A U.S. investment manager who remembers the Japanese economic bubble of the late ’80s says he’s experiencing déjà vu with today’s unrealistic U.S. tech stock prices.
“Stories surrounding the hottest disrupters are just as unrealistic as what happened in Japan,” writes Andrew Parlin, founder and chief investment officer of Washington Peak, an investment advisory firm.
In the late ’80s and early ’90s, Japanese real estate and stock market prices were greatly inflated. By August 1990, the Nikkei stock index had plummeted to half its peak. By late 1991, asset prices began to fall. In early 1992, this price bubble burst and Japan’s economy stagnated. The bubble was characterized by rapid acceleration of asset prices, overheated economic activity and uncontrolled money supply and credit expansion. Japan’s economic decline continued for more than 10 years.
Bubbles are formed around individual stocks and sectors, Parlin wrote for the Financial Times. “As the concentric circles of excess widen, more and more stocks are infected. Wildly exaggerated stock stories force a delinking between fundamental analysis and share prices.”
Parlin uses Tesla as an example. Its stock has a market capitalization of about $400 billion, up from $80 billion in March and $40 billion a year ago.
“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.
It’s rare for a stock to trade at a price-to-sales ratio of over 10 times, Parlin wrote. Normally, he said, this ratio is fairly stable since revenues are not prone to big profit swings and not as easy to distort as income or book value.
Today, however, 530 out of 8,513 U.S. listed common stocks trade at more than 10 times sales, according to Bloomberg data. This is 6.2 percent of all common stocks, up from a ratio of 3.8 percent at the market’s low in March.
“Only at the very top of the dotcom bubble, in March of 2000, can we find a larger percentage of stocks (6.6 percent) trading in excess of 10 times sales,” according to Parlin.
In 2000, three of the top 10 U.S. stocks by market cap had price-to-sales ratios over 10 times: Cisco, Intel and Oracle. Today, four of the top 10 U.S. stocks have price-to-sales ratios over 10 times: Microsoft, Facebook, Tesla and Visa. These high price-to-sales-ratio bubbles continue to expand until they burst, Parlin said. And when it happens, it is ugly.
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The total value of U.S. stock holdings rose from 60 percent of gross domestic product in 1990 to 120 percent of GDP by 1996 — “a ratio topped only by Japan at the height of its 1980s bubble,” former Federal Reserve Chairman Alan Greenspan wrote in his 2007 memoir.
In Japan, that ratio was 140 percent by the end of 1989, according to the World Bank. The ratio of market cap-to-GDP in the U.S. in 2000 reached the same level. Today, the U.S. market cap-to-GDP ratio is close to 200 percent. The S&P 500 companies alone are worth about $30 trillion — 150 percent of GDP, Parlin wrote.
“The bubble is firmly on track to be one of biggest in stock market history,” Parlin concluded.
