Wall Street came to a halt recently, as Chinese e-commerce giant Alibaba made its Initial Public Offering debut. The media became myopically focused over this so-called “historic event†and  its celebrity founder Jack Ma. By the time the closing bell had rung, the hype and fanfare propelled Alibaba up 36 percent on its first day of trading and caused the world’s largest IPO to display a market cap worth $231 billion. The investing public seems to have forgotten the dangers associated with disregarding valuation metrics—Alibaba is trading at a Price to Book value ratio north of 27!
This hysteria is scarily reminiscent of the late 1990s, where an over-hyped stock market soared to new heights fueled by an accommodate Federal Reserve. Today, just as in 1999, a vastly superfluous money supply is finding its way into the pockets of any flimsy business model, with stock valuations that far outstrip the book value or potential profits.
During the peak of the late ’90s tech bubble, the Price/Earnings ratio of the Nasdaq 100 was far in excess of 200. This confirmed investors were willing to pay very high prices for stocks, due to their delusional expectations of earnings growth. The problem, which is now easily acknowledged by using hindsight, was these companies never had the potential to reach the valuations ascribed to them—all they had was eyeballs. But a central-bank- manipulated increase in the money supply does strange things to investors, it afflicts them with a condition Alan Greenspan referred to as “irrational exuberance.â€
Today we see that same type of irrational exuberance, as investors fall over themselves to buy stock of a Chinese internet company, despite the fact the communist government of China retains total control over that country’s internet. If China’s Premier Li Keqiang decides to pull the plug on the company, it will become worthless overnight. However, while Alibaba does have revenue and earnings, the gross overvaluation of the enterprise echoes the tech bubble with frightening similarity.
