Q. Is this a real boom or can the bubble burst?

every business is boom-bust. first it goes up and then it crashes.

the definition of a bubble: too much money but few assets to buy.

when people have too much cash, they overpay for assets (stuff to buy, such as tulips, dotcom stock, gold bars, diamonds, etc.). the price goes up (some double their money) and others see that happen, so they also buy. prices go up yet more, so yet more people will buy.

the price has no correlation to the value of the item. for example, a little shop at the corner produces (let’s say) $1m in sales per year. maybe 10% is profit, so the owner makes $100,000. so the value of the store is the income, which is $100,000 per year. the owner can expect $100,000 every year in income for the foreseeable future (perhaps 10-15 years).

but a few people get the idea to buy corner shops because these are cute, whatever. there are only a few dozen shops in the city and these people have too much money, so they’ll overpay. the first one pays $1.2m for the store. the next one sees that the value of the store went from $1m to $1.2m ($200,000 increase!). Wow! the value is going up fast! the first person made $200,000 profit in six weeks, which is much more than that boring $100,000/year. so #2 will pay $1.3m for the same store. price went up another $100,000.

so a boom starts in the buying and selling of stores. the buyers are speculating on the fast-growing sales value, not the revenue value (the $100K/yr).

that’s what happening worldwide in stocks, real estate, art, etc.: values have skyrocketed because there’s too much money (they borrow at 3% to buy items that increase in value by 40-50% per year) and there are only a certain number of those shops in a city. those speculators are making very good money today, but one day, they’ll be standing on a street corner.

at some point, investors either run out of easy cash (e.g., stock market goes down) or they discover the price of wheat is growing fast so they start buying that and the price of corner shops will collapse. someone paid $4.6m for the shop, but now can only sell it for $2.4m, so he lose $2.2m. the bubble popped. the boom crashed.

all booms will crash because the price is greater than the value (the item’s income). there is no such thing as a forever-bubble or a forever-boom.

A fish by Pablo Picasso

A fish by Pablo Picasso

the most blatant example of the difference in price and value is art. a Picasso painting of a fish has zero value: it’s just a piece of old canvas and a bit of paint. it looks nice, but it won’t produce anything. however… the painting’s price has consistently gone up for 70 years and it’s now at $24m. buy it, hold it for a few years, and sell it for a few million more. the sellers and buyers don’t care a toot about the artist or fish: they only care about making money when they sell it. they’re speculating (hoping) on an additional increase in price.

the same with diamonds, which are just rocks but people pay for them.
so what about Uber (valuation at $40B), AirBnB  (valuation at $50B), Twitter (valuation at $20B), and a bunch of other dotcom startups? Wall Street swindlers will tell you to look at the future earning of these companies. let’s say Uber makes $1B per year. over the next 50 years, it’ll earn $50B. therefore, it’s worth $50B. yeah, right. when Wall Street tells you that, look at the bottom of the page where it says “future performance is not based on past performance”. what does that mean?
A Big Boat

A Big Boat

let’s say you build a big luxury boat to sail across the ocean. you sell tickets. you launch this in April, 1912. it holds 2,400 passengers. let’s guess a ticket is $1,000 (and 5X for first class), so let’s guess you’ll get $5m per trip. it can sail back and forth twice a month, so you can expect $120m per year. if you add up 30 years, so its valuation is $3.6B. cool!
and on its first trip, it hits an iceberg and goes to the bottom of the Atlantic. valuation also goes to zero.
see? just because a huge valuation can be projected, it doesn’t mean it will happen. all sorts of things may happen, and many of these will be totally unexpected. after all, the Titanic’s spectacular size and world-class engineering made it unsinkable.