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Billionaire Pops Stock Market Bubble Because We’re Running Out of USD

Last Updated September 23, 2020 1:56 PM
Ben Brown
Last Updated September 23, 2020 1:56 PM
  • Virgin Galactic chairman and billionaire Chamath Palihapitiya called the stock market a ‘bubble’ waiting to burst.
  • Palihapitiya blames the Federal Reserve for creating a gaping void between the stock market and economic reality.
  • He’s the latest in a string of billionaires to sound the alarm on this over-heating equity market.

Add Chamath Palihapitiya to the long list of billionaires calling for a further stock market correction.

The Virgin Galactic chairman, Social Capital CEO and NBA franchise Golden State Warriors’ owner said the current financial markets are an unsustainable bubble.

This bubble, like others, will burst.

Chamath tweet 

Stock markets rebound after coronavirus sell off

The U.S. stock market plunged into the fastest bear market in history in March as coronavirus lockdowns took hold. But they bounced back just as fast.

Despite ‘Great Depression’ levels of unemployment and widespread business closures, the S&P 500 is only 17% off its all-time high. The Nasdaq is positive for the year.

The speed of the recovery has sent stocks back into wildly over-valued territory. Billionaire David Tepper said the market was now the most over-valued he’s seen since the dot-com bubble.

stock markets
The stock market selloff and recovery during the coronavirus crisis (Orange: nasdaq, blue: S&P 500, red: Dow Jones Industrial Average). Source: TradingView

‘Not enough USD in the world’ – why this bubble can’t last

The reason for this monster bubble, Palihapitiya claims, is the Federal Reserve. Jerome Powell and his stimulus bazooka have flooded the financial markets with trillions of dollars. (And there’s plenty more where that came from).

The liquidity injection has stopped the credit markets from seizing up. But it’s also helped re-inflate equity prices. The Fed’s process of buying assets like treasury bonds, mortgage-backed securities, and even junk bonds, is known as quantitative easing (QE). But it can’t go on for ever. As Palihapitiya explains:

[There’s] just not enough USD in the world (unless you print infinite money and render it valueless) to keep buying / threaten to buy assets like this.

At a certain point, the Federal Reserve has to ease off. And what happens then?

S&P 500 completely detached from economy

At just 17% off its highs, the stock market isn’t pricing in the whole sale destruction of the U.S. economy. 36 million have now filed for unemployment in the last eight weeks and large portion of those jobs aren’t coming back. In a previous interview with CNBC, Palihapitiya claimed the Federal Reserve caused this gap .

We have completely divorced the economy from the stock and the bond markets, and the Fed has been the principal agent of that obfuscation.

He also suggested that stimulus measures would be better deployed to the general public to encourage spending and consumption.

Billionaires line up to predict stock market crash

Palihapitiya is one of many wealthy investors sounding the alarm over stock market valuations. Hedge fund manager Stanley Druckenmiller said the risk-reward for stocks right now is the worst he’s ever seen  while Tepper compared it to the 2001 tech bubble.

A recent UBS survey also revealed that a majority (61%) of high-net-worth investors were waiting for another pullback in the market before buying.

Meanwhile, amateurs and retail investors are pouring into stocks at record pace. Analysts see a shortage of new institutional money entering the market, but young investors are throwing cash at airlines and oil ETFs via apps like Robin Hood.

It’s a battle of the billionaire skeptics vs the optimistic retail investor. This could get nasty.