The risks of prolonged recession and a severe bear market are high.
Comparing financial bubbles is not always easy, like comparing Michael Jordan to Wilt Chamberlain. While the basketball greats were 27 years apart, the last technology stock bubble was 20 years ago.
The darling of 2000 was networking giant Cisco Systems, peaking at an enterprise value of $512 billion, or 53x annual gross profit and 114x annual operating income. The posterchild of today’s “everything bubble” has to be Tesla, tipping the scales at $726 billion, or 122x gross profit and 411x operating income. Keep in mind, without tax credits (subsidies), Tesla barely breaks even. At current prices, Tesla is worth more than the small cap universe (as measured by the Russell 2000) and the entire S&P 500 energy sector.
Such out-of-whack valuations are symptomatic of the many distortions in the economy after 12 years of zero interest rate policy (ZIRP) and asset inflation. Add a mountain of government and corporate debt, lockdowns in response to the coronavirus, the moral hazard of financial bailouts and stimulus packages, and baby boomers set to retire and tap into a trust fund that’s been drained, and it is not difficult to envision “challenging times” for the global economy.
Clearly none of this is discounted by a stock market trading at a market capitalization-to-GDP of 160%, its highest in history.
“Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
— Sir John Templeton