A Correction in Silicon Valley Will Send Out Shockwaves

By Jared Dillian, Mauldin Economics:

I love technology, and in spite of my bearish bent, I am a huge technology optimist and futurist. I was foaming-at-the-mouth bullish on Facebook back in 2008, when it was not yet public, at a $20 billion valuation. I said it would someday be worth $100 billion. People threw rotten eggs at me. It is now worth twice that.

I said it would be worth a trillion. It’s not there yet. Back then, in 2008, in the middle of the gosh-darn financial crisis, people were already talking about the bubble brewing in Silicon Valley.

Seven years later, I think that is a more reasonable discussion to have.

Opulence

But it’s hard to know where to begin.

Let me start by saying the level of opulence in Silicon Valley has far exceeded what was present in the Bay Area 15 years ago. The developers with the $350 ripped jeans and $125 flip-flops have been around for years, but this is different.

Check out San Francisco Magazine’s description of the food court at a well-known tech company:

There’s a produce section that’s forging farm-direct relationships. A whole-animal butcher who makes bone broth in-house. A fish counter that sources its own fish with the help of the sushi bar. Which—by the way, there’s a sushi bar and an oyster depot. Four Barrel coffee and Blue Bottle coffee. The obligatory Project Juice kiosk. A cheese guy. Tapas. Noodles. A wine shop. Ice cream. Pizza. Tacos. A salad bar. A bakery.

You might be deceived into thinking this is normal, especially in San Francisco where you are occasionally forced to dodge sidewalk poop (there’s an app for that), but it’s not.

The real estate market, too, has gone parabolic. See for yourself: pull up Zillow and cruise around Palo Alto to see the two-bedroom ranch houses going for $3-4 million.

But these sorts of things are never reliable signs of a top, because stupid can always get stupider, and it usually does. As I wrote in last week’s piece about trend following, it’s not productive to try to top-tick things anyway. But if Silicon Valley has a meaningful correction, it’s going to send shockwaves throughout the economy.

What Cycle?

For starters, seven years ago, people were saying California was ungovernable. And bankrupt. This was back when muni bonds had a bit of a scare. People really thought that California would default.

Fast forward to 2015, and Jerry Brown is a hero—even being mentioned as a presidential candidate. But anyone who knows California knows that state revenues are almost entirely dependent on capital gains. All it takes is a few WhatsApps and Moonbeam can dream big about $70 billion snail rails.

I believe that someday we will have self-driving cars. And I believe that Uber and Airbnb will start a revolution. And I believe that Elon Musk will one day get us to Mars, and that all cars will someday be electric. And I believe in Moore’s Law for solar and that someday we will render conventional utilities completely useless. And I believe in Moore’s Law for the human genome, too.

I believe in all of these things. But I also know that there are people in their early twenties who are getting impatient that they’re not yet decamillionaires, that seed round valuations are getting so big that venture capitalists are doing “pre-seed rounds,” and that these obnoxious tech CEOs behave like oracles, telling us how we should run our lives.

The technologists believe in the future, but they don’t know what the financier knows: that there is a cycle and all of human progress is three steps forward, two steps back.

The tech people have forgotten that there is even a cycle at all.

Some of them never knew. In fact, most of the Silicon Valley folks weren’t old enough to be working during the last big bear market 15 years ago that wiped everyone out. Think about that.

The technology guys take a very dim view of the Wall Street guys with their Ferragamo ties and bold pinstripes, and yes, the Wall Street guys tend to run from one side of the boat to the other. But what they know that the rest of the world doesn’t know is that overinvestment leads to malinvestment, which leads to a bear market to work off the excesses.

Just look at the energy sector, for example. In the just-released issue of Bull’s Eye Investor, I recommend to my subscribers a play on an industry that hugely benefits from the protracted slump in natural gas.

A client of mine runs a very successful hedge fund in San Francisco. I don’t want to speculate about his net worth here, but let’s just say it’s a lot. He tells me of cocktail parties he is invited to, where he’s easily the poorest person in the room.

If you want to know where the next bear market is, look around at the people who are enjoying unimaginable wealth. Mr. Market has a habit of correcting things over time.

My guess is that you won’t be paid $200K/year to drive trucks in North Dakota for much longer. The best thing about capitalism is that everything is temporary. The last time around, people had the stock, could have sold it, and didn’t.

It will be the same this time. They will ride it all the way to the bottom. It’s human nature. Everyone gives the GoPro guy so much crap for stuffing everyone with stock, but maybe he knows something the rest of us don’t.

Nothing lasts forever. By Jared Dillian. The article The 10th Man: You Can’t Stop Progress, Supposedly was originally published at mauldineconomics.com.

Silicon Valley is famous for bringing in IT workers from other countries – often to replace higher-paid American workers. And this is how Congress caved to the corporate search for cheap labor. Read…  American Workers ‘Roadkill’ for Lobbyists, Immigration Lawyers

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  9 comments for “A Correction in Silicon Valley Will Send Out Shockwaves

  1. Frank
    Feb 12, 2015 at 6:22 pm

    Lots of memories. I used to walk past the Lion and Compass restaurant on Fair Oaks Avenue in Sunnyvale and marvel at the classy cars the valets were parking at lunch time. That was the place where the big deals were being made right before the dot-com crash. I left Silicon Valley, and California, in 2003. There is so much irrational exuberance out there now that mobile homes are selling for $300K in parks that charge $1,000 or more monthly space rent.

  2. Michael
    Feb 12, 2015 at 8:54 pm

    For those of us that called this valley home before the stupidity, I pray the internet idiots and H1B visas fail and fail soon.

  3. NotSoSure
    Feb 12, 2015 at 10:17 pm

    I find it really weird that the economy “seems” more “resilient” with more people unemployed that not. There’s the oil shock and the clearly slowing worlds economy and yet I haven’t seen anyone declaring huge losses. A lot of countries seem to be on the brink and yet they seem to be holding on to the edge just fine. Is the Fed secretly bailing out everyone?

    • Petunia
      Feb 13, 2015 at 3:24 pm

      There is a house across the street from me with 3 fairly new cars in the driveway and 3 generations living together in a 3 bedroom house. Their household income may be relatively high but only because the economy is forcing them to live in one house. It is not the only house on my street like this. This may be why the economy seems resilient because the unemployment is being masked by households merging.

  4. Vespa P200E
    Feb 12, 2015 at 10:40 pm

    Agree that this is not your father’s SillyCon Valley.

    The halcyon days of boom that ended badly in early 2000 was mostly hardware not to mention SillyCon Valley gets its name from chip and hardware business. Roll forward 15 years and the valley’s stalwart names like Cisco, HP, Sun (long gone and cheaply acquired by Oracle), IBM, Intel (plus host of other chip makers), Agilent, Applied Materials (plus other chip equip makers), Seagate/WDC, etc., have been and still are busy trimming payrolls. Then came the software companies and social media coots like Fakebook which spawned more of sharing economy app crazed start-ups by kids who never even ran a lemon aid stand (P&L – gee what’s that?).

    And we have these young 20-somethings who think the good times and easy VC money will last forever not realizing that tech biz is cyclical.

    I recall landing at SJ airport back in 2002 at depth of job loss in SillyCon Valley and got into a cab driven by recent laid off engineer amazed that MSFT (then my employer) scathed thru the downturn and was hiring instead of RIF.

    Yep we learn history so as to repeat it for the naive schmucks…

  5. williamwilliam
    Feb 13, 2015 at 11:21 am

    I just flew on a plane out of San Fran with a bunch of young Facebook employees. I had to show the one sitting next to me how to turn on the reading light.

    • Petunia
      Feb 13, 2015 at 3:28 pm

      He/she was obviously a software engineer. Switches are a hardware problem.

      • williamwilliam
        Feb 14, 2015 at 2:32 pm

        I overheard the conversations are their well-paid friends quitting jobs to return to school, before their loans were paid off. Some of their friends of course quit the gravy-train to start their own business. Much of the conversation was people being reckless with their careers since times are so good right now.

  6. Julian the Apostate
    Feb 14, 2015 at 1:09 am

    Ah youth. We all figured we’d be in flying our cars, and have colonies on Mars and Luna. Recently rewatched ‘Back to the Future 2’ partially set in 2015. Had a good laugh.

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