How Stock Bubbles Die

The equity deals have come fast and furious this year which has quelled the bubble. Demand can never exceed supply. The boost in supply is driven by greed just as much as demand is. If demand is so strong, that the business doesn’t matter, companies with poor businesses will go public. It’s pretty easy to found a terrible business if access to capital is high. As you can see from the chart above, equity offerings have exploded recently. Offerings will explode through the end of the bubble. Supply is like a fire extinguisher putting out a bubble in markets.

SPAC Bubble Over

Equity supply will continue to explode in the next few months in spite of the worries that demand is waning. As price performance worsens, people will begin to panic. There is nothing worse than a panic combined with a jump in supply. The chart below shows the coincident drops in non-profitable tech stocks, long-duration stocks, and SPACs. Non-profitable tech stocks have been hurt by the economic reopening. SPAC stocks have been hurt by the rise in supply. Long-duration stocks have been hurt by the spike in yields.

Obviously, in the past few weeks, the 10-year yield has fallen. It’s extremely important to note that many of the bubble stocks have fallen in spite of higher rates. The reality is stocks with extremely high valuations without profits are bad investments no matter where the 10-year yield is at. We made the point that if your stock crashed because the 10-year yield rose 100 basis points, you had a bad stock. Don’t blame the decline all on the macro environment. We should see the 10-year yield rebound in the next few weeks because the economy is still strong. The fundamentals haven’t changed. This was a correction.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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