Are we in a stock bubble? DBS at Feb 2020 prices!


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A couple of you have reached out to share your amusement that DBS is back to its Feb 2020 prices, from before COVID was even a big thing.

And for the record, I am as amused as you.

Basics: What happened in Jan?

Taking a step back, the big news from Jan:

Democrats winning the senate – This means the Democrats have full control of both houses of congress, and the presidency.

Effectively, this allows them to pass stimulus and enact legislative changes, without Republican support.

This is very bullish, because it opens the way for massive stimulus from a Biden presidency.

This was the “Blue Wave” trade that markets were crazy about in Nov.

Rising treasury yields – The US 10 Year yield is now at 1.12%, when it was 0.91% just a week ago.

Essentially – markets are now pricing in much more stimulus from a Biden presidency (because they now control both houses), and a more inflationary environment going forward.

Inflation is not good for bonds (it reduces the inflation adjusted return), hence there was a sell-off in Treasuries last week, causing yields to go up.

And rising interest rates are good for banks – because their whole business model is lending money. Rising interest rates translate into higher net interest margin for banks, hence the big rally for bank stocks.

I’ll do a deeper dive into UOB this weekend to analyse if the banks are still a good buy at these prices. Gut feel for now, is that I’m probably no longer a buyer at these prices.

But let’s see.

Signs of a bubble? DBS Bank, IPOs, Small Cap Tech, Bitcoin…

Jeremy Grantham (of GMO fame) wrote an article recently sharing his view that we are in a bubble.

It’s a very interesting paper and I highly recommend you to read it in full to understand his thought process.

I’ve extracted a summary below:

The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.

But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.

He basically sees the market as cyclical. Towards the end of every big bull market, we always have a blow off, bubble phase at the end. In 1980s we had Japan, in the 1990s we had Dot Com, in 2007 we had housing. And now, we have the massive asset bubble again.

His advice for investors?

Focus on Value + Emerging Market stocks where there is less overvaluation, but accept some underperformance in the short term as the bubble continues.

Let’s examine both claims:

  1. That we are in a stock bubble
  2. That investors should focus on Value + Emerging Markets

Are we in a stock bubble?

We talked about this back in Dec, but I think the signs of froth are becoming clearer and clearer.

Tesla is up 8x from its Jan 2020 prices, and nearing 800b valuation. At these prices, the company is valued at more than $1 million per car sold (30 times sales).

Bitcoin is another one. It’s soared to $40,000, then had a meltdown to $30,000 where it sits today.

All recent IPOs have been really hot too. Airbnb with 100% day one performance, Nongfu Spring up 80% from post-IPO price, Snowflake doubling on IPO etc.

It’s strange that this comes in the midst of a recession, but a lot of the classic late stage bubble signs are all here.

Do I think this is a bubble?

Yes I think certain areas of the market like the small cap tech stocks and bitcoin are looking bubbly.

But I think a key difference is that this time around, the government +  Feds cannot allow the bubble to burst violently.

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Why this time (may) be different

In 2000, the bursting of the Dot Com bubble caused a mild recession in the US economy, and the Feds supported on the way down by slashing interest rates.

The difference this time around, is that if we have a bursting of the bubble in the midst of COVID – that has the real potential to derail the fragile economic recovery we are in.  COVID has genuinely caused untold destruction to the global economy, and many people are suffering now.

Intentionally letting the bubble burst, will make life even harder for these people, and it will make the economic recovery even harder. It’s a hard sell in today’s world, when politicians are elected, and they clearly have the tools to solve the problems.

This is like the 1930s where mankind didn’t understand how to solve the problem.

Think about it this way.

Imagine we are in June 2021.

The stock market is down 30% from its high.

As Joe Biden, what do you do?

Do you unleash a new round of stimulus to support the economy? Or do you do nothing and let the crash play out?

Probably the former right.

But let’s say he doesn’t. Let’s say that even though Democrats control both Houses of Senate, they decide to sit on their hands and not pass any stimulus.

What does Jerome Powell do?

Is he going to stand by and watch the market continue to tumble? Or does he step up the QE program, increasing the pace of treasury buying?

There’s a lot of fiscal and monetary support today. And if things get bad again, chances are they will step in. The alternatives are too disastrous.

Stocks are very overbought

That said, most major indices are looking very overbought.

Cathie Wood (or ARK fame) came out recently to say that she does expect a correction some time this year.

Historically speaking, the data backs this up.

When things get this overbought, we usually see a correction over a 3 to 12 month period.

But calling the timing for a correction is a fool’s errand. Don’t waste your time on it –  it’s almost impossible to get it right.

So options for investors are:

  1. Buy now and average in
  2. Wait for a mid term correction to buy (but you won’t know exactly when the correction comes)

Definitely no right or wrong here. It really depends on your existing portfolio, and your risk appetite, and how much cash you have on the sidelines.

For me personally, I’ve bought consistently for most of 2020. With the recent rally, I’ve became a lot more cautious on a short-term basis, and I’m a lot more cautious on valuations for new purchases.

Of course, going into the bubbley stocks like Tesla and Bitcoin now are still fine, just be sure to have a clear strategy. You need to know whether you’re in short term to trade it (in which case stop losses are important), or if you’re in to invest longer term.  Many times when a stock falls, traders become investors, and that usually doesn’t work out well.

Have a plan, and stick with it.

Investors to focus on Value + Emerging Markets?

Which brings me back to Jeremy Grantham’s point.

I do think there are still good opportunities in today’s market, and it’s important to focus on valuations.

The problem with focusing on value, is that the digital revolution has changed how value works.

All value means is to buy great companies at good prices.

But the traditional definition of value looks at P/B ratio, P/E etc.  These do not lend themselves to a digital world.

If you apply the traditional metrics today, all “value” gets you is old world companies, which frankly, are unlikely to do that well going forward.

So for this, I do absolutely agree that valuations matters. But I would disagree on the definition of “value” stocks.

In today’s world, Alibaba at 30x P/E but growing at 30% year on year can equally be a value stock.

Big changes in prices the past few weeks, so I will be reviewing the FH Stock Watch again. Targetting to have it out by this week/next.

Update: Access the latest FH Stock Watch here. Big changes from the 2020 version as the reflation trade has played out to a great extent, and prices have changed materially.

Love to hear your thoughts!

Note: This article is a premium article that first appeared on Patron. If you enjoy articles like this, do consider supporting Financial Horse and getting access to premium articles, my personal stock watch list, as well as my personal portfolio allocation.


  1. We definitely are in unprecedented waters and I think it would be foolhardy to trick yourself that you can ‘time’ the market. But to break it down, there are just 3 key factors to look out for. 1) The Fed. If they increase rates now it’s going to drive up credit spreads and simply kill more businesses in the US. At the same time, they are continuing with QE to drive down market rates. But this also results in 2) Inflation. As a reserve currency the US really has a high moat to protect itself against inflation as measured by CPI. But with such a weak dollar, even though dollar index is still around 90, the dollar has depreciated against many other currencies. As commodity prices soar (just look at corn, iron ore, its just simply blowing my mind), it will eventually be reflected in the prices of goods and services in the US. The coming inflation wave simply cannot be avoided. So Biden, Yellen, Powell they really are heading into stagflation if nothing is done. Unlike 1971, there are no more monetary tools that can be used to get out of this. And 3) China. The Chinese and Japanese bailed out the US in 2008. But is it going to happen again? No sovereign fund in the world is buying treasuries right now with USD set to depreciate another 10 – 15% by 2023 according to Goldman.

    At the end of the day for individual investors, its a battle of patience and emotion. Do you follow your greed and buy into the market because FOMO? Or do you stay patient and wait for impending doom, which might take 6 months to happen, or 3 years to happen, nobody knows? I think if you are close to retiring or in your 50s, the safest thing is to just sell it all and wait, because honestly you cannot afford the risk. But if you are young and confident in your future career, its probably time to ask yourself: Which economies will be the stars in 2030? Which sectors and industries will define the next 10 years? Invest in the future, stay patient, and don’t FOMO is my advice. Because I believe in fundamentals, and if you purchase the Cisco/Google of the future now, you will probably be having pretty good returns in 20 to 30 years. Of course if you are 50 you probably cant afford to wait that long. Reality check will come sooner or later. I’d rather take a 5% loss than be the fool on the street in a couple of years.

    • Hi Little Monkey, that’s a good comment. I do agree with you on most of the points. I agree the fed is boxed in (can’t turn off liquidity), and I agree the eventual outcome in the mid term is likely to be inflation and currency depreciation.

      For individual investors, how to navigate this climate is really a question of risk appetite and investment goals. And like you said, longer term, bet on the big secular trends that will shape the world over this decade.


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