The Bubble Question

> It’s hard to sustain a bubble for four years.

Says who? As Wilson observes, "Since the financial crisis of 2008, policy makers in the developed world have kept interest rates at or near zero. They have flooded the market with cheap money in an attempt to heal the wounds (losses) of the financial crisis and incent business owners to invest and grow their businesses." It's kind of amazing that he doesn't see how years of unprecedented coordinated central bank action could drive and sustain bubbles.

> It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low.

As an investor, there is no doubt that DFTF and BTFD has been very profitable, but the implication that a weak global economy and low interest rates is essentially responsible for sustaining the good times should be disturbing to anyone with exposure to the venture capital asset class given what it is supposed to represent.

Incidentally, I think it's somewhat amusing that VCs are asked the "Are we in a bubble question?" in the first place. When you ask market participants who can only play the market in one direction using a single asset class, you tend to get the least insightful answers in my opinion.

This is pretty spot on. We in the SFBA don't think about rates much but in a past life it was all I did. The moment the markets price in a long term expectation of rates rising, a lot of the current behavior we are seeing (eye popping salaries/valuations/home prices/rents) will correct themselves. It won't mean the businesses are bad - just that they're priced less richly. Until then, they are making hay while the sun shines and they're probably wise to do so.

Aren't a lot of those levels "sticky"? I could certainly see rate of increase going to zero very quickly, but actual decreases in salaries, leveraged assets like homes, etc. are a much bigger step.

I think Fred is not telling the entire story with this bubble question/explanation. From a macro perspective I personally don't think there is a bubble, part of the rationale is explained in Fred's post.

What I think Fred is avoiding is the company-specific micro-view. In that case, I think "yes", many late stage startups seem to be over valued, just by applying Fred's yield logic (and growth-risk accounted for). Zynga was one of those companies (and obviously) we never heard how overpriced this was at IPO from Fred.

The valuation of these over valued startups seem to be driven by (i) increase in capital/competition from funds, (ii) eagerness by public markets to jump on the tech/startup bandwagon, and (iii) unrealistic "believe" that double-digit growth is sustainable for years to come.

The Eurozone is looking at mild deflation, and it will do a lot of damage. Deflation in the US is nearly impossible, because the FED will just purchase assets until the problem of low inflation goes away.

Deflation in the Eurozone will be bad mainly because it will make the personal and public debts of the debtor nations unbearable. Not because "money will evaporate very quickly".