Summary; Slowly people begin to see that the third investment bubble has begin to burst, as in the report below about ad-supported online industries. It’s too soon to see the scale of the bubble, or do more than guess at the consequences. But we can understand these bubbles, why they repeat, and make it the last bubble.
“End Of The Online Advertising Bubble“
Kalkis Research, 19 April 2016
Excerpt from the Executive Summary
The online advertising market is saturated, and has no more room to grow. The traditional space for ads is overcrowded, and has started to shrink, as Internet users start to use ad blockers.
Ad placement companies have compensated by displaying ads on ever lower quality websites. Worse, they have led their clients into pay-per-display advertising instead of pay-per-click, much less efficient and difficult to track. As a result, online advertising efficiency has been decreasing for years, and companies have to spend more ad dollars for the same result.
The process of ad placement has become ever more automated, obscure and complex, while intermediaries have multiplied, each taking a cut from the client’s initial ad budget.
Controls and regulations are nonexistent, and a big chunk of ad spending is being stolen, plain and simple. Customers are growing aware of the phenomenon of ad fraud. Every new fraud scandal bears the risk of customers scaling back on online ad spending. The whole ecosystem is at risk of turning from growth to decline, overnight, in a rerun of what happened in 2000-2001. When this happens, the smaller players will be wiped out. …
I recommend reading the full report. Attentive observers, including readers of the FM website, were told about these factors two years ago — when they were already obvious to those inoculated against moonshine. But that’s history. What does this mean for our future? What does it tell us about America?
About bubbles
“If God didn’t want them sheared, he would not have made them sheep.”
— Calvera, bandit leader in the movie “The Magnificent Seven” (1960).
Investment pros used to say “everybody gets one bubble” sometime in their career. Yet we have had two, with a third now on the verge of popping — affecting multiple industries from biotech to social media. Something has changed in our economy’s structure. Economist Larry Summers warns that these days only bubbles give our economy a burst of growth, albeit short-term followed by hangovers. But nobody forces investors to burn their money in these “field of dreams” investment scams. How do they happen?
During the tech bubble I sold corporate services — including investment banking — to pre-public firms in the Silicon Valley. My partner (back then he was the only one of us with grey hair) and I would visit these firms’ offices wearing our good suits, listening to CFO’s explain how they would gather “clicks” by giving away their online services and content. We’d asked, tentatively, how would they make money. The invariable answer was “You just don’t get it.” We thought this was all quite mad.
They were right. We were wrong. Most of those executive teams walked away from the bubble with money, often lots of money — and power résumés, setting them up for corporate advancement and a front-row seat at the next bubble. It was a wealth transfer from America to them — and the VCs who created the game, and the bankers who ran it.
Like all fun parties, it was repeated. The housing bubble repeated these processes, but on a larger scale. The current bubble (with dimensions unclear, as always until the end) is round three.
Ponder that. We have been suckered into 3 bubbles in 20 years. How can we be so stupid? It’s as if we’ve fallen into a dystopian sci-fi novel — either our IQs have fallen or they’re putting something in the water. We can do better.
Consequences
“Sooner or later, everyone sits down to a banquet of consequences.”
— Attributed to Robert Louis Stevenson.
The effects of bubbles are complex and varied. Hopeful young people find their careers wrecked when their now-rich bosses retrench or close firms. Investors lose money — Darwin in action — transferring wealth from the naive to the sophisticated (Wall Street is an open-admission school, but not a free one).
Regions benefiting from bubbles suffer devastation when they pop (not shared by local elites who made their money developing their land and running lucrative businesses during the bubble). The Bay Area, America’s bubble machine, is now in the bulls-eye.
On a larger scale, bubbles are a Darwinian economic process that not only boosts inequality but also contributes to Americans’ diminishing confidence in their institutions and alienation from the nation’s political system.
The economic effect of bubbles depends on the nature of the investments made. The UK’s early 19th century railroad and canal bubbles devastated investors, but laid the foundation for its later fantastic growth. The late 1990’s tech bubble might also have had positive long-term effects, as might today’s biotech bubble. The online bubble — creating of a hundreds of doomed-to-fail advertising and subscription-based services (including social media) — probably represents wasted resources (as is, arguably, the time we spend chatting with our machines).
Antidotes to Bubbles: Remembering and Learning
They can build a bubble and promote it in every media, but we can refuse to buy it. Skepticism plus learning from our past can protect us from the temptation. And not just from bubbles. These are the keys to freeing ourselves from the blanket of propaganda that blankets us and taking control of America.
- Learning skepticism, an essential skill for citizenship in 21st century America.
- Our minds are addled, the result of skillful and expensive propaganda.
- Remembering is the first step to learning. Living in the now is ignorance.
For More information
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about bubbles, especially these…
- February 2014: The new tech bubble takes us to a new world. A mad world.
- How we’ve become accustomed to bubbles bursting the economy, instead of fighting them.
- Let’s ignore another warning from the BIS. Do we enjoy paying for burst bubbles?
- We see a stock market bubble but prefer to close our eyes.
- Looking ahead at the inevitable effects: Who will get hurt from the next stock market crash? Not just investors…
- Don’t ask if there’s a biotech bubble. Ask why we have another bubble.
- The key things to know about the great American bubble machine.
- When you look back on this day & remember the bubble…
- The advertising glut dooms the social media industry.
- The first consequences appear: First signs of dreams shattering in Silicon Valley.
- Playing The Bubble Game: Investing In The 21st Century.
Great books about bubbles
Fabius,
What makes you so sure the bubble is popping? With interest rates moving toward negative, there’s a good case to be made that equity markets have been in consolidation and are getting ready to break out on the upside, perhaps taking multiples past the stratospheric highs of the 1990’s.
John,
“With interest rates moving toward negative”
There is no evidence of that.
“there’s a good case to be made that equity markets have been in consolidation and are getting ready to break out on the upside”
There is no enduring relationship between rates, real or nominal, and equity prices. There are periods in which they move together, and those in which they move in opposite directions. The relationship is called noise, from which investors derive urban legends.
Real “risk free” rates are already negative throughout most of the OECD.
My old professor Mr. Malkiel agrees with you. Predicting bubbles popping is equally chancy to predicting booms and each are potentially very expensive if you are wrong.
John,
Years of stable 2% gdp growth is not the stuff that creates negative interest rates. In fact, looking at Q2:
Even to me, an economic novice (but a technologist by trade), it was apparent long ago that the SF Bay boom was completely untenable and built on fantasy. When Instagram had (and still has) no plan for how to make any money, not even from advertising, had floated by on VC money for years, and then suddenly commanded a billion dollars from Facebook, it became apparent to me. I also knew back then that once companies finally figured out that their online ad dollars were mostly wasted (due to ad blockers or people just becoming numb to, and ignoring, such advertising), the whole 2nd dot com bubble would inevitably come tumbling down.
I was starting to think that I must be crazy, or I must be getting something terribly wrong in the economic math. It seemed so clear to me that this was all crazy, yet every high power investment firm kept saying it’s not a bubble, it’s just fine, all these companies are going to make lots of profits someday, yada yada yada.
I recently moved cities for a new job. I had an offer from a company out in Redwood City…I said, “No freaking way!” As an IT professional, I don’t want to be caught dead anywhere near the Bay when the bubble pops and every Stanford and MIT whiz kid is competing against me for jobs. Now that LinkedIn is building what will become SF’s tallest building, the Skyscraper Theory (https://en.wikipedia.org/wiki/Skyscraper_Index) looks to be proven once again.
ch1kpee,
As a Bay Area native (here since 1987), I understand.
“built on fantasy”
Many profitable enterprises are built on fantasy. Some poorly-written young adult fantasy made JK Rowling a billionaire. Some chicklit Twilight fan fiction made E. L. James one of the best selling authors of all time.
These investment bubbles are odd in that we don’t know that we’re buying fantasy. But, like the above examples, they create fortunes. Unlike them, their customers are left unhappy. But it’s a Darwinian process, so what matters is what we learn from them. So far that has been nothing.
Can’t predict booms or pops?
“Now might be the perfect time to take a position in any solid company with the ability to manufacture quality “crying towels” and get them quickly to market. After all: Unicorn tears we’ve all been told are far different from most others. And sales of a good quality product might be more in demand than anyone ever though possible very soon.”
……from an article linked here, last October.
Maybe that is just the point. If one has not been around long enough to experience and realize how the last 20-25 years are not “different this time”. The music does stop. Expecting to guess when should tell you that you are not in the group leading the Band. So you might just take her hand and get off the dance floor, right soon? Leave a little early? Take a profit, avoid the traffic?
But then……I’ve been known to be both late and early.
Breton
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