Multiple bubbles are bursting at exactly the same time
When the tech bubble burst in March 2000, investors had lost sight of what they were paying for companies that sounded exciting but didn’t earn money and eventually had to fire employees and shut down. Just now, a whole crypto industry built on smoke and mirrors and no substance is firing employees, rescinding job offers and trying to cope with a different crypto coin collapsing each week because they are backed by nothing.
This time, we have multiple bubbles bursting at exactly the same time. Perhaps that is not surprising since Jerome Powell’s Federal Reserve vowed in March 2020 to support every single asset class as COVID abruptly shut down our economy. During 2008 and the Great Recession, the Fed’s goal was to keep our consumer-driven economy glued together by “reflating” housing prices and the value of stocks and bonds. They succeeded.
For more than a generation, buying bonds was a brainless idea. Over the last 40 years, interest rates fell from 18% to near zero. Bond prices move inversely to interest rates so the value of any bonds you held just increased. Now bonds are providing little protection and are also having a poor year.
With mortgage rates in the 2% range, house prices also rose to record levels. Most buyers focus more on the size of the mortgage payment and how much house it will buy them than the actual price they are paying. Mortgage applications are plummeting as mortgage interest rates have surged from 3% to 5.5% in one month. Not surprisingly, housing stocks have cratered. If you wanted to sell, I hope you already have.
The new financial entities that facilitated the meme stock craze like Robinhood have lost 90% of their value over the last year. HOOD is now selling for single digits because its revenues have collapsed along with its loss of clients. The IPO fund that buys all Initial Public Offerings is off 51%. Last year’s IPO offerings leaned heavily on so called SPACs, Special Purpose Acquisition Companies that raised money without proper underwriting standards imposed by the SEC and with no known business models. The SPACs raise money with the promise to buy a company with the proceeds. If they didn’t within two years, they had to return the money.
What an enticing opportunity for Donald Trump, who has always run his operations privately. He joined forces with Patrick Orlando who offered three different SPACs last year to launch his Truth Social venture. Digital World Acquisition Corp. came public at $10, then peaked its first month of trading at 175. It’s hard to know exactly what caused DWAC to collapse 28% in one day on June 14 to 27 but the SEC is continuing its investigation of the offering as to whether Trump and Orlando had conversations in advance of the offering which would have been illegal. Its first-quarter revenues were less than $2 million yet at its peak last year DWAC was absurdly valued at billions. The present price is a drop of 85%. It is another such company with no substance that made millions for the underwriters but lost vast sums for retail investors.
The Dow is off 16% YTD, the S&P 500 is off 22%, and the NASDAQ has fallen 31%. Those are nasty numbers but they pale in comparison to the staggering losses in crypto currencies and related stocks like Coinbase, now down 80% this year. Buy the Dip is finally out of fashion. I hope that the idea of “disruptor stocks” has been discredited in favor of companies with exciting futures that are profitable, sell at reasonable multiples of earnings and are likely to make you money, not wipe away your portfolio.
Joan Lappin CFA has been called an “investment guru” by Business Week and a “top manager” by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email JLappincfa@gmail.com. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.
