Bubble blowers
May 10th, 2008 by Republican By DefaultThere’s a lot to be learned from economic bubbles. Have you ever stopped to think about who it is that actually blows the bubble in the first place?
Whenever there’s money to be made the ‘used car salesmen’ show up trying to get their mitts on some of the cash that’s floating around. Since they’re seldom able to add any real value to what’s happening (no real business skills, no tech skills, etc.) they find places to apply what little skill they do have.
The skill I’m talking about is a combination of emotionally manipulative banter and a lack of scruples. It’s the skills that created the stereotype that comes to mind when used car salesmen are mentioned.
Unfortunately, people with that ’skill’ aren’t restricted to peddling cars for a living. They’ll push any wares that are attractive to or needed by a large and ignorant audience. You’ll find them anywhere that you can find a lot of people willing to buy something that they don’t completely understand.
The Tech Bubble
In the dot com bubble it wasn’t just stock brokers who cashed in on the hype. It was all so new that most people didn’t understand technology or technology markets. They couldn’t tell a solid product from a fad. Sales pukes (as they became known to some of the technology workers who had to clean up the messes) used all of the usual ploys to make a sale that they had learned in other industries. And most of them worked.
A particularly effective ploy was the competition card. They would scare potential customers into thinking that their own competitors were going to get ahead because those companies were using the Web to find new customers. Statistics on Internet usage and buying patterns didn’t support that idea, but the fear was all the salesmen needed.
Unfortunately, when those unwitting customers spent that pile of money on technology that didn’t work like it was supposed to, the company that made the technology benefited from the addition to their sales figures. That, in turn, drove up their stock price. Unfortunately the sales figures didn’t necessarily represent satisfied customers who bought a viable product. The figures represented the results of hype from used car salesmen who found a new industry to work.
It wasn’t always a complete failure. In many cases the products simply underperformed. The car still ran, metaphorically speaking, but it needed a lot of repairs. So they called someone they could rely on to sort out the mess and tell them what they needed to hear, rather than what they wanted to hear. I actually did a fair amount of business with companies that has spent a pile of money on the latest techno-fad and couldn’t get it to work. We were usually able to recoup some of the investment by putting the product to good use. But that’s an expensive way to buy a car.
Quite often the company they bought it from had either gone out of business or were on their way out because of high customer support costs and slipping sales (caused by a lot of unsatisfied customers).
I could list dozens of technologies (and technology companies) that I saw come and go because of this cycle of hype. Most were based on meeting a real need. Some were based on a perceived need that was created by the hype.
When Bubbles Burst
One of the clearest early indicators of a coming failure was a company’s inability to show a clear path to profitability. A simple business principle (that wasn’t followed in the dot com bubble) is that a company sells stock to finance an investment that will produce a profit. But many companies sold stock to finance an idea that might someday be profitable, but they weren’t sure how. Those companies generally find ’seed money’ or initial ’rounds’ of funding from venture capitalists who know what they’re getting into and can afford to lose the money they invest. Instead there were institutional investors (retirement funds, mutual funds, etc.) investing in risky businesses who’s value was based on hype.
I remember talking with a ‘C’-level executive at a Web Development company in mid-1999 about a correction that was coming to high tech stocks. I briefly explained that it was due mostly to the hype of stock in companies that didn’t support the stock price with actual value. His response was, ‘yeah, I think you’re right’. Less than a year later the bottom dropped out.
There are always a few economists and industry experts who speak up early about a coming problem in a booming industry. They are often ignored. Personally, I like to listen to those people no matter how unpopular they may be.
Currently Bursting
Now we’re in yet another bursting of a bubble. This time it’s the so-called ’sub-prime mortgage’ debacle. When money was cheap to borrow and the economy was good the used car sales became mortgage brokers. They found a lot of people who were ignorant of solid business principles and tricked them into buying something that sounded good but might not pay off in the long run.
A few things happened that contributed to the mortgage bubble:
- Money was cheap because interest rates were low. This made people think they could afford a home when they probably couldn’t, or that they could afford a bigger home.
- Ignorance of mortgages and simple issues like ‘fixed’ verses ‘variable’ interest rates left buyers vulnerable to rising interest rates.
- The demand for houses brought on by all of the new buyers caused housing prices to climb. The law of supply and demand was at work.
- Some investors saw an opportunity to ‘flip’ houses or to buy houses to rent out to others.
- This brought more money into the market and the perception of a boom (that probably couldn’t be sustained). The Seattle area suffered from something like this in the 80’s and early 90’s. Housing prices climbed and attracted investors who pulled out when the market stabilized. In their haste to pull out and invest the money elsewhere they dropped their prices (it was all profit anyway). This caused the other prices to drop in order to compete.
- Contractors built houses on spec, which means they built a house that they didn’t have a buyer for. This helped to offset the supply/demand issue, but also left their investment vulnerable to a downturn.
- All of this activity attracted unscrupulous lenders and mortgage brokers who did all they could to exploit the market for their own gain.
- This brought competition to the lending industry which caused even well run companies to lower their standard for lending.
So now we’re picking up the pieces. Congress in considering a bailout of home buyers who bought what they couldn’t afford which in turn will help the lending businesses (and investors) that made money available to people who couldn’t afford it. I think it’s a bad idea. I believe there’s a better way to help people in this situation. But more on that another time.
The Building Bubble That Will Probably Burst
Wouldn’t it be nice to know what the next bubble will be so you can avoid it? I have a pretty good idea of what it is. This won’t be popular with some readers, but think of it as a word to the wise.
The big fad now is investing in ‘green’. Don’t get me wrong, I think we need to be good stewards of the environment, but we need to do so in balanced ways. I don’t think the current approach will prove to be either effective or sustainable.
When you set the hype aside you’ll find that there are respected scientists who don’t agree with global warming hysteria. In my opinion, these are the experts that aren’t being listened to who will, in the long run, prove to be the voice of reason. Even though some say that anthropogenic global-warming and it’s dire consequences are proven scientifically, that is not the case.
A few examples of ‘green’ technologies that are neither green nor sustainable? Fluorescent light bulbs that may save energy but contain mercury vapor that can cause brain damage. Hybrid cars that use batteries that contain toxic materials and can explode in an accident (not to mention electrocute emergency service workers). Solar panels that take decades to pay off with the minimal savings they provide.
It’s hard to tell how long the fad can sustain the added spending that the green industry needs to stay afloat. However, if we face a real and sustained economic downturn (not this over-hyped so-called recession we’re in right now) people will begin trying to save money on their short term expenses. That will probably mean that they’ll buy the less-green products to save money, leaving the green products sitting on the shelves at the store.
I can’t be certain that this is indeed only a fad, that it will end or if it does end when it will do so. Until I know for sure I’m going to keep a pragmatic approach to going green and I won’t be investing in any companies just because they’re green. They’ll have to prove themselves in other ways before I’ll consider them viable.
