A new era has dawned: there is now a consensus that this is a stock market bubble. We’re back where we were during the last bubble, or the one before it, though the jury is still out if this is February 2000 or October 1999 or sometime in 2007. How do I know it’s not just some intrepid souls on the bleeding edge who are claiming this, but a consensus?
Bubble data keep piling up relentlessly. IPOs so far this year amounted to $51 billion, the highest for the period since bubble-bust year 2000, the Wall Street Journal reported. Of them, 62% were for companies that have been losing money, the highest rate on record. Follow-on offerings by companies that already had their IPO but dumped more stock on the market amounted to $155 billion, the highest in Dealogic’s book, going back to 1995. And throughout, the DOW and the S&P 500 have been jumping from one new high to the next.
It’s even crazier in the land of bonds, where issuers are dreading the arrival of higher interest rates – which have already arrived. And they’re pushing everything possible out the door while prices are still high. So far this year, $911 billion in bonds were issued, also a Dealogic record. Emerging-market bond issuance hit $802 billion, a notch below their all-time record last year, but emerging-market bonds went into tailspin during the summer taper-talk, which slowed things down temporarily.
These ominous clouds have been billowing up on the horizon for a while, but nothing is a bubble until enough people say it’s a bubble. And today, shortly before 10 a.m. Pacific Time, it officially became one.
I heard it on the last place where you normally hear this kind of thing, on KQED Public Radio in San Francisco, on Forum, a local show. Host Michael Krasny was chatting with New York Times writer Nick Bilton about Twitter as part of Bilton’s book tour. This is soft-spoken public radio.
Twitter’s IPO shook up San Francisco. People are waiting for the tsunami of money. Everyone talks about it. And everyone talks about their gift to Twitter. Like all good corporate citizens, Twitter got a huge tax break from San Francisco, and that money is currently being extracted from everyone’s pockets.
In April 2011, the Board of Supervisors voted to give Twitter and other companies that would relocate to Central Market Street or the Tenderloin – not the most polished areas of town – a six-year exemption from San Francisco’s 1.5% employment tax. Twitter had threatened to leave and do whatever, if it didn’t get it. Voilà. Corporate extortion works every time. Only new hires would be impacted. At the time, the gift was estimated to be worth $22 million.
So Twitter moved into its new digs, and the headcount jumped, and salaries went up, and there has been some turnover, and now the gift has grown to $56 million – and continues to grow. Twitter too has become a corporate welfare queen.
But not everyone is happy, given the hoopla of the IPO, the billions involved, and the soaring rents in San Francisco as newly hired employees of startups with no revenues stand in line to rent whatever is available, rent not being much of an issue with their inflated salaries. Like Twitter, these companies are under no pressure to make money. So evictions jumped 38% between March 2010 and February 2013, the last period for which data is available; “Ellis Act” evictions – named after the state law that allows landlords to evict tenants when they want to sell their property – jumped 170%. Housing has been booming!
And people are being pushed out of the city. So on Thursday, as Twitter’s valuation settled on $31.7 billion, residents of San Francisco, who not only have to pay for Twitter’s gift, but are now facing ballooning rents or eviction, demonstrated in front of Twitter’s headquarters. “People over profit,” a sign said. “No to evictions,” another said. Or “$56 million in tax breaks – Are you Twittin’ me?”
This conflict too – between the fake money that pushes up prices, and long-term residents who can no longer afford to live here – is a sign of a bubble. San Francisco has been there before: in the late 1990s. It popped spectacularly.
“Why is Twitter not a total fad perpetuated by yet another financial bubble in speculative tech stocks?” a caller asked Bilton toward the end of the radio show. This sent Bilton off on a tangent, away from promoting his book. There were “bubble companies” that made you wonder “how on earth” they would be “worth so much,” he said.
Pinterest in San Francisco, an internet message board for images with 50 million monthly users, got $225 million in a round of funding that valued the company at $3.8 billion – though it has zero revenues. That a big chunk of the funding came from mutual fund company Fidelity, instead of venture capital funds, raised even more eyebrows. Or messaging app developer Snapchat in LA is stewing over an investment that would value it at $3.5 billion, and it doesn’t have any revenues either.
“I absolutely” – emphasis his – “believe that we’re in another bubble,” Bilton explained. “And it is going to pop,”
Companies like Pinterest with sky-high valuations and no business model or revenues – what are they going to do? Well, they either would have to be sold, which you can’t do easily at these valuations, he said, “or they’re gonna pop.”
That, on KQED, made it official.
I remember very well: in late 1999, everyone knew it was a bubble, and the word “bubble” had become a common term, though strenuously denied by Chairman Greenspan and others at the Fed, and by other official mouthpieces of Wall Street, but those in the market knew. They were just riding the wave, and the wave was too magnificent to get off. Money was being fabricated. IPOs were flying off the shelf, doubling and redoubling. Everyone was planning to get off the wave in the nick of time, ahead of the rest of them. And everyone was happy.
Well not everyone. Not the poor souls who were driven out of San Francisco because they couldn’t afford to live here anymore. Not the folks who lost fortunes when it all blew up. Not the Fed that claimed afterwards that you can’t see bubbles when they’re inflating – which made the Fed look really stupid.
But this time it’s different. Money is being fabricated. IPOs are flying off the shelf. Investors are riding the magnificent wave for as long as possible. And they’re all planning to get off the wave in the nick of time, ahead of the rest of them.
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