All bubbles begin with a pyramid, end with a pop

More evidence that we are in the inflation stage of the Next Bubble - Mark Cuban argues that we are in a pyramid scheme, not a bubble (we are about to float over The Chasm - see above diagram - in my view. Also see our Ten Step Bubble Beaufort Scale explanation):

Over the last three months alone, Facebook’s roughly $33 billion valuation has roughly doubled, to an estimated $60 billion. Zynga’s reported valuation has jumped to upwards of $9 billion from $4 billion last May. And both pale in comparison to Twitter, which generated an estimated $150 million in revenue in 2010 yet has reportedly received overtures that peg its worth at between $8 billion and $10 billion. (Just two months ago, when Kleiner Perkins led a $200 million investment in Twitter, its valuation was $3.7 billion.)

Fueling the fire are firms like Andreessen Horowitz, which last week sunk $80 million into secondary shares of Twitter, and Kleiner Perkins, which this week threw $38 million at Facebook shareholders to (finally) add the company to its portfolio. But they’re certainly not alone. According to the secondary shares marketplace SecondMarket, VCs have represented the majority of SecondMarket’s buyers since the third quarter of 2010 and they accounted for more than 40 percent of its transactions in the fourth quarter.

Maybe the VCs truly believe that Facebook, Twitter, Groupon and Zynga are on the cusp of becoming among the most valuable companies in the world. But it may also be true that they believe they can sell their shares to a greater fool. (JPMorgan’s planned social media fund jumps to mind.)

Either way, when the chain ultimately ends, few, including Cuban, will feel terribly sorry for those left holding empty envelopes.

“When the market has a correction, stock prices will correct dramatically, and that sound you’ll hear from the Valley?” says Cuban. “[It] will be of a fund manager screaming, ‘Sh_t!’ as he turns out the light on his fund.”

I would argue that all bubbles start with an In-Industry Pyramid scheme, which is the stage we are at now. We are seeing massive inflation in value of companies that probably can make it (Facebook, Groupon etc) and the production of large numbers of new startups (witness the rise in new incubators, I eagerly await First Tuesday 2.0) It only becomes a real Bubble, however, when those Fund Manager In-siders who came to the party late, who do indeed "believe they can sell their shares to a greater fool", actually need to find the next tranche of Greater Fools to unload onto. JPMorgan’s planned social media fund does indeed jump to mind. And of course the JP Morgan scheme and it's kindred (and there will be) are a way of finding the next layer of Greater Fools, from the early mass market. Howard Lindzon does an excellent job of explaining the rationale of the Pragmatics as they decide to Enter The Bubble:

Americans LOVE to speculate. Read my pal Michael Bigger’s post and don’t forget it!

I am too happy to be cynical right now. I will save the cynicism for when it’s trendy again. Right now, dumb is winning.

This bull run is very real and very liquidity driven and the gains in my portfolio are shockingly real. They would be more real if the cynic in me had just died a horrible death in 2010.

If your cousin is pitching you startups, heed Mark’s advice. If your cousin is telling you the market is a scam, thank him and buy some more $aapl .

....the last line of Greater Fools being the Great Unwashed Public, so when your Taxi Driver or Dull Cousin stars to tip you about stocks its time to run.

However this Pyramid still has to cross the "Chasm", ie the event that persuades the early mass market to start sending ther hard earned cash into the New New Bubble. The deals like J P Morgan's are bridges, but to really cross the divide you need something bigger. In the past this has been a Major Greed Event like a major IPO (Netscape anyone?) that persuades Lindzon's Rational Pragmatist that there is money to be made.

Facebook IPO, I'm looking at you......

(Update - the Guardian asked us to say a few words, its over here - also refers to the earlier Ten Ways To Know if You are a Bubble post referenced at the top of this post)