The Bubble Bernanke Doesn't See Is Going To Have Consequences Again

by: Paulo Santos

It's not hard to see that there's another giant dotcom bubble in the market. There are simply too many stocks trading at ludicrous valuations on imaginary future rivers of honey. These include (in a non-exhaustive way):

  • NetSuite (NYSE:N);
  • Workday (NYSE:WDAY);
  • Netflix (NASDAQ:NFLX);
  • Tesla (NASDAQ:TSLA);
  • (NYSE:CRM);
  • Groupon (NASDAQ:GRPN);
  • LinkedIn (NYSE:LNKD);
  • SolarCity (NASDAQ:SCTY);
  • Facebook (NASDAQ:FB);
  • Yelp (NYSE:YELP);
  • ChannelAdvisor (NYSE:ECOM);
  • ServiceNow (NYSE:NOW);
  • Financial Engines (NASDAQ:FNGN).

And I am probably forgetting many others. All of these companies share something:

  • They share a huge valuation based on historical or near-term earnings, frequently trading at 100-200 times the next 4 quarters' earnings (that's if they have earnings);
  • And they also share a beautiful story that's supposed to compensate for the present lack of earnings by promising the said rivers of honey in the future.

But the truth is simply that this is exactly like what happened in 2000 with the dotcom bubble. And the huge earnings multiples are not the only thing pointing that way. There's also the requisite bevy of 100% pops in first-session IPO stocks. Stocks like FireEye (NASDAQ:FEYE) or Rocket Fuel (NASDAQ:FUEL), leading once again to irrational valuations on these just-IPO'd stocks.

Every bit of evidence says the same: that the exact same phenomenon we saw during 2000 is replaying right before our eyes. This time, this bubble falls squarely in the lap of Fed Chairman Ben Bernanke. The continuous printing by the Federal Reserve has left no alternative but for the market to inflate wildly.

And yet, the Federal Reserve acknowledges no such bubble. It doesn't acknowledge it because if it did, it would have to stop the printing campaign to stop inflating the bubble, and it can't have any of that.


We do know, however, that bubbles pop. This one will pop, too, as at this point it feeds only on price gains. The only reason to buy these stocks is because they're going up. Once they stop going up there will be no reason to buy. And then it pops.

The problem is that when bubbles pop they bring consequences with them. After the dotcom bubble burst back in 2000, the economy saw a recession. After the real estate bubble popped in 2007, the economy also saw a recession. Thus, it seems likely that once this dotcom 2 bubble pops, we will again see another recession as well.

Given how slowly the Federal Reserve is taking away the monetary stimulus, it is thus possible that this bubble will pop while the stimulus is not yet fully withdrawn. And obviously, as this stock market bubble bursts there will be significant incentive to once again rekindle the monetary fire.

In short, it's likely that before the Federal Reserve is done removing monetary stimulus, the conditions will already be such that it will see the need of further stimulus. This will end up being extremely negative for the dollar as it will finally show that once the printing starts, it's nigh on impossible to stop without crashing the stock market and the economy with it.


There's a new dotcom bubble in town that's likely to burst before the Federal Reserve's printing campaign is over, prompting further printing and a strong debasement of the U.S. dollar.

Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.