Fortune 's On-again, Off-again Bubble

Fortune has discovered there might be a tech bubble. No, revise that. Fortune has, a little late, declared a tech bubble upon us, at least on its cover, which shouts in big, bold type: "Tech Bubble 2.0." But once inside the magazine, you're met with a headline, "Don't Call It the Next Tech Bubble -- Yet," which suggests, well, more uncertainty than the cover declares. In fact, the Fortune story by David Kaplan takes a tortuous path up the mountain of bubbledom, then down into the valley of maybe not. Yes, Silicon Valley is hot, venture capital is flying around, social media companies are going public at high valuations, and -- Fortune has a fixation here -- already expensive real estate has gotten ridiculous. And, oh yeah, there's some very expensive balsamic vinegar on sale in the Valley.

But is it a bubble or is simply some euphoria over a subset of tech stocks that may -- or may not -- prove to be justified? Let's clear a little underbrush. A bubble may be difficult to detect and deflate, but its definition isn't really in doubt. A bubble occurs when the price of an asset loses any connection to underlying value; it's increasingly driven by its own momentum. Now, of course, this definition is full of peril, mostly involving that underlying value, which particularly when it comes to tech stocks is a potentiality that exists somewhere out there in the misty future, exposed to all kinds of factors that could justify a price that seems high today, or confirm that some fool paid too much. So it's hard to tell. This definition is necessary but not sufficient to corner the elusive bubble. Because -- and this is often lost in enthusiasm for bubble stories -- a bubble is not just an overvalued stock, or even an inflated asset class. A bubble is large and contagious. It must have scale; it must spread. Some stocks are always overvalued -- some dramatically. But a sector, say biotech in the '80s, that sent a lot of companies public without a prayer of success, was not a bubble in the systemic sense, because when reality gobsmacked investors, biotech stocks fell, while the rest of the economy forged merrily forward.

Kaplan offers his own attempt to get a feel for this elephant in a dark room. After he enumerates all the conspicuous consumption in the Valley, he admits that the tech crowd itself isn't sure what's happening. "Reasonable folks can disagree about the prospects for boom and bust. But their reckoning is about psychology more than economics." Kaplan then searches for psychological signs, which really means a sort of off-the-shelf sociology. "A sure sign [get that "sure"] of budding bubbliness is the rush to find alternative metaphors." Not to interrupt, but alternative to what? "Read the blogs, attend the tech conferences, sit at Starbucks for an hour in Sunnyvale some afternoon [but not in, say, Palo Alto?] -- you'll hear most of them. There's a wave -- ride its crest, but don't get inundated! There's froth and ferment. There's a rush and gush. Our favorite, from a well-known investor: 'The cuckoos have come out of the clock!'" They do love their metaphors in the Valley.

But obviously, that's not quite rigorous enough, for Kaplan then turns to the well-worn cliché of greed and fear. Fear is a hedge. Immediately after the suggestive cuckoo comment, Kaplan argues, "For there to be a bubble, the wisdom goes, greed must overcome fear. And for the moment fear still rules, which means the memory of 2000 lives. Metaphorically [ah, metaphors again], we may be in 1995 or 1996. After all, LinkedIn is not" True. And 1995 is not 2011 either.

Kaplan's conclusion: This is a bubble, but not quite yet. This is a nascent bubble. This is a bubble that may not be a bubble. " 'I think it's a wanna-bubble,'" Kaplan quotes "longtime Valley observer Paul Saffo," who continues: " 'Investors are desperate for something -- anything -- with a prospect of returns, and there is a lot of hot money looking for a home.'"

One can sympathize with Kaplan. The scene, not to say the future, is difficult to read, particularly if you're trying to interpret psychological signs. And Kaplan obviously didn't write the cover line. Fortune's bubble story tells you more about Fortune and its relation to the tech economy and its readers than anything else. Fortune knows that tech, euphoria, optimism, winners sell. And for all the handwringing, bubbles are associated with good times, particularly when they're incipient. Moreover, Fortune is not alone in embracing Silicon Valley as the very model of the American economy, except perhaps for that tendency to bubbledom; this partly explains why there are so many bubble stories out there. In a depressing economy, in a gloomy world, the Valley looks like the best way to provide readers with a dose of blast-from-the-past hope. Kaplan can't quite close the deal with his bubble diagnosis, but all to the good: That means the Valley may actually be healthy. Folks there (as if denizens of the Valley were the only problem in the dot-com bubble) remember. It's a small thing, but Kaplan's story will someday allow Fortune to declare victory no matter what happens.

Of course there's the matter of the bait-and-switch between the cover and the story. This is, alas, too common in magazines these days. An even more egregious case appears in the increasingly downmarket Money, one of Fortune's stablemates at Time Inc., which also tangles with a big macroeconomic story. On its most recent cover, Money offers up: "Why Housing Will Rebound." (Fortune predicted a housing rebound a few months ago as well.) That sounds exciting, no? Alas, the cover line refers to a single page of graphics that are both simplistic and generally useless. In fact, one set of charts argues the "sucker" case and the other that "housing is a steal." Like Fortune, Money can't decide. This is supposed to help homeowners figure out the housing markets?

No, Money just wants you to impulsively buy the magazine for the coverline. This is an old trick, beloved of newspapers and magazines. In the great scheme of things, it's a minor, if tawdry tactic; newsstands are full of it. Still, the Murdoch scandal does sensitize one to broader issues besides hacking, blagging and bribery that go under the banner of tabloidization. First, what's the social compact with your readers and how is it violated? Second, how simplistically can the world be described until it resembles no world that we recognize? Fortune and Money are not News of the World, Time Inc. is not News Corp., and silly bait-and-switches are not phone hacking. But newsstand-driven circulation does tend to erode loyalty to readers. And commercial pressures drive even operations with such distinguished histories to treat readers just a little shabbily to sell a few more copies. Besides, what does it really matter in the end? Nobody can really predict the damn future anyway.