If It Walks Like a Bubble, and Talks Like a Bubble…
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  • thibaud

    There are plenty of promising real investment opportunities in the world today, but most of them require large quantities of two things that are perennially in short supply: patience and due diligence.

    Most of these opportunities are in real assets, infrastructure projects, and emerging market (ie beyond BRICs, in countries like Indonesia and Myanmar) companies.

    But researching those things is hard. So much easier to buy junk IPOs on Nasdaq.

  • Unbeknownst to me pundits may be putting forward the idea that lack of economically viable investments is causing excess liquidity to create bubbles – but I haven’t heard it before. It certainly is a credible description of the dotcom bubble. I would add that there is another factor pretty common in bubbles – what I think of as the MacDonald’s effect. That is once a successful idea is proven it gets replicated ad nauseam until it no longer represents value. This effect is also what has caused the cost of higher education to rise faster than the rate of inflation.

  • “The world is awash in excess liquidity, with huge pools of cash around the world restlessly seeking higher returns.”

    Liquidity, thy name is China.

    With China, numbers swamp everything. A thugocracy to boot. What are we doing there?

  • Brett

    When companies like Apple are sitting on a cash hoard of $110 billion (enough to fill 50 Olympic-sized swimming pools with dollar bills) and can’t find a way to make money with it, that’s a sign that the world economy at a basic level is still not back to real health.

    It’s more that Apple has a significant amount of profits from overseas operations that it can’t bring back to the US without incurring a significant penalty in taxation. It’s one of the reasons why they’ve been pushing for a tax repatriation holiday.

    As the NYT Bits Blog reports, there’s a perverse logic at play here, and it’s the sad norm in the tech sector: no business plan means pesky numbers don’t get in the way of stratospheric valuations when the company is sold.

    I don’t see what the problem is. Even if the vast majority of start-ups would amount to nothing on their own due to no business model, consumers still get to benefit from their services – and from the services of the profitable survivors. Think of how the Dot.com bubble destroyed a lot of start-ups, but left a few behind that changed the world for the better (Amazon, Google, etc).

  • Jacksonian Libertarian

    “The world is awash in excess liquidity, with huge pools of cash around the world restlessly seeking higher returns.”

    This is just wrong; businesses wouldn’t be holding cash, if deflation wasn’t making that cash worth more. The Law of Supply and Demand is just as valid for Money as any other product or service. The Risk and Return on Investment of holding cash, is clearly the winning move for most businesses at the moment. If all that capital could find a higher return elsewhere it would have already gone there and wouldn’t be sitting in banks drawing little or no interest. Ask yourself this question. Would these businesses be holding all this cash in an inflationary environment? No, they would already have used it to buy back their own stock, or invested it in a profitable opportunity. But they don’t see anything more profitable in a deflationary environment than holding it as cash. As for Facebook, they may have done something strategic, or they may have just made a mistake, I don’t know. What I do know is that this is no Bubble, as you don’t see any other businesses doing anything but holding cash, so cash must be getting them the highest return.

  • Mick The Reactionary

    @Jacksonian Libertarian:

    “businesses wouldn’t be holding cash, if deflation wasn’t making that cash worth more. ”

    Kindly back your assertion with some facts and data.

    Try to show deflation (Real Estate excluded) for the USA where official inflation is 3-4% and food and energy are in double digits.

    Or you can follow the storied tradition of Via Media of simply waving your hand as substitute for data.

  • Kris

    [email protected]: Without endorsing your thesis, I note that the following could be used as corroborating evidence: some companies with large cash reserves (eg Google) are selling bonds.

  • Ellen

    A superb article, as always! What you’re describing with venture capital is an overall issue with capitalization… it is difficult for a small software business with a genuine plan for profitability to get investment capital, because they are unlikely to return that 5x or more multiplier with a fast acquisition. It doesn’t matter that they would be a profitable investment… the problem is that they would not be an insanely profitable investment.

  • Excellent points, Professor Mead. Many of us have been saying for years that the crisis before us is primarily one of solvency, not of liquidity.

    The never-ending attempts of the USA and the EU to cover up this reality with printed money will only lead to more bubbles and stagflation. We desperately need real leaders who can show voters a better way.

  • [email protected]: I think you need to take a closer look at Professor Mead’s post. He’s noting that asset inflation is happening in some classes while asset deflation occurs in others. That’s a classic consequence of trying to address solvency issues with excess liquidity.

    And it creates a great deal of turbulence in global markets. Leading businesses are struggling to “read” where the economy is heading. They know that the stock market is very volatile, so does buying back stock really help them right now? How will QE3 and/or the expiration of the Bush tax cuts alter the existing dynamic? How will the coming crises in Europe affect demand for their products?

    The situation is not as simple as you’d make it seem. Businesses are holding on to cash because it’s rough out there, and they may be needing that extra dough sooner than we’d like to think.

  • Uncledave

    Why not just fill one pool with $50 bills?

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