It is one thing for investment guru Jeremy Grantham to bravely declare that we are living through “one of the great bubbles of financial history.’’
It is quite another to get at least some clear evidence that he is absolutely correct.
However, Grantham’s claim that “the single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behaviour, especially on the part of individuals’’ has now officially come to pass.
And it was none other than the crown prince of overvalued companies – Elon Musk – who showed the extent of the bubble with a simple tweet of “Use Signal’’ which was dutifully read by his 42 million adoring followers.
— Elon Musk (@elonmusk) January 7, 2021
Tesla valuation defies analysis
It was Grantham himself who had pointed out research showing that Musk’s famed electric car company Tesla was now valued so highly that each car sold in a year represented a staggering US$1.25 million of market capitalisation compared to just US$9,000 per car for General Motors.
Musk’s tweet was actually meant to highlight an alternative encrypted messaging app to WhatsApp, due to a change in the privacy conditions of use that will allow parent company Facebook to target users with advertising.
If those privacy conditions are not agreed to by WhatsApp users by 8 February, their accounts will be deleted, which has led to a boom in downloads of alternative encrypted messaging apps such as Signal or Telegram.
Mistaken stock tip goes ballistic
Unfortunately, many of Musk’s faithful followers misinterpreted his cryptic tweet as being a stock tip to load up on shares in a tiny medical device company called Signal Advance.
And load up on its stock they did, forcing the price of the baffled company up by an amazing 11,708% in just three days – sending its market value from US$55 million to more than US$6 billion as the shares flew from US$0.60 to US$70.85.
Of course, once this group of trend-following, buy now, research later lemmings eventually realised they had made a monumental mistake, they sold off the stock like it was a petrol-powered car and the shares dived.
If you were looking for an example of bubble-like behaviour, it is hard to go past an almost US$6 billion creation of market capitalisation based on a misunderstood tweet from the guy at the helm of a company which has a valuation that nobody can make any sense of in relation to its profits.
Grantham has more bubble evidence
If this crazy mistake was the only evidence of a bubble forming in the US share market, you could possibly overlook it.
However, Grantham has plenty of other examples to bolster his theory – although he does admit that the timing and speed of any bubble deflation is always very difficult to pick.
One of the measures he pointed to is the so-called “Buffett indicator” which compares total stock market capitalisation to GDP.
The indicator has broken through its all-time-high 2000 record, which was set just before the tech wreck.
Another measure is that in 2020, there were 480 IPOs in the US – 248 of which were SPACs or Special Purpose Acquisition Companies that are designed to buy other assets – which again broke the record of 406 IPOs in 2000.
For good measure, Grantham pointed out that there were 150 companies with a market capitalisation of more than US$250 million that had more than tripled in the year, which is over three times as many as any year in the previous decade.
Looking for value in a bubble
Of course, it is one thing to diagnose a market bubble and another thing to know what to do about it – particularly when even Grantham is not sure about how long any bubble might last or how quickly it might pop or deflate.
The bubble might last for several years and then slowly deflate or it could pop spectacularly tomorrow but, as usual, the future is unknowable.
While acknowledging the difficulties in navigating a market bubble, Grantham says the answer probably lies in looking at the worst performing sectors in the market which in an international context are value stocks and emerging market stocks.
“Not surprisingly, we believe it is in the overlap of these two ideas, value and emerging, that your relative bets should go, along with the greatest avoidance of US growth stocks that your career and business risk will allow. Good luck!’’ said Grantham.
It is interesting advice for personal and professional investors – particularly after Elon Musk and his breathless acolytes certainly proved that billions of dollars of valuation can be created and then erased on the back of a total stuff-up and some clueless stock purchases.