I don't normally read Gillian Tett's market insight column in the FT and I would never read the Bank of England's twice-a-year Financial Stability report. But Ms. Tett's Friday column on the report, which highlighted the rapidly growing balance sheets of LCFIs (large complex financial institutions, see chart) closed with the following:
Moreover, a veritable army of bankers keeps telling me that innovation and risk transfer is changing how leverage works - meaning some of the old rules about the credit cycle no longer apply. Some policymakers appear to believe this, too, particularly in Washington. But whenever I listen to these arguments about how we have moved into this Brave New World, I also hear uncanny echoes of the last internet boom. It is hard to read today's report from the Bank and not feel worried. Page 31 - and the chart titled "LCFIs' total assets" - is a good place to start.
Then in today's FT there was a full-page article titled Bubble 2.0 (sorry, subscribers only) which had the following call-out: "Many are relying on the advertising networks of Google and others to monetise the eyeballs they have collected - terminology that was rife during the late 1990s." The article focused on the tremendous amount of VC money available and the endless string of web-video start-ups.
And finally (at least for this post) is the Atlantic Monthly article by Michael Hirschorn titled The Web 2.0 Bubble - Why the social-media revolution will go out with a whimper. Hirschorn cites an interview with Spark Capital's Todd Dagres in the Wall Street Journal in December:
Mr. Dagres begins: Web 2.0 is a bubble for 3 reasons: 1) There is far too much money chasing Web 2.0 deals. Too much money means too many companies getting funded at higher valuations. 2) There are virtually no barriers to entry in Web 2.0 and therefore the ability to develop a unique solution and sustain a competitive advantage is virtually nil. Therefore, it's difficult for Web 2.0 companies to build long term value. 3) There is very little liquidity in the market for Web 2.0 companies. The Dow was recently at a high and still no liquidity. Without liquidity, Web 2.0 companies must rely on acquisitions to achieve liquidity and this will put a lid on the potential exit options and ultimate valuations of these companies. In short, they will be playing a musical chairs game in which there are far too many players and too few chairs.
Bull markets are said to climb walls of worry. The worry seems to be getting healthier and healthier.
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