of a VC to make risky bets at valuations which are supposed to reflect future promise and may never materialize. That’s why they get 20% or more of the company rather than charging terms, say, a bank would for a small business loan. There’s also the fact that the consumer Web is now a world-wide phenomenon with more than 1 billion people online. And there’s the fact that there’s a glut of venture capital trying to wedge itself into more capital efficient companies, so naturally a supply-demand imbalance will result in higher prices.

There have also been plenty of examples of the rising tide not lifting all boats. MySpace has cratered during this “social media bubble,” companies like Digg and Six Apart are shadows of what they could have been and plenty of companies haven’t been able to raise money. And even with the recent expansion of the “$1 billion club” we’re talking about less than thirty companies among thousands started every year. And there’s little economic fallout from VCs investing at heady valuations, since they have a liquidation preference and will at a minimum make their money back in the worst-case-scenario fire sale transaction.

But never mind facts, Waggers wanted to say it was a bubble just in case the bubble was slowly building they could call it first. And then, the broader stock market crashed. I wondered last week, how will people twist this into evidence of a bubble? Some chimed in saying it was a bubble that was just ahead of the public markets. That sentiment that makes no sense if you consider the very definition of a bubble is a mass economic or euphoric phenomenon, not something where insiders are being ahead of the market. Others came up with a more ludicrous suggestion after the Dow had its worst day since 2008 on Monday: The bubble popped.

Wait a minute. You mean the bubble that never appeared? So….I guess our fictional war is over now?

Beyond the obvious point above, is another one: This crash is so not about Pandora’s IPO and LinkedIn’s P/E ratio no matter how much waggers want it to be. There was the little matter of the S&P downgrading the US’s credit after two weeks of Washington reenacting the Keystone Cops. And that other niggling fear about Spain or Italy going the way of Greece and defaulting on debt payments. And the tiny matter of the US’s anemic economic growth in the first half of the year. The startup economy has long been decoupled from the things causing this sell off: Unemployment remains at 9% in the country, while there’s an aggressive talent war in most of Silicon Valley.

Yes a few IPOs have postponed this week. That’s a basic cautionary move any company would take in a broader market like this, and none of the companies in question were exactly Zynga, Groupon or Facebook.

At the most extreme, stocks of recent tech IPOs were collateral damage. Can anyone cite someone who lost their job as a result of this “bubble” bursting? A company going under? Also, while recent tech IPOs were hit along with everything else, they didn’t get the worst of it. Have you taken a look at bank stocks? The Journal has a great article on why this crash is different from 2008, but at least those two declines have some parallels that caused people to cry deja vu. Note they didn’t write a story on why it’s not like March 2000, nor does their story even mention tech. Because no one looking at the broader economic picture would think that. At some point, if we get paid to inform people what’s going on in our little ecosystem, we have to actually look around at the reality of what’s happening.

So, still no evidence of an economic bubble in tech. What then about a psychological bubble? Well if anything, we just saw the bizarre opposite of it. If a psychological bubble is when people get emotionally wrapped up in a phenomenon where wildly overvalued things seem fairly priced, this was a case where people got emotionally wrapped up in fear that prices we are seeing could be wildly overvalued. We may need a new word for what we just saw. An event of widespread hysteria wailing about something that wasn’t happening that had no widespread economic repercussion. I mean something other than calling it a monster hiding under the bed. Yeah, thank God it just burst.

I’ve written before that my grandmother made Warren Buffet rich. This is how it happens. The changing tone. The changing attitudes. The euphoria morphing into hysterical and irrational distrust. This way, and only this way, a stock market returns to healthy, normal valuations. The last good time to invest in the stock market was 1982. That was too early for me. But if stocks continue down long enough, eventually the market will be cheap enough that I will want to invest in the stock market.

Post external references

  1. 1
    http://techcrunch.com/2011/08/09/good-news-the-bubble-that-never-inflated-has-popped/
  2. 2
    http://www.teamlalala.com/blog/2008/12/31/my-great-grandmother-made-warren-buffet-rich/
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