by Eugene McGrane

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Slowdown in Asia
The slowdown in Asia has history on its side and could result in a potential replay of the DotCom Bust.

A popular phrase often plays in my head: “The more things change the more they stay the same”.  In 1999, I was just getting ready to turn 21 and has not yet entered the world of commercial real estate. I was attending the fine University of California at Riverside. In those days, the world was concerned about the coming Y2K computer implosion (spoiler, the world did not end) and tech, well tech – you just can’t go wrong with tech.

Another popular phrase bandied about during the late 90’s was “It’s the New Economy.”  The New Economy, much like the old required liquid and eager venture capital. Venture capital then as now relied on challenging investment cycles in which the desperate search for return and especially the types of returns offered by the venture capital firms.

What Caused the Bust?
What most of us have overlooked is the underlying cause of the first Dotcom bust. It wasn’t so much that the famous busts were always doomed to fail, it was more that the aggressive capital employed in the building of these overnight e-commerce behemoths began to ask questions about the returns they would be getting on their money. The questions were driven by their investors, who all of a sudden begun to pull back on their positions.

Asian Swoon & The Price of Oil
What was the underlying cause of such a pullback? The major cause of the pullback had to do with the late 1990’s Asian Swoon.

Dragon at the Door Eugene McGrane Cushman

Brent Crude Oil Spot Price Historical Data

 

Fundamentals Unhinged
As the stock markets continued to become more and more driven by the tech sector boom, the base fundamentals of the market began to become unhinged. The clearest manifestation of the phenomena was the halving of oil prices from only three years prior. This oil price drop, while minor in comparison to the drop following the 2008 Financial Collapse, was very serious nonetheless and reflected a lessening in both raw and finished goods demand in Asia.

As we began heading into 1999, the tech sector job growth was quite literally booming with growth projected to outstrip any prior technological revolution in both speed and strength. One of the underlying tenets in underwriting the never ending growth was a global growth made possible by the anticipated explosive growth of China.

None of that would actually occur.

The global economy and subsequently,  the United States economy staggered into a recession that was only offset domestically by a fantasy fueled ride into the housing market.

Parallels and Differences: Uber Changes the World
Uber represents a fascinating case study as a parallel and illustration of Web 2.0 – or whatever phrase is currently popular to describe the current and ever changing state of being online.

Uber has a sound business model that on the surface has forever challenged and altered an entire industry. Within a few short years, Uber, who recently announced its major expansion plans in Oakland, CA, has changed the way mankind gets from point A to point B. Uber boldly took on an established and highly lucrative service in the taxi industry and continues to do so with great success.

FINAL UBER

Some statistics cite that taxi income has decreased by over 70% in some cities. On more than one occasion, many San Francisco, Silicon Valley and Oakland residents have witnessed forlorn looking and idle cab drivers, smoking cigarettes near their vehicles and wondering what exactly happened. Things will more than likely never be the same.

A large portion of Uber’s 50 Billion dollar valuation  is that it will continue to increase its domestic market share within the cab industry, and that it will also grow some unquantifiable amount in the international markets.

Part of what has led to the flood of capital willing to attach itself to such aggressive growth stories is the lack of other outlets for reasonable returns in the general market. What happens if that continuous flow of capital dries up?

Between the global collapse in oil prices, which by the way at $40 to $50 a barrel, is still not a collapse – it’s simply a return to normal commodity prices, and part of the major slowdown in China.

We shall see. But for those of us interested in using history to gain insight into the future, it remains clear that the trouble in China and elsewhere in Asia (i.e Japan) has not been viewed as the past being a harbinger of the future and putting a damper on the current good times the US economy is enjoying.