Tuesday, November 12, 2013

The chorus is getting louder

The number of smart people that are lining up on the side of - we're in another bubble/this will end poorly - is starting to get disturbing.

The contrarian in me says, "uh oh, if all of these people are expecting a major pullback in stocks and another credit crisis then the opposite may happen".  However, many of these people tend to be right over the long-haul so they are worth listening to.

While there is no direct corollary between QE3 and rising stock prices, the suppression of interest rates makes assets seek higher returns elsewhere which typically means stocks.  There's no hard evidence that this should be the case, but the standard rebuttal is "Well, it just makes stocks go up."  We've discussed at length the fact that the Fed has painted themselves into a corner and must begin to wind down QE at some point in the next 6-9 months.

My current opinion is that it feels like the fall of 1999 and 2007 all wrapped into one.  In 1999 we had a bubblicious tech/dotcom fueled stock market that rose to unreasonable levels as new concepts came to market and we were trying to evaluate the value of these new technologies.  In 2007, we had a housing bubble fueled by low-rates and lower lending standards.

Today, the bubble in venture capital and stocks is very real.  Traditional companies are growing their bottom line through cost cutting and very few are seeing revenue growth (hence the race to open earlier and earlier on Thanksgiving - but that's a topic for another day).  Twitter is an unprofitable company with $500 million in revenue valued at $30 billion.  The most recent winner of a large technology hackathon in SF was a site dedicated to raising money for other startups. The incubator craze of 2000 really marked the beginning of the end of first bubble and I think we're approaching that point here.  However, I'll note that there was an explosive "blow-off" in the market as the bubble burst.  This could happen again at some point and it will be hard for those predicting a correction to stick with that call if stocks jump another 10%-20% in their face.

The current housing bubble is very interesting.  This bubble has been driven by perception.  Very large investors have decided housing can be an asset class and have bought up huge portfolios of homes around the country.  This gives one the perception that inventory is falling, however, many of these homes remain vacant so they are removed from the "for sale" inventory but they remain in the virtual inventory as unoccupied and unavailable for rent.  The average consumer doesn't see this and just takes the "comps" fed to them and overpays for their home despite the fact that 1/4 to 1/2 of their block may be vacant.  When these large investors start leaking inventory back into the market this has the potential to be very bad for the average homeowner.

So on that cheery note enjoy your 11/12/13.

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