Amazon, Bitcoin, Tesla—who’s up next?
In the late 1990s, we were bombarded with stories that Amazon was a bubble. “Look at those foolish investors, buying into a company that never earns any profit.” Then attention switched to Bitcoin.
“Look at that foolish Ponzi scheme. Imagine people paying $30 a coin!”.
Then it switched to Tesla. “The smart money is on the short side—the $200 price is all hype, there are no profits”.
Who will the smart money focus on next as the perfect example of an asset price bubble? Please let me know when you find out.
🙂
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20. July 2020 at 09:50
The S&P500 overall will likely trade at mid-20’s forward P/E for the next decade, so get ready to read that stocks are expensive for years to come.
20. July 2020 at 09:50
How would you describe Bitcoin price behavior in late 2017/early 2018?
20. July 2020 at 09:55
Shyam,
I’d describe it as extremely volatile, as bitcoin has always been. Here’s a price chart of bitcoin in log scale, which shows the volatility on a % basis wasn’t that strange during that period.
https://ibb.co/YRsdMLS
20. July 2020 at 10:15
Bitcoin will be in a bubble again when it hits $100,000 around the end of 2022. Ultimate stable price after a couple more decades of volatility will probably be at least $500,000.
20. July 2020 at 10:20
Amazon is profitable because of AWS, which no one valuing the company in 1999 would have known about.
20. July 2020 at 10:22
Shopify. I’m surprised it hasn’t been mentioned more frequently.
20. July 2020 at 10:30
Garrett, I agree.
Shyam, Not sure, but since bubbles don’t exist I doubt it was a bubble.
Mike, Bubble again? It’s never been a bubble.
20. July 2020 at 10:45
Off-topic: https://www.bloomberg.com/opinion/articles/2020-07-17/the-fed-is-setting-the-stage-for-a-major-policy-change
‘Faced now with the prospect of another prolonged period of low inflation, Fed officials are signaling they will place less emphasis on Phillips curve estimates when setting policy. Fed Governor Lael Brainard said this week that “with inflation exhibiting low sensitivity to labor market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence.”’
‘By de-emphasizing the Philips curve, the Fed loses its primary inflation forecasting tool. Instead of an inflation forecast, the Fed will rely on actual inflation outcomes to determine the appropriate time to change policy. Brainard pointed out that “research suggests that refraining from liftoff until inflation reaches 2% could lead to some modest temporary overshooting, which would help offset the previous underperformance.” ‘
‘Federal Reserve Bank of Philadelphia President Patrick Harker goes even further in a Wall Street Journal interview, saying “I don’t see any need to act any time soon until we see substantial movement in inflation to our 2% target and ideally overshooting a bit.” Expect to see more Fed speakers also saying they want inflation at or above 2% before they tighten policy. Also expect to see something along these lines codified at in a policy statement. ‘
‘This shift also has implications for the Fed’s ongoing review of policy, strategy, and communications. When Brainard talks about offsetting “previous underperformance,” she is giving a green light to a “make-up” strategy in which the Fed compensates for a period of below-target inflation with a period of above-target inflation. The Fed’s current policy does not allow for such a strategy. The broad willingness to accept overshooting implies that the Fed’s policy review will conclude with a shift toward some form of average inflation targeting in which the central bank explicitly sets policy to compensate for errors such that inflation averages 2% over time.’
If “make-up inflation” gains traction over the next decade, maybe we’ll see level targeting in the 2030s
20. July 2020 at 10:59
I’m a believer in EMT but your argument is completely circular.
Your jusification for high prices in the past is that prices today are higher, and therefore those past investors were correct. But it is tautologically true that a price chart can only be at is highest point for a day or a tick.
Is there any price chart that you would consider to be evidence of a bubble having occured?
If your definition of a bubble implies that they cannot exist, then your definition doesn’t refute anyone, its just not useful.
20. July 2020 at 11:47
Correct answer is, who cares? This is like banter/disputes between ESPN talking heads. Provides ephemeral entertainment, but nothing of value for daily life.
20. July 2020 at 11:59
Anyone who can reliably predict bubbles should be running a hedge fund. I can’t and don’t.
20. July 2020 at 12:28
Dollars. The Fed pays no interest and keeps spending/lending more.
20. July 2020 at 12:51
Garrett, If that’s all they do I’ll be very disappointed.
Ryan, You said:
“Your justification for high prices in the past is that prices today are higher, and therefore those past investors were correct.”
LOL. Do you really think I’m that dumb? I’m arguing that bubble theories are not useful. The burden of proof is on those who think they can beat the market.
pcash, Yup.
Alan, Yes, and based on recent performance, those people are not the ones currently running hedge funds.
20. July 2020 at 13:22
My random, uninformed guess about the next big bubble is some kind of internet-based citizenship provider, whether it’s an org that looks more like today’s eos.io or Stripe idk. The next big market is in citizenship.
20. July 2020 at 13:39
How would EMH explain Wirecard?
20. July 2020 at 16:02
I wish someone had made a compelling argument that we were in a reverse bubble a few months back….before the stock market raliied by 40%.
20. July 2020 at 20:14
I publicly announced I was investing in Tesla last May and have earned an almost 600% return since. For those wondering about the Tesla valuation, you might want to check out Sandy Munro’s YouTube Channel, Munro Live:
https://www.youtube.com/channel/UCj–iMtToRO_cGG_fpmP5XQ
Munro was a production engineer before founding his own manufacturing engineering consulting firm Munro and Associates. He now tears down car models, for example, and produces highly detailed reports, including complete cost and competitive analysis. He sells his reports to automakers for hundreds of thousands of dollars-per-copy. He talks a lot about his recent Model Y teardown and his initial analysis of the Cybertruck.
The conclusions of his company? Tesla is now years ahead of the industry in software, battery management technology(hence range/cost), motherboard technology, electric motors, and other critical areas. They are the only automaker practicing “continuous improvement” meaning they don’t wait for the next model release to integrate significant changes in product content and production process changes to improve their cars. An early production model X or Y can be significantly different from one that comes later that same production year, for example.
Also, and most importantly, Munro concluded with the Model 3 teardown that Tesla’s gross margin on that model was at least 25-30% at the prices then advertised, and he’s stated that the margin on the Y is even higher. He’ll go into more detail about that after they’re ready to release their full Model Y report. These are exceptional margins for vehicles, period, but especially for cars.
20. July 2020 at 20:17
The idea many of us Tesla bulls have is not that Tesla will have a majority market share in cars one day, but that they will have a signicant minority market share, with extremely high margins, similar to Apple in the smart phone and computer markets. Apple was able to build a company with a valuation now easily exceeding a trillion dollars with such a business model.
20. July 2020 at 20:22
‘By de-emphasizing the Philips curve, the Fed loses its primary inflation forecasting tool. Instead of an inflation forecast, the Fed will rely on actual inflation outcomes to determine the appropriate time to change policy. Brainard pointed out that “research suggests that refraining from liftoff until inflation reaches 2% could lead to some modest temporary overshooting, which would help offset the previous underperformance.” ‘
I’m a bit more optimistic about this, since prices are obviously stickier than real output. This could mean a rather substantial gain in average RGDP growth. Of course, inflation targeting of any kind is suboptimal and it’s better to move on to NGDP targeting, but this would still be a substantial step, even if not quite as good as explicitly targeting average inflation. I’m quite glad the Fed may abandon it’s inflation forecasting, which has always been a bad joke.
21. July 2020 at 04:06
Scott is messing with everyone and no one gets the joke. I guess you have to believe EMH to get it. EMH says on average you cannot out guess the market——and I would say that has had a good track record. It says nothing about “stocks are always properly priced”——it says on average you can’t beat it—-and as anyone who reads this blog should know (under the assumption that readers are educated in markets) on average people who explicitly try to beat a market——do not. Worse than random in fact. By facts and measurement.
21. July 2020 at 04:25
Tesla and Amazon are interesting stories. An EMH person is not precluded from finding certain stories interesting. Tesla almost cratered because it missed 3 or 4 forecasts by large margins—-I think it was on its last legs but the market had signaled it would give it one more shot—-and bought 2 bill of stock. Then they finally started delivering cars—-people love visionaries who deliver. Same with Mr B. He delivers on top line—almost always. So his price is framed ——is it fair value? I would not buy either of these two companies as a private placement—-assuming no public market. But I am sure I own both somewhere in my portfolio.
21. July 2020 at 04:36
The word ‘bubble’ should only be applied to situations involving fraud and market manipulation, in my opinion. A bubble is something artificially blown up that eventually explodes. Amazon was not a bubble, but Wirecard was.
21. July 2020 at 04:40
So I assume Wirecard wasn’t a bubble either.
Michael,
That’s not news. And where is the room for improvement in this story? Tesla’s bull stories don’t make much sense. The current price may be justified if everything goes perfectly right for Tesla in the next few years. But even then, it’s already a high price.
Tesla is already worth way more than Toyota, and probably more than Daimler, VW, BMW together, maybe more than most European car companies together. You have to be very optimistic if you want to believe such a story.
Right now, it’s a car company for rich hipsters. We already had that with Porsche, Ferrari etc. But these companies were never worth more than VW, Toyota etc.
21. July 2020 at 05:10
https://thereformedbroker.com/2020/07/20/will-tesla-be-added-to-the-sp-500/
Interesting perspective. Suggests that part of the bull thesis for TSLA has been that once it posts a profit this quarter it’ll be eligible for the S&P500, which will bring in index money.
And it’s not just the passive funds that will drive this, but also active funds who have to manage their relative performance risk versus the index. Right now if you’re benchmarked against the S&P500 and you don’t own TSLA, you’re neutral, which means TSLA’s performance won’t affect yours. If TSLA comes in at a 1% weight, all of a sudden you’re short 1%, meaning if TSLA goes up another 20% then that’s gonna cost you -0.20% relative performance.
So passive funds will buy enough to get to 1%, but lots of active funds will also buy even if they’re bearish to manage their underweight.
21. July 2020 at 07:45
Sean, The EMH says that stock prices reflect publicly available information. That was true of Wirecard, wasn’t it?
Michael Rulle. The EMH model basically says that the EMH model of asset price determination is more useful than anti-EMH models. That’s what “true” means to me.
Anti-EMH models applied to Amazon, Bitcoin and Tesla proved spectacularly unsuccessful.
Garrett, Good point. I suppose that expectations of S&P500 inclusion are already starting to be priced in.
21. July 2020 at 08:56
Well, I agree with more useful. What do you mean by “more useful”?
21. July 2020 at 10:37
Okay, now I’m beginning to understand the “fundamentals” behind Tesla: the price is getting so high that it needs to be included in an important index, and then index funds have to buy it whether they want to or not for technical herd mechanism reasons.
Isn’t that pretty much the idea of the bubble theorists? Self-reinforcing herd mechanisms?
So in other words, the only fundamental about Tesla is that other people will have to buy it soon. GREAT.
😂
Already in January 2019 the Financial Times reported that Wirecard is basically fraud. The information was definitely there.
But it’s not as easy to profit from such information as some theorists might think. Short selling is usually a really bad idea, especially for normal people; the crazy herd market can always squeeze you out and cause a margin call. Being right in this case is completely worthless and even dangerous, unless you have absurdly deep pockets.
Being long is so much easier than being short, I think this might be a reason why prices and the EMH are not always correct; it’s mostly correct but not always.
The most recent doubts came to me in late February and early March when even most of the forists here were wondering why the stock market was not responding. And then finally the crash came, but there wasn’t really new information at that time, the information was already there since weeks, the markets just ignored it, like they ignored Wirecard. And then they finally reacted, but quite extreme, maybe there was even self-reinforcing panic selling.
Scott, are you denying that panic selling exists?
But if panic selling exists, then the opposite must exist as well. Hyper-euphoric bull buying, with a lot of dreamy scenarios, wishful thinking, and pretty far away from fundamentals.
Since February/March it can at least be said that the EMH is always right in the end, but there can sometimes be considerable lags, like a mudslide that gets stuck, then loosens, and then explodes like crazy. Sticky prices if you will!
21. July 2020 at 11:55
Christian List,
You wrote:
“That’s not news. And where is the room for improvement in this story? Tesla’s bull stories don’t make much sense. The current price may be justified if everything goes perfectly right for Tesla in the next few years. But even then, it’s already a high price.”
Actually doing the math, if Tesla sells 3 million cars/year with a net margin of 15%, their earnings/share would be $81. That would put their share price at $1620, with a discount rate of 5%, which is higher than the rate for the S&P 500.
Tesla’s current price is $1568, so I don’t see anything unreasonable here at all. And Tesla sells more than just cars. They also sell home and commercial energy solutions. Estimates of future margins, sales, or discount rate don’t have to change much to result in another big price boost.
And don’t forget that Tesla has started selling SaaS, which is software as a service, unlike any other carmaker, though BMW is starting to flirt with this approach as well.
21. July 2020 at 12:24
Michael,
how is that different from what I said??? $1620 and $1568 is pretty much the same price. 3 million cars/year is a lot, in 2019 Tesla sold a tiny fraction of that.
I’m not saying they never sell that much. It might be even plausible that they sell that much at some point in the future.
You say yourself that the fair price then would be about $1620, but that’s pretty much already the price being paid today, although that’s just dreams of a really rosy, really perfect future. So again, how is that fair, and where is the big room for improvement???
As I said a lot of things must run almost perfectly for Tesla in the upcoming years, and all this only so that they can justify their current price.
21. July 2020 at 12:31
EMH – it is hard to get rich in markets
If you are not rich, you can’t say EMH doesn’t exist (by definition), unless your claim is that you just don’t like money.
21. July 2020 at 12:35
Christian List,
‘Being long is so much easier than being short, I think this might be a reason why prices and the EMH are not always correct; it’s mostly correct but not always.’
You are correct that being long is much easier than being short, but it should be noted that this is just due to how markets work – being long has a limited downside, while being short has an unlimited downside, which makes it more expensive to take a position on – someone selling that needs to hedge their own risk, which is expensive.
For myself, I don’t think ‘prices are not always correct’ is a very useful/truthful statement. Prices are what people will pay and sell at (yes, while the mark-to-market mid price is not always ‘correct’, when there’s a wide spread, it’s as close as we can approximate to); saying they are ‘incorrect’ because they are ‘too high’ is rather nonsensical – if the ‘price’ is above the bid, and lower than the ask, it’s accurate.
Though, like I said, I don’t think we should use the word ‘bubble’ to describe anything that isn’t a matter of fraud – like the original bubble, the South Sea Bubble, was.
21. July 2020 at 12:38
Christian List,
Tesla hasn’t even reached their production capacity in Fremont, which is around 500,000 cars, they’re still ramping up production in their brand new factory in China, they’ll start building their Berlin factory soon, and they’re going to build a Cybertruck factory in Texas. They have over 600,000 pre-orders for the Cybertruck alone.
Again, that doesn’t even count their home solar, home energy storage, or commercial energy production/storage businesses. Even a slightly lower discount rate can boost the price appreciably.
21. July 2020 at 12:40
Also, Sandy Munro has said that the gross margin on the Model Y is higher than that on the 3, which was 25-35%. To the degree that pans out, that could greatly boost the stock price. There are many obvious, rational ways TSLA can continue to rocket upward price-wise.
21. July 2020 at 12:45
It’ll be a bubble when some professor starts justifying asset prices with some bizarre metric
21. July 2020 at 12:46
For example, if the discount rate is only .5% lower, the share price will increase over 11%, ceteris paribus.
21. July 2020 at 13:20
We don’t have much data on TSLA durability whereas the Hondas our family have owned have all run for at least a dozen years. Is there really a broad market for a car manufacturer whose cheapest model is $33,000? Companies with price/cash flow over 100 are scary for me.
21. July 2020 at 13:35
Alan Goldhammer,
Adherence to arbitrary ratio limits for price/cash flow will only mean you filter out the most profitable investment opportunities. What difference does the price/cash flow make if the estimates of future earnings are rational?
21. July 2020 at 16:00
do bubbles exist? [ ].
21. July 2020 at 16:09
@Michael Sandifer
I am a value investor and as a retiree concerned about preservation of capital. Estimates of future earnings are just that. I spent a lot of time around the biotech industry watching estimates of future earnings go up in smoke.
22. July 2020 at 04:53
Alan Goldhammer,
Do your value stocks beat the Nasdaq, for example?
22. July 2020 at 08:20
Michael Rulle, The EMH is useful to investors (index funds are best for average people) researchers (my book on market responses to policy during the Depression) and policymakers (we don’t need regulations preventing bankers from making bad decisions, we need to reduce moral hazard.)
Anti-EMH theories are not useful.
22. July 2020 at 13:33
Scott,
I increasingly find that people who question valuations as “high” usually tremendously lack imagination when it comes to plausible justifications.
23. July 2020 at 06:53
I’m not one to think there are inherently objectively ‘correct’ valuations, but I also have no desire to own Tesla stock currently. Maybe once they make a profit from selling cars I’ll change my mind. As it is, their only money-making business is selling regulatory credits.