Bubbles happen when everyone realizes there is a gold mine somewhere, but no one knows how to find it. Some things are overvalued, some things are undervalued. Usually the gold is in a place where you least expect it.
The Netherlands had two flower bubbles, but not because people where crazy. People started to realize that this tiny patch of soggy land would one day be the biggest exporter of flowers and vegetables in the world. Flowers are clearly worth way more per kg than grain, but how much exactly? No one knows, but surely those tulips must be worth a lot.
Land was being mass produced in the first half the 17th century. My guess is that people couldn't imagine running out of land because you could keep reclaiming it from the sea, but they could imagine running out of tulip bulbs. Thus they undervalued land, and overvalued tulips.
Similarly, during the .com bubble, people couldn't imagine a slightly improved search engine would be worth anything, but an online grocery store seemed like a gold mine.
We have had a cheap money policy for way too long now, decades literally. It is not just US, but also the fast growing developing countries, who all tend to keep interest rates very low.
We've also had bubble after bubble, after bubble.
Is tech 2.0 a bubble?
1. Even if it is, it's not nearly as big or stupid as .com 1.0 was.
2. Oil, gold, a bunch of other stuff, too much money is chasing things to buy. Is it a bubble of just an early pre-view of what inflation will do to EVERYTHING?
3. Some prices certainly do seem extremely speculative, LinkedIn being a prime example, obviously they are worth something, but are they worth THAT much?
I think we're in a tech maturing period, that is to say, that if valuations of a bunch of tech companies suddenly collapse, other tech companies won't be affected. When tech stops being identical to all other tech, the market has reached a sort of maturity.
But yeah all markets are acting screwy right now, between a likely default of Greece and who know else, and 0 or even negative interest rates in the US, Japan, and the EU.... yeah, we live in strange times.
I've not see Economist Debates before but it looks to be a very well thought out environment for debate. They roleplay the form of a debate so well that it inspires courteousness from the general audience. The timetable and structure of the debate as well as the expert commentary is all very nice.
I'd like to see such a system for political discourse. At the local, state, and national level, it would be a welcome place to share ideas. If all the major news organizations are going to keep spewing opinionated journalism, we may as well take it to the logical conclusion. With opinion should come debate.
When even the guy making the "against" case opens by saying
I am not arguing that Netflix, Salesforce.com and LinkedIn are not overvalued; I am simply arguing that their valuations have not become completely divorced from any rational thought. If they have not, we have not taken a major step towards a bubble.
that's starting to sound kinda bubbly. "Not completely divorced from rational thought" is kinda on the faint-praise side.
Perhaps, but "kinda bubbly" is many degrees of separation from the kind of "bubbly" that was going on in 1999. So calling this "another tech bubble" is disingenuous because, frankly, it just doesn't compare in degree of irrationality.
It's not a bubble because there's only a handful of companies which are trading at values which I would consider to be excessive for the underlying business.
Netflix, Salesforce, Tesla, LinkedIn, and potentially Facebook/GroupOn.
Almost every other technology company is trading at lower then average P/E values, including for the first time in a long time, Google and Apple.
So is a handful of potentially over-valued companies reasons to call out a bubble? I'd say no, at any given time there will be absurdly valued companies trading on any given stock exchange, that probably hasn't changed in the entire history of the NYSE.
I've said this before but anytime a stock is trading at an earnings multiple significantly higher or lower than average, the burdon of proof should fall on the person arguing for such a multiple.
Netflix is trading at a P/E of about 75. Right or wrong that should at least give an investor pause. There is a lot of success already baked into that price. At this type of multiple a company has to outperform already sky high expectations in order for an investor to make money(in a fully rational world). This is possible but it becomes increasingly difficult as that multiple expands.
For companies like Linked In with tiny earnings a sky high multiple might make sense. They only have one or two quarters of profitable business in. But for companies like Netflix and Amazon, who have sustained growth, revenue, earnings, and a pretty clear business model, you really have to think about the magnitude that 70x earnings growth implies.
I guess it depends on how you define sky high. LinkedIn is trading at 2100x earnings according to google finance. Now there are certainly times when P/E is meaningless and LinkedIn probably is one of them but for a company with no track record it should give some pause.
The question is are people investing in these companies or are they speculating about them?
To be honest I'm not an expert. In my opinion Netflix feels overvalued to me. Maybe not based on the P/E but it certainly doesn't seem like a 15 billion dollar company to me.
Do the arguments that, "there are so few companies with large IPOs" or, "there's only a small proportion of people buying in right now" seem bizarre to anyone else?
I mean, the point is to realize the bubble early. When there are 2 tech IPOs a day and your 75 year old father is buying the hottest Facebook competitor's stock...yeah, obviously a bubble.
But it's more subtle now, and we have to figure out if it's leading to where we DON'T want to be. To me, and some other people, it seems so.
Eh, the boring utility sector has a 18.52 PE, versus 17.47 for technology. That's not necessarily proof of anything, and even 17.47 is a little high. But still.
The Netherlands had two flower bubbles, but not because people where crazy. People started to realize that this tiny patch of soggy land would one day be the biggest exporter of flowers and vegetables in the world. Flowers are clearly worth way more per kg than grain, but how much exactly? No one knows, but surely those tulips must be worth a lot.