Irrational exuberance

As we now know, the U.S. TMT bubble peaked in March 2000. Alan Greenspan (borrowing from Bob Shiller) made his irrational exuberance remark in December 1996. From the date of Greenspan’s speech, the tech-heavy NASDAQ would nearly quadruple…in a little over three years. And then it would plunge 78%, giving back all its gains. Irrational exuberance can continue for a long time but rationality prevails…in the end. In the 1990s and today, the riskiest activities have been rewarded with the best returns. That state of affairs cannot continue forever. If it did, then those activities wouldn’t be risky (and their expected returns would have to be much lower).

Many that made money in the 1990s or the last decade chalk it up to their farsightedness or edge. The common thread – in the 1990s and today – has been that riches have gone to those who took the most risk and had the right exposure(s) at the right time. In the 1990s it was venture capital and high-flying U.S. dotcom and telecom companies. Today it is large cap growth stocks, venture capital, and cryptocurrencies.

There are a few other parallels between the TMT bubble and today:

1) A belief that innovation is accelerating and has the potential to transform the world. The internet did have far-reaching implications and perhaps the innovations of today will prove world changing. But innovation only translates into returns if you are early, right, and don’t overpay.

2) A belief in the power of the Fed. In the 1990s we had Alan Greenspan, the Maestro, and the Greenspan put. Today it is low interest rates and a flood of monetary and fiscal stimulus.

3) Personal attacks on those who voice any skepticism about the speculative assets of the day.

4) A wide-open IPO market for companies with unproven business models, little or no revenue, significant losses, and no clear path to positive cash flow. 2021 will be a record-setting year for U.S. equity issuance.

5) FOMO and strong preferences for skewness (lottery-ticket outcomes).

6) Disdain for traditional valuation metrics.

A valuation, which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which really do not make much difference . . . since there will be no strong roots of conviction to hold it steady.
– John Maynard Keynes

There is no question that markets are expensive today. That doesn’t mean they can’t get even more expensive. But the question you should ask…is today closer to late 1996 or 1999? I don’t know. But unlike the late 1990s, there are few places to hide today (asset classes with the prospect of attractive future returns).

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