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Another Bubble?

 

Dotcom Bubble 2.0

Remember that crazy dotcom bubble in the late 1990s and the huge bust that followed? It looks like we’re about to sit through the same movie all over again.

That’s what Fred Wilson, a well-known venture capitalist, has been saying lately. Wilson, who runs Union Square Ventures, a New York–based VC firm, says he sees “storm clouds” on the horizon, and he worries that we might be headed toward another disaster. “When I look at where we are right now, it reminds me so much of 1999 and frankly it scares me,” Wilson wrote recently on his blog. The 49-year-old venture capitalist’s fear is understandable. In 1996 he cofounded a New York venture fund called Flatiron Partners, which did booming business investing in Internet companies—until the bubble collapsed, wiping out a bunch of its portfolio companies. Wilson and his partner pretty much shut down Flatiron in 2001, while still helping to manage some of its portfolio companies that had survived.

Undaunted, Wilson and a different partner launched Union Square Ventures in 2005, and he’s riding high once more, with smart investments in some of the hottest new companies on the Web, including Twitter, Foursquare, and Zynga. Nonetheless, Wilson has grown nervous in recent months. He says too many investors are pouring money into Web-based startups, driving valuations to ridiculous heights. In days gone by, the rule of thumb was that a company with two or three employees would be valuedat $5 million or less. But “today in the early-stage market we’re seeing two- and three-person teams that are getting $30 million, $40 million, $50 million valuations, and I think that’s not right,” Wilson said onstage at a Web 2.0 conference in San Francisco last month…

I beleive that the VCs have gone waaaay off the edge in productivity improvement applications, and in the valuation of the WWW social networking utilities, whose revenue model is at best – tenuous and highly volatile.

Yeah – I tend to agree there will be another meltdown – but we are talking about a really small bubble relative to the dot com meltdown which resulted in 3 million lost jobs, and the fall of dozens of major companies from which we have never recovered.

The only real question is – in an already devastated economy, would this be the straw which broke the camel’s back?

And I am not disagreeing with the Capitalist Maxim the “Greed is good”… It’s just that other old Maxim – “Pigs get fed, hogs get slaughtered” that tends to ring so true at times like this.

 

 

 

 

 

 
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Posted by on December 3, 2010 in American Greed

 

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The Looming Depression – China Meltdown

China’s economic miracle has come with a number of costs. They have largely financed the US economy as a methodology to drive exports extending over $2 trillion in credit to the US to keep economic growth going.

The issue is that despite having 1.2 billion people – less of 10% of China’s manufacturing output is meant for the domestic market. Many of the products are beyond the means of the average worker. This has meant a massive slowdown as the US economy has imploded.

Interestingly enough, just as the US Government has tried to stem the tide with economic stimulus money, and has the ability to not only control the flow of money, but the lending practices of the banks – this has resulted in a massive real estate bubble instead of real economic growth. The precursor to a China meltdown will likely be the implosion of it’s overheated real estate market. There is a ton of inventory on the market, yet prices are still rising – as our own meltdown proves, that is not sustainable forever.

A second hit is going to be the movement of manufacturing back into the US, as both the US Government and increasingly restive public apply serious pressure to industrial and manufacturing companies to help in lowering unemployment. This could also have serious repercussions on the economy of India.

China: the coming costs of a superbubble

The world looks at China with envy. China’s economy grew 8.7 percent last year, while the world economy contracted by 2.2 percent. It seems that Chinese “Confucian capitalism” – a market economy powered by 1.3 billion people and guided by an authoritarian regime that can pull levers at will – is superior to our touchy-feely democracy and capitalism. But the grass on China’s side of the fence is not as green as it appears.

In fact, China’s defiance of the global recession is not a miracle – it’s a superbubble. When it deflates, it will spell big trouble for all of us.

To understand the Chinese economy, consider three distinct periods: “Late-stage growth obesity” (the decade prior to 2008); “You lie!” (the time of the financial crisis); and finally,  “Steroids ’R’ Us” (from the end of the financial crisis to today). Read the rest of this entry »

 
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Posted by on March 20, 2010 in General

 

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