How to Avoid the New Tech Bubble

James Juliano Insights

The Nasdaq recently reached its year 2000 highs, and there is only one thing investors need to know; There is NO bubble in public technology companies.  Billionaire investor and businessman Mark Cuban recently made headlines proclaiming that the current “tech bubble” is far worse than the one in 2000. His article is well worth a read.  We both agree and disagree with him.

Why This Tech Bubble is Worse than the Tech Bubble of 2000 by Mark Cuban

Cuban is right about higher risk in private technology markets due to lack of liquidity. Cuban says, “the only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity.” We agree that the SEC made liquidity dead for smaller investors in private technology, but we would not stop there.

The entire industries of private equity and venture capital are mostly illiquid. Investors in these types of deals usually incur large lockup periods on their capital and cannot exit or liquidate position as they could if they were trading equity shares of a publicly listed Nasdaq company. Let us be clear, we do not dislike or disapprove of either private equity of venture capital investments. Both PE and VC are hugely important for funneling the seed corn of capital into the companies and jobs of tomorrow.

What we do find harmful is that PE and VC have been labeled as “asset classes” to a generation of investors. They are not asset classes. Think of private equity or venture capital as investment vehicles or “wrappers” one can use to deploy investment capital. Some common features of both wrappers are risk of losing 100% of your investment capital and little to no liquidity with long lock up periods. Investors must know what they own, and the labels PE and VC do not describe what one owns or the policy risks one is exposed to by owning it. For example, how do you think private equity funds in the energy/oil space did when oil prices crashed? Were those investors invested in “private equity” or energy? We must clearly understand the investment bets we are making and how they are tied to the current and changing government economic policy landscape. We cannot be blinded to what we own through investment industry lingo like private equity, venture capital, angel investment or hedge fund.

Now that we have agreed with and expanded upon Mr. Cuban’s worry about liquidity, let us disagree with him.

We disagree that public market technology prices are comparable to levels back in 2000. While the headlines proclaim the Nasdaq has returned to the 5000 level last seen fifteen years ago, we must be careful about what we are measuring.

Yes, the Nasdaq has returned to year 2000 levels in nominal terms, but what has it done in real terms? What does the new “tech bubble” look like if we measure the Nasdaq in real, gold terms as opposed to measuring it in US dollar terms?

When we strip away the US$ unit of measurement a different story appears. If the US$ were to remain stable (i.e. gold priced in US$ were to remain flat) the Nasdaq could more than quadruple in real terms to reach levels last seen fifteen years ago. We are not saying the Nasdaq is due for a 4X or even 3X return, but there is little case to be made that public technology stocks in the Nasdaq are anywhere near bubble levels of fifteen years ago when viewed in real terms.

Measuring things in US$ terms when the value of US$ is falling hides the truth. What we “know” about the last fifteen years is largely skewed by a US$ that lost a tremendous amount of value from 2000-2011 evidenced by gold prices that rose from $250/ounce to $1,800/ounce. In real, gold terms the Nasdaq is currently nowhere near 2000 levels. Don’t fear the “tech bubble.” Fear poor government economic policies killing this bull market before it even gets started.

 

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