Comment by steveplace | Hacker News Reader

Comment by steveplace | Hacker News Reader

Probably not. Here's some questions:

1. Exactly what asset class are we referring to? It's probably not a credit bubble that had issues back in 2008, probably not housing, maybe commodities, maybe equities... but most likely HN discussions revolve around the eye-popping valuations in Groupon, twitter, facebook, zynga, and so on. So it's probably not the bubble, but a bubble.

2. How can you tell the difference between a moderate capital mis-allocation and a straight up bubble?

3. Have you actually compared what was going on now compared to any other bubbles that popped?

4. How much widespread adoption have we had with respect to capital allocations in these "overvalued" names? They aren't public, and there's not widespread participation by the "unwashed masses" in this asset. Compare that back in 1999 when non-revenue companies went IPO and everyone piled in.

5. Speaking of IPOs, how are they doing? How many names go IPO right now and see their stock triple in 90 days?

6. What's the size of the total bucket of money in this "bubble" relative to the total capital market?

7. What kind of deviation from historical valuations are we seeing in VC-land? Is it a total market deviation or limited to a few outliers that everyone loves to hate on?

8. Are bubbles really this obvious?

9. Even if we are in a bubble, are we early stage or late stage? Are we hearing about the million-dollar florist from twitter in Time magazine yet?

Regarding "not a credit bubble," where do you think the money to push up these asset prices came from? Cheap money and low rates = financial institutions desperate for yield = pour money into high yield "hot" sectors.

The people purchasing FB and Groupon shares are only a few steps away from the Federal Reserve money fountain. This leads me to believe the bubble (or whatever we want to call it) is credit driven

That's possible, but let's take an analogy with the housing market.

Market's were overflowing with liquidity due to low rates and easy credit, and then the housing market securitization exploded to the upside, which then fed on itself and created it's own bubble. There was mass participation from all the major banks, and we saw real estate riches books in Barnes and Noble.

How does that compare to now? We've yet to see public securitization of these "overvalued" companies, and there's no outrigh participation by banks leading them to IPOs, at least not yet... there's GS raising capital for facebook but that's really it.

Yeah we could get all zerohedgey with respect to how the fed is pushing up assets, but the majority of capital is coming via public equities and commodities... and the participation really isn't there at the moment.

The important question is: where is the money coming from?

If it's from hedgies flooded with investment from banks, then it's credit driven. In a zero interest rate environment banks are going to be desperate for yield. There's nothing zerohedgey about that, it's just financial system basics.

EDIT: To clarify and put into textbook terms: in a good economic environment, there will be plenty of good projects to put investment dollars into. In a bad economic environment, credit contracts so there are less good projects but also less $s floating around. If you flood the market with credit in a bad environment, the same amount of $s you had in the good economy are chasing far fewer good projects.

Banks need to find yield so they take all the extra credit sitting around and pour it into hedge funds, VCs, etc. Those funds need to put the cash to work and so they pump up hot sectors to get their return. Bubble forms as valuations for companies like Facebook go through the roof. It's driven by the excess credit, ie. stimulus investment dollars that need to find a home.

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