Stock-Market Bubble Fears Are Greatly Overblown
Despite some pockets of excess, valuations today are nothing like those of the dot-com era.
Bloomberg, February 24, 2020
In today’s column, I lay out many of the reasons I doubt we are in a tech bubble.
This is only the first part of the exercise. Anytime you think about a major market or economic position — bullish or bearish, expansion or contraction, long or short, inflation or deflation — you should more than understand the opposing side’s arguments. To avoid all of the usual confirmation biases, you should be able to make the counter-arguments at least as well as your intellectual opponents, e.g., the people on the opposite side of your trade, can.
So merely making the anti-bubble case is an incomplete exercise. To fully explore the issue, we must include the pro-bubble argument. As a companion to my “This ain’t your father’s 1990s tech bubble” claim, here are the pro-bubble arguments:
To begin with, it has been a decade since the great financial crisis (GFC), and two decades since the dot.com implosion. That is enough time for people to have gotten over their PTSD and to have forgotten much of their traumas.
Ever since the GFC recovery, there has been way too much capital sloshing around, leading to excessive valuations; way too many bull market profits leading to too much optimism among investors.
Not just in public equities, but in the private markets. Unicorns and other Vision Fund debacles have imploded, they are the canary in the coal mine — the early warning sign for publicly traded companies.
Central banks around the world have only made it worse: Their ultra-low rates have artificially pumped up profits. The Federal Reserve has contributed to a bubble by making the cost of capital cheap, and all of that liquidity and cheap capital falls right to the bottom line. Cheaper borrowing also gooses revenues by making it cheaper for customers to finance purchases.
Bubble advocates urge us not to overlook the impact of lowered borrowing costs on the massive share repurchase programs, financed through cheap, easy money. Reducing a public company’s total outstanding shares has the effect of making earnings look better on a per share basis.
You don’t have look far among publicly traded companies to see all the usual signs of excess: Tesla’s stock has doubled over a short period to $163B market cap. It is more valuable than GM ($49.5B), Ford ($31.5B), Fiat Chrysler Automobiles NV ($25.9B) and Ferrari ($32.9B) – combined.
This is to say nothing of the runaway valuations of the trillion-dollar firms: Apple ($1.39T), Microsoft (1.37T), Amazon ($1.05T), Google ($1.03T). Poor Facebook is only ($604B); At least its bigger than the mere $556.4B for Berkshire Hathaway. I can’t imagine how Reed Hastings, CEO of Netflix, can even show his face at the club with a mere $168.2B market cap.
That’s before we even get to the very elevated Shiller CAPE ratio.
But here’s the thing: None of that is proof of a stock-market bubble. Let’s look at some themes and issues to demonstrate why this is so…
You can see my counter bubble argument here: Stock-Market Bubble Fears Are Greatly Overblown.
I originally published this at Bloomberg, February 24, 2020. All of my Bloomberg columns can be found here and here.