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Waiting for the bubble to pierce Nasdaq, Tesla, Bitcoin. Waiting for the last dance

“There is nothing more annoying than watching your friends and neighbors get rich quickly and easily.” – Jeremy Grantham .


Founder and investment strategist at GMO Asset Management, which manages more than $ 100 billion. In the investment world, Jeremy is known for correctly identifying and predicting financial bubbles over the past 50 years.


Jeremy_Grantham is the author of “Waiting for the last dance” Bloomberg


In this article we want to describe the situation in which the American markets find themselves in. In the next article we will provide an appropriate solution for a globally diversified portfolio of assets that can be implemented using index ETFs.


Sources of this analysis:


Article by Jeremy Grantham, founder of a $ 118 billion investment firm;


Analysis by Convoy Investments (ex. Bridgewater, the world’s largest hedge fund);


“Waiting for a puncture of the bubble”

For about ¾ of the time, markets operate as an efficient asset pricing machine. In other words, assets are traded at more or less fair prices, deviations from fair value are insignificant and not long-term.


During such periods, to achieve optimal investment results, it is sufficient to have optimal allocation in standard index assets (for example, in indices of American or international stocks or bonds). The future results may be comparable to the recent past.


Serious problems begin when the markets, or a significant portion of them, are in a bubble. Thus, the long-growing stock market, which began in 2009, was briefly interrupted for a sell-off at the beginning of the pandemic, and then fueled by the monetary experiment of central banks, eventually turned into the largest bubble in financial history.


The financial bubble is the time when fortunes are made and lost. The current financial bubble, primarily in US tech stocks, began gradually. In the 2nd and 3rd quarters of 2020 stocks were still associated with fundamental value and in the eyes of investors looked like business models for the “post-pandemic world.” Then, there was an acceleration of growth and revaluation of many assets beyond reason.


Today the American market is at the highest historical values in terms of its multiples to business indicators. The right-hand column in the table below shows the percentile for the entire history of observations by the American investment bank Goldman Sachs.


S&P 500 index multiples

Goldman Sachs stock market multiples


A financial bubble is a rare event, and therefore not everyone can clearly identify its existence, since they are experiencing it for the first time. Most Recent Financial Bubbles in History – 2008 Mortgage Bubble, 2000 NASDAQ Technology Bubble; 1989 – the bubble of everything in Japan and so on.


Any financial bubble is accompanied by the generally accepted market view is that the current bubble will definitely not burst.


Easy money in the form of ultra-low interest rates.


Accelerated growth of prices for “stocks from the future” in a short period of time with the maximum acceleration of growth just before the bubble burst.


A record number of IPOs.


A record number of new brokerage accounts opened among the population.


Sharp and negative reaction of clients trying to keep up with missed mythical high profitability to any criticism and suggestions to reduce risk.


An increase in leverage in investment accounts.


Critical financial implications for the entire global financial system.


The belief that low interest rates and central bank action will prevent the bubble from bursting.


Low value stocks resulting from low returns in recent years (e.g. Berkshire or JNJ)


The current state of affairs is characterized by the following points:


  1. The highest historical multiples of the stock market valuation simultaneously with one of the worst historical indicators of the real economy. The chart below shows the Price / Earnings multiplier

Median P / E of GMO, Worldscope, Compustat, MSCI


  1. Speculation in individual names, where the rationale for a rise in stocks borders only on the imagination: Hertz, Kodak, Nikola, NIO, Virgin Galactic, Plug and many others. So for example:
  1. Hertz – shares have grown 10 times already in bankruptcy proceedings, despite the fact that, by any estimate, as a result of bankruptcy proceedings or debt restructuring, shareholders had nothing left.

The investment bank serving Hertz even petitioned the court to issue shares in order to raise capital during bankruptcy proceedings, the value of which would still be “zero”


  1. Kodak – shares jump 30x on news that the company will manufacture chemicals to treat COVID-19
  1. Nio is an electric vehicle manufacturer in China that produced only 43,000 vehicles in 2020 but has already reached a $ 100 billion market capitalization on news of a partnership with NVDIA on autopilot.



  1. Warren Buffett’s indicator (market capitalization to GDP) exceeded the record high in 2000.
  1. In 2020, 480 IPOs took place in the US, and at the peak of the 2000 bubble – 406 IPOs. The amount of attracted investments exceeded any records before the previous bubbles punctured.

Cumulative IPO on US exchanges Dealogic, WSJ


  1. The activity of retail investors in the options market in 2020 grew 8 times compared to 2019, which already exceeded the average long-term indicators, and the leverage of trading accounts also broke all previous records

Investors’ leverage backed by Finra securities


Biggest stock bubble – Tesla:

  1. Tesla’s current market capitalization is ~ $ 770 billion. In just one trading session on Monday, January 11, the company lost $ 50 billion.
  1. Sales of cars in 2020 – 500 thousand units. In other words, the buyer of Tesla shares buys the company at a multiplier of $ 1.5 million per car, when the average cost of one sold car fluctuates around $ 50-60 thousand, and the recommended retail price of M3 is from $ 40 thousand. General Motors shares are traded at a multiple $ 9 thousand for a car produced in 2020. Tesla shares are up 800% since 2019, amid 17% growth in car sales.
  1. Tesla’s sales in Europe fell 10% y / y in 2020, compared with more than 100% growth in the European electric car market
  1. Tesla has a market capitalization greater than the sum of all of the automakers in the US, Europe, Korea, and the Japanese Honda. These companies cumulatively sell 50 times more cars than Tesla
  1. Investment bank analysts (Morgan Stanley) trying to justify the market price expect that in 2023. Tesla will have a car insurance business with an estimate of only $ 37 per share. Joint Venture Berkshire x Amazon x JP Morgan recently announced the suspension of a joint venture to set up an online prescription drug business (a less regulated industry than auto insurance)

MS Equity Research Report Adam Jonas


Tesla Sum of the Parts Morgan Stanley score


  1. Against the backdrop of the Tesla cult, Nikola was listed on the stock exchange this spring, with shares rising to $ 30 billion. However, Nikola not only does not produce cars (prototype stage), but Nikola does not even have its own factory in which it is going to produce its cars.
  1. If you expect that Tesla can repeat 800% profitability in 2021, then you must believe that a company that produces only 0.5 million cars a year will equal 37% of the entire US economy in terms of capitalization.
  1. Many market veterans compare the performance of Tesla shares to the performance of Yahoo’s shares in 2000. Then Yahoo the world’s largest company by market capitalization.

Yahoo and other tech companies since bubble puncture


Bitcoin is a speculative asset, not applicable for settlements on trading operations


  1. In the current state, Bitcoin cannot be an acceptable measure for any kind of economic calculations
  1. If you measured inflation in the US in Bitcoin, then: in 2018, inflation on goods would be 275%; in 2019 there would be a deflation of 50%; and deflation in 2020 would be 75%. No economy can work when you come home from work on Friday and don’t know how many goods you can buy on Sunday
  1. Bitcoin, like other alternative assets, is growing due to the fact that there are negative real interest rates around the world. Many institutional investors (clients’ money managers) are forced to hold more than $ 18 trillion of debt obligations with negative yield to maturity, in other words – with a guaranteed loss. Therefore, instead of a small portion of a portfolio with a guaranteed loss, they choose an asset with an “unknown return” (Bitcoin).
  1. The use of blockchain technology will be actively developing, but Bitcoin today has only the use of a “market sentiment indicator”. Some are trying to compare Bitcoin with gold, but this is also not correct due to the realized volatility of Bitcoin and due to the industrial use of gold. Daily liquidity in gold and gold-linked financial products is over $ 140 billion per day.

Bitcoin:  here is a detailed investigation of how, with a high probability, most of the entire trading volume of Bitcoin on crypto exchanges is probably fake.


  1. If you believe that in 2021 Bitcoin will repeat the dynamics and growth rates of 2020, then you must believe that by July 2021 Bitcoin capitalization will exceed all cash dollars in circulation. It is unlikely that the authorities of developed economies will legalize and on such a scale will allow trading in assets in which there is no identification of the beneficiary.

Dollars in circulation vs Bitcoin Convoy Investments (ex-Bridgewater)



It is impossible to predict the exact moment when the bladder will puncture. The market can remain irrational longer than we are solvent.


So, for example, in the 1980s, GMO predicted a bubble in Japan, completely sold out all positions and waited for three years watching the madness. At the peak of the Japanese Bubble in 1990, the Japanese Equity Index was trading at 60x Price / Earnings, and all Japanese real estate was valued at 4x the value of all US real estate.


A puncture in overvalued sectors and asset types can begin at any time. Most of the big investors talk about the moment of the beginning of mass vaccination in the developed economies.


Investors and financiers will deliver the vaccine, understand that the global pandemic will end sooner or later, that states will not be able to indefinitely take on the debts of all participants in the economy, look around and see that Teslas are still rarely found on the roads, the economy is in a terrible state, and financial asset prices are high. All this will push investors to take profits.


Financial markets cannot be understood in terms of one precise formula. However, there are asset classes and investment factors that outperform broad market indices during periods of high volatility and bubble creation.


To begin with an investor must recognize the existence of a bubble and assess the existing risks to one’s personal portfolio. Once you have positions in the names that everyone is talking about, start planning for a gradual and disciplined exit and reinvesting in defensive assets.

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