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Peter Schiff: Frothy IPO market a bubble for the 1%


Chinese Internet juggernaut Alibaba has made it official: the company will be going public in the U.S. and the deal is going to be enormous. Described as a hybrid of EBay (EBAY) and Amazon (AMZN) Alibaba is expected to raise $15 billion. That would make it the biggest IPO since Facebook (FB) raised $16 billion in 2012 and give Alibaba a total value of about $130 billion.

After sitting moribund for years in the wake of the dotcom implosion of 2000 and the financial meltdown of 2008, the IPO market roared to life in 2013. More than 220 companies raised $55 billion last year and 2014 is off to an even faster start. While the boom delights VCs and investment bankers there are those who see more than a bit of irrationality in the public’s appetite for new issues.

"The Fed has managed to create a bigger stock market bubble than the one we had in the 1990s and a bigger real estate bubble than the one that burst in 2008," shouts Euro Pacific Capital's Peter Schiff in the attached video. "Imagine how bad it's going to be when these two bubbles burst simultaneously."

Schiff points to the surreal valuations being paid in the private market in transactions such as Facebook's $19 billion purchase of WhatsApp as evidence of the current mania being even bigger than 1996 when a record 845 companies went public. The difference this time as Schiff sees it is that Main Street investors aren't involved. Calling it "the bubble for the 1%," Schiff notes that fewer people are buying stocks and home ownership rates remain subdued.

While his ire is understandable, if Schiff is right about the public avoiding speculation in stocks or houses it's actually great news for Mom and Pop investors. Speculation in equities can be a disaster for individual investors but it was the housing collapse that nearly sunk the global economy and left millions of people at risk of foreclosure. The surprise is less that home ownership rates are low than the fact that American politicians are once again peddling the notion that the ability to secure a high-risk mortgage is part of the American Dream. In an environment of slow job growth and illiquid housing the last thing on earth most people need is to be saddled with mortgage debt and tied to a residence in a state where there may or may not be job opportunities.

Populist rage aside if there's one lesson to be learned from the debacles of the last 15 years it's that gambling on get-rich-quick IPOs and flipping houses is a recipe for disaster. When the music stops, and it always does, whoever gets stuck holding shares with no intrinsic value and a house they can't afford is ruined (unless they happen to be wealthy enough to qualify for a government bailout, but that's another column).

It's unlikely that an IPO like Alibaba is going to be traded solely among the wealthiest speculators, but if that were the case it would represent the greatest advancement of mass intelligence since the creation of written language. Let the 1% buy as many shares of the Candy Crush offering as they can get their hands on. They deserve it.

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