The (un)surprising cause of the next financial crisis

You know that it is coming, you just don’t know how … The next financial crisis

di George Salapa

Most predictions agree on the timing (2019/2020) and that it will be one of the deepest crises in the world history (the economy has been growing consistently for 10 years now), but no one can predict how it will happen. Knowing that, of course, would be priceless. Traders and hedge fund managers who took the ‘right side of the trade’ and bet against the 2007 subprime crisis made hundreds of billions over night. Jon Paulson and many others got famous and (even much) richer.

Crises are certain; they are inevitable like death and taxes because the world economy is based on the concept of greed. Human greed is good — it is what drives the economy up … and then gets it going again after it falls over the cliff. It is a necessary substance; a serum and a poison in one.

It was in the U.S. that greed got reinvented as a good thing. That is, it was the new world that injected poor immigrants with the idea of American dream and made money into a universal merit of success. And ever since it has been the U.S. that gave the world market bubbles. Last time it was the subprime mortgages and derivatives that no one understood; this time it is the tech sector.

There are two sides to the tech sector. Facebook and Google are what Standard Oil Co. Inc. was at the beginning of the 20th century—a well tolerated monopoly. Together with Apple, they form the ‘old’ side of the tech sector — the one that actually makes money … and tons of it. But beyond that,there is the utopian tech sector. You know: Silicon Valley, its millennial founder-entrepreneurs, with zen-like smiles, enlightened modesty and open shirts. So very unlike the old world dominated by Wall Street, they and their tiny little start-ups inspired the beginning of the present economic recovery by promising to create an infinitely more efficient and cleaner way of doing things, exchanging factories and steel for smartphones and abstract products.

Three companies — Amazon, Uber and Tesla (ATU) — are a perfect embodiment of this trend. To some extent, ATU are truly revolutionary — making our lifes cheaper (Amazon), more practical (UBER) and exciting (Tesla) — but for the most part, people love them because they are a sensation.

Good enough is just not good enough when it comes to financial markets. People don’t want to be told that they should stick their savings into a 1.5%-yielding super-slow-growing annuity. No, we all want our chance at becoming millionaires, and if that requires us to chase a sensation, then so be it. This is not to say that UBER hasn’t changed the urban transportation for good, that Tesla doesn’t make innovative cars, or that Amazon doesn’t offer convenience and price that others can’t match. No. The problem is that somewhere down the line, ATU have become a religion of future and people forgot to value them on the cold basis of profits & losses. Somewhere down the line, ATU freed themselves from the dryness of discounted cash flow analyses, and they took the whole market with them on a trip to forever.

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