At the peak of the internet bubble two decades ago, there was a mad rush of companies crowing about their e-commerce ambitions and rebranding themselves as “.com” players in an effort to cash in on the hype that pushed market to dizzying heights.
And, for a while, it worked.
We’re seeing the same kind of thing now with blockchain, and, according to Howard Ma of Meritocracy Capital, just like two decades ago, it won’t end well.
“Greater fools and FOMO thinking has permeated the stock market,” he said. “The dramatic surge for cryptocurrency and blockchain companies is a symptom of what is happening in the financial markets. Fundamentals don’t matter.”
Aside from the crypto mania, Ma uses Robert Shiller’s closely followed “CAPE” ratio, which compares the S&P
to the average annual inflation-adjusted earnings of that index over the prior 10 years, but with a twist.
While the CAPE ratio has proven to be a fairly reliable predictor of long-term returns, it’s also been widely criticized, Ma explained. One reason is that it’s susceptible to outliers, like those abnormally weak earnings during the global financial crisis.
So Ma uses what he sees as a more accurate tweak to the formula by using the median instead of the mean. He calls it the “CAPME” ratio, and he introduced it back in September when it showed the S&P valued in the 94th percentile looking back 135 years.
As you know, it hasn’t exactly gotten cheaper. Here’s how the current CAPME, which is now in the 96th percentile, ranks among history’s biggest bubbles:
“This parabolic rise defines bubbles. It is only in times of frenzy would people pay up for increasingly expensive assets and expose themselves to substantial downside risk,” Ma wrote. “This happens late in business cycles when irrational behavior is highest.”
Evidence of that “irrational behavior” certainly isn’t difficult to find. Just take a look at Long Blockchain
the former tea company that decided to transition to — you guessed it — cryptos and enjoy the spoils with a 183% pop.
“We have seen this before and we know how it will end,” Ma said. “Valuations are at an absurd level right now. Make no mistake: We are in a late-stage bubble.”