Everything Keeps Going Up

Aren’t we supposed to be in a bubble, says the media? Why does it refuse to pop? Whether it’s stock prices, web 2.0 valuations, China, or Bay Area real estate, the unending post-2008 asset boom continues with no end in sight.

Those web 2.0 valuations keep rising, especially for companies valued at over $1 billion (unicorns). Uber’s valuation went up another$15 billion this week, on its way to being worth $100-150 billion upon IPO. My opinion, the valuation for the most prized web 2.0 companies, such as Snapchat, Pinterest, Dropbox, Uber, and Tinder, will keep rising until either IPO or buyout. There will be no 2000-like blowup, or at least not for a very long time. While the first internet boom lasted just 8 years or so (1992-2000), the web 2.0 boom, which began around 2004 or so, is still going strong 10 years later, and I see no reason for it to suddenly burst. You look at companies like like Facebook, Twitter, Air B&B, or Uber, which originally were speculative ideas, become juggernauts that have upended the status-quo, creating multi-billion dollar mobile advertising and big data infrastructures. It’s not like these companies are all hype; no, there is massive growth, profits, and market dominance behind these huge valuations. Right now, as part of the bigger is better theme, the best VC strategy is to invest in the most successful of the unicorn companies rather than speculate on the small stuff. Any app company right now that is worth$2 -5 billion can easily make the jump to \$10-20 billion. That right there is a 200-900% ROI in just a year or so.

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Stocks keep going up, too, with the S&P 500 making new highs every week it seems. In nominal terms, this is quite possibly the biggest bull market in US history, exceeding even the 1995-2000 boom. Dubbed the ‘idiot maker‘ rally (for all the supposed ‘smart people’ who predicted its demise), the S&P 500 is now up 200% from the March 2009 lows, creating millionaires out of people who ignored the media’s every attempt to elicit fear and panic to scare people into selling too soon. While valuations are not exactly cheap, with rates forever low, cash has to find somewhere to go. A 1-2% CPI and a 5-year bond paying 1 1/3 percent means that you you need to either buy 10-yr (or longer duration) bonds or stocks to not lose money in real terms. Low rates should not be confused with QE, the later which ended awhile ago, which is in response to people who insist that the rally is only due to QE. In spite of the unprecedented magnitude of the post 2008 asset boom, the fed has the luxury of keeping rates low due to the global ‘flight to safety’, as well as other factors. Ultimately, unlike in 2000, 2008, or 2011, there is no compelling reason for stocks to go meaningfully lower, and we’ll probably see the DJIA go to 25,000 with a couple years. Of course, I could be wrong, but I seldom am.

Especially since 2008, we’re also in a STEM/high-IQ boom, of people of above-average aptitude earning more money than everyone else, whether through wages, better employment opportunities, rising valuations for web 2.0 and other start-ups, or investments like stocks or real estate. Like the prior two examples, this boom too will continue for a loooong time. Meanwhile, real wages for people not in STEM have tended to lag inflation. Not all STEM is equal though, and computer science, math, and engineering have seen the biggest inflation-adjusted gains. An advanced degree in computer science pretty much guarantees good employment. Coders in the Silicon Valley can easily command a solid six-figure salary, and many are becoming wealthy overnight after their company gets bought out or gets slapped with a super-high valuation. In today’s economy, being smart is the gateway to prosperity and success, albeit it’s a narrow gate since few are smart enough to become good coders.

And last but not least, there is the Silicon Valley/Bay Area housing boom, now in its third year. Homes prices in that region just keep going up, and will continue to do so. Prices in the most coveted areas are up another 10-20 YOY, AFTER 20% YOY gains in 2013. Homes are being sold at a huge premium above asking price in all-cash bidding wars between high-IQ foreigners, techies and private equity. So much for housing being a poor investment, as some fools insist it is. It’s all about location and a little of timing. Smart people keep making money in real estate year after year, defying the losers who call it a bubble.

To quote a famous economist, markets can remain irrational longer than you can remain solvent. But we’re in a special situation where markets are rationally high.