NEW DELHI: Since global markets bounced back from their March lows, the prices of Tesla shares and Bitcoin have defied both gravity and valuation metrics. Former Reserve Bank of India (RBI) governor and respected economist Raghuram Rajan says cryptocurrency is nothing more than a classic case of bubble, while Tesla stock’s momentum is in part driven by hordes of small investors.
“Temporarily low performance is being ignored in favor of the idea that we are experiencing a big boom and that things will look good going forward. In the short term, low interest rates are relatively insignificant. These are the calculations the market makes. There is of course the foam that small investors have created in the markets, and this is where things like Bitcoin and Tesla have raised prices because people are just stepping in, “Rajan said in an interview with ETNow.
Bitcoin, the virtual currency introduced in 2009, hit new highs after rising more than 400 percent in the past year. After reaching the $ 40,000 mark, Bitcoin was below $ 37,000 last week.
“Bitcoin is the classic bubble, it doesn’t produce any value. It’s an asset that can’t even be used to pay because it’s really difficult. As my friend Austan Goolsbee says, they don’t use Bitcoin as a form of payment at Bitcoin conferences because it’s just too expensive and still costs $ 40,000! Why do people buy bitcoin? They think it’s going to go up and that’s very bubbly in the mind, “he says.
Tesla is up over 700% in the past 12 months and has become by far the most valuable auto company in the world, despite producing a fraction of what competitors like Toyota Motor, Volkswagen and General Motors do.
According to Rajan, Tesla is another case in which investors valued the stock at multiples of the price of solid auto companies like Toyota or GM. Assuming there are similar stocks in India that punters believe can make money quickly and get out, things will skyrocket, he said. “Markets are expecting a strong recovery from the second quarter onwards. This is one reason for the exuberance of all assets, which is why the Indian market is rising in part,” said Rajan.
The former chief economist at the IMF explained the flow of money, saying that once you’ve priced up the S&P500 and valued growth stocks, look for emerging market stocks and high yield bonds. “Every asset is priced up, and that’s partly why Bitcoin is in the stratosphere. India is not unique in this regard. Every emerging market is experiencing this. The question is how much of that is warranted given the economic conditions.” said.
Regarding the disconnection between stock market performance and the economy, Rajan said that low interest rates, the growth of the manufacturing sector, and the fact that many large companies are benefiting while small businesses are out of business have temporarily created a positive sense of where things are going Economy developed.
“When you look at the Sensex, you think the problems are over. No, they’re just beginning,” he said. His only advice to investors in the current market is to stay diversified.