As the current stock and debt market turmoil plays out, it's remarkable how similar they are to the building and bursting of the telecom and housing finance bubbles. They've both got lots in common, but the primary thing is way too much financing and leverage. In 1999, we had Lucent pioneering aggressive vendor financing and the creation of Winstar. In 2004-2007, we had subprime lending, no-document loans, and a worldwide boom in mortgage bonds.
Now that it's all starting to blow up, I ask a couple of questions: 1) What lessons can we learn from the telecom bubble; and 2) What's the current market madness mean for telecom?
On the first question, I would say the primary lesson is, the length and duration of the unwinding of the bubble is usually proportional to the ramp-up in the bubble. In other words, anybody that thinks this housing finance bubble will unwind in a month and be over is out of their minds. Given the size and duration of "house flipper" mentality -- which fueled enormous growth for several years -- this will take awhile to sort out.
On the second question, I believe that telecom will remain relatively stable (compared with other markets). The reason being that since the washout in 2002, telecom investors have been chastened and somewhat risk averse. Such a subdued environment is not prone to crashes. The other reason is that the supply/demand dynamics in the telecom market have actually been improving in recent years. Pricing for networks is starting to get better. New devices and applications are driving demand while supply for network capabilities is actually declining.
Bottom line? A hiding spot in telecom -- especially big companies with decent fundamentals -- isn't such a bad place to be in this mess.
As for your latest real estate deal, don't expect everybody to go back to flipping houses in six months. Think about telecom in 2001.
— R. Scott Raynovich, Chief Bubble Editor, Light Reading