Saturday, December 4, 2010

Are We in a New Silicon Valley Bubble?

Dealbook reports:
Less than a decade after the dot-com bust taught Wall Street and Silicon Valley investors that what goes up does not keep going up forever, a growing number of entrepreneurs and a few venture capitalists are beginning to wonder if investments in tech start-ups are headed toward another big bust.

The chief evidence, according to industry experts and analysts, is the way venture capitalists and established companies are clamoring to give money to young companies, including those with only a shred of an idea. They are piling into me-too start-ups that imitate popular Web companies that already received financing. Companies that involve social shopping, mobile photo sharing and new social networking are finding it easy to attract investors because no one wants to miss the next big thing...Fred Wilson, a prominent venture capitalist, said he had watched the trend accelerate over the last six to nine months. “I am seeing many more unnatural acts from investors happening,” he said in a recent blog post. He attributes it to competition among investors eager to participate in popular young start-ups. And he notes, “I have never seen phases like this end nicely.”

No one really knows if there is a bubble until after one pops. Nevertheless, there are many signs of froth. For example, enthusiasm for closely held Facebook shares has run so high that private investors are trading derivatives of it.
Two things are happening here.

First, the extreme desire to hold cash that was present during the financial crisis is melting away. The sexy industries, such as those in Silicon Valley, are going to be among the first to benefit from the unthawing.

Second, and a more recent factor, is Bernanke's money pumping. It's starting to enter the economy, and Silicon Valley, as a capital goods sector, will be among the beneficiaries of the pumping.

Is it a bubble? To the degree it's fueled by Bernanke mad money printing, absolutely. There's a lot of creative stuff going on in Silicon Valley, but the Fed's money printing distorts, to the upside, how much real investment money is available to fund this creativity.

How long will the bubble last? For as long as Bernanke continues to print sizable amounts of new money. Until he stops, the boom will accelerate.

Botton line: The activity in Silicon Valley should be considered a very important signal that new money is, indeed, entering the economy very quickly now. It is likely to be very price inflationary down the road. The Princeton crowd, Bernanke and Krugman, along with other Keynesians are going to have a very difficult time explaining the growing price inflation that will be obvious to everyone in 6 months or so.


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