bubble

Did the Stock Market Bubble finally get its trigger?

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November 8th brought the ultimate shock and the futility of depending on masses to the surface. Contrary to folklore, democracy and the “wisdom of crowds” appear oddly contradictory. In case that is not clear, yes, electing trump was very odd, if anything. The stock market indices first fell, and then selectively stocks for large banks, private prison firms, defense and other areas have risen.

There is a general sense of belief that the Republicans will come in with sparkling dust and a magic wand to reduce individual and corporate taxes and boost the economy. Yes, in the short term, this is very feasible. Well, this has been tried during the Bush Administration, and in Wisconsin and Kansas. Not once was the result good.

Furthermore, there is some giddiness surrounding expectations of the riddance of Dodd Frank, the CFPB, and oddly enough the ACA as well. Sure, these are all possible, even with all the legal battles that will ensue. But no one seems even a bit bothered that the absence of Dodd Frank is what in most part caused at least some of the problems leading to the crash in 2008.

Then, Realtor.com is worried that Freddie and Fannie Mae are in the gop cross-hairs. This makes it quite odd, if true. I agree with Realtor in that it directly affects the people who supported trump.

There are also some questions as to whether inflation will rise as is being expected as part of this run up, and as to whether if it did, that would be a good thing.

Trigger Point

Well, where does this leave us all? I think this election result is the trigger point. There is true irrational exuberance at play. Stocks are rising when the status quo is about to change, especially in ways that are not good. They are also not taking into account the instability of the president elect. He says and does things which make as little sense as possible. Plus, as someone who also did not believe he was going to win, he never had plans. For example, it has become apparent that besides vague threats to Amazon.com (and Jeff Bezos deserves it for treating his lower level employees like dirt), trump has no plans for the technology industry at all!

All the republicans want is to be rid of the ACA. However, none of them know what to replace it with. Because they wouldn’t. They never knew how to solve the healthcare problem. So, they will do really stupid things. Yes, they will not regulate as the Democrats have, but that is not enough to keep up the healthcare and insurance industry shored up for long.

So, taken in effect, along with trump’s volatility, the stock market is rising now based on nothing. Take this with the technology and real estate bubbles already underway, I think we will finally see rapid growth and the ultimate crash. It is now just a question of time.

Timing the timing

I don’t think we will need to wait long to figure out a way to judge things.

  1. I believe we will see the stocks rise, then plateau and then rise.
  2. When the interest rates are finally increased in December, we should see more activity.
  3. The various crazy laws that the gop plans to implement should start popping up as soon as Congress opens shop in January.
  4. Then will come the various executive orders in third week of January.
  5. Add to that the changes to immigration they want. I don’t know when they want to start doing this, but it should be pretty early on and will be very disruptive to the workforce. Several experiments have been attempted to replace immigrants with natives in hard labor jobs and they have never succeeded.
  6. Finally, given the incredibly crazy territory we are swimming into, there will be other unexpected signs. We just have to wait and watch.

The challenge is simply not in knowing there will be or that we are in a bubble. The challenge is in the timing. This is what I am going to try and track as closely as I can. Keep an eye out.

Reference: 

  1. http://www.realtor.com/news/trends/donald-trump-mean-for-housing/?identityID=552ba5c6edb284622b00002c&MID=2016_1111_WeeklyNL&RID=2925787362&cid=eml-2016-1111-WeeklyNL-blog_1_trumpandhousing-blogs_trends
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Time Travel with GM, back to the Year 2000 and the prevalent foolishness

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Well, for years, GM helped you travel across space. Now, you can travel across time with them. Except, it doesn’t look all that good. Let’s have a look…

The year 2000 was filled with mass stupidity. Many mistakes were made, and we thought people would learn a lesson or two. Then rolled in 2008 with its own crisis and a “bail out” that is STILL the topic of Presidential Debates. Even just taken as averages, that is about one crash a decade, and involves both the players in this story – technology and automakers. And you would think GM would be one of the last companies to engage in such shenanigans as what follows. Yet, they decided to buy “Cruise Automation” with unproven traction for about a whopping $1bn according to reports.

Who needs to do the lesson learning?

Well, you and I are the ones who have to learn a lesson. A publicly traded company means this: “when you run a publicly traded company you are spending other people’s money, so play fast and be loose”. 

I don’t even know how I could criticize Mary T. Barra and the absolute insanity she has unleashed buying and investing in unproven technologies and companies without someone yelling “sexism”, but well, I support Hillary Clinton, so let us leave that behind if you will.

Now on to the topic. While some of the other GM investments such as in Lyft itself are quite questionable, this valuation, at $1bn of a company that has only raised $18mn (and will now give Y Combinator a reason to churn out all kinds of unicornish trash, ugh, and if you will spin-off even more predatory “incubators” – tune in on this later) and is probably not anywhere close to the valuation is absolutely bizarre.

Peer Pressure

This whole notion that instead of doing some ground-up thinking, the big 3 should simply just engage in knee jerk investment trickery seems like good old peer pressure, with all the unwarranted innuendos and snide references.

You may feel certain sympathy towards GM. After all, look at what Ford just did – invest millions of dollars to create some sort of “start up” that will engage, apparently in partnerships, and also its own technological innovations. But, in Palo Alto. Well, while that is very cute, Bosch and BMW beat them to this by decades. And of course, Tesla, Google and Apple are natives here and know what they are doing.  Not only that, with real estate prices in the Bay Area, picking Palo Alto in particular just appears like gold plating on the part of Ford. And yet, what GM has done appears to be the worst of it all.

Now I know that eventually, there will be a stable market for ridesharing, automated travel and all that jazz, but I think the hype cycle is still on an upward trend and investments made now will not equate to their real value.

My Theory

Without the valley’s rose glasses while I still live here, I am like a full grown grizzly bear in a petting zoo. That made it very, very, very, very hard for me to come up with any logical reason behind the valuation, other than the notion that Barra and all her advisors have gone bananas, and they probably have no downside to throw away their investors’ cash.

So, I have theorized this. All Economic Bubbles, are not just cyclic, but they also have repetitive patterns and key inflection points. With all signs of a global economy in disarray, an ailing oil market, and the tech market itself in a very questionable state, this would be the absolute worst time to value a company, what by 10 to a 100X.

And in the year 2000, we were exactly at this point. Investments were being made even as every logical indicator would have stopped companies. Thus, I think if I am not entirely wrong, we have about a year, or even less, before “it” hits the fan. And if I am wrong and it just takes longer for the bubble to burst, the downside is only postponed.

So, mark this point in time. Now let us see what happens…

References:

  1. GM’s “purchase”: http://fortune.com/2016/03/11/gm-buying-self-driving-tech-startup-for-more-than-1-billion/?utm_source=CB+Insights+Newsletter&utm_campaign=9a10fe85ae-FridayNL_03_11_2016&utm_medium=email&utm_term=0_9dc0513989-9a10fe85ae-86415837
  2. Image Credit: https://static.pexels.com/photos/4097/city-cars-traffic-lights.jpeg
  3. Ford’s Investment: http://www.sfgate.com/business/article/Ford-sets-up-Palo-Alto-subsidiary-to-invest-in-6885191.php
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Silicon Valley is apparently bleeding talent, mainly due to real estate and cost of living

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The blog post I am about to quote, from WSJ, along with a video from NBC, only talks about US-born talent, but anecdotal evidence that I have shows that even foreign born talent is not going to stay in the area much longer, assuming the trend continues. I mean, I am one. I swore to myself I would never live outside the Bay Area in the US, and after shifting my gaze from a house in the Peninsula to one in San Jose and then Hayward all the while watching prices meaninglessly appreciate, I decided I might just abandon the whole idea and see if there are other places across the country.

The message here is deeper than either the article or the video. I seriously doubt if the traffic or housing prices are the only reason for the move. With Yahoo! going through a meltdown and many VCs developing less warm feet, if not cold feet altogether, the madness may be coming to some sort of a head here and at least few people must have realized it is time to move on.

Egress

Well, we all know this is just another bubble and it is going to burst, just that, none of us knows when. However you dissect the type and number of people who are leaving or the reasons for why they are leaving, there is a long term problem here. The “hotness” of the Real Estate market here, the cost of living and the fact that 5AM and 8PM are slowly creeping into the “rush hour” category means only bad news.

Ingress

You need to think of everything in unison here. It is not just that a handful of tech workers are going to Seattle, which is also relatively bad in terms of real estate, or to a desert location like San Diego. The exodus is causing us to lose professionals from various fields. The ingress is becoming increasingly unpalatable as well. Ask yourself where your kids’ schools will find good teachers? Or any other non-tech related professional services?

Unsustainable mash-up solution: Soviet Style Housing

San Jose for example thinks it has “solved” the low cost housing problem. For every 20 or 25 meaninglessly expensive housing projects, there is one, just announced, like the “Donner Lofts” with just a 102 units that will remind people of the Soviet Union with its ugly, boxy, industrial look and drab colors that some architect is going to try to fool you into believing is “modern”. Also, I am yet to hear what “affordable” means, and how long it will last, and what 102 units are going to do. The problem is not that Ed Lee and Sam Liccardo summarily lack vision, they also just don’t care.

Sooner rather than later, these types of unsustainable band-aid solutions will also fail. Of course, then comes the crash. If it takes another year or two till the bubble bursts, things will only get worse till then. After that of course, real estate will, I predict, going into a rapid, downward spiral. All those “multi-family, high density” adjective-soup units will either have to go empty, or drop rents, forcing this to become a whole another nasty ball game.

Gaming Housing

Almost everyone who lives here or talks about the problem here knows that foreign buyers, and by that I mean, wealthy Chinese individuals, and institutional buyers are deliberately gaming the market in all cash deals, never making housing competitive enough. Imagine housing having gone up 13% in just a year?

I used to track the housing prices when I was “in the market” and I started getting quickly disappointed. Every now and then, for s*s and giggles, I look up housing, only to find a bunch of run down shacks in a high-crime area in San Jose displayed as selling for, wait for it, $600,000 asking prices. Of course, usually people cough up “more” not less than the asking price.

I don’t know what you can do in a market economy to stop this sort of unfair price gouging, but if this trend continues, it spells disaster for the Bay Area. All one can hope for is that these greedy people gaming the prices also take at least some of the hit.

All problems and no solutions?

This is mainly the problem with the Bay Area. From bubble to bubble, we never achieve balance. I don’t know that a solution can be achieved here. The venture capital industry doesn’t care. The “entrepreneurs” want to sell you garbage just so they can become billionaires. What with accommodating lunatics like Marissa Meyer (and the people who thought a 37 year old engineer can save an me-too-also-ran media company) who bought Tumblr, you can’t really blame them.

Silicon Valley doesn’t have good political leadership. The people who get elected here, mostly want to use this as a launchpad for their political agendas. A great example? Chuck Reed, former mayor of San Jose, who not only screwed the city beyond recovery, but also channeled a very ineffective and directionless successor, Sam Liccardo and moved on to weaken unions and pension funds by siding with Republicans. Because, an insecure retirement is a great attraction when hunting for talent I assume?

In a very ironic way, it might take another round or two of bubbles and actual loss of competitiveness to other areas before something changes. Till then, all we can do is, see if we can guess when the next one is coming down and try to duck for cover soon enough.

For more

This particular post was dedicated to real estate, traffic and talent exodus. Here is another WSJ piece on the valley’s slowdown:

http://www.wsj.com/articles/for-silicon-valley-the-hangover-begins-1455930769

References:

  1. The WSJ blog post: http://blogs.wsj.com/digits/2016/03/03/silicon-valley-residents-leave-for-greener-grass-cheaper-housing/
  2. The NBC Bay Area Video: http://www.nbcbayarea.com/news/local/Housing_-Traffic-Spur-People-to-Leave-Silicon-Valley_-Study_Bay-Area-371126301.html
  3. Donner Lofts Announcement: http://www.bizjournals.com/sanjose/news/2015/01/08/midpen-housing-breaks-ground-on-102-unit-donner.html
  4. Image Credit: https://www.pexels.com/photo/city-cars-traffic-lights-6732/
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