Stock Market Bubble

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.

I believe we will see the stocks rise, then plateau and then rise.
When the interest rates are finally increased in December, we should see more activity.
The various crazy laws that the gop plans to implement should start popping up as soon as Congress opens shop in January.
Then will come the various executive orders in third week of January.
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.
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:

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

That bubbles would be sticky is unscientific on its face, but I am speaking metaphorically here. When several companies “down exit”, that is sell for less than what they raise, it becomes harder to predict when the bubble will burst. Plus, it keeps the technology bubble going for a while longer, and thus my metaphor.

Just today, I saw a write up by CB Insights (link below) on two interesting pieces of information, one, of the exit of “Good Technology”, a company I came to know of just today (and I live in the Valley, making their rise and fall that much more interesting), and two, of the increasing trend towards “down exits”, or in plain English, companies that sell for less than they raised, resulting in a loss for the sellers, though curiously enough, some parties lose less than the rest.

Can Down Exits be predicted?

The downfall of anything can be a bit hard to predict. Apple and Facebook stock prices continue to perplex me. However, if you are diligent enough, you can never be 100% wrong, though the opposite is also true. I mean, Apple and Facebook prices will have to go down some day, with the latter being more or less worthless, no matter what stories of advertising revenues you try to feed me till sun down.

Gazelles

In effect though, when I looked at some of the quaint examples from the approximate 214 VC backed firms with down-exits that CB Insights put together, “Gazelle” makes total sense to me. As I watched a very bubbly “young person” looking idiot, tell me on the TV, as to how I could get $200, $300 or $400 for my old iPhone by simply mailing it back to them, my brain struggled to inculcate commonsense into that business model of repurchasing old phones at such high prices when practically no one wants them.

Well, there is your example. You know you are in a bubble when a company like Gazelle raises $61.9M based on a business plan less useful than what a bull standing in the field could give you.

You can confirm that you are in a bubble, when some genius pays $18M for Gazelle. Apparently it is a company called “Outerwall”, another one never heard from or cared for. Similar examples including LifeScribe, are available in the link below.

Conclusion

It would appear that for timing the bursting of the bubble, one would have to look closer at these so called “down exits”. See, what it is, as the greedy stockholders of Good are finding out about the equally greedy investors of Good, the investors are not letting the lessons from 2001 die easy. Instead of going from $500M to 0 in 60 seconds, they are now selling off worthless companies to more worthless companies (what kind of a future is it when you are sold to BlackBerry?). This is a new type of game, and it looks like the investors will first make away with the goods for as much as they can, before plunging us all in the dark. So, the next bubble wont pop and whoosh, but slowly die away.

By the way, two things:

“Unicorn companies”, the broader farce, I am saving for another day, and,
Apple just reduced its orders for iPhones, as I scribe this post on 5 January, 2016.

Exciting times for all of us ahead!

References:

The CB Insights Story: https://www.cbinsights.com/blog/poor-exits-startup-trends/?utm_source=CB+Insights+Newsletter&utm_campaign=c7eac2bc9b-TravelTech_01_05_2016&utm_medium=email&utm_term=0_9dc0513989-c7eac2bc9b-86415837
The Good Technology Story: http://www.nytimes.com/2015/12/27/technology/when-a-unicorn-start-up-stumbles-its-employees-get-hurt.html?_r=1
Exit Sign: Courtesy of https://www.pexels.com/photo/red-exit-sign-5371/
Gazelle Artwork: Courtesy of http://www.freevector.com/gazelle/

Bubbling Economies

No one can predict when they burst, but it is fun to track them

Did the Stock Market Bubble finally get its trigger?

Down Exits – they make the bubbles sticky