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The Online Bubble Is Bursting. Time To Ask Why This Keeps Happening To Us.

Summary; Slowly people begin to see that the third investment bubble has begin to burst, as in the report below about ad-supported online industries. It's too soon to see the scale of the bubble, or do more than guess at the consequences. But we can understand these bubbles, why they repeat, and make it the last bubble.

Box of Bubbles

"End Of The Online Advertising Bubble" Kalkis Research, 19 April 2016
Excerpt from the Executive Summary

The online advertising market is saturated, and has no more room to grow. The traditional space for ads is overcrowded, and has started to shrink, as Internet users start to use ad blockers.

Ad placement companies have compensated by displaying ads on ever lower quality websites. Worse, they have led their clients into pay-per-display advertising instead of pay-per-click, much less efficient and difficult to track. As a result, online advertising efficiency has been decreasing for years, and companies have to spend more ad dollars for the same result.

The process of ad placement has become ever more automated, obscure and complex, while intermediaries have multiplied, each taking a cut from the client's initial ad budget.

Controls and regulations are nonexistent, and a big chunk of ad spending is being stolen, plain and simple. Customers are growing aware of the phenomenon of ad fraud. Every new fraud scandal bears the risk of customers scaling back on online ad spending. The whole ecosystem is at risk of turning from growth to decline, overnight, in a rerun of what happened in 2000-2001. When this happens, the smaller players will be wiped out. …

Attentive observers, including readers of the FM website, were told about these two years ago - when they were already obvious to those inoculated against moonshine. But that's history. What does this mean for our future? What does it tell us about America?

Bubble burst

About bubbles

"If God didn't want them sheared, he would not have made them sheep."
- Calvera, bandit leader in the movie "The Magnificent Seven" (1960).

Investment pros used to say "everybody gets one bubble" sometime in their career. Yet we have had two, with a third now on the verge of popping - affecting multiple industries from biotech to social media. Something has changed in our economy's structure. Economist Larry Summers warns that these days only bubbles give our economy a burst of growth, albeit short-term followed by hangovers. But nobody forces investors to burn their money in these "field of dreams" investment scams. How do they happen?

During the tech bubble I sold corporate services - including investment banking - to pre-public firms in the Silicon Valley. My partner (back then he was the only one of us with grey hair) and I would visit these firms' offices wearing our good suits, listening to CFO's explain how they would gather "clicks" by giving away their online services and content. We'd asked, tentatively, how would they make money. The invariable answer was "You just don't get it." We thought this was all quite mad.

They were right. We were wrong. Most of those executive teams walked away from the bubble with money, often lots of money - and power résumé, setting them up for corporate advancement and a front-row seat at the next bubble. It was a wealth transfer from America to them - and the VCs who created the game, and the bankers who ran it.

Like all fun parties, it was repeated. The housing bubble repeated these processes, but on a larger scale. The current bubble (with dimensions unclear, as always until the end) is round three.

Ponder that. We have been suckered into 3 bubbles in 20 years. How can we be so stupid? It's as if we're fallen into a dystopian sci-fi novel - either our IQs have fallen or their putting something in the water. We can do better.

Stock Market Crash

Consequences

"Sooner or later, everyone sits down to a banquet of consequences."
- Attributed to Robert Louis Stevenson.

The effects of bubble are complex and varied. Hopeful young people find their careers wrecks when their now-rich bosses retrench or close firms. Investors lose money - Darwin in action, transferring wealth from the naive to the sophisticated (Wall Street is an open-admission school, but not a free one).

Regions benefiting from bubbles suffer devastation when they pop (not shared by local elites who made their money developing their land and running lucrative businesses during the bubble). The Bay Area, America's bubble machine, is now in the bulls-eye.

On a larger scale, bubbles are a Darwinian economic process that not only boosts inequality but also contributes to Americans' diminishing confidence in their institutions and alienation from the nation's political system.

The economic effect of bubbles depends on the nature of the investments made. The UK's early 19th century railroad and canal bubbles devastated investors, but laid the foundation for its later fantastic growth. The late 1990's tech bubble might also have had positive long-term effects, as might today's biotech bubble. The online bubble - creating of a hundreds of doomed-to-fail advertising and subscription-based services (including social media) - probably represents wasted resources (as it, arguably, the time we spend chatting with our machines).

Antidotes to Bubbles: Remembering and Learning

They can build a bubble and promote it in every media, but we can refuse to buy it. Skepticism plus learning from our past can protect us from the temptation. And not just from bubbles. These are the keys to freeing ourselves from the blanket of propaganda that blankets us and taking control of America.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.