In all of our history stock prices have never been so disassociated from our economy. The year just started and the Russell 2000 index already went up over 6%. The only other year it rose more than 6% only at the beginning of January was in 1987. Then, it skyrocketed an additional 23%, and it crashed a little later in the year. We could easily witness a massive crash in 2021. However, it’s even more likely that we wee this happen in the Nasdaq 100 than the small cap index due to high large cap growth valuations.
The Oxford Economics recovery tracker index has taken a turn for the worse in the past few weeks with the Pacific registering the lowest performance. The stimulus money for unemployment benefits is expected to last for 11 weeks, but roughly 12 million Americans are still out of their jobs and it’s highly unlikely all of them will find work by the end of this period. Therefore, another stimulus bill will be necessary to assist these people again, that is to say, soon enough more artificial money will be launched into the system.
Meanwhile, completely disregarding what is coming next for the economy, the Nasdaq 100 is being flooded by investor euphoria, particularly on the large cap growth segment of tech stocks. But the names that are mentioned the most are from money losing tech firms. That’s why the strategists affirm that now is possibly one of the worst times ever to be searching for the next great tech stock. There’s over $1 trillion worth of tech stocks with negative earnings.
But investors seem to keep ignoring the real data and falling into the mainstream media trap of an untouchable market led by a fresh set of hot stocks. A burning news everyone seems to be talking about is the fact that Elon Musk became the richest man in the world, surpassing Jeff Bezos of Amazon. But what many fail to understand is that usually, when these types of landmarks happen, it’s a sign that speculation in the markets has gone way too far.
Another landmark was that Tesla stocks went almost vertical and its market cap surpassed Facebook’s, which made Tesla the 5th largest company in the United States. During the peak of the 1990s dot-com bubble, in March 2000, Cisco had a market cap of $569 billion. Adjusting this figure according to the current inflation, Cisco’s market cap peak in today’s dollars would be approximately $864.9 billion. This indicates that at $836.5 billion, Tesla is closing in on Cisco’s peak.
These are very similar bubbles, and keeping in mind that the health crisis doesn’t have a clear end in sight, and as long as the economy remains impaired more stimulus relief will be issued to boost it, this time around, the bubble can get even larger, which means the crash would be much deeper. Worried about a downfall with similar proportions to the previous housing bubble burst, Michael Burry, the investor whose billion-dollar bet against the US housing market was immortalized in Michael Lewis’ book “The Big Short,” is warning that Tesla stocks might crash in the same fashion. “Well, my last Big Short got bigger and bigger and BIGGER too,” Burry tweeted last Thursday.
Likewise, macro strategist David Hunter is predicting a massive melt-up in financial assets. Hunter’s perception is remarkably aggressive, he forecasts that a 65-80% crash in prices may happen by the end of the year. However extreme it may seem, historic patterns and current evidences seem to be on his side.
Every time excessive debt has enabled market assets to distort to unsustainably excessive heights, a dramatic correction to clear out the bad debt and malinvestment has always occurred. In short, we are moving towards the most dramatic correction ever recorded. And when this stock market bubble finally bursts, it will be catastrophic.