Thursday, September 15, 2016

September 15, 2016 - I'm Mister Dot-Com Energy Housing Digital Bubble, If I Pop, You're in Trouble!

I'll have to warn you ahead of time, I'm not that much up on economics, either.  Had a class in freshman year, and managed to get through unscathed.  Any more informed people who want to step into this subject, I'll gladly yield the floor--Like the rope-twirler once said, all I know is what I read in the papers.
But with this week's headlines about 4K UHD drives in game consoles illustrating the current shakiness of both the 4K industry and the Digital-movie industry, it's probably safe to stand back and look at the over-abused B-word that gets thrown about at times like these.  Most economic forecasters talking about "the next Bubble market" that's about to pop like to use the word, and it's been so sexy in the last decade to use it, people aren't always sure on what exactly is one or isn't.

One PBS Nova special, trying to explain the 00's Mortgage Meltdown, depicted an experiment that tried to explain the psychological mentality of a Bubble market:  Subjects were asked to play a computer stock-simulation game, and buy, sell, compete, and network with the other players for the richest portfolio--BUT, with the condition that they were told outright at the beginning that partway through the game there would be a new startup, let's call it Company X, that would rocket to success in price, but also at some pre-determined point in the game, would begin falling and falling to bankruptcy, and there was nothing in the game programmed to prevent it.
Okay, you're thinking:  If it was me, I'd be the forewarned savvy bear-investor, stay above the whole greedy game, keep just a nest-egg of Company X to pay for my other genius investments, and be the survivor who bailed at the right price once things looked shaky?  Uh-uh.  Didn't happen.  Greed and Playground Bragging-Rights are blood brothers.
Once the rise of Company X started, it became a mania--As prices rose, bold investors who'd jumped on early began liquidating their other stocks just to build a solid core of CX's new phenomenal millions, and a private "Billionaire's Club" between the powerhouse players began turning the entire game into networking together over the heads of the other players to see how insanely far up they could manipulate the new price to unrealistic levels for their secret game-winner.
And once the fall began, there was no parachute--The players who'd put all their eggs in the new basket quickly had to ditch their rapidly bottoming investment at a safe price, and get back some of those more sensible companies they'd sold off when they'd forgotten the rest of the game.  But the problem with selling a stock is that you have to sell it to someone else, and no one wanted it, especially not the other players in the former "billionaire's club" panicking to get rid of their surpluses.

For kids, a simpler metaphor illustrates it better:  Ever play Monopoly, and get so excited that you managed to snag both Boardwalk and Park Place that you trade and sell off every single one of your other properties just to pay for those $200 hotels and pump up that corner to a powerhouse that will crush the other players the minute they land on it...And then no one ever lands on it??  Luxury Tax seems to hate you and love the other players with a karmic kismet.  And then you land on that other player's dinky $600 hotel on Connecticut Ave., and you've got no remaining capital left to pay for it, so down go the hotels and your entire real-estate holdings with them?

Simply put, a Bubble market is an empire of dreams, and what pops it is the alarm clock.  You knew it was going to ring some time, when you set it the night before.
The most famous quoted example of Bubble markets was the reported Great Tulip-Mania of 1634--fueled by the "new market" of Dutch trading--to the point where a single Semper Augustus tulip bulb could buy a house, and when every European garden now started producing tulip bulbs in bulk, the market was soon oversaturated.
Wheat also became a cash crop in 1921 when the US government bought wheat at insane prices to provide relief for the Russian famine, but when the famine was over, overproduced surpluses at home, and acres of wheat farms that had stripped new groundbroken Oklahoma land to a Dust Bowl, were two of the factors that helped trigger the Great Depression.

And then there's that one more people remember:  When the Internet first arrived in the late 90's, no one knew what it was except for those crazy computer wizards in their garages, so all anyone knew was that it was Magic.  The new Virtual Universe meant you could now sit at your keyboard, buy a few servers, click a few magic keys, and run a business full of invisible customers who would pay you invisible money, and the mavericks who'd started up Amazon and Google had done just that.  Since no one knew from what well-meaning little maverick garage the next Amazon or Google would come, every new Internet startup that announced itself became the next hot property, attracting investors determined not to miss out.  Some were half thought-out ("How exactly does this make a profit?" was the most frequently asked skeptic question), some developed too-high overheads when they built new physical office headquarters and hired staff, and a few were later proven to be scammed by their own execs, but by the end of 2000-'01, more than two dozen new companies had joined Excite, InfoSpace and in bankruptcy.

As we can see from examples, there are a few clear symptoms of a Bubble, and the first two are appropriately named: 
The Land of Oz refers to the new frontier that can now be invested in, and whose awe-inspiring alien novelty of a new unexplored market gives it a mystique--Whether it's Dutch trading, deregulated energy, self-driving cars, social media or Chinese websites, you don't know what it is, but dang, you want to be the one that got a piece of it, and it's so new, no one's ever failed at it yet.  (Remember when Hillary Clinton asked us to Pokemon Go to the polls?...Yeah, kinda like that.  Like she'd ever played in her life.)
The second, We're Off to See the Wizard, means that since you don't 100% know what you're buying into, you put your utter faith and trust into everything the one entrepreneur who does work in this strange new alien field told you about this new opportunity--And what he's likely telling you is that there's no possible way you CAN'T get rich off this, and a million investors who believed him can't be wrong.  And you're happy to believe him, so long as he handles the weird complicated techie stuff.  When mortgage derivatives seemed the new surefire way to get a piece of the Housing Boom, customers literally couldn't understand the bizarre formulas by which profits were "derived", and the dubious companies offering them openly bragged that their customers couldn't understand them, but who cared, as long as they were buying them anyway.
Which leads to what the computer experiment ended up demonstrating, the Billionaire's Club--If you're one of the Million Investors Who Can't Be Wrong, and it seems to be working for the moment, you're the gang ruling the playground, not like the stinky spoilsport kids who are predicting shaky longterm foundations or a possible collapse by asking "Where exactly is the real hard cash floating around in any of this?"  Other holy movers and shakers rush to the defense of the Wizard, and the burden of proof is now on the prophets of doom, to explain how and why people shouldn't be laughing all the way to the bank--Which they can't offer, since, um, the prophesied disaster hasn't happened yet.  Which means you can safely discredit any naysayers as probably Up to Something, and maybe spreading lies for a rival company or party.  In fact, profits are so clearly the bright new future, maybe it's time to start thinking Grandpa's OLD complicated investments are on the way out!

Which leads to the last stage of a bubble:  The Pin From Left Field.
Optimism can't plan for everything--in fact, it usually doesn't--and it becomes the unexpected real-world event or consequence nobody did plan for that starts demanding real debt from the imaginary profit, and pulls the Three of Clubs out the bottom of the house of cards.  Mortgage derivatives worked fine so long as people paid their mortgages, but what if a large number of those new subprime customers were laid off (by companies hit by fuel costs of an Energy Bubble), couldn't pay them and suddenly had to be foreclosed?   The Margin Stocks of those champagne-popping pre-Crash 1920's were fine so long as European countries were buying goods and steel, but what if they were buying them to shut off their borders, or were hit by their own post-WWI economic problems, and now one missing margin-call after another suddenly became due?

At the moment, we've got a craze a lot of big important movie studios are interested in.  
They don't exactly know how it works, since they don't really have the leisure time to enjoy it themselves and appreciate the subtleties of it, or understand why customers would or wouldn't be interested in it--But, hey, how about those kids glued to their cellphones, amirite?  And with one company after another jumping on, it's sure to be the next hit market, and put those failing disk companies back in the 90's where they belonged!  Hey, didja read that Important Sociologist who wrote that Millennial teens today probably hate physical Blu-ray disks, because they hate material goods and move in with their parents instead of buying houses?...That's current, y'know!
We can only call it a "craze" since it's not technically a "Bubble" yet--only in the sense that Ultraviolet isn't a traded company with investors trying to boost their price--but name any other symptom it HASN'T displayed.  There may not be any artificial manipulation of price, but there's certainly an artificial market that wasn't there yesterday.
We also have a company so determined to not be left back in Grandpa's chair, they've already set out to intertwine their format's fate with the Future:  Sony's new push for 4K UltraHD--with this summer's hits already available on 4K UHD disk--will be a two-pronged approach, with the industry still fighting among itself whether the new movies will be on the new Blu-ray disks or on-demand streaming format.  Netflix and YouTube have already began offering new platforms of their service for 4K UHD customers (once all those screens and compatible players/set-tops start selling), and Really Important People continue to question the necessity of a hard-disk based format that just incurs more unnecessary costs for movie studios and retail outlets.  With people on the go, Streaming is the new future, and 4K is the way to watch it!

Could any unexpected pin from left field pop those dreams?  Oh, I don't know...
How about, for example, if surveys happened to prove that people don't like digital movies and won't buy them?--Well, see, that's not really an event.  Something has to HAPPEN, that nobody planned for, to get the boulders rolling.  Okay, what if Internet providers started cutting back on service, to reduce clogged servers with the rise in video-binge streaming, making most average customers' bandwidth hard to manage anything complicated?--Talked about, hasn't happened yet, could someday, but still.
In that case, how about if Sony's game division suddenly went to a press event one day to announce that the expected new rollout of a mass-saturated 4K UHD hard drive designed to appeal to standalone-player non-buyers wasn't going to happen after all--except to the competition--which might later end up hurting their own home-theater division's hardware sales, crippling their new next-generation format early, and taking Digital Streaming's next new bold chapter with it, Netflix and UV included?  
Okay, if it happened, that would be an example of an "Oh, poopie!" that went out of control fast.  As "rogue economist" Steven D. Levitt theorized in his book Freakonomics, the social effects of economics are all about Cause & Effect, and you sometimes have to look in the strangest places.  And as Levitt & Dubner themselves might say, what does a Playstation video game of Grand Theft Auto V have to do with the ultimate fates of Ultraviolet, Samsung, Warner Home Entertainment and Best Buy?

Am I recommending that we movie fans all start stocking up on canned food and bottled water?...Um, don't think we need go that far.  It's just about movies, after all.
All you have to stock up on for those are DVD and Blu-ray disks.  Y'know, the ones All the Important People are so quick to tell us All Those Millennial Kids hate.

No comments:

Post a Comment