Commentary on Political Economy

Sunday 10 January 2021




More Than a Repeat of 2000

Stock markets are getting mighty frothy, particularly in the U.S. Are comparisons to the tech bubble of 2000 overdone?

The weeks since the U.S. election and the announcement of successful mass vaccine tests have brought with them a shift to the kind of frenzied price appreciation that was witnessed in late 1999 and early 2000, even as bond yields rise sharply, and macroeconomic data, in the form of the latest U.S. unemployment numbers, begin to look more negative. If anything, I would argue, aspects of this latest dose of speculation are beginning to look more extreme than their predecessor two decades ago.

I will offer one brief but fair example, which is Tesla Inc., now the fifth-largest stock in the U.S., and controlled by the world’s richest man. Plainly, Tesla is a real company making real products and with a history of sales and even some profits. It isn’t to be compared to or or many of the other small companies that should never have gone public and enjoyed a brief manic burst of fame two decades ago. Small and speculative companies are always prone to froth.

Instead, it is worth comparing Tesla to three companies that were at the center of the TMT boom in 1999 and 2000 and have gone on to prove that they are indeed great companies: Cisco Systems Inc., Microsoft Corp., and Inc. Microsoft nearly doubled in the 12 months up to its peak in December 1999, while the other two trebled in the last year before their peaks. None of them remotely compares to the ascent of Tesla, which is now up more than 800% over 12 months:

No company during the tech bubble increased its market value by as much as Tesla did in the last 12 months. Back then, the internet was new and exciting, and a variety of players were beginning to experiment with ways to make money from it. There was plenty of news. Today, the prospects for electric vehicles look good, and Tesla leads the nascent market, but it still has a long way to go, with plenty of well entrenched players. Maybe Tesla’s long-term prospects are better now than those of Cisco and Amazon were when the first bubble came to a head. But any such claim has to rest on conjecture. Lots of​ things have broken just right for Amazon, the biggest and best-known specialist internet retailer, over the last two decades, and it has made a lot of great calls. As for Cisco, it continues to be the dominant provider of routers.

Now, let’s take a look at how investors fared if they bought any of those three great companies at their respective tops at the turn of the millennium:

In price terms, Cisco’s investors are still under water. Amazon shareholders had to wait out a decline of more than 90%, and didn’t show a profit​ on their investment for a decade; since then it has worked out brilliantly. Buyers of Microsoft at the top in 1999 had to wait 15 years to make a profit. And all of these are companies that looked as well established as Tesla does now (Amazon is a partial exception), and which have fulfilled the rosy expectations of them.​

There are (valid) arguments that the entire market isn’t in a bubble. There are also (very valid) arguments that it is difficult for stocks to fall far while bond yields remain historically low, and that there are strong forces preventing yields from rising any time soon. There have been incidents in the past of excessive behavior in one corner of the stock market while all else remains relatively calm. And of course there are valid arguments that Tesla could indeed be as influential and powerful a company in the future as Microsoft or Amazon are now.​

Having bent over backwards to be open-minded about this, however, it still strikes me as absurd and dangerous that Tesla is being bid up so aggressively. The risks far outweigh the potential rewards. The more we see of such crazy behavior, the more we should prepare to take evasive action against a true investment bubble.

Authers’ Notes

So far, 2021 hasn’t felt much like a return to normality after the horrors of last year. The gallows humor is that this Monday will be December 42nd, 2020.​ But we’re now going to do our own small bit to return to normality after we were so rudely interrupted, and resume the Authers’ Notes book club. Our last discussion was on the morning of March 3 last year, just after the Federal Reserve had shocked the world with an unscheduled meeting and a cut of 50 basis points​ in the fed funds rate. Little did we (or the Fed) know that they would be cutting by another full percentage point the following week as the coronavirus took control of our lives and briefly threatened to bring the market to a halt.

Our new offering is​ The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival​ by Charles Goodhart and Manoj Pradhan. Published last year, it has been hugely influential. As its title implies, it is not a barrel of laughs. Its central point is that demographics, in the form of a massive increase in the capitalist world’s global working-age population, has fueled both the positive and negative economic trends of the last three decades, such as low inflation, low interest rates, healthy economic growth in the emerging world, and deepening inequality in the developed world. Now, the demographics have reached a turning point, working age populations will decline relative to the number of retired, and this will mean —​ the authors contend —​ a rise in both inflation and interest rates. The good news is that by increasing the power of labor relative to capital, it should also mean that the trend towards deepening inequality in the west is also decisively reversed.

This isn’t a consensus call. As discussed, the current bullish stock market, and quiescent bond market, is based on a world in which the economy reflates without kindling higher inflation. Bond market inflation breakevens have risen sharply in recent weeks, but still remain very low. Goodhart and Pradhan’s suggestion​ that inflation could hit 5% this year or even head for double figures, made in a column for the Center for Economic Policy Research’s VoxEU site as the pandemic was breaking out in full force, is in nobody’s calculations:​

Demographic trends move slowly by definition, and this debate has been developing for years as Goodhart and Pradhan worked on their views. As this​ long essay I wrote four years ago​ shows, the critical question for their theory is whether they are right to assume that retirees will hold on to the benefits they have been promised in full. This, I think, is the critical question when we look at their thesis. Others question whether union power can revive enough to push up wages, or whether automation will put an end to cost-push, but the key question that emerges concerns intergenerational equity. Paying for the growing ranks of the elderly to enjoy the comfortable retirement they have been promised will mean growing taxes on the working population, who haven’t been given such guarantees for their own retirement. The pandemic has already given us a dose of the problems caused by inter-generational equity, while inflation in the price of assets, particularly houses, combined with the increasing cost of college, is also creating a strong sense that younger generations get an unfairly bad deal. The most important and contentious part of the thesis, then, is whether society is really going to keep paying the relatively generous retirement benefits now in force.

To get into the mood for their ideas, you can listen to the authors talk about them to my colleague Stephanie Flanders on the Stephanomics podcast, or​ this podcast from the Institute for New Economic Thinking, or this episode of The Sound of Economics podcast from the Bruegel Institute.

Now, the drill is to get hold of the book and spend the next month reading it. We will be holding a conversation with the authors on the terminal some time next month (date soon to be determined). If you have any questions or feedback, please send them to the book club e-mail address:

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