Is it the 1990s all over again? In the financial markets, we could be reliving déjà vu all over again thanks to bubbles, speculation and fierce money-printing by the Federal Reserve. The only thing that’s missing are funny “The Simpsons” episodes, but that certainly won’t happen in today’s world of entertainment.
A new report suggests that the dot-com era may very well be returning because a greater number of companies are going public even before they start earning a dime, and that could prove to be troubling for the initial public offering (IPO) market, says Jay Ritter, a business professor at the University of Florida, who tracks IPO data.
Last year, 71 percent of IPO companies were unprofitable, up from 46 percent in 2012, when these companies weren’t making a dime. In other words, the market hasn’t been this aggressive for unprofitable IPO companies since 2000, a time when 80 percent of IPOs weren’t making any money.
In 2014, startup funding also hit $47 billion, which officially surpassed dot-com levels. Most of the money was allocated into mobile applications, even if they have generated sales or revenues – most of this venture capital funding is for marketing, offices, staff, etc.
The simplest of websites were sprinting to the stock market faster than Ben Johnson. Despite their infancy and lack of profits, investors still tossed money at these companies because of the cheap money that was lying around due to Fed policy. The only difference today is that it’s not just tech IPOs but rather biotech.
The ladder industry is quite a hard one to predict because it’s rather volatile: these firms bet on the long-term and suffer short-term losses, pharmaceutical drugs fail and many drugs face extensive regulatory scrutiny.
Experts purport there won’t be any slowdown in the next two to three years as the stock market is hungry for more IPO openings, though they warn that there won’t be a repeat of Alibaba, which gained $25 billion last year and now owns the record of having the biggest IPO in history.
What these same financial experts omit from their analysis is that the United States central bank has been the one to create these bubbles through money-printing, artificially low interest rates and cheap money that has funnelled throughout Wall Street. These biotech and tech firms are willing to take on losses and heavy debt loads because of a low-rate environment, but they may be in for a shock once rates do start rising – who knows when that’ll be?
If a rate hike does transpire and the money eventually ceases filtering throughout the stock market, will these startups prefer to be bought out by bigger entities than going public since the Googles and Facebooks of the world can afford a financial crisis?
The Fed was the culprit in the 1990s, it was the culprit of the housing crash and it will be the culprit in the coming IPO crash. As we reported last year, Fed Chair Janet Yellen even concurred that there were bubbles as the result of record-low interest rates, but noted that she wouldn’t hike rates just to burst them.
The stock market is reminiscent of the dot-com era: investors are delusional again and tossing money at unprofitable companies.