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“ ‘When and how this ends is impossible to say. But with the Fed pursuing thunderous asset purchases and getting ever softer on its 2% inflation target, the bubble is firmly on track to be one of biggest in stock market history.’ ”
That’s Andrew Parlin, founder and chief investment officer of investment advisory Washington Peak, joining the growing chorus of bearish pundits in a recent op-ed for the Financial Times.
The piece caught the attention of Société Générale economist Albert Edwards, who’s been known to offer up some rather gloomy market takes of his own:
As an investor who navigated the historic bubble in Japan decades ago, Parlin said that he’s “experiencing déjà vu” in the current top-heavy climate.
“Back then, anything with a whiff of exposure to real estate was at the centre of speculation,” he explained. “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.”
As Parlin sees it, stories surrounding “the hottest disrupters,” are every bit as unrealistic as the nonsensical real-estate investments of Japan’s mania.
“Bubbles are formed around individual stocks and sectors. As the concentric circles of excess widen, more and more stocks are infected,” he said. “Wildly exaggerated stock stories force a delinking between fundamental analysis and share prices.”
He said Tesla TSLA, -19.33% is an example of “these pods of excess” that will ultimately have a destabilizing effect on the broader market.
“Just as soaring price-to-book ratios signaled massive speculative risk in Japan in the late 1980s, where assets were all the rage, so today in the U.S. insanely high price-to-sales ratios highlight the total lack of realism embedded in the hottest growth stocks,” Parlin wrote.
This metric, he explained, tends to be fairly stable, and it is rare to see a stock trading at a price-to-sales ratio over 10 times. But that’s most definitely not the case these days.
According to Bloomberg data cited in the op-ed, 530 out of 8,513 listed common stocks in the U.S. trade at more than 10 times sales. Parlin pointed out that only once in history have we seen a larger percentage of stocks trading in excess of 10 times sales.
When was that? You guessed it: March of 2000.
“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,” he wrote. “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.”
Tuesday’s decline may not be “shocking” but the major indexes, at last check, were firmly in the red. The Dow Jones Industrial Average DJIA, -2.17% was down more than 400 points, while the S&P 500 SPX, -2.63% and Nasdaq Composite COMP, -3.71% were hit even harder on a percentage basis.
As for Tesla, the stock was taking a beating, down about 14%.
