Defrag Blog

A few days ago, I addressed the “bubble 2.0″ talk. One of the comments that came up in response to my post was that the tech industry could get hurt as the mortgage woes and the credit crunch spread to consumer spending and bank lending (respectively).

This morning brings the perfect moment to respond to this — with the usual caveats that I’m no expert, I hold no securities licenses (though I did at one point), and my opinions are just that - *opinions* - and should be treated as such. So, the worry was:

1. the sub-prime and, increasingly, prime mortgage woes begin to hurt consumer spending - which, in turn, hurts technology companies (those selling consumer-facing technology, anyway).

2. the jitters that the credit markets are feeling (again, increasingly) bleeds over into a banking sector that doesn’t lend to tech companies as freely as is normal.

3. credit spreads result in a drying up of private equity M&A - which slows down tech’s “liquidity” events.

This morning (without getting into it too much) we find:

1. the European Central Bank injecting 95billion euros into their markets to calm “credit jitters.”

2. the US Fed opening the “window” a little.

3. Stock futures plummeting.

4. Futures on tresuries (which are acting more like options than futures) pricing in a 100% chance of a Fed rate cut of 25 basis points in the September meeting.

All of today’s activity is happening because of recent statements by investment banks (BNP Paribas and Bear Stearns) that have given rise to a “run on a bank” fear (ie, you go to withdraw your money and they can’t give it to you).

The larger context in the US is the slowing economy and the debate over whether our concerns should be deflation or inflation (as the fed is still saying).

And its compounded by some rumors that certain hedge funds that run what’s known as “Stat-Arb” (or Statistical Arbitrage) have been getting destroyed the past few days.

Now, volatility aside (summer markets are always volatile), the real question I wanted to tackle here is *how* this impacts the tech sector — specifically, not the large public companies (that are obviously involved), but the private, startups and the entire ecosystem around that.

With all of that in mind, my crystal ball:

1. the sept-nov timeframe sees the home mortgage meltdown get *really* ugly, and sees some major blowups in the private equity and hedge fund worlds (Long Term Capital Management, anyone?).

2. the fed ends up *having* to cut rates by at least 25 basis points in the sept-oct timeframe — with a chance for 50bps by the end of the year.

3. the overall US economy slows but does not touch recession, while certain housing heavy regions (florida, vegas, etc) go to negative growth and “blood in the streets.”

4. the weak dollar gets weaker in the wake of fed cuts.

All of that sets us up for:

1. Congressional chest-beating (hopefully, they won’t do anything stupid, as they’re prone to do with financial markets).

2. A relative slowdown in tech M&A, but most likely not a slowdown in VC investments (at least not one that’s due to market/credit crunches).

3. All of which sets us up for a rebound by the summer of 2008 — where a relatively strong tech sector becomes a leading force and John Chambers’ recent “productivity gains of web 2.0″ becomes a rallying cry for the tech sector at large, as “consumer focused” companies give way to a resurgence of “enterprise focused” tech companies. (That last bit is *vitally* important.)

4. If (BIIIIIG “if”) all of that happens, then I think we’re in the exact right spot for a *real* tech boom (similar to the late 90s), and then once we’re firmly into that, we can all sit around pontificating about the bust.

Bottom line: the markets are gonna be scary for a while, and while the tech world sees some bleed-over, we come out of it in better shape than most of the economy and ready to lead things higher. Fear not, go back to innovating.