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Soapbox: The bubble of all bubbles

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Is the US stock market in bubble territory? Opinion is divided but it is starting to feel that way. Valuations of some US companies have soared, and seem to be based more on promises of future profitability than anything else.

The electric car company Tesla, whose shares are traded on Nasdaq, now has a market capitalisation of about $400 billion – ten times what it was a year ago. Tesla’s share price has gone up by almost 500% between 1 January and the end of August. This is staggering for a company that has never had a profitable year and last year had a loss of $862 million. The electric vehicle (EV) revolution is gaining traction but even 10 years from now they will still represent a small minority – about 7% of the 259 million vehicles expected to be on US roads by 2030.

Some of the so-called ‘FAANGS’ (Facebook, Apple, Amazon, Netflix and Google) have had an astonishingly good year – Apple’s share price has gone up almost 65% – it first listed in December 1980 and has split its stock five times since then. Amazon has gone up this year by more than 78%, Facebook by more than 37%, Netflix by almost 60%. Apple’s market capitalisation recently peaked at more than $2 trillion.

But in the context of the financial stimulus – reckoned by some to be in the order of $20 trillion, which is new money added by governments to the global paper money supply – these sky-high valuations are to be expected. When interest rates are at rock-bottom and bond yields are dismal, where else are people going to put any spare money but into stocks?

Nor is it just US stocks that investors are piling into. In Hong Kong this week a bottled water company, Nongfu Spring, floated on the Hong Kong exchange; on its first day of trading it closed 54% above the issue price. Demand for shares in the company outstripped supply by more than 1,000 times. Many of those who bought shares were not professional asset managers: “demand from mom-and pop investors prompted investment bankers to increase the offering’s retail tranche from 7% to 37%” reported the Financial Times. The paper quoted a Hong Kong-based stock broker as saying “When you’re getting no interest at the bank you might as well have a punt at it”.

Punt at your peril

Share trading fever is spreading around the globe. In India the securities depositary CDSL, which crunches local stock market data, reported this week that the number of individual investor accounts since the start of the year has gone up by 20% to 24 million. India’s Zerodha, a discount brokerage platform, says it is daily processing five to seven million transactions. It claims to have three million customers with an average age of 28. Nithin Kamath, Zeroda’s CEO, says that stock markets “had this whole ‘Fomo’ feeling” – fear of missing out. Like the US’s ‘commission-free’ trading platform Robinhood Zerodha has this year had a boom in retail (i.e. individual) investing.

Lemmings and tulips

At the height of the 17th century’s tulip mania the price of a single tulip would have bought a mansion in Amsterdam. In the 18th century the UK parliament of the day authorised the South Sea company to assume a portion of the national debt. Directors of the company talked up the prospect of future riches and the share price rose from £128 in January 1720 to a peak of £1,050 by the end of June that year, only to collapse to £175 by September.

There is a theory to explain such bubbles – the ‘greater fool’ theory. This says that buying something that intrinsically has little or no value is only sensible if you can hope to sell it on to someone for a profit. That works well until it doesn’t.

Not that I am arguing that Tesla or other ‘FAANG’ or high-tech stocks are worthless, simply that some seem to be priced far beyond their future prospective profitability. There is a lemming-like feel to markets right now. That ‘FOMO’ factor is what has helped to drive stock prices so high, and is aided and abetted by the $20 trillion cash pumped into people’s pockets.

If you do not intend to participate in the ‘greater fool’ merry-go-round and understand that the creation of this new feeling of wealth is all based on the artificially created extra paper money supply, then you should join Glint, and use its services to save, spend and share stable money, which is gold.

Download the Glint App to start saving and spending your gold

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