The Great Deflate
Spoiler: the “Bubble” was a Balloon. And it’s deflating.
Note: The below all seems fairly obvious, but given the amount of times I’ve had this same basic discussion over the past several weeks with various different people and groups, I figured it would be worth jotting down, to clarify my own thoughts, if nothing else.In the famous story of The Boy Who Cried “Bubble!”, reporters, bloggers, and everyone in between cries “Bubble!” until they’re blue in the face and everyone else is numb in the ears. And then a real bubble comes along…
This is not, of course, a story. It is what has been happening for the past 20 years or so in the world of technology. Basically every year, many times a year since the last actual tech bubble — you know, the “Dot Com” one — many people have been certain that exuberance in tech is going to end in disaster. The size and shape of this would-be bubble is often different, but it’s always, definitely a bubble. Except, of course, when it’s not.
Perhaps the defining characteristic of a bubble is a propensity to burst. This happened with the tulips. It happened with the housing market. But it still has not happened in the tech world since the aforementioned early 2000s. Sure, there have been drops, such as in 2020 when COVID hit, but that was a macro event that touched everything, including tech. And the rebound was swift. And even furious!
What’s happening right now seems different. The stock market, and specifically tech stocks — but even more specifically, high-growth tech stocks, many of which are newly public, have been a bit of a bloodbath over the past few months. Some of this was undoubtedly caused by sell-offs to end the year to get ahead of proposed tax changes (most of which haven’t actually passed and may not). But it has continued into 2022 as the dirty word “inflation” hits the broader market, while the flip side of the coin, interest rate hikes, come into focus. Stocks are slowly becoming no longer the obvious best way to park your money. Certainly not high multiple stocks. And the end of the “steroid era” of government stimulus is exacerbating all of this as we seem to have line of sight to the end of COVID. Or at least, the end of fiscal measures to counter it.
All of that is to say, the world is going back to normal.
As such, I might suggest that for the 20th year in a row, we’re not going to see a tech bubble burst. Because it’s not and never was a bubble. Instead, perhaps it’s best to think of it more like a balloon. And while those too can pop, they can also deflate over time. This feels like a more apt analogy for what is happening here. The air which had inflated earnings multiples to the Moon in tech is slowly but surely coming out, returning the balloon closer to Earth.
So instead of 10%, 20%, 30% crashes in value in a single day, we’re getting 1%, 2%, 3% dissipating from many stocks nearly every day. The end result is similar, drops upwards of 50% in terms of price and market cap. But again, it has happened over weeks and months, not days.
Just as importantly, unlike the bounce backs that often happen after steep plunges (even if only of the ‘dead cat’ variety), the deflating balloons seem unlikely to magically re-inflate. Certainly not overnight.
Again, all of this feels natural. The market was overheated, but it was for fairly clear (if not exactly natural) reasons as noted above, and with those reasons now floating away, things are cooling down. This is rational.
Private markets (in which I mainly operate as an investor) remain mostly inflated. But that’s just a matter of time. If what I laid out above is true, there will be trickle down effects that are inescapable thanks to the magic of market comps at the growth stage of investing. Which then trickles down to venture stage. Which then may trickle to seed stage, depending on how long this “new normal” lasts. Each of these stages will take months to be impacted by what is happening in the public market. Some savvy investors are making moves to get ready for that now. But they will be countered by the bulls who think all of this will rebound faster — so much so that it may not trickle down…
And it’s tricky because basically nothing has changed for the actual companies whose stocks are sinking right now. It’s just a less voracious appetite to buy earnings further out into the future. The companies, you’d hope, will still hit those earnings (obviously some will not, that’s the game), but the time horizons become less attractive as money can soon be parked elsewhere to make faster bucks. But if you believed in the companies yesterday, there’s no reason not to believe in them today. Again, unless you wanted a quicker buck. Which many did. But many others also are long most things in tech, which probably makes sense given the way and direction of the world.
But these latest equations equal a world where the prices to be paid are just different. They will slowly creep back up over time as companies mature, and perhaps when another balloon inflates for one reason or another. Maybe even sooner rather than later, but it’s hard to see it right now.
All of that is to say, if you were still waiting for some tech bubble to burst, you can probably stop waiting, as the bubble was actually a balloon and it’s deflating in front of our eyes, rather than bursting. It’s less Rest In Peace, Good Times — a correction, of course, also caused by macro events and not a tech bubble bursting — and more just rest, good times. Take a breather.
And yet…
Obviously, there remains real macro risk too. Beyond more COVID variants popping up, there’s the more acute risk of Russia invading Ukraine, which would obviously tank the stock market, as wars always do. Or the possibility of China going full lock-down again to try to stamp out Omicron, which would likely re-impact the already badly impacted global supply chain.
Still, those are shifts that would hit everything. Tech would once again be along for that ride, and perhaps more so because the industry is now the most important one on a number of fronts. But even those headwinds would not alter the fundamentals of the future. Not only did a worldwide pandemic not change the course, in many ways, it accelerated it.
And yet, here we are with the world hopefully emerging from two years of lockdown and now is when the air is coming out of the balloon?
It’s just what air tends to do given enough time. Pressure changes, airflow shifts. It’s natural, but still painful. The pain is just less pronounced than it is dull and steady. But just as with COVID, we may have to live with this for a while.
Of course, the important caveat here is that there can be smaller bubbles even if they’re not the capital ‘B’ Bubble. The world of “Web3” offers us a plethora of options here. Many areas inflating fast enough so as not to be mistaken for balloons. And there’s obviously some risk that if one of these sub-sections were to burst — be it Bitcoin, NFTs, or anything in between — it could have a cascading effect into broader tech. This would be largely narrative driven, but it could impact the venture world substantially as well, with so much capital now flowing into those spaces. We’ll see.
Bubbles do come along from time to time, no matter how sick we are of hearing about them…
Update 1/21/22: Two more takes along the lines of the above worth calling out today:First, Dan Primack is officially calling “top” to the startup valuation peak. As noted above, I think this is correct but hasn’t fully been realized yet, and many rounds are still getting done at insane prices relative to where the public markets are heading. That’s just a natural lag though (and many of these rounds were done months ago, they’re just announcing now), and in hindsight this will likely be accurate.
Second, and more dire, Jeremy Grantham is not only calling “top” to the asset classes discussed above, but to almost everything. He makes a (compelling) case for a “3-sigma” event unfolding — that is, a collapse of U.S. housing, equities, and bonds (and maybe commodities too) all at once. Not just a bubble, but a “Super Bubble”, as he calls it.
This would be the fourth such “Super Bubble”, with the others being the U.S. in 1929 and 2000 and Japan in 1989 (which he suggests the country still has yet to recover from). And there are a lot of rational points here, some backed up by compelling data. And none of it is incompatible with what I’m talking about above — which again, is just noting that high-growth tech stocks, while deflating to “normal” levels, are also not by and large a bubble — but it goes far beyond the narrow segment on which I focus (while specifically calling out insane investor behavior around “meme stocks” and crypto amongst other things). He largely blames the Fed for all of this (related to the “steroid era of stimulus” thoughts I link to above). Worth a read! And also:
