“Temporary low performance is being ignored in favour of the idea that we are going to get a strong rebound and things are going to look good going forward. Low interest rates in the near term do not matter relative to the long term. Those are the calculations the market is making. There is, of course, the froth that small investors induced in the markets and this is where things like Bitcoin, Tesla have got priced up, because people are just jumping in,” Rajan said in an interview with ETNow.
Bitcoin, the virtual currency launched in 2009, scaled new highs after rising more than 400 per cent over the past year. After hitting the $40,000 mark, Bitcoin settled below $37,000 level last week.
“Bitcoin is the classic bubble, it produces no value. It is an asset that cannot even be used for payment, because it is really difficult. As my friend Austan Goolsbee says, they do not take Bitcoin as payment at Bitcoin conferences, because it is just too costly and yet it hit $40,000! So why are people buying Bitcoin? They think it will go up and that is very bubblish in thinking,” he says.
Tesla, up over 700% in the past 12 months, has become the most valuable auto firm in the world by far, even though it produces only a fraction of what rivals such as Toyota Motor, Volkswagen and General Motors do.
Rajan says Tesla is another case where investors have priced the stock at many multiples of the price of solid car companies like Toyota or GM. Presuming that there are similar stocks in India where punters think they can make a quick buck and get out, things get driven up, he said. “Markets are pricing in a strong recovery from the second quarter and that is part of the reason for the exuberance across all assets, which is partly why the Indian market is going up,” Rajan said.
Explaining the flow of money, the former chief economist of IMF said once you have priced up the S&P500 and gone to value from growth stocks, you look for emerging market stocks and for high yield bonds. “Every asset is being priced up, and that is partly the reason why Bitcoin is in the stratosphere. India is not unique in this. Every emerging market is experiencing this. The question is, how much of this is justified given the economic conditions,” he said.
On the disconnect between stock market performance and the economy, Rajan said low interest rates, manufacturing growth and the fact that many large companies are benefiting while small companies are going out of business have created a temporary positive sense about where the economy is going.
“Looking at the Sensex, one thinks problems are over. No, they are just starting,” he said. His only piece of advice to investors in the current market is to stay diversified.