We are in the midst of the biggest stock market bubble in market history, according to Andrew Parlin, the founder and CIO of investment advisory firm Washington Peak.
In a recent op-ed for the Financial Times, Parlin says he’s experiencing “déjà vu” as he outlines the parallels between the Japanese real estate bubble of the 1980’s and today’s tech-driven bubble.
As a young investor during the real estate craze in Japan, he met with an analyst who claimed the stocks of a midsized and heavily indebted railroad company should be worth 5 times to 10 times more, because they could convert some of their land holdings into a giant condominium complex.
“Never mind that the land was desolate and inaccessible. Nor that acquiring the necessary permit would take years. He produced elaborate financial models showing how the stock was actually worth five to 10 times its current value. My head spun,” said Parlin.
“Back then, anything with a whiff of exposure to real estate was at the centre of speculation. Now, the hottest sectors in America are nearly all disruptive technologies. Stocks with real, or perceived, exposure to the cloud, digital payments, electric vehicles, plant-based food, or anything at all to do with the stay-at-home economy have shot up meteorically.”
But Parlin says the value of many of these “disruptors” is as unrealistic as what he saw during the Japanese real estate bubble.
“Bubbles are formed around individual stocks and sectors. As the concentric circles of excess widen, more and more stocks are infected. Wildly exaggerated stock stories force a delinking between fundamental analysis and share prices.”
He points to Tesla as an example of this phenomenon.
“That is how a stock such as Tesla commands a market capitalisation of about $400bn, up from $80bn in March, and $40bn one year ago. Tesla’s rise then engulfs the entire electric vehicle market in a frenzy of speculation.”
Companies Approaching the Market Bubble
Parlin’s reliable metric for a market bubble is the price-to-sales ratio. He says the number of companies with sky-high price-to-sales ratios is approaching dot-com bubble territory.
“Today, according to Bloomberg data, 530 out of America’s 8,513 listed common stocks trade at more than 10 times sales. This is 6.2 percent of all common stocks… Only at the very top of the dotcom bubble, in March of 2000, can we find a larger percentage of stocks (6.6 percent) trading in excess of 10 times sales.”
“The point is that price-to-sales ratios in the stratosphere do not stay there, any more than a tulip bulb in 17th-century Holland was able to maintain a price of $100,000. This gets at the troubling thing about bubbles. They do not simply undergo smooth and endogenous shrinkage until they disappear. Instead, they continue to expand until they burst. This is why their bursting is more often than not shocking, spectacular and disorderly.”
He says he doesn’t know when the bubble will burst, but we are all a part of the biggest bubble in history.
“When and how this ends is impossible to say. But with the Fed pursuing thunderous asset purchases and getting ever softer on its 2 percent inflation target, the bubble is firmly on track to be one of biggest in stock market history.”