Well-behaved bubbles often make history | Hacker News Reader

Well-behaved bubbles often make history

future.a16z.com

112 pointsjger15127 comments

Here's my theory of bubbles:

You have an asset (doesn't matter what it is). It's going up because the fundamentals improved, or because favorable press, or whatever. That's not a bubble. Stuff goes up all the time.

So people start buying it, because it's going up, and they want in on the action. That's still not a bubble. People buy stuff that's going up all the time.

Now there's new money flowing into that asset. So now the price goes up because of the new money flowing in, and the new money was flowing in because the price was going up. Now it's a bubble. But it's not dangerous yet. People can lose their shirts, but it won't hurt the overall economy.

It becomes a dangerous bubble when (lots of) people invest in the asset with borrowed money. Now if it crashes, it can take banks with it. If that happens at a large enough scale, you damage the economy as a whole.

If the government deems all banks “too big to fail”, does that remove the risk?

no. because bank going bankrupt doesn't wipe away YOUR debt. it wipes away banks obligation to the governing body.

also micro-lending will be as big in west as it's in China in the next decade. borrowing 10k to margin trade the stock market is inherently more risky than borrowing 10M for a mortgage.

Hardly, it may (or may not) help to mitigate the fallout though.

If only. The debt becomes worn as inflation and higher taxes.

It makes things worse because the banks now have an incentive to engage in riskier behavior. Their downside is covered by the government and their upside is payoff. So reckless behavior becomes a nobrainer.

I think a naturally occurring Ponzi scheme is the simplest and best definition of a bubble.

I like the idea of calling market bubbles "wild Ponzis".

This definition is not the best since at the very least it missed that a Ponzi scheme lacks transparency and is fraudulent.

PG had one of the best definitions: "a rapid increase in buying based on the expectation of soon selling to a sucker willing to pay more". It's in an old Startup School video and I doubt I am getting his wording correct.

https://en.wikipedia.org/wiki/Greater_fool

what's the difference between "People buying stuff that's going up" and "New money flowing in?"

None. "People buying stuff that's going up" is exactly "new money flowing in" to that asset.

But I may have left some confusion in my fourth paragraph. It's a bubble when it becomes a self-reinforcing feedback loop. People bought because it's going up, which makes it go up more, so more people buy, so it goes up even more, and so on. I didn't state that clearly enough.

I see, thank you.

It sounds like you're saying the provenance of the funds is a key indicator. People buying stuff that's going up because those people closely follow industry or sector news. The people who buy because THOSE people bought are what drive the bubble growth.

The difference is whether people are buying the stuff that's going up because it's going up or they're buying it because it's good and has intrinsic value beyond what they think the market will pay for it tomorrow.

Why not both?

IMO the trouble starts all the way back with "So people start buying it, because it's going up". That's speculation. And it uses up some of the wisdom of the crowd rather than contributing to it.

> "So people start buying it, because it's going up". That's speculation.

Mostly but not entirely. It's also previous shorters who buy to manage risk. These people are qualitatively different from the speculators.

there's nothing wrong with speculation.

But there's something wrong with speculating using other people's money.

There's nothing wrong with speculating using other people's money as long as you're honest about it. Most mutual funds operate that way.

Do mutual fund investors accept that their money is on the line? As the saying goes, a financial crisis is when someone loses money and it's socially unacceptable for them to not be paid back. So perhaps a bubble is when you speculate with money that it would not be socially acceptable to lose.

Yes mutual fund investors accept that their money is on the line. Many mutual funds have negative returns. Your definition of a bubble makes no sense.

I agree with you. I'll put it another way. Usually if the price of something goes up and becomes too high, fewer people buy and the price drops. That is a stable system. An unstable system is when the price of something goes up, so that causes more people to buy causing the price to go up more. That is an unstable system causing exponential growth, which I'd call a bubble.

Is the lesson learned that people are irrational gamblers?

I think the lesson learned is that the system is setup to encourage this kind of bandwagon investment. For example, all the people who are buying houses as a vehicle towards financial security: completely rational within the confines of the system we have. But causing huge problems, and therefore something that shouldn't be incentivised.

I'm seeing it in the sense of gambling: I buy when I think it's going to go up, you sell because you think it's going to go down (stocks), but people don't think, they just get excited, bubble happens, then we get a small minority winning big and the majority losing.

That's just human psychology. Can't fix that one. It's one of the fundamental anomalies of markets. People also tend to sell more when the price is trending downwards, all other things being equal.

That does not mean it's not the problem

But where I disagree maybe is that it's a market anomaly. It sounds like a human anomaly but the market is here to allow it to be expressed fairly and in the open so that it corrects itself naturally over time.

The alternative is a small group of well educated or armed people planning the economy by 5-year increment for the good of the people. They can be right for very long, but is it fair to prevent us to make mistakes and only allow them ?

The market maybe isnt here to maximize efficiency of outcome, but maximize fairness of access ?

free market does not maximize anything. it just is. fairness is not in the equation. free market (or something similar) is just good enough way to organize economy with good enough outcomes.

> free market does not maximize anything.

That's a little too strong. It doesn't maximise efficiency of outcomes. But it does (more or less) maximise profit under free-market rules.

There's this branch of medicine called "therapy" that is specifically about fixing human psychology, and this other thing called "education" that aims to prevent issues identified in human psychology early in people's lives.

Also, “religion” and “culture”.

Can even get worse if the borrowed money only exists based on promises in the first place.

The tragedy is that that these crashes often increase inequality and concetrate power. The victims are innocent and the perpetrators are not held accountable.

> Can even get worse if the borrowed money only exists based on promises in the first place.

but isn't this all modern fiat money?

I dont know if innocent describes people signing a contract. They can be victims of manipulation but maybe people are less stupid than you give them credit for.

Maybe they understood that it was an opportunity to seize, a cheap loan in a bubbling up market, and they decided against carefulness.

I face this with bitcoin for instance, trying to stay careful in an exciting rising market. If I stick to fundamentals and what I think I know of past experiments, this makes no sense. If I look at making money in my lifetime, I feel stupid resisting.

Every single working class/ non-asset wealthy person loses out as their relative net worth decreases with every rescue package.

I mean people who don’t participate, even cannot, or are convinced to participate by experts. This is the vast majority of affected after a crash.

The financial market and its powerful actors have a massive collective responsibility, that they often don’t seem to be aware of.

The few that are responsible have been ignored for reasons I cannot otherwise understand but as greed.

I speak as an outsider and layman here. I understand that mistakes can be made and that things are very complex and unpredictable. What I have a problem with is that they don’t seem to get accounted for, and certainly not fixed.

The criticism of the banking system and financial markets goes way back. It has been discussed and brought to attention by the likes of Adam Smith. But somehow we just keep patching over the symptoms, if at all, rather than question the severed connection between power and responsibility.

Reminds me of a meme about the current state of real estate prices. Which is that because banks became stricter about lending, it's not a bubble this time. The reason it can still be a bubble is that 1) ZIRP and 2) while governments somewhat achieved their mandate of low unemployment, employment stability (not having to constantly job hop to survive) is through the floor. That's why this is a structural megabubble IMO and isn't tracked very well with the proxy of 'how much debt is on individual balance sheets'.

> ZIRP

The naive valuation of a stock that gives it an infinite value at a real 0% interest rate relies on an infinite horizon. Thankfully at least for residential loans it's difficult to get an interest-only mortgage -- in practice deposits and principal payments are binding constraints on valuations. Maybe that changes with corporate landlords becoming more prevalent, though.

> employment stability

This is interesting: high job turnover is usually seen as a sign of a healthy labour market because it can represent people sorting into jobs they're better suited for. I guess it's a question of what you hold constant: maybe people are changing jobs because jobs are plentiful. If people keep changing when jobs are hard to find things could get dicey.

The reason I and my colleagues are seemingly changing jobs often is because:

1) newJob pays more than oldJob

2) oldJob is becoming unstable, toxic, and will likely be firing us all in 6 months, so better to leave early and start the clock over

In a world where we remain at oldJob til the end, we risk 6 months of that extra pay differential, plus we now have to job hunt while technically not being employed

I think both points fit the "job market is healthy" description -- (1) explicitly has `newJob`, (2) implicitly assumes `newJob` in its faith in starting over. Conversely, if jobs were scarce it's plausible many of those changes wouldn't happen. Arguable in the case of "toxic" workplaces, though.

Bringing this back to shaker8's point about financial risks, I think these kinds of job changes mostly point to systemic resiliency, not fragility.

Interesting ideas. I suppose we can say the US job market is healthier than Spain's, because unemployment in the US is low, and the pay/expense ratio is good enough. In Spain, unemployment is very high, and the pay/expense ratio is not very good.

But imagine if the US job market changed to this scenario: still the pay is high, still the expenses are low, still the jobs are available, but you have to change jobs every week. That would signal two things:

1) Employers are suddenly finding it advantageous to rid themselves of workers on short notice

2) Time and money are being wasted interviewing people and onboarding them rather than letting them work for sustained periods

I think such a system, while still "healthy" because workers are still employed and paid similarly, is "less healthy" than a system where the workers can expect the duration of their work at one employer to be longer than 1 year

No, the pay/expense ratio is not good at a global level. The odds of making it to an 'early' retirement at age 60 at 50k per year and saving 20k are very low. The odds at 150k saving 50k are equally low. This is because the net worth required to move to passive income, due to ZIRP, has gone way up.

Based on these comments I believe everyone here is talking about the resiliency of the tech job market. I'm talking about the resiliency of the job market in the US, and the job market globally, what are sometimes called 'semi-skilled' jobs (a truly brutal term but hopefully that helps people get it). Even this doublespeak about talking about resiliency of markets implies a certain amount of dogma about how markets, not people, need to be resilient. If the market is resilient, it will somehow trickle down to ordinary folk.

agree but it’s not even just that.

it can just be a plain bubble even if everyone buying it has enough money to afford it. there’s been plenty of bubbles that didn’t involve leverage or loans at all. people simply got crazy and paid ridiculous amounts for assets far above intrinsic value. and when at some point something happens to the asset, it has a far way to fall.

seems like they should restrict the use of debt-based (government emitted credit money) for the purpose stock market speculation.

or if they wanna keep the ability to take huge risks, there should be some way to force large financial entities to face the loses when they do risky things and fail as opposed to letting the "market" (i.e. the future taxpayer) pay the bills.

at the very least they should cut them off from "new money" (which is government emitted credit=debt-money) until they pay back in whole as opposed to just making even more "money" to dig a deeper hole for the future taxpayer to fill back up.

I'm reminded of filling up a hole by digging in other places to fill the original hole without ever realizing that you're actually in the ocean and thus you are just lowering the overall water level.

There is no separate category of debt-based government emitted credit money. Since we left the gold standard all US dollars have been debt based. That's not a bad thing, it's just how our banking system works.

Stock investors are already generally limited to 2× leverage in brokerage accounts.

> There is no separate category of debt-based government emitted credit money.

maybe there should be

You may enjoy this essay, which calls this mechanism "liqudity flywheels": https://lt3000.blogspot.com/2020/07/market-inefficiency-liqu...

    A liquidity flywheel is a situation where inflows into an asset class lead to buying pressure that pushes up prices, leading to favourable apparent return and volatility characteristics in the said asset class. This favourable outcome then attracts yet more inflows, leading to yet more buying, etc. Conversely, poorly performing asset classes with significant downside volatility can lead to investor redemptions, leading to forced selling that contributes to yet further price declines, yielding even worse returns and even greater redemptions, and so on. This process can go on for years, and sometimes even for decades, and is a fundamental contributor - perhaps the most important contributor - to both major asset-class bubbles, as well as asset price busts and secular lows that lead to fire sales prices (which are 'anti-bubbles' driven by the same drivers of bubbles in reverse)

Good analysis.

It isn’t looking great.

https://www.currentmarketvaluation.com/models/buffett-indica...

Hyman Minsky had a concept he called Ponzi financing:

"Minsky distinguished between three kinds of financing. The first, which he called “hedge financing”, is the safest: firms rely on their future cashflow to repay all their borrowings. For this to work, they need to have very limited borrowings and healthy profits. The second, speculative financing, is a bit riskier: firms rely on their cashflow to repay the interest on their borrowings but must roll over their debt to repay the principal. This should be manageable as long as the economy functions smoothly, but a downturn could cause distress. The third, Ponzi financing, is the most dangerous. Cashflow covers neither principal nor interest; firms are betting only that the underlying asset will appreciate by enough to cover their liabilities. If that fails to happen, they will be left exposed."

-- https://www.economist.com/schools-brief/2016/07/30/minskys-m...

The crash that occurs when people realize that an asset class is not going to keep going up is a "Minsky Moment". His conclusion was that stable growth led people to take on more debt - that stability itself was destabilizing and financial crises are inevitable.

A lot of these examples seem to be conflating normal business cycle peaks with bubbles. I think calling every "thing that goes up and then down later" a bubble is stretching the definition past the point of utility into absurdity.

I found this article disjointed and meandering and am not sure what the author intends the reader to take away from it. Smells like an article from someone who likes to call themselves an expert by using buzzwords to reductively categorize history into their personal arbitrary framework, but doesn't have much practical experience in what they preach.

I had a tough time figuring out what the take away was as well. I think my sense is that there isn't a prescription or anything to the article but that a bubble isn't inherently a terrible thing and that there are good things as in the authors argument that bubbles point to a future change based on current [over] optimism. Maybe a silver linings take on the bubbles.

I thought it was interesting to think about them but I do agree the vagueness of the take way did leave me wanting more from it.

not just that

“Enron, Theranos, Long-Term Capital Management, and Countrywide Financial”

two of those are blatant frauds and ltcm just had over levered trades go against them. not sure they are examples of bubbles

> A bubble is an objectively irrational shared belief in a better potential future … but that doesn’t just describe someone bidding up asset prices; it also describes anyone who chooses to build that kind of future.

Feels like they're redefining the term to be all encompassing. Normally something like Apple investing in R&D, and deciding to make the iPhone wouldn't be an "asset bubble".

Exactly right. "The definition of X is Y. Y is actually good because blah blah". It's terrible.

He didn't just generalize it. He heaped on positive connotation. Bad thing is good because we've defined it to be good.

The only concession is that it's irrational. But flip that around, the implication is that the irrationality is good. Here is a theory that lets me feel good about undeniable mass irrationality.

Speculation is speculation. Sure it's all fine and dandy…when by luck it works out okay.

> Bad thing is good because we've defined it to be good.

That literally defines popular morality. There is no other definition of good and bad besides cultural consensus.

But each time Amazon added a category, they acquired users who would spend on their existing categories, and, later, merchants who could offer newer categories. Each search tweak Google made gave them a new set of tools to monetize clicks, but also reinforced the instinct to perform lots of searches. Facebook’s marketplace is partly a way to monetize the site, but it also gives buyers and sellers one more reason to log in every day; as it turns out, one of the most addictive games ever launched on the Facebook platform is called “Affordable Exercise Equipment Quest,” and I’m a daily active user.

If someone had just bought shares of these three stocks a decade ago and turned off their computer,went outside, and did nothing else, they would have beat probably 99.5% of money managers/funds. Moreover, it would not have required any special insight or skills, but rather just investing in companies that a decade ago were already very big and dominant and in the news, not trying to find a hidden gem.

> If someone had just bought shares of these three stocks a decade ago and turned off their computer,went outside, and did nothing else, they would have beat probably 99.5% of money managers/funds.

Will that be true a decade from now? For these companies to 10x again would end up with massive market caps, nearly $20T for AMZN.

If amazon, google, and facbeook become the economy, then there is still much more room for upside. We saw this with Covid in which Amazon and Walmart became major suppliers and distributors of goods and services.

I remember Facebook's ipo. If I'm not wrong, the shares crashed for a few weeks/months right after the initial enthusiasm. It wasn't clear at all that Facebook was going to keep growing indefinitely.

By the way, did you buy Coinbase shares? In ten years it could be another example of some obvious buy ("big, dominant and in the news"). Or they might have turned to junk, too.

Remarkably, facebook was still worth around $100 billion on its IPO even tbough it seems so long ago. It had huge growth leading up to the IPO. It fell due to concerns about Facebook not being able to monetize mobile, which proved to be unfounded.

NO, I would not buy coinbase stock

I could see Coinbase as the world's bank and stock market all in one. Or a pets.com cautionary tale. Check back in a decade or two!

If only someone had bought shares in companies like Chevron and Exxon that a decade ago were already very big and dominant and in the news, they'd have almost as much money now as what they invested.

EDIT: I don't mean this in a snarky manner, I just know that I would personally lack the skill to pick stock market winners, and if I were to pick investments based on publicity, then all my money would be in Tesla, doge, Gamestop and Bitcoin. That would be akin to gambling.

Some hindsight bias there I suspect. If it was so obvious a decade ago can you identify the next decades’ no-brainer investments?

How likely do you think antitrust action is over the next decade? Without it, it's just going to be the same 3 companies again.

Cloudflare and stripe spring to mind. Companies clearly on a trajectory to become dominant, but not so large that they have no more room to grow, like Apple.

Yes, if ten years later you assume magic stock-picking skills then you can outperform the market. There's no strategy or anything interesting here. You're not 'investing in companies that a decade ago were already very big', you're cherrypicking a few such companies based on their returns.

Inside the bubble, this is just called "morale".

It's very visible as a phenomenon in gaming. What gets pitched in new games is not rules and assets, but a whole set of beliefs and values: there are games where you are spurred towards world conquest, and games where you are meant to relax and socialize. The value system is literally encoded into the play through those rules and assets. Therefore, game makers have a ready-made market wherever they can pitch people's beliefs back to them, like "I'm secretly the hero", or "playing longer makes me more powerful."

And then the negative side of that comes into play when the game pops someone's bubble: "that's unrealistic", "it doesn't let me play how I want", "that other player is using a cheap move" - and it gets really out of control in video gaming specifically when the hype is built on a promise of all possible worlds being contained within the game, or being patched in through updates. Star Citizen has been managing this sort of hype for years, and No Man's Sky had the player bubble popped but eventually came out the other end of it many, many updates later. Cyberpunk 2077 likewise had feverish hype followed by massive disappointment, though that story still has time to play out.

I often tell myself to reexamine my grip on things. If I hold an idea too tight, I'm sure to lose objectivity - I don't need a tight grip on anything, just the pragmatically useful one. And playing very difficult games has helped me loosen my grip, in fact; good strategy and techniques often result just from seeing the game as it "really" is and playing into that, and that's a useful life lesson.

Fun and perhaps marginally relevant fact: the author posted the following in what I believe was the first cryptocurrency thread on HN:

https://news.ycombinator.com/item?id=253999

That was 3 months before the Bitcoin paper was published. I wonder how many years went by before a second HN comment even mentioned the energy critique of Bitcoin mining.

Yep, looks like you found Satoshi’s HN account - blastomere.

Things they talk about - energy consumption, crypto puzzles, similarity to gold, etc. In 2008! It is either Satoshi or someone very close - Hal Finney, Nick Szabo, Wei Dai, Dave Kleiman, etc.

Blastomere links to Nick Szabo blog posts:

https://news.ycombinator.com/threads?id=blastomere

...links to:

http://unenumerated.blogspot.com/2005/12/bit-gold.html

This is a fascinating find.

> In humans, blastomere formation begins immediately following fertilization and continues through the first week of embryonic development.

They (Nick Szabo?) are posting about this on July 23, 2008 and trying to shill for Bit Gold. The Bitcoin white paper was released on August 18, 2008.

> Bit gold was one of the earliest attempts at creating a decentralized virtual currency, proposed by blockchain pioneer Nick Szabo in 1998. Although the bit gold project was never implemented, Szabo's attempt is widely considered to be the precursor to Satoshi Nakamoto's bitcoin protocol.

People often try to peg Szabo as Satoshi but I have never felt it is him. Satoshi’s writing tone seems less blunt than Szabo’s. Satoshi is to the point, but Szabo always seems aggressive and confrontational.

Shilling for Bit Gold when you are about to launch Bitcoin a month later would be an odd move. Or is it just advanced subterfuge? I guess we will never really know.

People always look to irrationality as the first explanation for bubbles. This is lazy thinking. I find that there are almost always structural cash flows that create them by some sort of economic or regulatory intervention, and the crash by reversal of the same. Similarly, I don’t think there are technology bubbles. Obsolescence is a very slow and steady process while you’re going through it, but everybody remembers that one day the whole world turned in their rotary phones for the iPhone X.

I wonder how much of current asset appreciation is due to our largest trading partners (China, Europe, Japan, Korea, Taiwan) wanting to make sure they can maintain large trade surpluses to maximize manufacturing employment. Rather than send trade proceeds home, they buy stuff in the US (treasuries and equities) to keep exchange rates stable.

It's actually a big reason we gave everyone and their dog mortgages before 2008. Too much foreign savings not being borrowed so the government made it easier to get mortgages.

I'm not sure I agree. Any valuation for an asset is going to be expressed in terms of other assets. If lowering interest rates to near zero causes a dramatic rise in prices for a number of assets like we have seen in the past year, this doesn't necessarily mean the assets are priced unfairly in relative terms. Same goes for any regulation which creates a favorable environment for a rise in a particular type of asset - that asset may be fairly priced given the context.

Usually bubbles by definition have some level of irrationality. The price of asset(s) far exceed what is rational given the context. For example tulip mania, dot com bubble. I guess we do refer to the 2008 housing bubble and I would agree with you there that was driven just as much by systemic issues as opposed to just irrationality.

I’ve struggled to find an explanation for tulip mania, but there are some hints at it.

It’s important to realize that the Dutch monarchy was spending themselves into incredible debt for these explorations, and the lenders expected them to return with huge amounts of gold and silver like the Spanish. They came up empty on that, so the monarchy and the financiers had to find a way to convince the world that what they did have was even more valuable, and an efficient mechanism to offload the debt. They created the most advanced financial system the world had ever seen, including a futures market that allowed for cash-free asset purchases without violating usury laws of the church. The asset was a new technology by which one could replicate precious minerals in their own garden, and of course selective breeding would eventually discover a way to mass-produce petals of gold. The alchemists had it all wrong, killing themselves with dangerous chemicals. And you didn’t even need any money to participate. All you needed to do was ‘buy’ a lucky bulb future, and then sell it to somebody else before the bill came due. The church blesses it, and the king demands it.

I had some early beanie babies. They were cheap, well-made, and safe toys for toddlers, a real hit. Then Ty cut supply and the first free market for collectibles ever, opened on this mysterious technology called the Internet. Normal people sold their baby toys for double (still a shipping loss) to new parents, and then double again to eBay reselling businesses, then speculators and criminals blowing their PayPal, a new self-sovereign internet currency that was air-dropped to any new email address, and only a tiny fraction going to the weirdo collectors featured in magazines.

There will always be people that will bet more than they have, if you let them. If casinos started offering loans, would we call it a blackjack chip bubble?

The Beanie Baby case is interesting; I think it represents a turning point where gamified artificial scarcity in entertainment started to become more aggressive. (The pog craze and the first wave of collectible card games happened around the same time.) Ty went crazy making different beanie babies of various rarities, and even after the bubble had become obvious, there were people still compulsively buying them all (although I think you always knew which one you were buying). Before that, it seemed like mixing in intentionally rare items was just confined to baseball cards.

Many of these definitions of bubbles are so broad that any investment can be seen as a bubble, thus there is no bubble-free asset; making it a negligible distinction.

A definition I like, from Warren Buffet, on what is a bubble in contrast to an investment:

You’re just hoping the next guy pays more. And you only feel you’ll find the next guy to pay more if he thinks he’s going to find someone that’s going to pay more.

> Star Trek was right about some parts of the future: Material goods got very cheap indeed, and Amazon’s price and delivery speed are rapidly approaching the Replicator.

this is not sustainable, at all and will collapse at some point in the future

Currency is something that isn't a store of value. Cash should be thought of as a depreciating asset like a car. We do need bubbles though - it just a way through an investment cycle in something new. In January 2009 NVDA was below $10 and the investment community certainly didn't appreciate the longer term future there. Coinbase (COIN) is a very interesting idea these days. It's not easy to see the long term but that was true for NVDA and FB at the IPO when the shares tanked to $18.

Someone could definitely write a book on bubbles that never popped, or the bubbles that popped, but didn’t have too.

Narratives drive what happen to bubbles, and I assume there have been bubbles that were captured by the wrong narrative at the wrong time.

This fits in perfectly with my "bubbles are everywhere" thesis. +1 insightful.

That sounds like confirmation bias.

It sure does sound like it. But if you want to put some substance behind your thoughts, I recommend this book: https://www.amazon.com/Chaos-Making-Science-James-Gleick/dp/...

> Bubbles can be directly beneficial, or at least lead to positive spillover effects: The telecom bubble in the ’90s created cheap fiber, and when the world was ready for YouTube, that fiber made it more viable. Even the housing bubble had some upside: It created more housing inventory, and since the new houses were quite standardized, that made it great training data for “iBuying” algorithms — the rare case where the bubble is low-tech but the consequences are higher-tech.

The housing bubble led to a short term increase in housing inventory, but it also dampened housing development (arguably forever). I'm guessing the net affect to housing supply was economically inefficient.

Certainly a sign of the times when VC firms hype the positive externalities of bubbles as US companies climb to insanely high price to earnings ratios, interest rates are at record lows, and cheap money and debt abound.

I have a feeling this ain't gonna age well.

What mechanism(s) of the housing bubble dampened housing development?

We have and are still struggling to get back to the same level of housing development we had around 2000 [1]. If we adjusted for housing starts per capita this would look even worse.

Why? I don't know, but I'll hazard two guesses:

- Financing requirements around development became much stricter after 2008.

- Housing was once seen as a risk free, stable investment.

1. https://fred.stlouisfed.org/series/HOUST

when you see an asset plummet are you really going to invest in more of it? people thought it was a toxic asset and many home builders went out of business

People still prefer to live inside. I wouldn’t expect landlords to walk away from housing the same way that owner occupants (especially zero or first-time buyers) might get uneasy.

not landlords but builders will slow down or abandon new construction

and prospective landlords didn’t enter the field

>I have a feeling this ain't gonna age well.

People have been warning of this since 2014 when Facebook bought out WhatsApp.Even 2012 when Facbeook bought out Instagram. Maybe it will end well and surpass everyone's expectations. Why don't people ever predict that?

Because pessimistic sounds smart, optimists make things

What are examples of companies that have maintained an extremely high price to earnings ratio for decades and never crashed down to Earth? I don't ask this to sarcastically imply it doesn't happen. I generally would like examples if people have them.

I'm personally not sure what's gonna happen. I don't foresee US economic growth rates of the past 40 years sustained for the next 40.

We kicked the can down the road in 2008, 2012, 2014, sure. Anytime the S&P500 suffers we lower interest rates, open swap lines, buy corporate debt, and now we're talking about a 10T infrastructure program. Just take a sober look at US federal spending and entitlement programs. At what point is the US itself a bubble? Burry's answer: "When the degree to which we can tax our population eclipses the interest on our debt" [1].

It's not pessimism to tell someone they're standing under a massive, precariously placed boulder. Just because you like them, just because it's inconvenient, just because it's very rare people get hit by boulders -- it doesn't make the boulder go away. The boulder is current debt levels and it's just gotten bigger over the past 10 years.

1. https://youtu.be/pDXHMbnF1nw

You got the quote backwards, friend.

Inflation devalues debt. I don't have the answer either but I don't think doom & gloom is the #1 scenario. But it's definitely a possibility.

There is a more timeless valuation metric that looks at asset valuations in reference to treasury yields.

And it is helpful to look at treasury yields as a reference to how much money is in the system that needs to be placed. The entire incentive is to find an investment that earns money faster than the value of your money drops due to treasury & central bank activity.

(The actions of issuing governments and central banks are the primary way more money gets into the economy than before, and this pushes down interest rates.)

TINA - "There is no alternative" has been used over the last decade to suggest a problem: that there is no where else for investors to park money so they stretch valuations poorly.

But "TINA" has always been the case, to a degree which has only been limited by geopolitics and fragmented economies in the past.

Valuations have always been tied to how much money is in the system.

So - yes - the capital formation and placement process is messy and there is wild short lived inefficiencies in some parts of the market such as a single collectibles market attracting too much capital or a single stock becoming a crowded trade. But across the entire asset classes bubbles might not necessarily be bubbles.

I think I agree with that "more timeless valuation metric". Would you mind sharing what it is saying about current conditions?

I havent checked how close/far to the correlations we are right now, but the main point is that its not useful to use some P/E ratio* from the 1980s to decide if a particular company or sector is overvalued or not. It would basically be P/E/Money Supply instead

*or revenue multiple, general valuation, etc

To me, this doesn't feel like a bubble so much as fiat currencies like the dollar losing lots of value. Using gold price as a reference, gold has gone from ~$300 in 2000 to ~$1850 today. As the dollar loses value, things denominated in dollars but with real value like land go up. IMO, it doesn't seem like a bubble so much as the dollar is only worth about 15% of what it was 20 years ago.

This article is an ingenious version of 'all our investments were too early' defense.

What a strange article - how would you know if a bubble is “well behaved” before the fact?

Seems to me that the whole point of venture capital is to get in on the bubble, any bubble, before too many others do.

Since the article is taking a historical perspective, I'm not sure it needs to?

A bubble is an objectively irrational shared belief in a better potential future … No, bubbles in the world of economics are inherently bad, ponzi schemes concocted by charlatans.

Powell say something spooky about rate outlook and I missed it?

There are plenty of different definitions of the word "bubble" out there, but most of them relate in some way to asset prices coming untethered from fundamentals. For example, here's Schiller's from 2015:

> A situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.

You can find more academic definitions, but this one seems pretty spot-on when you hold it up next to the famous manias throughout history. Price increases drive further price increases, because the draw of future price increases is strong and the concept of "overpaying" for an asset ceases to exist.

The author, on the other hand, attempts to define a bubble as:

> ... an objectively irrational shared belief in a better potential future

While it's true that innovation/invention (and sure yes marriage too!) do require optimism and some degree of irrationality, it's a far cry from the "animal spirits" that cause investors to abandon any notion of a fair price in favor of momentum.

Sure, in some way bubble-era investors "believe in a better potential future", but it usually seems to be a future of further price increases, and any narrative required to support those prices becomes thinner as the price rises. This can be a lot of fun! However, it is neither sustainable nor a clear net positive.

One of the reasons that (certain!) bubbles are so damaging is that the least sophisticated investors with the most to lose get pulled in last. A series of investors are holding the assets through the entire post-bubble price decline - someone "cashing out" at the peak means that someone else is "buying in". It's a little uncomfortable to claim the following benefit to the 2008 financial crisis:

> It created more housing inventory, and since the new houses were quite standardized, that made it great training data for “iBuying” algorithms

On the other hand, some bubbles do create useful infrastructure - the Dotcom bubble laid a lot of fiber (mentioned in the article), and the railway mania of the 1840s laid a lot of track - although the latter was pretty "inefficient" due to high construction costs, parallel routes, and etc.

I'm not really sure what the author is trying to justify here. Bubbles are what they are, we basically know how they work, and we appear to be living in one today! They'd probably be getting a lot less push-back if they avoided trying to re-define the word "bubble".

> A bubble is an objectively irrational shared belief in a better potential future …

An objectively irrational bubble is generally akin to a ponzi scheme, where everyone hopes someone else is left holding the bag. Phrasing it as a bunch of people who just believe in a better future is an extreme enough euphemism I'd expect to see it in a Silicon Valley parody.

"Please don't post shallow dismissals, especially of other people's work. A good critical comment teaches us something."

https://news.ycombinator.com/newsguidelines.html

I just edited it. Acceptable?

It's certainly better but the swipe at the end seems completely gratuitous to me, and breaks the HN guideline against snark.

Moreover, you're still breaking this site guideline: "Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize." The author is not saying anything as stupid as "it's a bunch of people who just believe in a better future", and reducing other people's statements to stupid statements is a trope of poor internet comments.

Actually, the author is doing something very close to that.They have redefined a reasonably well-defined term in a disingenuous way and then taken that as a given for the rest of the article.

You can see several people point this out. This very thing - redefining terms to fit an agenda or argument - is often used in political arguments. It's destructive.

Reply on news.ycombinator.com