The 10th Man: You Can’t Stop Progress, Supposedly

I am a sometimes gold bug and hard-money advocate, and a hard-core fiscal conservative. I have a pretty bearish outlook on the markets, I am generally skeptical of company management and especially journalists, and I think most investors, even the professional ones, are clueless.

I’m one of those hopeless romantics who pays down his debt (often ahead of schedule), would never ask for a bailout, and would be loath to sign up for unemployment benefits or even Social Security. If I looked hard enough, I could probably find a tinfoil hat that fits.

However, people who fit this profile are not typically big advocates of technology. You can’t use social media after the Snowden revelations, your phone is like a LoJack for the government, and who would trust a self-driving car?

I would. Do you know how much reading you could get done?

I love technology, and in spite of my bearish bent, I am a huge technology optimist and futurist. I was foaming-at-the-mouth bullish on Facebook back in 2008, when it was not yet public, at a $20 billion valuation. I said it would someday be worth $100 billion. People threw rotten eggs at me. It is now worth twice that.

I said it would be worth a trillion. It’s not there yet. Back then, in 2008, in the middle of the gosh-darn financial crisis, people were already talking about the bubble brewing in Silicon Valley.

Seven years later, I think that is a more reasonable discussion to have.

Opulence

But it’s hard to know where to begin.

Let me start by saying the level of opulence in Silicon Valley has far exceeded what was present in the Bay Area 15 years ago. The developers with the $350 ripped jeans and $125 flip-flops have been around for years, but this is different.

Check out San Francisco Magazine’s description of the food court at a well-known tech company:

There’s a produce section that’s forging farm-direct relationships. A whole-animal butcher who makes bone broth in-house. A fish counter that sources its own fish with the help of the sushi bar. Which—by the way, there’s a sushi bar and an oyster depot. Four Barrel coffee and Blue Bottle coffee. The obligatory Project Juice kiosk. A cheese guy. Tapas. Noodles. A wine shop. Ice cream. Pizza. Tacos. A salad bar. A bakery.

You might be deceived into thinking this is normal, especially in San Francisco where you are occasionally forced to dodge sidewalk poop (there’s an app for that), but it’s not.

The real estate market, too, has gone parabolic. See for yourself: pull up Zillow and cruise around Palo Alto to see the two-bedroom ranch houses going for $3-4 million.

But these sorts of things are never reliable signs of a top, because stupid can always get stupider, and it usually does. As I wrote in last week’s piece about trend following, it’s not productive to try to top-tick things anyway. But if Silicon Valley has a meaningful correction, it’s going to send shockwaves throughout the economy.

What Cycle?

For starters, seven years ago, people were saying California was ungovernable. And bankrupt. This was back when muni bonds had a bit of a scare. People really thought that California would default.

Fast forward to 2015, and Jerry Brown is a hero—even being mentioned as a presidential candidate. But anyone who knows California knows that state revenues are almost entirely dependent on capital gains. All it takes is a few WhatsApps and Moonbeam can dream big about $70 billion snail rails.

I believe that someday we will have self-driving cars. And I believe that Uber and Airbnb will start a revolution. And I believe that Elon Musk will one day get us to Mars, and that all cars will someday be electric. And I believe in Moore’s Law for solar and that someday we will render conventional utilities completely useless. And I believe in Moore’s Law for the human genome, too.

I believe in all of these things. But I also know that there are people in their early twenties who are getting impatient that they’re not yet decamillionaires, that seed round valuations are getting so big that venture capitalists are doing “pre-seed rounds,” and that these obnoxious tech CEOs behave like oracles, telling us how we should run our lives.

The technologists believe in the future, but they don’t know what the financier knows: that there is a cycle and all of human progress is three steps forward, two steps back.

The tech people have forgotten that there is even a cycle at all.

Some of them never knew. In fact, most of the Silicon Valley folks weren’t old enough to be working during the last big bear market 15 years ago that wiped everyone out. Think about that.

The technology guys take a very dim view of the Wall Street guys with their Ferragamo ties and bold pinstripes, and yes, the Wall Street guys tend to run from one side of the boat to the other. But what they know that the rest of the world doesn’t know is that overinvestment leads to malinvestment, which leads to a bear market to work off the excesses.

Just look at the energy sector, for example. In the just-released issue of Bull’s Eye Investor, I recommend to my subscribers a play on an industry that hugely benefits from the protracted slump in natural gas.

A client of mine runs a very successful hedge fund in San Francisco. I don’t want to speculate about his net worth here, but let’s just say it’s a lot. He tells me of cocktail parties he is invited to, where he’s easily the poorest person in the room.

If you want to know where the next bear market is, look around at the people who are enjoying unimaginable wealth. Mr. Market has a habit of correcting things over time.

My guess is that you won’t be paid $200K/year to drive trucks in North Dakota for much longer. The best thing about capitalism is that everything is temporary. The last time around, people had the stock, could have sold it, and didn’t.

It will be the same this time. They will ride it all the way to the bottom. It’s human nature. Everyone gives the GoPro guy so much crap for stuffing everyone with stock, but maybe he knows something the rest of us don’t.

Nothing lasts forever.

Jared Dillian