Asset Bubbles

Easy credit, in addition to other factors, contributed to the real estate bubble. I believe that venture capital also benefited from cheap money. I looked at the amount of venture capital invested in biotechnology and medical devices (from Thomson Reuters, NVCA Yearbook 2009) and compared it to the Case-Shiller Home Price Index (from Standard & Poor’s). As the chart below shows, VC investments in biotechnology and medical devices (bars) have followed a similar path to that of home prices (line). While there shouldn’t necessarily be any correlation between the two, the abundance of cheap money seems to have helped over inflate a number of assets. If you believe that real estate is overpriced and that the correlation to hold, VC investments still has a ways to fall.

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