The stock market’s plunging, financial companies are crumbling, the government’s a giant fur ball of confusion, and clients are freaking out. Yeah, it’s been fun, huh? In a lot of ways it’s reminding me of what things were like way back in ’01 when I published “The Dot.Bomb Survival Guide,” a look at what happened during the dot.com bubble. Things were pretty messy then just as they’re pretty messy now.
So where should you go from here?
You can hide your head in the sand, avoid looking at your 401K, and freak out. Why not? There’s something comforting about commiserating about hard times with everyone else in the same boat.
Or, you can face this challenge by remembering the lessons we (supposedly) learned during other great boom-bust cycles. Those who don’t remember the past, after all, are doomed to repeat it. But those who can peek over the big mountain of poo in front of us and see the next big thing will triumph. Even if you have to climb over the unsavory mound, taking the long view from the top is a lot healthier than getting buried.
The roots of all the current fiasco go back to ’70s when President Nixon took the U.S. off of the gold standard. The moment Tricky Dick signed the change into law we went from being an economy based on tangible reality (gold) to an economy completely based on information. One day a dollar was worth an equivalent amount of gold, the next day a dollar was worth nothing more than what we all agreed it was worth.
To paraphrase Nicholas Negroponte, this was the ultimate move from atoms to bits. By untethering the dollar from reality, reality could be created by those who controlled the financial markets and by those who controlled and manipulated information.
Think back to the dot.com boom (and subsequent bust) if you want to see how this worked. Back then, merely the idea of a company was enough to attract venture capital in giant heaps. The Internet made this possible because it made the idea of a company nearly equivalent to a “real” company (or so we thought) because the barriers to entry for starting an online business were so low and the potential universe of customers so high. Where in the past, a company had to worry about tangible reality — facilities, inventory, location, distribution — on the Internet you could be everywhere without having to worry about all that “old economy” stuff dragging down your profit margins.
Investors went nuts (well, at least “irrationally exuberant”), driving up the value of companies on the stock market because of their future potential value. Behind all this was the control, manipulation, and dissemination of information in a new, distributed, and (more importantly) democratized way. Online trading (remember “day traders?”) gave everyone access to a piece of the pie. “Wired” told us the Dow Jones Industrial Average was going to hit 100,000 soon and we believed. And our belief sustained us.
That nasty old tangible reality stepped in and the party was over. While it was possible to sell everything from pet food to furniture to cosmetics on the Internet, it didn’t mean it was possible to sell it profitably to enough people to generate the promised returns. Malls didn’t disappear. Most of us actually decided we didn’t want to do all our shopping in our underwear. Old economy “problems” such as shipping costs, inventory, returns, and taxes meant that new economy companies were subject to physical (and statutory) laws and that things really weren’t all that different. More importantly, we learned that while technology changed quickly, people changed slowly. The growth rates we were promised were going to take years, not months, to emerge. Pop!
The thing is, money doesn’t go away. Even after the dark days of 2000 and 2001, those at the top of the heap of the financial world still had lots of money because they’d taken a cut of all the money changing hands during the IPO-mania of the tech bubble. They needed to invest that money to make more but had nowhere to put it. That’s where credit came in.
For you and me, borrowing money means getting into debt. For those providing that money, lending that money is an investment.
So credit became fast and loose. After all, there was a lot of money to lend out. Consumer credit, commercial credit, mortgages — the more that went out (the thought went) the more that’d be coming back eventually. And loose credit meant it was easier to get into real estate than ever before.
Real estate as an investment looked a lot safer to both Wall Street and Main Street. Not only was it — well — real. It was also something regular folks could understand, not like those wacky tech companies run by black-clad 20-somethings from the deck of a Razor Scooter.
So we borrowed. And bought bigger houses. And sold them. And bought even bigger houses. We maxed out our credit cards and paid them off with home equity lines of credit and bought more stuff. Why not? If the value of your house is going to go up 20 percent a year from now until forever, who cares? Viva la Bubble!
Unfortunately we hadn’t learned from the past. While dot.com stock prices were based on information with little connection to reality, so too were housing prices. The “value” of a house really meant “what someone would pay for it” and eventually what people could pay — no-doc/subprime/interest-only/crazy-ass loans aside — became more than the market could bear. People could only pay so much, especially as they struggled under the weight of subprime mortgages and credit cards. Defaults began. Values plunged. All of a sudden, regular folks who’d been riding the wave found themselves underwater and the bottom dropped out of the market.
Remember: credit is really based on information. Information about the borrower’s ability to pay the loan back. Information in the form of perceived “value.” And while homeowners banked on information that their home’s value was going up (egged on by real estate Web sites and an industry that kept telling them that the party was going to last forever), the financial folks were aggregating credit information and selling it in the form of derivatives that were even farther removed from what little tenuous “reality” existed out there. The information revolution on Wall Street allowed allowed for nifty devices like credit default swaps that drew even hazier lines. The pyramid just kept on growing.
But eventually the reality of regular people’s ability to pay caught up with the fantasies created by the smart folks in investment banks. Defaults grew, loans were called, and almost nobody could pay. The party was over.
Welcome to the information revolution.
The Next Big Thing
So where do we go from here? Regardless of the turmoil that’s going on today, there’s still a lot of money laying around that’s going to start seeking out new opportunities as soon as the smoke clears.
Based on the last two bubbles, the next big thing has got to have a few characteristics. First, it has to be easily understood by regular folks. Regardless of all the money at the top, there’s nothing like the flow of funds into 401K plans to keep things moving. Second, it has to intersect with people’s real lives. While commodity trading, currency markets, and derivatives are fine for the masters of the universe, Joe and Jane Six Pack need something they can explain to their friends. Third, value must be based on information. Finally, it has to latch onto the zeitgeist. Tech stocks jumped as soon as the Internet launched into the public consciousness. Real estate was an antidote for tech stocks. The next big thing has to simultaneously share characteristics of the other big things but has to seem like it’s different.
Here are a few ideas:
- Energy. You don’t have to look any further than the presidential campaigns to see that both parties are hyping “green” energy, “energy independence,” and “alternative sources” of energy. Everyone needs energy, everyone understands it, and it seems pretty dang real to most folks. Deregulation has also turned it into information. Enron may have just been an early adopter that got too big for their britches, but they also might be a taste of things to come.
- Infrastructure. Again, another meme of the U.S. presidential race but also one that’s easy for people to touch, feel, and experience on their own. Like energy it also has the side benefit of having been on a slow burn for a fair amount of time now. It may be boring but that’s its allure and it’s ready to burst into the public consciousness.
- Vice. Yes, vice. Regardless of what the economy is doing, drinkers are going to continue to drink, smokers smoke (all government intervention aside), and gamblers gamble. Sure, the “destination” gambling establishment is taking (and will continue to take) a hit, but when people are looking for money, they’re going to look here. And they’re going to have a drink in their hand when they do it.
- Pharmaceuticals. Another big presidential campaign meme is healthcare, and the healthcare system is really just a big drug distribution system. People aren’t going to get less sick in a recession/depression: they’re going to get sicker. And not only are their bodies going to get sicker but their minds are going to need some smoothing over, too. They don’t call it a “depression” for nothing.
- Security and defense. While the institutionalized fear of terrorism may be waning, people are now scared about defending their stuff. Based on what we hear from the presidential race, it doesn’t look like the U.S. is going to stay home any time soon. Again, “fear” is generated from information.
So cheer up! Look over the hill. There’s another bubble coming if you know where to look for it. Just remember to get out before everyone else does.