Tag Archives: financial bubble

The online bubble is bursting. Ask why this keeps happening to us.

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.

Box of Bubbles

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?

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Playing The Bubble Game: Investing In The 21st Century

Summary: Investment commentary these days overflows with mentions of bubbles. The concept is vital to understanding our economy yet encrusted with myths in the minds of most investors. This post cuts through those to the known history and theory of bubbles. As usual with economics, this gives us clues about the future – but only clues.  {Second of two posts today.}

  • We’re in an era of bubbles, but they’re masked by myths.
  • Understanding their history and dynamics can guide our investing.
  • Bubbles create high risks not easily managed.
  • Failure to prepare for these risks has created serious losses, and will do so again.

Bubbles

Bubbles in history

“You Can’t Cheat An Honest Man.”
Title of W. C. Fields’ 1940 movie, harshly and cynically describing the essence of bubbles.

Bubbles are an inherent aspect of free market systems, easily produced in classroom exercises. Whether managing a nation or a portfolio, they must be understood.

Those who lived through the giant 19th century UK and US investment bubbles would find our bubbles quite familiar. Journalist and promoter Charles Mackay participated in several, and the scars from them led to his bitter polemic Extraordinary Popular Delusions and The Madness of Crowds. See more about this history in “Charles Mackay’s own extraordinary popular delusions and the Railway Mania” by the brilliant Andrew Odlyzko (Prof Mathematics, U MN).

Then and now, bubbles have common characteristics.…

Read the rest at Seeking Alpha. Post your comments there.

First signs of dreams shattering in Silicon Valley

Summary: Next is this series about the the boomers’ third financial bubble is this by entrepreneur Mark St. Cyr, describing how current events in Silicon Valley show the early signs of dreams shattering, events that precede a crash.

 

Crying Towels:
Silicon Valley’s Next Big Investment Op

by Mark St.Cyr • From his website
14 October 2015

Posted with his generous permission

 

Nothing focuses the mind more than either the lure of riches or, the loss of them. And there has been no other group caught up more in the lure for riches than: the disruption class.

Disrupting is what it’s been all about over these last few years. However, there’s another disruption on the technological horizon heading right towards Silicon Valley itself, and that brewing storm is – disruption of the disrupt-ers.

The once emblematic IPO cash-out that lured many is beginning to morph into the loss of IPO dreams that resemble wash-out with every passing earnings cycle. For a glimpse into the event horizon that is the future. All one needs to do is look no further than what myself and a few others have dubbed the “canary in a coal mine” of all that’s Silicon Valley: Twitter™.

Nothing against Twitter per sé. What I take issue with is its valuation vs its ability to produce net profits. And that goes not just for Twitter, but everything “social” in general.

I’ve stated from the get-go Twitter is a great, innovative platform. But worth Billions, upon Billions of dollars? Sorry, far from it. One of my assertions has always been; would you pay for it if they charged you? What if charging you meant you could type more than 140 characters? Would that be enough to entice? Usually the answer from my own unscientific (as well as gut) research came back with a resounding no. And here lies the problem that’s symptomatic of many others that will once again come to light and be amplified this earnings cycle. More so than the last in my opinion.

Twitter is (again, in my opinion) a real-time microcosm of what’s about to hit the whole Valley. i.e., A real shite storm, and here’s my reasoning…

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The stock market gives us its 2 classic warnings. Will we listen?

Summary: Again the US stock market skates on the edge of an abyss, this time without the Fed holding a safety net. We’ve seen this combination of peaking economy and overvalued stocks; it never ends well. Too bad we don’t learn from history. But I suspect we’ll soon get another opportunity.

The Fed is like the chaperon who orders the punch bowl removed just when the party is warming up.”
— Attributed to William McChesney Martin Jr., Chairman of the Fed from 1951–1970. Those days are long gone.

Pigs running off a cliff

(1)  The biotech party

Here’s the weekly StockCharts view of the exchanged traded fund for the S&P Biotech Index (XBI). The heart of the bubble, it has the classic parabolic rise of an investment mania. Now down almost 30% from its July record high. Propelled by vapors and dreams, we need not consult Nostradamus to guess at what comes next. For details see Don’t ask if there’s a biotech bubble. Ask why we have another bubble.

EFT of the S&P Biotech Index

(2) The social media mania, and Tesla

The stock media stocks are the frothy edge of the bubble. Their boom began with the IPO of Facebook (FB) on 18 May 2012 at $38. It peaked at $99 in July, now at $89 (down 10% from peak). While Facebook has carved out a dominant and profitable niche, most of its scores of competitors remain little but dreams given form by Venture Capitalists — many doomed to die as independent companies when Wall Street has squeezed the last drips of juice from the mania.

Here’s the weekly chart of the Global X exchange-traded fund for the social media industry (SOCL), now fallen 20% from peak to its long-term support — with nothing below but the void. For details see The advertising glut dooms the social media industry.

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Who will get hurt from the next stock market crash? Not just investors…

Summary: There is an exception to Saturday’s post, which said that a stock market crash would have only minor economic effects on America. Just as an oil crash hurts oil producing regions, such as Texas, a stock market crash hurts areas that produce stock certificates. Printing this “paper” is the most profitable part of the San Francisco Bay economy, putting it in the cross-hairs for the inevitable crash.

Stocks Crash

Sector crashes often harshly affect industries and regions even when the national impact is minor or even beneficial. An oil bust hurts not just oil exploration and production companies, but also regions focused on that industry (e.g., Texas) — while helping everybody else. Similarly a stock market crash will hurt companies that trade stocks (brokerage firms) and those that print stock certificates (Tesla Motors) — and areas that manufacture stock certificates, like the San Francisco Bay Area.

Silicon Valley and the entire Bay area form a 21st century version of a gold rush. Money floods in and fortunes are made — but instead of exporting pretty rocks it exports papers promising future riches. This should be obvious by now. I walk through the details in these posts…

These industries will not disappear, any more than finance did after the 1970s crashes, or the oil industry did after the 1980s bust. But the people in these industries and the areas in which they cluster will suffer from the fall to Earth (except those people at the top, and those who got in early).

The fall can be quite far. Here’s the price graph of the iShares Nasdaq Biotechnology Index (Symbol IBB), as it rose from $80 to $340 in five years. Try not to see the bubble when you look at it (that requires an investment professional’s eye). Do not ask how many of its 145 constituent stocks are profitable. The ETF’s profile is here.

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How would a stock market crash affect us?

Summary: As so many of us expect, the US stock market might (might!) have begun the big rollover. If so, how might that affect the US economy? If you rely on the news, you’ll be surprised. Here’s a brief note; I’ll write more about this next week.  {2nd of 2 posts today.}

"Little Wonder" by Joe Maccer

Little Wonder” by Joe Maccer at DeviantArt.

The decline of stock prices in China and America will produce the usual flood of clickbait. In fact stock prices have only minor effects on the economy. In the 25 May 1970 issue of Newsweek, 3 major economists gave their views. Friedman and Samuelson are Nobel Laureates.

Henry Wallich: “After 1929, the Dow Jones industrial average dropped by about 90%. I see nothing of the sort ahead. And even if the stock market suffered further reverses, the economy still would not be decisively affected.”

Milton Friedman: “The stock crash in 1929 was a momentous event, but it did not produce the Great Depression and it was not a major factor in the Depression’s severity. A sharp but not unprecedented contraction was converted into a catastrophe by bad monetary policy — one that permitted the quantity of money to decline by one-third from 1929 to 1933. Whatever happens to the stock market, it cannot lead to a great depression unless it produces or is accompanied by a monetary collapse. And with present institutions and present understanding, that is well – nigh impossible.”

Paul A. Samuelson: “{R}emember, in our economy, the market is the tail — and the tail does not wag the dog, which is gross national product. The decline has cut a quarter of a trillion dollars from people’s net worth and that will be a depressant, but not a major one, on consumption and investment spending.”

Also see this analysis by the Boston Fed from June 1971: longer, same conclusion. Not much has changed since.

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The advertising glut dooms the social media industry

Summary:  The internet is a mirror in which we can see important aspects of America. Businesses funded by speculation (greed) struggle to survive in an era of few opportunities and falling investment, while high technology and rising inequality reshape America. The social media stocks are in this maelstrom, as virtual advertising space grows faster than their audience and advertisers dollars. Publishers grow desperate, try ever more intrusive ads. Few will survive.

Bubble cloud

Contents

  1. The race for internet revenue.
  2. Speculation.
  3. Inequality.
  4. Analysis of the ad-supported internet.
  5. For More Information.
  6. Great books about bubbles.

(1)  The race for revenue on the internet

The evolution of the internet is best seen in terms of what pays for it: banner ads, then pop-up ads, then auto-run video ads, and now “integrating” the content with the advertisements (these tends often end by debasing the product). It is an evolution to increasingly intrusive ads, forcing people to either spend more of their time killing the ads — or installing ad blockers (which are in a Red Queen race with the developers of ad technology).

Don’t blame the managers of these companies. That’s as foolish as blaming airlines for the poor service that accompanies the cheap fares we demand. We don’t pay for most of the information and many of the services we get on the internet. As Andrew Lewis said: “If you’re not paying for something, you’re not the customer; you’re the product being sold.” So we have no grounds to complain.

The managers know the futility of this race they’re locked into, but they’re desperate.

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