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It has all been fun and game in the markets in the first nine days of brand new year 2021. Take a look at some of them.
Our own Nifty has gained over 8 percent in the last one month, 22 percent in the last three months and 34 percent in the last six months. And this has happened in a year which has witnessed worst recession in decades. What a disconnect!
The price of Jet Airways shares has surged by an unprecedented 500 percent since September 2020. We have no idea as to when and how the company is going to get take off. That has not come in the way of company’s share price taking off in a way never seen before. What an apt example of irrational exuberance!
Let’s go back to Musk. He gained $28 billion more than the total net worth of Bill Gates in just year. According to CNBC.com, “Musk’s wealth surge over the past year marks the fastest rise to the top of the rich list in history.” There is no denying that Tesla has been quite an innovative company (not yet iconic though). But does that justify a surge of more than 800 percent in its stock’s price in 2020 and further 25 percent last week?
And the surge is not confined to financial assets alone. Despite global growth falling off the cliff and massive lockdown induced demand destruction, commodity prices are on a tear.
While the price of crude is at 9-month high, prices of steel are at a level not seen since the 2008 high. It looks like the liquidity-fuelled rally has lifted all boats, irrespective of underlying fundamentals. Does the script sound familiar? Didn’t we have a similar run in the first half of 2008? Let us recall what happened in 2008:
The second half of 2008 witnessed a massive selloff, with prices of crude falling from more than $140 a barrel to less than $40 a barrel in a matter of weeks. And steel prices even now are nowhere close to what they were in the first half of 2008.
This is not to suggest that we are going to see an action replay of what happened in 2008. There is one major difference between what happened in 2008 and what is happening now. While in 2008 the brutal sell off was because of major dislocation in the financial markets after the collapse of Lehman Brothers, the global financial market now is quite buoyant and flush with abundant liquidity.
But there is something called intrinsic value of any asset. Can the price assigned to it stay divorced from the intrinsic value for a long time? And can the financial market stay immune to what is happening in the real world, good or bad?
We have had a record run in the first week of this year. This has happened despite
Any of these events would have triggered a selloff in normal circumstances. Not anymore. The markets shrugged all of them together as if they do not matter.
History tells us that such period of irrational exuberance is almost always followed by a period of equally irrational pessimism. It is, therefore, advisable to stay calm and watch from the sidelines liquidity-fuelled rally running its course.
(The author is an occasional writer and an aspiring entrepreneur. He tweets @Mayankprem. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
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