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Arithmetic in another bubble 11/26

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Arithmetic in another bubble 11/26

Worse than the Dotcom mania?

Arnold Kling
Nov 26, 2021
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Arithmetic in another bubble 11/26

arnoldkling.substack.com

The New Yorker’s John Cassidy writes,

Earlier this month, Rivian Automotive, an electric-vehicle manufacturer that had yet to report a dollar in revenue, issued stock on the Nasdaq—in one of the biggest I.P.O.s ever. At lunchtime on Monday, the company was notionally valued at close to a hundred billion dollars—comfortably more than Ford, General Motors, or Honda, which between them have nearly four hundred billion dollars in annual revenue.

In July of 1999, I wrote Arithmetic in a Bubble.

Last year, musicmaker had $75,000 in revenue. That is thousands, not millions. And that is revenue, not profits. They took in enough in sales to pay a secretary with benefits, and now they have gone public. Successfully.

After the IPO, the market capitalization of musicmaker was over $700 million. Dividing this by their revenue gives a price/revenue ratio of nearly 10,000.

By today’s standards, Musicmaker was undervalued. But it went bust, as did many of the stocks of the Dotcom mania.

We survived the 2000-2001 meltdown with relatively little macroeconomic pain. We could survive another meltdown, particularly if the crash is confined to shares of companies with hardly any earnings. But we might discover that some banks or other large financial institutions that were previously thought to be sound are no longer viable.

A sharp reduction in paper wealth would probably dampen inflation. But it’s hard to predict the overall social consequences of a market collapse, should it occur. I think that relative to 2000 we are in a dangerous place: the strong populist strains in our politics; the generally sour public mood; and social media’s aptitude for assembling mobs and designating scapegoats.

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Arithmetic in another bubble 11/26

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Thomas L. Hutcheson
Writes Thomas’s Substack
Nov 26, 2021

The dot-com crash had no effect because the Fed did not allow it to reduce inflation below target. Same this time so long as the Fed sticks to its policy of keeping the average at 2% PCE.

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Brandon Reinhart
Nov 26, 2021

What are the conditions under which the music stops? A high profile bust? What caused the dot com era to finally blow up? I assume at some point, capital smartens up? I ask in part because the crypto world looks a bit like it's being fueled by stupid money.

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