Back on November 9, 2022, I sent out some market commentary titled, “Dial B for Bubble.” The “Dial B for Bubble” title is an homage to the film noir classic, “Dial M for Murder” which starred the exceptionally beautiful Grace Kelly and was directed by the needs-no-introduction, Alfred Hitchcock. Given the action yesterday it seemed like a good idea to reprise the title because market bubbles continue to deflate.
Market history is chock-full of examples of asset bubbles. For example, famous historical bubbles have included Tulipmania (17th century Holland), the Mississippi Bubble (early 18th century France), the South Sea Bubble (early 18th century England), the Roaring 20s (1924 – 1929 US), the Japanese Bubble (mid-late 80s Japan; and Taiwan, too), the Tech Bubble (late 1990s – early 2000s), and the Housing Bubble (2003 – 2006). There’ve been other less well-known versions like the Spanish Merino Sheep Bubble, the Mulberry Tree Bubble, the Tea Bubble, the Cochin Chicken Bubble, the Ostrich Feather Bubble and my personal favorite, the Rabbit Bubble which occurred in Japan in the early 1870s.
But what makes bubbles exceedingly interesting is, initially, the excessive speculation on the way up attended by all sorts of newly crowned successful investors and new-era gobbledygook, and then secondarily, the sheer terror on the way down. Each bubble (check paragraph above) gets a label or title which ultimately becomes an unflattering epithet.
Tesla – Weekly w/ 40-Week MA, MACD, and Rel. to S&P 500. My target has been at the $100 level for some time but it’s not a stretch to figure $60 will be hit (see chart).
While nobody could’ve known when prices would have peaked on the way up for each of the historic bubbles listed above, they were all measurable simply by monitoring the amplitude of their price gains. This is contrary to what Ben Bernanke said on Oct 15, 2002, when he gave an “Asset-Price “Bubbles” and Monetary Policy” talk before the New York Chapter of the National Association for Business Economics. Bernanke said, “…the Fed cannot reliably identify bubbles in asset prices.” My response then and my response today is, “The Fed cannot reliably identify bubbles in asset prices because the Fed does not pay close enough attention to asset prices.” Heck, the Fed hardly pays enough attention to goods prices so how can we expect them to monitor asset prices, too.
The current period – some have termed it the “Everything Bubble” – has included MEME stocks and FOMO stocks (both of which spawned ETFs; I think the plethora of ETFs is also a bubble but that’s a subject for another day), NFTs, bond prices (when rates were repressed and, in many instances negative), VC, home prices, crypto, Growth Relative to Non-Growth, and COVID-beneficiaries, in general.
More importantly now, however, and this is especially so given where we are in this current bear cycle, is what happens in the aftermath of bubbles popping. In general, bubbles fully pop when the asset goes down 80% – 90%. For example, the DJIA declined 90% from Sept 1929 – July 1932, the Nikkei lost 80% into its 2003 low and it finally bottomed after losing 82% into its 2008 trough, NASDAQ dropped 78% from March 2000 – October 2002 while the NASDAQ 100 lost 83% and the SOX 85% over the same period, and the S&P Homebuilding Index had a 92% cliff-dive from July 2005 – November 2008.
Though Tesla is down almost 75% from its November 2021 peak a full bubble popping for it would see the stock between $40 – $80. It was clear on the way up and it’s clear, now, on the way down that the stock was a bubble and, while I have no animus at all for Elon Musk, he was a pluperfect example of the “Cult of Personality” bubble as was, of course, Sam Bankman- Fried. As the annotation in the first chart showed, I’m going with $60 as the next downside target (beneath my initial $100 target) as that was the breakout level for Tesla in the summer of 2020.
Tesla’s bubble fueled – or vice versa if you will – the ARK Innovation ETF bubble. ARKK went up spectacularly by nearly 700% (!) over 240 weeks from mid-July 2016 to mid-Feb 2021. Its proprietor was also a “Cult of Personality” charter member. The ARKK ETF is down 81% from its mid-Feb 2021 peak – and has solved for the “easy” part of the bubble popping decline – but I’ve been estimating that it has risk to $20 by showing the following chart in our weekly 22V Research Webinars. This quote from Benjamin Anderson’s “Economics and the Public Welfare” (1949) is as apropos for this era as it was for the Roaring 20s – “Every era of speculation brings forth a crop of theories designed to justify the speculation, and the speculative slogans are easily seized upon. The term ‘new era’ was the slogan for the 1927 – 1929 period. We were in a ‘new era’ in which old economic laws were suspended.” Sounds familiar.
Big 5 Index – AAPL, AMZN, GOOGL, MSFT, and TSLA – w/ 40-Week MA, MACD, and Relative to S&P 500. The market cannot stop going down until this index bottoms.
And, of course, the same is true for the Capo di Tutti Capi.
