- Equity bulls seek to justify why Nasdaq of 2015 is not as bubbly as was Nasdaq of 2000
- Bubble elsewhere – in VC, in biotech, and most importantly, in easy money
- Excesses driven by ‘this time is different’ psychology never pan out
In the days leading up to and after the Nasdaq broke 5,000 on Monday, there have been floods of commentaries seeking to justify why the Nasdaq now is different from the Nasdaq of 2000. In other words, why 5k was a bubble back then, but is not now.
On a cursory glance, there is no denying that. Valuations are not as excessive. The slope of the rise in the index is not even remotely comparable. Back then, from the August 1999 low to the March 2000 high, the index doubled in seven months. This time around, it took over three years to achieve the same feat.
I was in San Francisco back then and vividly remember how some of the housewives I knew started to day-trade in the second half of 1999. These are people who had no prior experience. Did not have a degree in finance or economics. But they witnessed others making/minting money doing it, and decided to jump in. The irony is, most of them did quite well in the initial months, as they rode the final thrust higher in the Nasdaq. But they overstayed their welcome. Did not get out as the bubble popped. Did not know how to. And lost their shirt in the process.
The good thing is, we don’t hear of such John-and-Jane-Doe lunacy these days. So, yes, from that perspective, things are different.
But each cycle is different. Excesses could be showing up somewhere else – at a different level. It took the Nasdaq 15 years to revisit 5k, but consider this. Since its March 2000 high, BTK, the biotechnology index, has surged nearly 400 percent (using the monthly low, it is up nearly 700 percent).
And how else do we explain what is going on in the U.S. venture-capital land?
Uber’s latest round values it at $40bn. Airbnb is valued at $20bn, Snapchat at $19bn, Pinterest at $11bn, among others. Nothing to take away from these companies. They provide great services, some of whom I have used myself and adore. But the issue here is about the parabolic rise in valuations. Not to pick on Uber, but its valuation doubled in less than a year and a half. That is what happened in 1999/2000. The Nasdaq doubled in seven months. People were justifying higher multiples, thinking this time was different. In hindsight, it was not.
What drives this behavior? Greed. It was true back then, is true now – people not wanting to miss the party. Back then, investors widely believed that the advancement in technology/telecom would lead to a permanent high plateau for the economy, hence the willingness to pay sky-high multiples. There was no fear. And there is none today. This time around, it is driven by the Fed, and the so-called Fed put.
Ever since QE started in the latter months of 2008, U.S. investors increasingly have gotten on the risk curve, believing – rightly or wrongly – that the Fed has their back. In fact, they have so far been proven right. Post-QE1, stocks began to come apart, and soon QE2 was launched. As QE2 came to an end, stocks once again came under severe pressure, and only breathed a sigh of relief as QE3 was announced. As QE3 was coming to an end, stocks, as if on cue, started selling off this past September and stabilized once James Bullard, president of the St. Louis Fed, in a Bloomberg interview dropped hints that QE4 was a possibility.
What has this to do with bubble? The last 10-percent correction in the S&P 500 large cap index was nearly three years ago. The September correction came close, but missed by a whisker. In the big scheme of things in a bull market, pullbacks and corrections are normal – in fact healthy as they help bring in new buyers. And perfectly rational. However, at the present time investors have been conditioned to believe that this time is different. The Fed has their back. That is the groupthink. This herd behavior is what leads to a bubble.
Now who knows how long this is going to go on. Could go on for a while, or it could be on a short leash. What we do know is this: The bigger the party, the bigger the hangover. History is littered with examples.
Then-darlings such as Pets.com, eToys.com, and Webvan, among others, remind us of how fickle this thing can be. Most recently, Fab.com, valued at $1bn about a year ago, recently got sold for $15mn (courtesy of Bloomberg).
It all comes down to the availability of easy money – or a lack thereof.
The 2007/2008 financial crisis was the result of excessive reliance on debt. Unfortunately, as a nation, we have since added another $6tn to our debt tab (as of 3Q14, total debt outstanding was $58tn). Since the tech bubble burst in 2000, total debt outstanding has gone up by 124 percent! Now that is a bubble. The bubble in easy money.
FB ($80.89) paid $19bn for WhatsApp a year ago, $4bn of which was in cash. That transaction must have played a role in exerting upward pressure on Bay Area real estate, or elsewhere for that matter. Or must have meant some additional business for some server vendor, or some vacation spot somewhere. But if history is guide, this will all vaporize as soon as easy money leaves the scene.
Bubbles get eventually popped. It is just a matter of time.
