May 19, 2019

Warning Signs That a Bubble Is About to Burst

In 1999, I and a gaggle of other San Francisco internet founders and CEOs went to an airfield, where we browsed private jets. It made sense that, at 34, I should have a one-bedroom apartment to transport me across the surface of the atmosphere at mach .8, because I was a fucking genius who could afford, on paper, to spend the equivalent of a thousand years of my mother’s salary on a Gulfstream.A bunch of thirtysomething dicks looking at planes, and it feeling normal, is a decent signal that the canary is dying and these budding masters of the universe are about to get bitch-slapped — which we were. I never got the jet. But I have achieved Mosaic status on JetBlue.

Jamie Dimon, CEO of JPMorgan Chase, defines a financial crisis as “something that happens every five to seven years.” It’s been 11 since the last recession. As you get old enough to observe cycles as actual cycles, you begin to recognize that the economic time you’re in is a point on a curved line, and, sooner than you think, the direction of the line will change. Better or worse.

An asset bubble is a wave of optimism that lifts prices beyond levels warranted by fundamentals, ending in a crash. In 1999, I promised myself that I’d be smarter next time. “Next time” meaning on the cusp of a pop or recession.

So, how do you ID when we’ve entered the danger zone, and should you adjust your behavior? There are several hard metrics for why we may be nearing a full-Monty bubble, including things my NYU colleagues spend a great deal of time thinking about and understand much better. But you don’t need a Nobel to see the similarities between 1999 and 2019. Some of the softer metrics are far better canaries in this particular coal mine.

  • The metrics around valuations, P/E ratios, and easy credit-inflating bubbles are logical indicators of canaries. Seth Klarman, the most successful hedge fund manager nobody’s heard of, recently warned that the sugar high of stimulus combined with high-cholesterol protectionism doesn’t end well.
  • When nations and firms start erecting big buildings, look out. The Pan Am Building, Sears Tower, and any number of giant penises plunging into Mother Earth in emerging markets are little more than multibillion-dollar dick pics and may seem like a good idea at the time but are just tacky.
  • The most obvious canaries within companies are typically manifestations of the CEO’s ego. The strongest sell signals are when the CEO goes Hollywood, or believes the world shouldn’t suffer their absence from fashion covers and ads. David Karp in J.Crew ads and Dennis Crowley in Gap ads should have told us their companies would soon be shadows of their former selves and valuations. Marissa Mayer’s 3,000-word profile in the September issue of Vogue around the time she spent $3 million of shareholder money sponsoring Vogue’s Met Ball is an indicator of poor judgment. This way of thinking leads you to spend another billion dollars of shareholder money to purchase the blog platform (Tumblr) of the guy who’s in the J.Crew ads, only to find you spent $1.1 billion on a porn site that has little revenue.
  • A CEO’s fashion can also be telling. When he or she starts showing up on stage wearing a black turtleneck (“I’m the next Steve Jobs”), it likely means not that Jobs has been reincarnated, but that the company’s stock is about to crash (Jack Dorsey) and/or the FDA is going to ban you from your own labs (Elizabeth Holmes).
  • Mediocrity + two years of tech experience = six figures. Kids who can code and are two years out of school, who are mediocre, are making $100,000-plus in the market. What’s worse is that they believe they’re worth it. If you can code, yay for you. But you have no real hard skills or management ability. Not recognizing that you’re overpaid means you won’t have the funds to avoid your parents’ basement when shit gets real.
  • Bidding wars for commercial real estate. Firms that investors believe are the next Google, armed with cheap capital, roam the streets of New York and San Francisco, driving up commercial real estate. They are also competing with the Four (Amazon, Apple, Facebook, and Google), which are purchasing superblocks in NYC.

I was invited to the World Economic Forum’s annual meeting in Davos when I was 32, pre-crisis, as internet entrepreneurs were the new masters of the universe. I met with several CEOs who wanted insight from me on business, as clearly I had unique insight. No, I didn’t. I was a reasonably talented 32-year-old, who at any other time would have been making only a decent living. Instead, I was Yoda, lecturing more talented businesspeople on what their firms should do. When the dot.bomb hit, I was 34 and returned to Davos, where I couldn’t get arrested — nobody would meet with me.

The greatest asset of a child CEO is being too stupid to know you’re going to fail.

When times are bad, people look to gray hair for leadership. When times are good/frothy, people look for youth. Evan Spiegel and Jack Dorsey are incredibly talented young men who have built companies that are likely worth hundreds of millions, maybe even a billion dollars, but not tens of billions. Snap, WeWork, Uber, Twitter — combined, worth more than Boeing — are run by talented young men who in their next lives will be vice presidents (optimistic) and really grateful. As a former twentysomething CEO of new-economy firms, I can tell you that the greatest asset of a child CEO is being too stupid to know you’re going to fail. Young CEOs pursue avenues that are crazy and that sometimes end up being crazy-genius. But most are just too inexperienced to be running companies that hundreds or thousands of families depend on for their livelihood.

If the tech boom continues its run, there’s a non-zero probability that a teenager will be the founder/CEO of a $1 billion–value tech firm in the next decade. When that happens, we really will be on the precipice of the economic zombie apocalypse. If he or she wears a black turtleneck, treats employees like shit, and sports tattoos, a nose ring, or other accouterments of youth, society will treat them like Jesus Christ. We now worship at the altar of innovation and youth, versus character or kindness.