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Why The Stock Bubble Might Not Pop. Yet.
Why do cycles die?
There are a lot of possible (plausible) answers, but one of them isn't "old age.
It is a bubble. It will burst. H has been doing a good job of laying this out lately. Only question: is it 1994/2004, 1999/2006 or 2001/2008. Or possibly the better historical context: is it 1925, 1927 or 1929?
BoA apparently has note out today expecting AI investment to triple to $1.2T from 25-30. Essentially, US equities have become a a macro level Ponzi scheme is which service/infrastructure providers leverage their balance sheets (either cash on hand or worse debt issuance) to sign “mutually beneficial” reciprocity agreements with strategic partners meeting accounting standards for Rev Rec to inflate earnings. The other side of the deal then does the same back and or inflates the assets on their balance sheet. US tech companies are no longer asset light, they are asset massive. All of this is all being done with no valid end user ROI model.
So when the talking heads in the finance infosphere say this time is different because there are real earnings, they are lying even if they actually believe it. At best the earnings growth is solely driven by infrastructure overbuild and are transitory, not structural.
Right! The large asset mgrs are all uniformly saying its not 1999 bc there are earnings. They also are v quiet on the Quarterly calls about comparisons to ‘vendor financing’. Then it was with debt, now its cash upfront for shares. And THAT is the reason they give, this its OK this round…no debt pmts.
And once AI disappoints like 2001 internet capabilities…ppl always expect things too fast….orders will drop, earnings will -gasp- not climb so fast (they dont even have to go down, as this is all part of Sentiment), the AI hype will die down, combine that shift in mood with the bs from djt….sentiment shifts and markets fall. Wall St seems think that numbers need to nominally be worse than 1999, when really its the direction…the relative change that hits people.
As you have stated, the problem is really with the top 7- 8 largest companies in the S&P 500 (by market cap). Currently, the top 8 represent 33% of total market cap. In 2015, top 8 were15% of total market cap.
So if this pops, where does all the money go?
https://www.finhacker.cz/top-20-sp-500-companies-by-market-cap/#2025
The money lost when prices die doesn’t “go” anywhere. It simply disappears. The assets (rights to future cash income) are still there. They are just worth less. In the case of stocks whether the price ever “comes back” is in no way guaranteed, nor is the price itself. There are no promises with stock.
Quite right Mr Lucky. I sometimes find it useful to remind myself that the entire 50+ trillion market cap of the S and P is derived from a population of transactions that total a little more than 100k USD (the sum of the last recorded trade for each of the 503 component stocks). Other than limit-down rules, there really isn’t anything stopping that 50 trillion pretty much disappearing next week.
Valuations are a figment of the shared imagination. My favorite explanation is thus: Create a new crypto fixed at X units, sell 1 unit to me for which I pay you $1, and you suddenly have X dollars on paper, assuming you can convince anyone about the liquidity of your crypto, i.e. there is someone else willing and able to buy it from you at that price. The principle is the same with stocks.
Actually easier and more lucrative with crypto not being regulated as a “security”.
Take the example farther, and you have a very real example of what happens in crypto.
1) Print 1 billion and 1 tokens.
2) Sell 1 token for $1.
3) Congratulations, you’re not a billionaire on paper. Actually, not even on paper. On the blockchain.
I know a couple guys who actually did this as a joke. It’s a simple transaction to create a token on the ethereum blockchain. They created the F#CK coin and sent it around to people so that they, “Would never run out of F#CKs to give.” They printed a pile and sold a few to friends for $0.10 so they could claim to be millionaires. I still have a few in my wallet.
I found the old contract! I forgot they named it “Finally Usable Crypto Karma.” Nice acronym. 70 million coins printed, and they traded for a time on EtherDelta when that DEx still existed.
Coin contract address https://etherscan.io/token/0xab16e0d25c06cb376259cc18c1de4aca57605589