This is a tech bubble, when's the crash?

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  136. No, Facebook should not become a nonprofit
  137. Sell all crypto and abandon all blockchain
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  166. Someone is wrong on the internet, wages and the stock market edition

Pro tip: confirm reader bias, then act like you just don't care. Styling it out, we have the West Coast index provider Research Affiliates declaring: “Yes. It's a Bubble. So What?”

Its contribution to the bubble-angst-chill genre includes such gems as:

perhaps bubble-like prices can be perfectly rational as long as we accept curiously high volatility in the curvature of investors’ utility functions. 

And:

the market constantly creates single-asset micro-bubbles, isolated examples of extreme mispricing which require severe right-tail outcomes to justify the asset’s price.

Stick with it though, as there's some great stats in there which get at a hindsight view of what constitutes a bubble. If many years later it proved to be a terrible time to buy, then it was probably a bubble:

At the beginning of 2000, the 10 largest market-cap tech stocks in the United States, collectively representing a 25% share of the S&P 500 Index—Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun, Qualcomm, and HP—did not live up to the excessively optimistic expectations. Over the next 18 years, not a single one beat the market: five produced positive returns, averaging 3.2% a year compounded, far lower than the market return, and two failed outright. Of the five that produced negative returns, the average outcome was a loss of 7.2% a year, or 12.6% a year less than the S&P 500.

Today think Netflix or Tesla, which Research Affiliates' Rob Arnott and Shane Shepard see as one of those micro-bubbles that illustrates another truism of the phenomenon: buyers must think their actions are rational. It seems unlikely all cars will be electric in a decade and Tesla will make a significant percentage of them, but clearly some investors buy into the grand plan. As Rob and Shane write:

 there will always be a cohort that says, “This is no bubble!”

Which brings us to holders of cryptocurrencies and blockchain-y tokens. Those traders might be interested in a lesser-known bubble in the Zimbabwean stock market, which largely ceased to exist after its value dropped 98 per cent in a week. Right-click to open a larger version in a new tab:

Quill Cloud

Still, the question which really matters is much bigger: is the US stock market in a bubble?

In terms of warnings and worryings, the world is not doing much soul searching. Here's the Google Trends data for the term “market bubble”:

Quill Cloud
Quill Cloud

It turns out the peak of interest was June 2005, when there was a prescient but rather early feature on house prices in The Economist:

Unlike some of the other cover stories, the analysis bears up pretty well:

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.

We should also credit Robert Shiller. The Yale professor's book, Irrational Exuberance, which predicted the dotcom crash, had just been republished with an update on the housing market. A Barron's feature on his pessimistic forecast for house prices came a few days after the Economist story.

Still, the recent December peak in Google searches for “market bubble” was the highest since 2006. Possibly of note is that Canada shows the most interest in the term, with a crest of inquiries last May, around the time of the Home Capital Group crisis. The country's housing market has been somewhat bubble-like, but the searches could also reflect a surge of interest in bubble tea.

Taking another method with a longer history, general media usage of the term “market bubble” peaked in 2003, according to the Factiva database, perhaps due to much writing about the dotcom aftermath. The most recent surge came in 2015, when worries about China spooked many investors and prompted an August spike in stock market trading activity:

Quill Cloud

It may be that many have given up sounding warnings. Attempting to predict the end of a stock market bubble is notoriously hard, and has proved many a pundit wrong.

Research Affiliates has a point when it comes to big tech, however:

At the end of January 2018, the seven largest-cap stocks in the world were all tech fliers: Alphabet, Apple, Microsoft, Facebook, Amazon, Tencent, and Alibaba. Never before has any sector so dominated the global roster of largest market-cap companies. At the peak of the tech boom, four of the top seven companies by market cap were in the tech sector, and at the peak of the oil bubble, five of the top seven were in the energy sector. Only the Japanese stock market’s bubble at yearend 1989 has matched today’s tech sector dominance of the global market-capitalisation league tables.

Take the long view, and it won't be those seven at the top of the table in 2028:

History shows that, on average, just two stocks from the global market-cap top 10 list remain on the list a decade later. The two survivors almost always include the number-one stock. But the number-one stock has never been top dog a decade later, ultimately underperforming and moving lower in the list. The second surviving stock has 50/50 odds of beating the market. If this history repeats, nine of the top 10 market-cap stocks will underperform the market over the next 10 years, and just one has a 50% chance of underperforming.

We should probably mention that Research Affiliates has an interest, among other things, in the business of indices not constructed according to market capitalisation, as most tend to be.

Hence, perhaps, the so-what sentiment to the big-tech bubble. For two years after March 2000, the peak of the dot com boom, the average US stock price actually rose about 7 per cent, while the S&P 500 was losing almost a quarter of its value as the biggest companies plunged.

Still, the average US stock price did then proceed to drop 36 per cent. Everything goes wrong for a bit in the end.

Further Reading:
Amazon is not a bubble - FT Alphaville
Is Google cheap? - FT Alphaville
Canada's housing market flirts with disaster - FT

  1. WeWrite-down
  2. No deal Brexit is not a hedge fund conspiracy
  3. Europe’s digital infrastructure issue
  4. Let’s give a helping hand to Andrew Yang
  5. Anatomy of a malware scam
  6. ARK Invest’s Tesla model gathers dust
  7. A delirious defence of Uber
  8. WeLiquid: Adam Neumann pockets $700m
  9. Yesterday, in efficient markets
  10. The warm fuzzy feeling of indirectly owning Tencent
  11. The best of Morgan Stanley's Adam Jonas
  12. Apple/Tesla: M&A and heartbreak
  13. Did Beyonce make $300m from Uber's IPO?
  14. Bitcoin is the 10-year Treasury of our time
  15. High resolution music is a solution looking for a problem
  16. Amazon is furious about this negative review
  17. Missing: $500bn of American savings
  18. Blockchain for Brexit: a wonderfully terrible idea
  19. The Bank of Hodlers [sic] (sigh)
  20. Behind the curtain at China Ding Yi Feng
  21. An answer to Mark Cuban's question
  22. Crumbs! It's CRYPTO: the movie!
  23. National Beverage Corp loses its fizz, and its mind
  24. Amazon won't spin-off Amazon Web Services
  25. Mensch! Dan McCrum is innocent, ok?
  26. Europe's $1 trillion tax gap
  27. Why online propaganda mobs are an investment red flag
  28. Davos has produced an amazing new guide on precisely how not to think about risk
  29. When the public relations industry does PR for itself
  30. Who wants to be crippled by student debt?
  31. The bitcoin price is wrong
  32. The warm fuzzy feeling of Goldman debt
  33. “Cryptoassets” are crashing again. Is it time to start calling them cryptoliabilities instead?
  34. Puff the tragic cryptowagon smokes out the Mumsnet demographic
  35. Don't write off the public sector
  36. Initiative Q: an elementary pyramid scheme with grandiose ideas [Update]
  37. Moral investments aren't outperforming
  38. No one is killing it in crypto (not even Woz)
  39. Too smooth: the red flag at Patisserie Valerie which was missed
  40. No, the housing crisis will not be solved by building more homes
  41. Sorry Civil, 'crypto-economics' and 'constitutions' won't save journalism
  42. 'Short-termism' isn't a thing, say Fed economists
  43. Coinbase wants to be “too big to fail”, lol
  44. Regulation and innovation don't have to be enemies
  45. Retailers get so lonely around the holidays
  46. Folli Follie: $1bn of fake sales, and what to learn from the debacle
  47. The new green evangelism
  48. Tilray, how low can it go?
  49. The ICO behind the tragic Everest stunt is now “airdropping” tokens from rockets
  50. Beware the Hindenburg Omen?
  51. The broken conversation about financial regulation
  52. The improbably profitable, loss-making Blue Prism
  53. The EM rout is not made in America
  54. Wages and growth and honestly we just give up
  55. Britain's first blockchain-enabled co-working space isn't blockchain-enabled
  56. There is a FIRE that never goes out
  57. The WeWork Garden of Eden
  58. IQE: lumpy 'Apple' sauce at the pricey Cardiff chip shop
  59. There's only so much a central bank can do alone
  60. Eight questions every first-time buyer should ask
  61. MiFID II: not all doom and gloom
  62. Tesla: getting to Q3 profitability
  63. Turkey contagion fears are overblown [Update]
  64. The chance of an inflation shock may be higher than you think
  65. Sorry Tim, the humanity is not being drained out of music
  66. Digital crop circles
  67. What could go wrong here?
  68. Sirius Minerals: money for a hole in the ground
  69. The Bank of England has a strange idea of what QE achieved
  70. One for the ladies...
  71. 'Of course, many ridiculous papers appeared'
  72. Is a change goin' to come?
  73. The capacity's not there yet (and probably never will be)
  74. Musk and Tesla are not inseparable
  75. Libraries, from Carnegie to Bezos
  76. Crypto & government: from anarchy to amity in the USA
  77. 'I'm sorry Dave, I'm afraid I cannot sanction this Series B round'
  78. RBC, through the FANG barrier
  79. Self-help to buy
  80. CFA: Chartered crypto analysts -- updated
  81. The Netflix dilemma -- updated
  82. Fujitsu's new blockchain offering: really cheap or really expensive?
  83. Nothing But the Shirt on Your Back
  84. Universities of Britain: cosying up to crypto is a bad look
  85. How to make a living in the cult of meritocracy
  86. Spotify: Drake-oil salesmen
  87. Oh, the digital humanity
  88. Sports are not markets, predictions ain't investment
  89. Spot the difference, Steinhoff edition
  90. Larry Robbins, a cautionary tale
  91. The node to serfdom
  92. Carney is down with the crypto kids
  93. Samsonite: inventory, excess baggage, and unresolved questions
  94. It might be a long wait for “the equivalent alternative to ICOs”
  95. Don't blame it on the sunshine
  96. In corporate America, brands develop you
  97. One in ten dollars of US housing were anonymous
  98. Should AT&T worry more about its debt?
  99. Who cares if Elon is incinerating capital?
  100. Let’s not try make 'crypto chicks' a thing
  101. Tokens all the way down
  102. Eight-dimensional chess with Elon Musk
  103. A lopsided trade is a good trade, Italian inflation edition
  104. How to buy Italian fire insurance
  105. Atlas bugged
  106. Inflating inflation
  107. Crypto's most devout believers are suffering a crisis of faith
  108. Plus500: past performance is no guide to the future
  109. Noble rot in a shrinking Harbour
  110. In defence of ticket touts
  111. Please don't tell individual investors to buy leveraged loans
  112. RIB Software: the unicorn rainy-day fund
  113. Retail is not dead
  114. Did Soros really give Tesla a “vote of confidence”?
  115. At a crypto conference in New York, it feels like 2017 all over again
  116. Egregious expectations - Intelsat edition
  117. Bitcoin cash is expanding into the void
  118. Stop getting The Flintstones wrong
  119. Bond investors do not care if Argentina is solvent in 100 years
  120. Ubiquiti Networks: of cash and borrowed time
  121. “We're very disappointed in you, Spotify”
  122. 'Sex redistribution' and the means of reproduction
  123. Tesla probably needs to raise capital this year
  124. No entitlement crisis in America
  125. Free cash flow to whom?
  126. Hey crypto bros! Journalism ≠ advertising
  127. Human capital and the jobs guarantee
  128. The magic of adjustments: ebitla-dee-da
  129. FUD, inglorious FUD
  130. A complex analysis reaches same conclusion as simple one: hedge funds suck
  131. The jobs guarantee and human-capital “nationalisation”
  132. These hedge fund numbers can't be right
  133. The Vomiting Camel has escaped from Bitcoin zoo
  134. Lies, damn lies, and charticles
  135. The world doesn't need more Elon Musks
  136. No, Facebook should not become a nonprofit
  137. Sell all crypto and abandon all blockchain
  138. Immutable ledgers meet European data protection
  139. Amazon is not a bubble
  140. Japan's economic miracle
  141. Have you ever meta crypto joke you didn't like?
  142. Delaware should change its rules to let the light in
  143. Who needs the labels anyway?
  144. Baby Boomers want your family to finance a larger share of their retirement
  145. No, America would not benefit from authoritarian central planning
  146. No one needs to buy Tesla
  147. How to win a debate in the cult of meritocracy
  148. Steinhoff International and the case of Pepkor Global Sourcing
  149. Sorry Jack, Bitcoin will not become the global currency
  150. The “academic’s cryptocurrency” is an elegant waste of time
  151. Cigarettes are the vice America needs
  152. Well that’s one reason to buy yen…
  153. Musicians, don't just blame the labels for your lack of dough
  154. Giving stock away to staff doesn't absolve share buybacks
  155. A penny for Macpherson’s thoughts on the nominal anchor
  156. Monopoly and its discontents
  157. A State of Mind
  158. America is not the least protectionist country in the world
  159. This is nuts, when does Netflix crash?
  160. No Bloomberg, the world's richest people did not lose $114bn...
  161. Someone is wrong on the internet, government employee pensions and passive investing edition
  162. Someone is wrong on the internet, possibly fragile
  163. Someone is wrong on the internet, consumer financial regulation edition
  164. Someone is wrong on the internet: tontine tokens [Update]
  165. Someone is wrong on the internet, road economics edition
  166. Someone is wrong on the internet, wages and the stock market edition
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