The Airbnb mania gripping Silicon Valley and Wall Street has me worried

When interest rates are low and capital easy to come by, the valuation of assets can be out of kilter. Take Airbnb. Last week it was floated on the US stock market. The company was hoping that the shares might trade at about $60 (€49) a share. This week it was traded at just shy of $140 a share. Twice what the company valued itself at.

Earlier this year, as travel stopped, people in the know suggested that the company should trade below $30 a share. Today this company, which has yet to make a profit, is valued at $85 billion. Remember that behind all the hype, Airbnb can’t make a profit, so how can it have such a huge valuation?

It’s not just Airbnb. Consider Tesla. This company is now valued at $600 billion. This means that Tesla, a battery company with a car chassis dropped on top of it, is now worth six times more that General Motors and Ford combined.

Maybe Tesla will hoover up the electric car market in the future but it’s more likely that these valuations are more a reflection of stock market frenzy, where companies that can’t make money are benefiting from “hope” value rather than real value. It may be the case that Airbnb will continue to expand its revenues by 30 per cent a year (as it was doing pre-Covid-19) and eventually make the sort of profits that $140 a share require, but it’s still a punt, not an investment.

However, as the great economist Joseph Schumpeter noted “innovation is the outstanding fact in the economic history of the capitalist society”. And Airbnb is an innovator.

Its innovation is not some wonderful piece of technology, like Tesla’s batteries, but the understanding that property is expensive and underused, so people will rent out their places to those who fancy a cheaper option than a hotel. Hardly rocket science, but innovation is not about invention; it is about joining existing things that people never put together before. Critically, it is also about making these new products commercially viable.

Innovations have always excited speculators as distinct from investors. Speculators are always first. They are the pioneers of capitalism; investors are the settlers. Speculators want to capture the gains that derive from disruption. They are interested in the spectacular.

The investor, on the other hand, is concerned with the return on capital and a steady income stream thereafter. The investor doesn’t like the disruptive moment, preferring the state of the world as it returns to normality or equilibrium, allowing stable returns to accrue. The speculator is interested in the change itself, while the investor is interested in the world after the change. This is why the speculator loves what’s new, exciting, innovative.

Down the ages, the speculator has loved technology. In the Ireland of the 18th century, Dublin’s coffee houses became hotbeds for “canal mania” – one of my favourite economic parables, which Airbnb’s flotation makes relevant once again. Most of those who put money into canals lost their shirts, particularly on the Royal Canal, which ran over budget and took far too long to build.

Canal mania gripped England from 1767, when the Bridgewater Canal was completed around Manchester. Over the next 20 years, more than 1,000 miles of canals were dug in England.

(The term “Irish navvies” comes from this building boom. Because the men were digging canals, sluices and watery locks, they were constantly in water and became known as navigators rather than labourers.)

In the beginning the canals yielded huge profits, attracting the speculators. The canals promised to open up the country, massively reducing the cost of transporting goods and the time it took to get goods from one city and town to another. Shares in canal companies soared ever-skywards.

In 1790, at the height of this mania, work was begun on the Royal Canal, funded by Ireland’s landed gentry. Ahead of the Act of Union, Dublin was a cosmopolitan port city, and if the produce of the country – its agriculture – could get from inland to the coast more quickly and more cheaply, it would be a licence to print money.

The speculators piled in, excited by the prospects of a quick shilling. But like all manias, this one peaked, and, in 1791-1792, the shares crashed back to earth. The trigger for this was the beginning of the revolutionary war in France. The French revolution, with its message of democracy, equality and liberty, terrified the aristocracy, burst their bubble and caused them to reassess the future.

By 1794 the Royal Canal Company was bankrupt, digging had stopped, and the canal was not finished until 1817, leaving investors – who, unlike the speculators, didn’t trade the market – nursing huge losses.

By 1825 only one in five canals throughout Ireland and Britain was paying investors a dividend, and even that dividend was lower than the rate of interest of UK government bonds.

Railway mania

Less than ten years later, technology rendered the canals obsolete commercially, when construction of the Dublin to Kingstown (Dún Laoghaire) railway started in 1833.

Canal mania was replaced by railway mania, and the speculators were in again. The railway promised the same as the canals: cheap transport, speed and a miraculous new mode of linking cities. Yet again, the link between new technology and the heady speculator drove share prices way above anything other than “hope” value.

Railway terminology even seeped into our language, with people “getting up a head of steam”, and railway time completely altered our sense of distance. Real manias tend to be cultural rather than merely financial.

Over the next two decades, fortunes were made and lost on railway speculation and investing and, following one of the biggest financial scandals in Irish history, culminated with the suicide of John Sadleir, an Irish Parliamentary Party member and ally of Charles Stewart Parnell.

Scandals constantly follow booms and manias. There is always someone, somewhere operating a scam, inveigling money from excited punters, giddy on the promises of wild returns and lavish profits. We saw it here in the housing boom. We see it everywhere, from bank manias to housing bubbles, from tulip frenzies to stock crashes. This doesn’t mean that technology doesn’t change the world, it just means that betting on it is tricky.

A journey on the Dart – on the lines first laid in 1833 – often reminds me of the canal and railway manias of centuries past. I travelled that line again this week, and as I scrolled through the news of the Airbnb tech mania gripping Silicon Valley and Wall Street, I couldn’t help wondering how it would all end.

Italy has done us a huge favour by defeating Germany on monetary policy

While we are still convulsed over Phil Hogan, the EU has moved on. This week, the powerful head of the German Bundesbank, Jens Weidman, sought to reframe the battleground for 2021 and beyond.

The future of Europe will be a struggle between the North and the South and, more specifically, between Germany and Italy, Europe’s two manufacturing powerhouses.

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Nobody’s lending. Nobody’s borrowing. Here’s what to do

Another lockdown will destroy the economy unless we change direction. It’s really that simple, and it is because the banking system no longer works as a distributor of capital in the country.

Our Government and ECB have approached the crisis in the same way: cutting interest rates to zero to coax businesses to borrow and to encourage banks to lend. As a result, banks are the critical intermediary between the Central Bank, the State and the economy.

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There is a vaccine to immunise the economy. It’s the bond market

During the first great agricultural revolution (10,000 BC to 5,000 BC), when humans moved from being hunter-gatherers to farmers, settling in small villages and ultimately towns, the world human population is estimated to have increased from four million to five million.

In the next 5,000 years, from 5,000 BC to the birth of Christ, the human population is thought to have increased from five million to 100 million. In this second 5,000-year period, the human population increased approximately 25 times whereas in the first 5,000-year period, the increase was marginal. The reason for this disparity is that the earlier five millennia of domestication were the most lethal years in human history.

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It is time for a major property reset

Pepare for carnage in commercial property. In the past few years investors have piled into the Irish commercial property market, with a particular focus on Dublin. Initially, it was international players but latterly, as is always the case, Irish financial firms have been putting Irish investors’ and pension fund money into the mix, adding to the frenzy.

By the beginning of this year, average annual Dublin rent was €673 per sq m, placing Dublin just above Geneva and Milan but below London, Paris and Zurich. It ranked as the fifth most expensive city in Europe.

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John Hume understood the power of credit

In Mickey Bradley’s book Teenage Kicks: My Life as an Undertone, the bass player reveals that without Derry Credit Union, set up by John Hume in 1960, The Undertones might not have happened.

On June 15th, 1978, The Undertones had blagged their way on to the bill of a battle of the bands in Belfast, hosted by the legendary Terri Hooley of Good Vibrations record shop. Belfast was home to Stiff Little Fingers, whom The Undertones had just seen play in Kelly’s of Portrush. SLF had released the highly charged political single Suspect Device under their own record label and had just signed a new deal with the most happening independent label, Rough Trade. For the Derry boys, Belfast was big time.

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The State can finance everything for nothing – if it wants to

The Irish summer is hard to love. Walking towards the Twelve Bens, above Roundstone village on the bog road, beaten by torrential rain coming at you sideways, mightn’t be everyone’s idea of the perfect holiday.

In fairness, there’s something comical about paying for such a spiteful drenching. The late July temperature hits a sizzling 13 degrees, away from the wind.

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How Covid-19 could change Lahinch and Ranelagh for the better

The July stimulus plan announced by the Government this week is a step in the right direction. Expect more because the economic heft needed to lift the economy out of this slump will be hindered by coronavirus.

In normal recessions, the recovery emerges slowly as people become more confident, looking forward instead of backwards. An iterative process, this recovery is a step-by-step movement, like climbing a ladder, looking for the next rung. Confidence builds, one small decision at a time. We edge upwards. True escape velocity is only achieved when consumer spending – 60 per cent of GDP – kicks in. Without consumer spending, there is no recovery.

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Apple decision shows Ireland is not a tax haven

Whether they be city states or countries, all jurisdictions that experience growth rates and increases in prosperity that, for a time, dwarf those of their neighbours tend to have deployed an innovation, a resource or a policy that gives them a unique economic advantage.

For France, that policy might have been mass and brutal colonialism in Africa. For Holland it could have been the wholesale plunder, at gunpoint, of the natural bounty of Indonesia and Borneo. For Belgium, early 20th-century wealth came with the gruesome hacking-off of the hands of men, women and children in the Congo in order to force the enslaved African population to produce more rubber.

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