There are unintended consequences from loose monetary policy and easy money. When people look at the housing boom and bust, they tend to see the consequences of that easy money from 2003 to 2007 creating a boom in finance and housing, and then the bust that led to empty houses, bad loans, and overleveraged bets on Wall Street, bringing down Bear Stearns and Lehman Brothers.
However, the easy money split into other sectors; we saw a huge move in commodities and emerging markets. The move in commodities then split over into additional sectors. Because commodities went higher, alternative energy companies could compete with traditional energy firms, and there was cheap money around to finance them. We saw a huge bubble in solar and wind energy. Stocks like First Solar
(NASDAQ:FSLR) and Suntech
(NYSE:STP) soared to dizzying heights -- and then crashed 80% to 90% or more.
While no one really talked about the solar and alternative energy bubble, it was a consequence of the loose money policies of the post-2001 period when the Fed kept interest rates down too low for too long.
I think that the true bubble this time around is in government bonds; people will look back in amazement at the fact that anyone ever thought that the 10-year US government bond was worth 1.38%.
However, one of the consequences of all this printed money is that some of it is going to flow into "hot sectors." In a recent article
, I discussed Tesla Motors
(NASDAQ:TSLA), an electric motor company that has been one of these hot stocks. Fast money will always flow into new technologies that ignite the imagination. In 1999, it was the Internet; in 2007 and 2008, it was solar and wind power. Now it is electric cars and social media.
It seems like everyone these days has a Facebook
(NASDAQ:FB) or Twitter account. NFL players tweet about their concussions; it is a social phenomenon.
However, the valuations are ridiculous. Facebook trades at 122 times earnings and has a market cap of $122 billion. LinkedIn
(NYSE:LNKD) has a P/E of nearly 1000 and a market cap of $28 billion. Pandora
(NYSE:P) has a market cap of $4.52 billion.
We are now hearing the same type of comments that I heard during the dot-com bubble. It’s all about the number of page views and people using these services in the future who could be "potential customers." This will end badly. However, we never know where it will end. If there is another surge higher in the market, social media stocks could double from current levels. There are many stories of people who shorted tech in early 1999 just to be slaughtered in the short term, even though they were correct in the long term.
However, when the current money-printing and bond bubble bursts, these inflated social media stocks will surely collapse 80% to 90% -- or perhaps even more. Buyer beware.
No positions in stocks mentioned.