Bonds that a couple of years ago were yielding very good returns now offer frugal or even negative returns.
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There is a bubble. Not only in publicly traded companies, but also in cryptocurrencies, and even in the world of startups. The reason is simple: bonds that a couple of years ago were yielding very good returns now offer frugal or even negative returns. For example, the CETES , which from more than 8% in December 2018 to about 4% now or even the 10-year German bonds that trade at -0.34% (Yes, that’s correct, you actually “lose” money by investing in German bonds today). This has caused the money invested in these bonds to move to other sectors in search of better returns, such as Wall Street , speculative investments in cryptocurrencies, and yes, also in startups .
In reality, there have been bubbles or mini-bubbles before the decline in bond yields. A very common example is that of WeWork , which had to retract its initial public offering after its S-1 (the document that must be turned in for SEC and public scrutiny to go public) was a fiasco. And it is that they were trying to value the company in a stratospheric number, while burning money in new offices (and parties), and whose valuation was not comparable with similar companies (such as Regus).
This is how its initial public offering in 2019, where the company was pitching a valuation above $ 47 billion, unraveled in one of the largest initial public offering fiascos in history. As of today, The We Company (WeWork’s father), has raised more than $ 20 billion for its growth and survival according to Crunchbase, and is looking to go public again to save its skin at a more moderate valuation. of about 10 billion. In other words, the newest investors in the company have lost value and are at risk of losing all their money.
The bubble also extends to some companies that are already public. Take the case of Tesla , which has a valuation of roughly $ 750 billion. I consider TSLA to be a visionary-led company with enormous potential that has turned the huge auto industry on its head with its disruptive ideas and near-flawless execution. However, I think that does not justify today’s valuation. That eventually, if it lives up to its promise, it can be worth that and more in a few years, no doubt, but I think we will soon see a reduction in value when investors realize that Facebook (FB) has a similar valuation with a profit of 21 “billion” per year, while TSLA has a profit of only 0.69 “billion” (that is, FB has a profit of about 30 times more than TSLA, but they are worth the same in the market). I believe that TSLA’s growth potential is greater than that of FB, but the problem is that this potential is already “cooked” at the current market value. We will see what the outcome of this prediction is.
Also, of course there is the case of cryptocurrencies, with a trend that I honestly do not understand. That, although they can be good “trades”, the valuation in the medium term I think is unsustainable, and in my opinion it is the largest bubble that exists today (I know there are those who think differently).
The market capitalization of all cryptocurrencies today is more than 1.5 “trillion”, in which Bitcoin makes up 2/3 parts. To put it another way, Bitcoin today has a market value 20-30% higher than Facebook, being that the first produces 0 and its value is only based on supply and demand, while the second produces about 21 “billion dollars ”in annual profits. Think about it, where do you prefer to have your money? In an “asset” that does not produce anything and is also more expensive, or in an asset that produces.
Another of the “fundamentals” to assess whether we are in a bubble (at least from the point of view of listed companies), is to “value” the stock market in general or some of its indices. For example, the estimated price per profit (P / E) of the S&P 500 in February 2021 is 39.68. Only 2 times has it been higher than this in recent history, you know which ones I mean?
For all the above, then, I consider that we are in a bubble (stock, investment funds, cryptocurrencies) that can explode at any time. My advice? Get out of these assets (especially stock and crypto) and wait. Then there will be opportunities to return.