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Mark O' Donnell
 · 
Research Analyst
April 13, 2021
 · 

Is this the new normal? Or is it a bubble?

Is this the new normal? Or is it a bubble?

If you want to play a game, take off an item of clothing every time I allude to the unprecedented times in which we live. As Justin Timberlake once proclaimed, "I'll have you naked by the end of this song".

Question: Were finance and economics ever more interesting than it is right now? I dare say we are in unprecedented times. For one, stock prices have never been more expensive in the history of public exchanges. Microsoft (NASDAQ: MSFT) is about to join the two trillion-dollar club, Tesla's (NASDAQ: TSLA) valuation is supercharged, and the NASDAQ and S&P 500 are at unprecedented record levels. Put another way, at no time in history has the valuation of some publicly listed companies been so far removed from their traditionally gauged intrinsic value.

Well…, there have a couple of times where the PE ratio of the S&P was higher than it is now. That is, immediately following the 2001 Dotcom crash and 2008 GFC.

Is this new normal? unprecedented times

Desperation and FOMO is the new normal

But since our current bubble hasn’t popped yet (the only way we know we are in a bubble), let me speculate under the assumption that this is the new normal, and these are in fact, unprecedented times.

I do not think investor optimism is the reason for these valuations, more so desperation. We all know that Central Banks' unprecedented spending has led to an inflation in asset prices; governmental desperation, if you will.

But perhaps everyone is also a little desperate to not miss out on the next decade's big growth stock like they did last decade. If you had invested US$10K into Netflix (NASDAQ: NFLX) on Jan 1st, 2010, that little nest egg would now be worth over US$704K (I suggest you check out stockchoker.com to retroactively FOMO over other missed investment opportunities).

This asset inflation is excellent news for those who have KiwiSaver, AustralianSuper, 401Ks, and the like. Personally, my KiwiSaver has grown at an alarming rate since the infamous pandemic emerged. But I will not be able to touch it for another 40 years; who knows what will happen in this time? I presume a long list of unprecedented events.

I do not expect the growth we have seen recently to be the new normal. But perhaps things will now tapper off, and companies' exceedingly generous valuations will be the new normal moving forward. This could be the new lay of the land and we will have to get used to hyper bullish valuations. For the sake of my KiwiSaver, I kind of hope so.

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