The most famous book on the history of financial bubbles was written by Charles Kindleberger. He called it, Manias, Panics, and Crashes: A History of Financial Crises.
Kindleberger wrote manias are first enabled through an expansion of money and credit.
“Speculative manias gather speed through expansion of money and credit. Most expansions of money and credit do not lead to a mania; there are many more economic expansions than there are manias. But every mania has been associated with the expansion of credit.”
We have an expansion of money and credit, thanks to a central bank that views its job as the babysitter of asset markets.
As the mania starts to get underway, Kindleberger pointed out:
“A follow-the-leader process develops as firms and households see that others are profiting from speculative purchases. ‘There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich.’ Unless it is to see a nonfriend get rich. Similarly banks may increase their loans to various groups of borrowers because they are reluctant to lose market share to other lenders which are increasing their loans at a more rapid rate. More and more firms and households that previously had been aloof from these speculative ventures begin to participate in the scramble for high rates of return. Making money never seemed easier. Speculation for capital gains leads away from normal, rational behavior to what has been described as a ‘mania’ or a ‘bubble.’”
Is there an ongoing mania in today’s market? Without a doubt it is in electric vehicle stocks.
Tesla is of course the leader of the pack. Tesla is up more than 35% over the last week because it was added to the S&P. Tesla is now the 7th largest stock in the U.S. with a market value of $500 billion. Tesla is projected to do about $2 billion in profit this year and $4 billion next year. You can buy it for the bargain price of 250X earnings.
Tesla stock is a mania to be sure, but it doesn’t even come close to what we are seeing in smaller EV companies. This truly rivals the dotcom era. Shares are rising 10-50% each session with market values in the billions with sales of a fraction of that amount.
A company called Blink Technologies is up over 300% this month. Blink is worth $1 billion. It did $4 million in sales over the last 12 months. Electrameccanica Vehicles is a Canadian EV company that makes what looks like a covered scooter. Its shares are up about 200% over the last eight trading sessions. Electrameccanica is worth almost $800 million. They did $600K in sales over the last 12 months.
Then there is Lordstown Motors which doesn’t yet generate any revenue. It’s stock is valued at almost $5 billion. It stock has gained about 75% over the last eight trading days.
There is no news propelling these stocks and the many others that make EVs higher.
It would seem we are looking at the follow the leader situation Kindleberger described years ago.
Steer clear of the EV mania. It is indeed tempting to join the party when you watch your friends make 30%, 40%, or 50% in a single session, but stocks that can rise that much without a foundation to support them can fall even faster.