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This Tech Bubble Is Going to Be Much Worse

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Peter Schiff isn’t the only one warning about a new tech bubble. Renowned businessman Mark Cuban just published a commentary that draws comparisons between today’s unsustainable tech explosion and the last dot-com bubble. Only this time around, Cuban warns that the carnage of the pop will be worse.

15 03 06 Mark Cuban

Just as back then there were always people telling you their idea for a new website or about the public website they invested in, today people always have what essentially boils down to an app that they want you to invest in. But unlike back then when the dream of riches was from a public company, now it is from a private company. And therein lies the rub.”

Cuban explains that there are nearly a quarter-million “Angel” investors in the United States. These are individuals who have given money to small tech companies via private investment. Many of them participate in “crowd funding,” which allows small investors to pool their money and essentially become amateur venture capitalists.

Cuban believes all of those Angels are throwing their money into worthless companies. These companies sell the dream of creating the next big app without offering any guarantee of returns on investment. He writes that the vast majority of Angels will never see a cent on their money.

Because there is ZERO liquidity for any of those investments. None. Zero. Zip… The SEC made sure that there is no market for any of these companies to go public and create liquidity for their Angels. The market for sub 25mm dollar raises is effectively dead. DOA. Gone. Thanks SEC. And with the new Equity CrowdFunding rules yet to be finalized, there is no reason to believe that the SEC will be smart enough to create some form of liquidity for all those widows and orphans who will put their $5k into the dream only to realize they can’t get any cash back when they need money to fix their car.

“So why is this bubble far worse than the tech bubble of 2000?

“Because the only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity.”

Why would so many ignore the lessons from the last tech boom? “This time it’s different” is the common refrain. As Cuban has just pointed out, that’s completely incorrect. Peter argues that is the mantra of an investor who simply doesn’t want to look beyond the opportunity of quick profits.

In fact, Peter pointed out on CNBC this week that of course no two bubbles are exactly the same. Unfortunately, that doesn’t stop investors from believing history can’t repeat itself. He says:

It’s never exactly the same. Whenever there’s a bubble, it’s always different this time. There’s always reasons to rationalize why it’s different. Remember, that’s exactly what everyone was doing in 1999 and 2000. They were rationalizing why it was a new era, it was a new economy. You always feel like this in a bubble.”

The real problem is that this time the damage will be more widespread. One reason is because of Cuban’s observations – smaller, individual investors are risking private funds that they won’t be able to pull out of the market when everything collapses.

On an even grander scale, the rising stock market is one of the few things the Federal Reserve can point to as proof of an economic recovery. Therefore, the Fed will do everything it can to stop this bubble from popping, which will ultimately make the crash that much worse.

According to Peter, this means there certainly won’t be any interest rate hikes in 2015. More importantly, look out for a new round of quantitative easing in the next year.

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3 thoughts on “This Tech Bubble Is Going to Be Much Worse

  1. Ty Dauster says:

    I love reading all your articles that Peter shares on FB (but I rarely comment). Just wanted to say “Keep up the great work, Mike.” I’ll be reading.

  2. jrj90620 says:

    Any widows and orphans putting their money into these companies,deserves what they get.Why should taxpayers be responsible for their mistakes.

  3. Boot says:

    @jrj—-Does not matter “why” the taxpayers should be responsible for their mistakes. The pandering politicians will just declare that they ARE responsible to “make them whole again,” and no opposing pols will have the gonads to resist the tide to “save them.”

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