Google At $1000. Bubble Bubble There's Going To Be Trouble

Yesterday, shares in Google surged by more than 13% to over $1,000.  That came on the back of a good earnings report from the company.  That is rather at odds with the general picture provided by this quarter's company earnings, which have been disappointing.  Despite the fact that the economy in the US, UK and Europe has continued to be sluggish, despite the fact that earnings have shown a decidedly lacklustre performance, and indeed there are many technology companies that are yet to make any profits, the surge in Google's share price reflects similar lofty valuations across all equity markets, in most countries.  In fact, the one place where equity markets have not shown such elevated levels has been the one place where the economy has continued to grow very strongly - China.

The increases in the share prices of some technology companies is now back to the kind of level that was seen in the late 1990's, ahead of the Tech Wreck of 2000.  Indeed, the NASDAQ, is now just below the 4000 level, 80% of its 2000 peak of 5000.  That may not sound too bubbly given that it is now 13 years on, but it should be remembered just how much of a bubble it was in in 2000.  Throughout the 1990's, the NASDAQ soared ahead.  Technology funds put in 70% increases in their valuations during many years over the period.  I remember at the time talking to a friend of mine who is a computer programmer, discussing a number of ideas of Internet companies we might set up, because it seemed at the time, anyone could do it, and make money.  And indeed, many of them did just that.  Almost like a 1980's privatisation, every Initial Public Offering automatically soared in value, as soon as shares in the company started trading, making instant multi-millionaires out of its founders, whether the company had any sizeable revenues let alone profits.  Even successful companies of today like Amazon were referred to as "The River of No Returns", because even as its business continued to grow, and its share price rise, the prospect of it ever making any profits was nowhere on the horizon.

On top of all of this were the mergers and acquisitions, which with each one pushed the acquisition price ever higher, each deal being bigger than the last.  The daddy of them all was the merger of AOL with Time-Warner, which marked the end of the bubble.  In March 2000 having gone above 5000, the NASDAQ bubble burst, going down by 75% once more to below 1000.  That, in reality, probably reflected something more like fair value.  Even then looking at the DOW Jones, which had risen from 1,000 in 1982, to over 10,000 in 2000, even that level of 1000 on the NASDAQ was probably an inflated level.  The ten fold rise in the DOW did not reflect any real increase in the value of US companies, it reflected only the fact that during the 1980's and 90's, massive amounts of money had been printed, which found its way into blowing up these asset price bubbles.

Its wrong then to look back from today's valuations to the peaks of 2000 for the DOW, NASDAQ, S&P 500, or any other stock index, and conclude that after 13 years, prices have only recovered those previous levels, because those previous levels were themselves grossly inflated, which is why the bubble burst in 2000, in the first place.  After the 1929 Stock Market Crash, it took until 1954 before share prices recovered their pre-crash levels.

If even 1000 on the NASDAQ was a reasonable level in 2000, there is no way that the value of US technology companies today has risen four fold since then.  A number of very significant companies like Google, have indeed developed during that time, but its hard not to conclude that these current valuations once more have far more to do with the $85 billion a month that the Federal Reserve is pumping into the economy, and which is being forced to find a home, that provides at least some yield, rather than that it is a result of the actual growth in the value of companies.  The evidence of that is the fall in stock markets a few months ago, when the Federal Reserve announced that it might begin even to just reduce the amount of money printing.

The fact that the money printing has continued, and that it looks set to continue into next year, means that the bubble is just getting blow up even further, and the bust will be that much more cataclysmic when it happens.