Saturday, August 13, 2011

San Jose Mercury News Struggles to Understand the Business Cycle

We're a little surprised to see a mainstream media outlet even asking this question: the San Jose Mercury News wonders whether Silicon Valley is in the midst of a new (and unsustainable) tech bubble.

Much of the article is devoted to observations we've been making for weeks: billions in venture capital flooding into pre-IPO tech companies in the Valley and San Francisco, many of whom appear to lack a clear revenue model; sagging post-IPO stock values for firms like LinkedIn and Pandora; rapid acquisitions of start-ups by larger firms like Microsoft and Google; soaring salaries for software engineers; and skyrocketing rents for office and apartment space in places like San Francisco and Palo Alto. Apparently, the market for equity in social-networking firms is getting so overheated that venture capitalists and investment banks are growing concerned that such equity is becoming unacceptably risky. The past week's volatility in the stock market has only broadened these concerns.

Of course, if these folks grasped the logic of the business cycle, there would be less uncertainty about what's going on in Silicon Valley these days. With Ben Bernanke having pumped $600 billion of liquidity into the financial system as part of QE 2, and the denizens of Sand Hill Road being among those first in line for it, it stands to reason that an immense amount of money would be flooding into the area's tech companies. Whether these investments are correlated with firms' ability to create wealth, of course, is a separate question.


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