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People worrying about a technology bubble keep making this mistake

Snapchat co-founder and CEO Evan Spiegel speaks during the iHeartMedia Soundfront.
Snapchat co-founder and CEO Evan Spiegel speaks during the iHeartMedia Soundfront.
Michael Loccisano/Getty Images

Snapchat CEO Evan Spiegel warned of a tech valuation bubble (or maybe a general stock market bubble) at a Re/code conference earlier this week and got his remarks picked up at CNBC, the LA Times, and all over the business press.

It's extremely possible that valuations will go down in the future, but if you specifically look at what he said, you can see that we're actually in something like a bubble of bubble calls. Check out Jason Del Rey's writeup:

Spiegel said the investment bubble is being fueled by an "easy money policy" and low interest rates, which may not last a whole lot longer according to recent economic indicators. Those low interest rates are funneling investments toward stock markets, hedge funds and, yes, startups.

Lots of Silicon Valley types and venture capitalists have this concern about interest rates, and it makes some sense. But here's a crucial point: this isn't what a bubble is.

Low interest rates are not irrational exuberance. They're not mass hysteria. They're not hype. They're not a search for a greater fool. They're not overconfidence. They are very real. You can look them up on the internet. It is a genuine fact about the world that if you want a safe financial asset these days, you need to accept a very low nominal rate of return. That genuinely makes other asset classes — everything from houses to ordinary stock shares to zany digital media startups — look more appealing than they would be in a world of higher interest rates.

And that makes it eminently reasonable for the price of riskier asset classes to be higher than they would be in a world of higher interest rates.

To the extent that low interest rates push up the value of VC-backed technology startups, in other words, that's an example of asset prices being driven by the fundamentals. It's the opposite of a bubble.

Now, what I think Spiegel means is that these conditions won't last forever. Which is true. Financial conditions never stay the same forever. But "future valuations will change in response to changing objective conditions" is a totally different claim from "today's irrational mania will evaporate and prove to have been a mirage."

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