Newcomer Mailbag: The B&B Bubble
I answer readers' burning questions in my second mailbag post.
The reader mailbag is a new regular feature for paying subscribers. You can submit questions here for future mailbags.
I’m sitting on a couch in Syracuse, wrapped in a blanket, at my sister’s new house as the temperature plummets. My Dad is desperately trying to figure out if he’s going to be able to get from Macon, Georgia, my hometown, to Syracuse after Delta canceled his flight. This morning, we ate the bagels and accompanying Za’atar cream cheese that I brought from Bagel Pub in Brooklyn. Now I’m the last one left clicking away at my computer.
It’s time to answer some of your lingering questions as we wrap up 2022.
Why do asset bubbles keep recurring? (Yes, there are some specific circumstances triggering each recent bubble — dot-com bust in 2001, real-estate bubble in 2008, and the blitzscale investing/valuation/crypto bubble in 2021 — but in retrospect, humanoids appear prone to irrational exuberance)
Len Sherman, adjunct professor at Columbia Business School
First of all, Len, I’m a fan of the name “blitzscale bubble” — though as you reflect with your slashes, that moniker doesn’t quite capture the full range of lunacy that we’ve experienced over the past few years. It’s starting to look to me like we’ll remember this period as the zero interest rate bubble. Maybe that’s too wonky of a name to catch on. Crypto looms so large and has had the best morality plays. Perhaps it will be the Bitcoin Bubble. Or maybe we can split the difference and call it the B&B Bubble — Blitzscale and Bitcoin. Two sides of the same coin.
This business cycle, with little hope of returns from debt, investors were willing to take outsized, long-term risk on equities. And then once smart investors realized that deep pools of money were desperate to believe any sort of growth story — savvy investors became reliant on greater fools coming in behind them. So it was for on-demand businesses, crypto projects, SPACs, and even some software investments.
The Fed’s decision to drop interest rates during the pandemic gave Silicon Valley one last huff of mania in 2021. At that point, everyone knew the footwork so well, they gave quite the performance. Finally, the music seemed to stop this year.
So why does this seem to keep happening? Why do bubbles keep occurring?