Waiting for the nasdaq bubble to burst, Tesla, Bitcoin. Waiting for the last dance

“There’s nothing more annoying than watching your friends and neighbors get rich quick and easy,” Jeremy Grantham.

Founder and investment strategist at GMO Asset Management, a firm that manages over $100 billion. In the investment world, Jeremy is known for his correct definitions and predictions of financial bubbles over the past 50 years.

About ¾ of the time, markets operate as an efficient asset valuation machine. In other words, assets are traded within more or less fair prices, deviations from fair value are not significant and are not long term.

During such periods, having an optimal allocation in standard index assets (e.g., U.S. or international stock or bond indices) is sufficient to achieve optimal investment results. Future results may be comparable to the recent past.

Serious problems begin when markets, or a substantial portion of them, are in the bubble stage. Thus, the long-running stock market that began in 2009, briefly interrupted by a sell-off at the beginning of the pandemic, then fueled by the monetary experiment of central banks, eventually turned into the largest bubble in financial history.

A financial bubble is a time when fortunes are made and lost. The current financial bubble, which occurred primarily in U.S. technology stocks, began gradually. In Q2 and Q3 of ’20, stocks still had a link to fundamental value and looked like business models in the eyes of investors for a “post-pandemic world.” Then, there was an acceleration in growth and a revaluation of many assets beyond reason.

Today, the U.S. market is at its highest historical multiples to business metrics. The right-hand column in the table below shows the persentile for the entire history of observation by the U.S. investment bank Goldman Sachs.

A financial bubble is a rare event, and therefore not everyone can clearly identify its existence because they are experiencing it for the first time. The most recent financial bubbles in history are the 2008 mortgage bubble, the 2000 tech company bubble on the NASDAQ; the 1989 bubble of everything in Japan, etc. Other than that – few people are interested in a bubble.

Every financial bubble comes with one:
A generally accepted market consensus that the current bubble is definitely not going to burst.
Easy money in the form of ultra-low interest rates.
Accelerated growth in “future stock” prices in a short period of time with maximum acceleration of growth just before the bubble bursts.
A record number of IPOs.
A record number of new brokerage accounts opened by the public.
The sharp and negative reaction of clients trying to chase a mythical high yield to any criticism and suggestions to reduce the risk.
The growth of leverage in investment accounts.
Critical financial implications for the entire global financial system.
The belief that low interest rates and action by Central Banks will prevent a bubble bursting.
Low prices of value stocks, resulting from low yields in recent years (e.g., Berkshire or JNJ).

The current situation is characterized by the following points:
1. The highest historical stock market valuation multiples at the same time as some of the worst historical performance of the real economy. In the chart below is the Price / Sales multiplier

GMO, Worldscope, Compustat, MSCI median stock market P/S value
2. Speculation in individual names where the rationale for stock gains borders only on the imagination: Hertz, Kodak, Nikola, NIO, Virgin Galactic, Plug and many others. So for example:

a. Hertz – shares rose 10x already in bankruptcy proceedings despite the fact that by any estimates there was nothing left for shareholders as a result of bankruptcy proceedings or debt restructuring.

The investment bank serving Hertz even petitioned the court to issue shares to raise capital during the bankruptcy proceedings, the value of which would have been “zero” in the aftermath anyway

b. Kodak – shares rose 30x on news that the company would produce chemical elements to treat COVID-19

c. Nio – an electric car maker in China that only produced 43,000 cars in 2020, but has already reached a market capitalization of $100 billion on news of a partnership with NVDIA on autopilot

And so on…

3. Warren Buffett’s indicator (market capitalization to GDP) has surpassed the record levels of 2000.

4. In 2020 there were 480 IPOs in the U.S., and at the peak of the bubble in 2000 – 406 IPOs. The amount of investment raised exceeded any records before the punctures of previous bubbles.

5. Retail investor activity in the options market in 2020 increased 8-fold over 2019, which was already exceeding the long-term average, and trading account leverage also broke all previous records

The biggest bubble in the stock market is Tesla:
a. Tesla’s current market capitalization is ~$770 billion. In just one trading session on Monday, January 11, the company lost $50 billion.

b. Car sales in 2020. – 500,000 units. In other words – a Tesla stock buyer, buys the company at a multiplier of $1.5 million per car, when the average cost per car sold ranges around $50-60k, and the recommended retail price of the M3 is from $40k. General Motors stock trades at a multiplier of $9k per car produced in 2020

с. Tesla stock is up 800% since 2019 on the back of a 17% increase in car sales.

d. Tesla sales in Europe are down 10% y/y in 2020 compared to European electric car market growth of more than 100%

e. Tesla has a market capitalization greater than the sum of all: automakers in the U.S., Europe, Korea, and Japan’s Honda. These companies cumulatively sell 50x more cars than Tesla

f. Analysts at investment banks (e.g. Morgan Stanley) trying to justify a market price expect Tesla to have an insurance business in 2023. Tesla will have a car insurance business with only a valuation of $37 a share. The Berkshire x Amazon x JP Morgan joint venture recently announced the suspension of a joint project to create an online prescription drug business (a less regulated industry than auto insurance)

g. Against the backdrop of the Tesla cult, this spring Nikola listed on the stock exchange, whose shares rose to $30 billion. However, Nikola not only does not make cars (prototype stage), but Nikola does not even have its own plant, on the facilities of which it intends to produce its cars

h. If you expect Tesla to be able to replicate an 800% return in 2021, then you have to believe that a company that only produces 0.5 million cars a year will become equal to 37% of the entire U.S. economy in terms of capitalization

i. Many market veterans compare Tesla’s stock performance to that of Yahoo in 2000. Back then, Yahoo was briefly the world’s largest company by market capitalization

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