The Mother Of All Bubbles Is Coming

What's up guys, it's Graham here!

So even though the search term "market bubble" just recently peaked right as it did before the 2008 Great Financial Crisis, we can't ignore the fact that there have been quite a few eerie comparisons between what's going on today and the 2001 dot-com crash, which saw a record-breaking market before everything went too short.

Like, just for fun, let's play a game! All you have to do is tell me if these words were said during the dot-com bubble or in 2021. That's it! Now, if you think that's going to be easy, good luck, because I nearly guarantee you're gonna lose.

1. A company with no revenue soars 350 percent its first day on the stock market.
2. Today, it's all about building customer bases while creating technologies to serve them.
3. The economist Alan Greenspan warns of irrational exuberance.
4. A company looking to shift online rallies seventeen hundred percent in five days.
5. This is one of the most potent technological innovations of the century.

Now, I'm not saying this to imply that history is repeating itself. However, between headlines warning against the land rush into stocks, a bubble that's about to burst, the alarm of 2020 being the year of the crash, and Jim Cramer's urging to take profits, we should go over exactly what's happening, what we could look out for as investors, when all of this might happen, and then, most importantly, how you could use this information to make you money.

Although, before we start, as usual, if you enjoy videos like this or if you appreciate the unbiased information that takes me forever to research, it would mean a lot to me if you just popped that like button for the YouTube algorithm by making it turn blue. That's it! You don't need to go crazy and break your computer or phone screen unless you want to, but just a quick dap will do. Thank you guys so much! And with that said, let's begin.

Alright, now usually I'll admit when you hear the words "market bubble" and Michael Burry in the same sentence, it's easy to toss this prediction out the window as another wild claim for the SEC to investigate. But given how many people have been warning about the potential various bubbles in the market, we first should start with the most recent and most prominent of all of them, and that would be the EV bubble.

Through this, it's easy to look at Tesla as the automaker who's consistently defied the odds, increasing in value past a trillion dollars and surpassing its top five rivals, despite critics warning for years that it's overvalued. For example, in 2013, Forbes noted that Tesla was overvalued, and another famed investor said it was only worth 40 percent of its current price. In 2014, The Washington Post warned that Tesla's growth might not last and cautioned how high it was relative to other companies. In 2015, Elon Musk said the company could be worth 700 billion dollars by 2025, and people called him insane.

As I'm sure you could guess, this also continued through 2018, 2019, 2020, and today, where it's trading above a trillion dollars while the market's beginning to place a premium for electric vehicles being the wave of the future. And for stock prices, it's working! Ford stock skyrocketed once they announced their plans to shift towards EVs. GM stock hit a record when they celebrated their EV Hummer production. Volkswagen shares jumped on the announcement of a new electric vehicle. And as a result, some are warning that this is becoming the equivalent of adding a dot-com to a company's name back in 1999, which subsequently became the only merit to sky-high valuations before they eventually sold off.

Case in point, Rivian. Up until now, I think most people understood that the market was shifting towards technologically driven electric vehicles, and Tesla was really the pioneer. Every automaker began copying their design. The market reacted positively, and even though it became difficult to value given the stark difference between technology and machinery, it was clear that EVs were a disruptive force in the market that was worth taking into consideration.

And that, of course, brings us to Rivian. Now, on the surface, I'll admit the company is extremely promising. They were founded in 2009 and began focusing on creating autonomous electric vehicles in 2011. By 2017, two prototypes were complete, and in 2019, Amazon invested 700 million dollars for Rivian to produce a hundred thousand electric delivery vehicles. Shortly after, Ford also invested 500 million dollars into the new startup, and a few years later, on November 10th, they went public in an effort to raise an additional 12 billion dollars to fuel growth.

But their innovation wasn't what people were talking about. Instead, it was the valuation. Within 48 hours of going public, they doubled in value, growing to a market cap of 140 billion dollars—higher than Ford, GM, and Volkswagen—all with zero dollars in revenue! According to an SEC filing, Rivian only made its first truck deliveries two months ago, and the vast majority of those were to Rivian employees. But Rivian isn't the only one. The electric car manufacturer Lucid Motors is also more valuable than Ford and nearly as valuable as GM after they announced the first deliveries of their 170,000 Lucid Air and that their production was still on track for 2022.

Apple even hit a brand new all-time high on rumors that they're soon going to be coming out with their own electric self-driving vehicle. That's not to say that a significantly new product reveal isn't deserving of a higher price, because let's be real, an Apple car would likely be the last remaining piece before interstellar domination. But it is drawing some skepticism that maybe the market is beginning to get ahead of itself, just like it did during the dot-com bubble.

So, what's going on? Well, a lot of the recent excitement seems to stem from the passing of a one trillion dollar infrastructure package, which was set to allocate seven and a half billion dollars to create a nationwide network of EV charging stations and expedite the adoption of electric cars throughout the decade. On top of that, the Build Back Better plan might allow for the potential of a twelve thousand five hundred dollar tax credit for buyers of electric vehicles that are manufactured in the U.S.

And this new rule would eliminate the tax credit cap after automakers sell 200,000 EVs, making GM and Tesla once again available. An item within that package also noted for that credit to be what's called refundable, meaning even if you owe nothing on your tax bill, they will reimburse you money back in your pocket! Essentially just giving you a twelve thousand five hundred dollar incentive to go and buy an electric vehicle if you're eligible.

However, it's easy to forget that the planned EV stations are going to be nowhere near as fast as what you might expect with a Tesla, and they're estimated to only be able to replenish about 25 miles of battery per hour, meaning they're probably going to be best used for quick trips when you're planning to stop anyway and not so much as a replacement for a gas station. Not to mention it's still expected to face some pushback with the Senate. But either way, it's a significant push towards electric vehicles that makes it very clear that they're here to stay. They're only going to get more popular, and there's a lot of money behind them.

But does that make it a bubble? Well, in terms of Rivian specifically, the blog Market Sentiment analyzed the current price in relation to the valuation of both Tesla and Lucid, and the results were pretty surprising. Even though Rivian has fantastic support from Amazon and Ford, a strong management team, and great prospects, Rivian is trading more than double Tesla's projected revenue for 2022.

And for the current valuation of 125 billion to be comparable to that of Tesla, the company has to roughly deliver 130,000 vehicles in 2023 and 400,000 vehicles in 2025. Not to mention there's currently a lock-up period of 180 days for early Rivian shareholders, meaning after six months they're free to sell those shares and introduce more stock onto the market. Of course, the price is already down 30 percent from its peak, while Morgan Stanley warns it has the potential to fall even further.

Although the talk of a market bubble isn't just in relation to electric vehicles, but instead various aspects of the market, which some warn is all about growth. This is a land rush right now, profitability to be determined later. Other investors, like Rich Bernstein, even say that this is "the biggest bubble of my career," explaining that the Federal Reserve has distorted stock market valuations by keeping interest rates artificially low and causing more money to enter the market, driving prices up.

However, the issue becomes those prices are only justified when interest rates are low, and the only way valuations can stay high is to believe that interest rates won't eventually go back up. Because as he explains, that is the kryptonite to the bubble. The short seller Jim Chanos says that retail investors, like you and I, are prone to entering the market at the late stage of the cycle and are often left holding the bag. Not like securing the bag, which would be good, but like holding the bag as in losing money.

His rationale is that retail investors weren't there in 2009 at the bottom of the market; they weren't there in 2002 after the dot-com bubble collapsed. But they were certainly there in 1999, just as things were getting started. This is evidenced by the fact that retail trading has surged to its highest level ever. They've changed the landscape of investing in momentum stocks. Many of them are new investors, and as Goldman Sachs says, this could just be getting started.

In addition to that, they noted that a flood of companies rushed to public markets to raise capital this year to take advantage of sky-high prices and wild animal spirits. SPACs also rose at the fastest pace in history, more than triple what they were in the height of 2006. While other companies diluted shareholders to raise more capital at elevated valuations, Jim says we're getting into money being raised for all kinds of things that probably aren't, at the end of the day, going to be productive but might line up pockets of the promoters doing it. He ends it by saying that excessive risk is not going to end well for those doing it, implying that that time is now.

But in terms of fundamentals though, how does it compare with today? Well, if we look at the Shiller price-to-earnings ratio, we could see that in 2001, right as the dot-com bubble was about to crash, it was sitting around 66, which is more than twice as high as what we're seeing today throughout the overall market. Not to mention even though we are trading at a historically higher P/E ratio than normal, tech companies typically traded at a much higher multiplier and are valued more so based on future earnings than what we're seeing today.

However, if we look at the cyclically adjusted price-to-earnings ratio, we can see that, yes, we are higher than we were in 1929 and approaching that of 2001, suggesting that perhaps some valuations have extended beyond where they should be. But they're still trading below where they once did.

In terms of my own thoughts on this, I do tend to agree that the electric vehicle market does show a resemblance to putting a dot-com at the end of a name and immediately seeing the share price go up. Although I also think it's obvious that the market is shifting towards EVs being a dominant force, and so any company moving towards that is simply seen as getting with the times.

But as we've seen time and time again, the market will remain irrational longer than you can remain solvent. So any attempt on your end to try to time a market bubble probably is not going to end well. After all, if you just look back throughout the last 15 years, you'll see that there's a constant warning about the next stock market bubble and to brace for the worst.

Like we have here: 2006, the market bubble theory; 2014, Janet Yellen addresses the everything bubble concerns; 2016, everything you need to know about the everything bubble; 2017, the everything bubble is ready to pop; 2018, this is how the everything bubble will end; 2020, the everything bubble—pretty much every single year throughout the last 20 years, people have been calling for the market bubble to pop. And if you would have listened to that during the times where these concerns first started to surface, you would have missed out on one of the best bull markets of all time.

On the other hand, it's not to say that some stocks might not be trading beyond where they really should be, but short-term prices seem to follow momentum, attention, excitement, and investor sentiment, which really isn't something you could easily quantify. So instead, my personal philosophy is just this: with any investment, you need to consider if it's a short or long-term hold, and you have to decide how much you're willing to risk in the event that you're wrong.

You know, I'm just not a huge fan of short-term speculative investments, but I'm also not naive to see the appeal. I get the community; I understand the upside, and it's reasonable to expect that people would be tempted to invest. After all, it's easy to look at Tesla and wish that you had invested back in 2014, when some people were calling it overvalued. And now, you would be sitting on more cash than Jerome Powell's money printer.

People might have also said the same thing about Amazon, which dropped 90 percent in 2001 before now becoming one of the most valuable companies in the world. But for every Tesla, there's also Lordstown Motors, or a Nikola, and for every Amazon, there's a Cisco, which just never recovers.

When it comes to these sort of investments, I really fall somewhere in the middle. I enjoy watching them from afar, but I also don't mind allocating a small enough position so that if it goes to zero, I'm okay. For me, I just treat every short-term speculative risky investment the exact same way: don't invest more than you could lose, understand the risks, and realize that the quicker something goes up, the faster it could also go down.

Now, I understand all of this might sound like really common sense stuff, but even though it's a really exciting time for so many new industries and undoubtedly the trend is here to stay with a very promising future, just don't get carried away and understand that study after study still shows that the best thing for most investors is a well-diversified portfolio of long-term positions that you don't plan to sell for 10 to 20 years. And then basically all you got to do in between then is just have the diamond hands, not to sell.

So with that said, you guys, thank you so much for watching! I really appreciate it. As always, make sure to subscribe, hit the like button, hit the notification bell. Also, feel free to add me on Instagram and on my second channel, The Graham Stephan Show. I post there every single day I'm not posting here, so if you want to see a brand new video from me every single day, thank you so much for watching, and until next time!