November 4, 2013
Last week was a tale of two economies. One is beaten down, depressed and contracting; the other is upbeat, optimistic and expanding. But be warned because, in a few short years, the former will be copying the latter and the latter will be imitating the former. That’s the way it goes. Investors who put money in selective banks now will do very well, while those who chase the fashionable chimera of companies allegedly ”worth” billions but without profits will get creamed.
Contrast the effervescence of the Dublin Web Summit (which was a brilliant success, hats off to Paddy Cosgrove) with the dejection and bleakness in the banking sector. The high-tech sector is roaring ahead, while the local banking sector appears to be mortally wounded.
Many people are making the mistake of extrapolating today’s realities out into the future and suggesting things go in straight lines. We hear that the smart money is all in tech, financing the dreams of a new generation, and supposedly it is only dinosaurs who remain in old businesses like banking and local financing of basic industries.
Today, I am going to be deeply unfashionable and argue that the opposite is the case. The world doesn’t work in straight lines; rather, it goes in a cycle and is more of a pendulum than an arrow.
Common sense should tell you that when you see a man arriving at a summit in a sports car, fawned over by a political leader, and entering the arena to the tune of James Bond, your critical faculties should not only not desert you, they should be sharpened.
When he tells a rapt uncritical audience of believers that he is going to colonise the universe with his and other people’s money, you should become very worried. In fact, these are moments that will be looked back on as evidence that this industry – or at least a large part of it – is completely mad.
The tech bubble has its hipster companies that make no money, yet are being bought and sold for billions; everyone is cool, young and almost evangelical about the future but, financially, it is a very dangerous place.
On Planet Tech, everything that glitters is potentially gold. Billions of dollars are being pumped into follies that are attempting to change the world, sometimes with little compelling business reason.
Last month, I was at a tech conference on the west coast of America, and it reminded me of being in a room with the Moonies. Everyone was a believer; everyone was without an element of doubt that technology could change the world for the better. Privacy was a thing of the past and an open-all-day, never-switched-off connected world could only be positive. This may or may not be true. It remains to be seen.
When you stand back and look at the industry and its epicentre, Silicon Valley, you see that some people have simply made too much money too quickly and don’t know the value of the stuff. Equally, others who are getting into the game now in the expectation that they, too, will make billions of dollars don’t know the meaning of risk.
Historically, this combination of recently rich people who misdiagnose luck with genius, lots of easy money and nonchalance when it comes to risk, tends to end very badly.
As always in a bubble, those in the middle of it don’t know it is a bubble, and their enthusiasm becomes more and more delirious as each company is floated and more easy money is made.
This bubble is made even more inflated because in this connected, linked world where instant communication can hype things up instantaneously, we see the hype machine driving the hype machine. Twitter and Facebook, both investments – or soon to be investments – are themselves driving up their own value by being the chief propaganda platform for their own bubble.
All the while, lower and lower interest rates are driving cash out in search of the next big thing and, in a world awash with cheap money, it is easy to lose sight of the basics, like profits and value. The sheer momentum of the bubble bulldozes any critical thinking.
Billions of dollars will be lost in this tech industry in the coming years.
When you have new trendy on-line magazines, eulogising entrepreneurs as unique ”visionaries” rather than simply as very creative, hard-working, lucky people as we have had in every generation since the beginning of time, you should pinch yourself.
The modern tech industry, financed by its seed, private equity investors and investment banker executives, who are themselves beneficiaries of the same bubble, will lose fortunes as they chase valuations higher and higher.
But you wouldn’t think that today.
It is a bubble to beat all bubbles, and more money will be lost in that game than almost any other bubble in history because more money has gone into it that any other similar episodes.
Sure, there will be some winners. There are already many winners and, when our neighbours get rich, we tend to lose some of our financial judgment. The more people who are cheerleading the bubble, the longer it will last; but nothing lasts forever.
In contrast, when you see banks closing down, large chunks of debts being written off, huge mortgage arrears and an industry almost afraid of its own shadow, it’s worth considering that things will only get better for this business.
Over the next few years, the banking business will recover. Not the speculative nonsense of the boom years, but – let’s hope – the slow, unimaginative business of lending to people who want to invest and taking deposits from those who want to save.
Just as the collapse of this sector was inevitable after the bubble years, so is its eventual rebirth and rejuvenation. A country needs a banking system and so, at some stage, there is money to be made – and inevitably this will attract new entrants and new investment. The banking departures we saw this week were more a result of the sins of the past than a reflection of the opportunities that will exist in the future.
In contrast, giving billions to people who want to fly close to the sun, no matter how brilliant they are, will end, like Icarus, in a dreadful crash landing.
David McWilliams hosts Kilkenomics next weekend. Tickets at kilkenomics.com