Speculative Frenzy Smells More And More Like 2000

Scores of extremely bullish investors insist that the financial markets today do not resemble the technology stock craze near the tail end of the late 1990s. That position is getting more difficult to defend.

For example, market capitalization to GDP is a long-term stock valuation indicator with a high correlation (0.89) to subsequent 10-year returns. The valuation tool is frequently referred to as the “Warren Buffett Indicator.” The reason? In 2001, the Oracle of Omaha dubbed it as “…the best single measure of where valuations stand at any given moment.”

My eyesight may be faltering in my 51st year of life. Nevertheless, I am fairly certain that the breach of 140% by the Buffett Indicator in December of 2017 is very similar to the one that occurred in March of 2000.

There was a feeling then, as there is right now, that one had to invest his/her cash somewhere. Then, cash equivalents might only have been rewarding savers with 5%. (What people would not give for a risk-free 5% right now.) Yet that was deemed idiotic when stocks delivered 18%-20% in the “New Economy.”

In 2017, cash equivalents might provide 1.5%. “An unacceptable return,” many allege. “That just loses to inflation.” Stocks deliver 8%-10% over time, so why would you consider anything else?

It follows that many have been throwing in the cash towel. The stock-to-cash ratio at 5.0 in 2017 is extremely similar to the ratio during late ’90s insanity.

In the same vein, the average allocation to cash by investors in 2017 is actually slightly lower today than it was in 2000. Granted, the data does not imply that stocks must collapse from this moment forward. Yet it would be foolish to ignore circumstances that are undeniably analogous.

Let’s take the resemblance between the two periods one step further. Special purpose acquisition companies (a.k.a. “SPACs”) hit a global issuance record this year. What are SPACs? These are publicly-listed corporations that raise money from investors for an undefined business.