This post originally appeared as my closing argument in our debate in The Economist.
Technology stocks currently trade at an all time low vs. industrial stocks based on forward P/E ratios. Nonetheless, the esteemed and brilliant Mr. Blank argues that we are in a technology bubble.
When I pointed this out, Mr. Blank modified his argument to say that the bubble would only be seen in the new companies. This is odd, because in the previous technology bubble of 1999-2000, the veteran companies such as Cisco, Sun, and Oracle experienced meteoric rises in their share prices.
Nonetheless, let’s look at the prices of the new technology IPOs that Mr. Blank highlights in his argument:
LinkedIn—Mr. Blank’s poster child harbinger of the bubble is down 30% since Mr. Blank quoted its stock price.
Pandora—Is down 17% since its IPO.
RenRen and YouKu—The Chinese Internet companies that Mr. Blank referenced are down more than 50% and 25% respectively.
So, this is a technology IPO bubble in which all of the bubble companies are going down in price. Perhaps we should rename it the Incredible Sinking Bubble.
Of course, Mr. Blank’s primary argument is not logical, but rather, it’s psychological. He unspools a captivating theory with four psychological phases: stealth, awareness, mania, and blow off. He follows that up with a personification of investor categories: Smart Money, Shills, Marks, and True Believers designed to create empathy for the poor victims of the technology bubble and portray the others as sophisticated con men poised to take advantage of “your neighbors, parents, or grandparents.” I find these arguments to be most appropriate, because bubbles are not logical. They are, in fact, psychological.
Specifically, before a market can enter a bubble, the bubble psychological precondition must be met. The precondition is the same for all bubbles: the overwhelming majority of the population must believe that prices will continue to go up. In essence, in the great balance of fear and greed, there must be overwhelming greed and a vacuum of fear. Otherwise, prices will remain logical and no bubble will emerge.
Has the psychological precondition been met for the great technology bubble of 2011?
It turns out that there is plenty of fear in today’s financial markets in general and in the technology market in particular. Stocks are at their lowest point in two decades and technology stocks are at an all time low vs. industrials. I imagine the readers of the Economist are leading thinkers on these matters whose advice and inclinations will likely be followed by the larger population. As of this writing, 68% of the people who voted in this debate believe that we are already in a bubble. If 68% of Economist readers and their followers do not believe that prices will rise indefinitely, then it stands to reason that prices won’t rise and, low and behold, they haven’t. We should not be surprised by the Incredible Sinking Bubble, because it’s not really a bubble at all. In fact, it’s just the opposite: the balance has swung so far to the fear side that people believe we’re in a bubble even though we are in a boom.