Tail risks

A surge in inflation looks unlikely

But it is still worth keeping an eye on

In 1975 Adam Fergusson, a journalist on the Times, published a book called “When Money Dies”. 

A history of hyperinflation in Germany in the early 1920s, it was written with an eye to what was going on in the then-present day. Inflation in Britain was not at the prices-soaring-day-by-day levels seen in the Weimar Republic. 

But in 1975 it reached an unprecedented 24%—grim enough for Fergusson’s warning that the experience of inflation was “totally absorbing, demanding complete attention while it lasts” to hit home.

Rapid, continuous increases in prices arbitrarily take wealth away from savers and devalue people’s wages. It is not just the purchasing power of a unit of currency that is eroded; it is the trust in a reliable future on which contracts and capitalism depend. 

From the early 1970s to the 1980s more than 50% of Americans said “inflation or the high cost of living” was the single biggest problem facing the country.

But by the 1990s the beast seemed to be vanquished. Average rates dropped; so did the number of “inflation surprises” in which the rate spikes (see chart 1). 

When “The West Wing”, a television show, gave its fictional president a “secret plan to fight inflation” in 1999 it was as a joke, not a plot point. 

True to Mr Fergusson’s belief that the experience of living with inflation is “forgotten or ignorable when it has gone”, his book fell out of print.

It was republished to acclaim at the end of the 2000s, when post-financial-crisis stimulus packages increased government debt prodigiously, and “quantitative easing”, the process by which trillions of new dollars would be created, started to hit its stride. 

Many worried that the stage seemed set for prices to surge in a way which had not been seen for a generation.

They did not. Over the 1970s rich-world inflation averaged 10% a year. In the 2010s the rate stayed stubbornly below 2% a year. 

That is one of the reasons that the small but vocal band of economists and investors that is once again worried about excessive price rises is by and large being ignored. 

The agenda for a big conference on central banking to be held in February has copious space for financial instability, climate change and inequality but barely any for inflation—despite taking place in Germany, a country which, since Weimar, has all but fetishised sound money.

Indeed a modest rise in inflation, rather than giving central bankers the vapours, would have them sighing with relief. In recent years, and most dramatically during the worst of the crisis this spring, the threat of demand-sapping deflation loomed large, especially in the euro area and Japan. 

Some want central banks to aim for inflation higher than the 2% target that most of them use, and America’s Federal Reserve has already said that it wants to overshoot its 2% target in the recovery to make up for recent shortfalls. 

Recent experience suggests that may be hard: interest rates close to zero have left monetary policy hard-put to push inflation back up even to 2%.

Look behind you

But if it is easy to ignore the prophets of doom, it may not be wise. If 2020 has a lesson, it is that problems which many in the world had broadly stopped worrying about can rear up with sudden and terrible force. 

And those sounding the alarm today are right to point out that the circumstances of the covid pandemic do not offer a simple re-run of 2009’s false alarm.

Some of today’s inflationistas predict a possibly high but transitory spike in prices as consumer spending bounces back from the pandemic. On December 3rd Bill Dudley, who was until 2018 a vice-chairman of the Fed’s interest-rate-setting committee, warned Bloomberg readers that sharp price increases might be necessary “to balance demand with the available supply, which the pandemic has undoubtedly diminished.” 

The next day David Andolfatto, an economist at the St Louis Fed, warned Americans to “prepare themselves for a temporary burst of inflation.”

Others warn of more persistent inflationary pressure. Economists at Morgan Stanley, a bank, predict “a fundamental shift in inflation dynamics” in America, with inflation rising to the Fed’s 2% target by the second half of 2021 and going on to overshoot it. After a typical recession such a rebound takes three years or more. 

The most pessimistic group warns that complacent or distracted central bankers will allow such pressures to go unchecked, leading to a decade of stubbornly high inflation comparable to the 1970s.

Three main factors are deemed to be at play: the after-effects of the stimulus measures taken by governments to cope with the pandemic; demographic shifts; and changes in policymakers’ attitudes towards the economy.

Take the stimulus packages first. Monetarism, which was the dominant economic ideology over the period in the 1980s during which inflation was squeezed out of rich-world economies, sees the root cause of inflation as an excessive supply of money. On that basis the fact that nearly a fifth of all the dollars in existence have been created this year clearly looks perturbing. 

Central-bank balance sheets in America, Britain, Japan and the euro zone have risen by more than 20% of their combined gdp since the crisis began, mostly to buy government debt. This new money is paying for enormous stimulus programmes, including wage subsidies, furlough schemes and expanded welfare benefits that put money in pockets and purses.

This money creation differs from the burst seen after the financial crisis—the burst which, despite warnings, triggered no surge in inflation. That earlier burst began during a prolonged credit crunch. This meant that the new money created by central banks was making up for money that was not being created by bank lending.

This time it is not just “base money”— physical cash and electronic reserves the quantity of which is under central-bank control—which has soared. Measures of “broad money”, which includes households’ bank balances, have, too. Lending to the private sector has risen sharply as firms have borrowed cash to continue operations. 

After 2009 the broad-money supply rose slowly; today it is spiking (see chart 2).

The private sector will thus find itself flush with cash as vaccinated economies reopen. Households and firms may remain cautious, sitting on their accumulated savings. But amid the joy of reopening they may instead go on a spending spree, making up for all the time not spent in theatres, restaurants and bars during 2020. 

That would result in a lot of money chasing goods and services that might not be in ample supply, resulting in a period of inflation that would tail off as the purchasing power of the money involved fell, bringing things back towards the status quo.

From the Black Death on

Researchers from the Bank of England who looked at 800 years of (admittedly patchy) records have concluded that inflation does typically rise in the year after a pandemic begins. 

A recent paper by Robert Barro of Harvard University and colleagues finds that the influenza pandemic of 1918-20 “increased inflation rates at least temporarily”. 

By the time the effects of the covid-19 pandemic are fully on the wane more firms will have joined the ranks of those which have already gone under and many of the survivors will be struggling to run at full tilt. 

Thus people’s willingness to spend could easily rebound faster than their opportunities to do so. There is already some evidence of bottlenecks where supply is falling behind demand. 

The price of shipping an object from one country to another has jumped in recent weeks, while the price of iron ore has risen by more than 60% since the beginning of the year.

This is the risk of which Mr Dudley warns. In the aggregate, though, investors seem unconvinced. The inflation expectations which can be derived from prices in financial markets have recently picked up a little thanks to the good news on vaccines and the prospects for a rebound in the world economy. 

But they still suggest that investors think next year’s inflation is more likely to be below the 2% central banks target than above it (see chart 3). 

Lars Christensen, a Danish economist, points out that this means there is a “clash” between the two best-known economic theories associated with the Chicago school. Milton Friedman said sustained growth in the money supply leads to inflation; Eugene Fama argued that market prices fully reflect all available information. 

“If you believe that we are going to have inflation now...the efficient-markets hypothesis would have to be wrong,” Mr Christensen argues.

Most economists side with the markets and Mr Fama. In general they no longer think about inflation as 1980s monetarists did (indeed even Friedman, late in life, admitted that modern central banking might have severed the link between the money supply and prices). 

Following the “New Keynesian” framework of the 1990s they believe that the underlying driver of inflation is a combination of the public’s expectations of price rises, which are self-fulfilling, and the health of the labour market. Both currently point to low inflation.

Neither survey data nor the financial markets suggest that the public expects dramatic price rises. And most forecasts suggest it will take some time for employment to find its pre-pandemic level, even in the economies which bounce back most quickly. 

Goldman Sachs, a bank which has been especially bullish about the prospects for the American economy, does not expect the unemployment rate to fall below 4% until 2024. And America’s economy is expected to recover faster than most. 

Relatively high unemployment—in the jargon, an “output gap”—will give firms little incentive to increase people’s wages, and thus little need to raise prices. A “projected large output gap should push global core inflation 0.5% percentage points below its pre-crisis levels next year”, argue economists at JPMorgan Chase, another bank.

So even if there is a spending boom, there will be plenty of economic slack around to accommodate it. Some economists bridge the two views, predicting that the economy will get back to speed in fits and starts, some perhaps inflationary. But for most, high joblessness and contained inflation expectations make forecasting continued low inflation a no-brainer.

What, though, if the New Keynesian view is missing key parts of the story? In “The Great Demographic Reversal”, published last summer, Charles Goodhart, a former member of the Bank of England’s monetary-policy committee, and Manoj Pradhan of Talking Heads Macro, a research firm, provide an alternative view of the past decades’ low inflation. 

It was not, they say, the result of a correct diagnosis of the problem leading, in the hands of independent central bankers, to appropriate monetary policy. Rather, it was driven by global demography.

In recent decades the integration of China, Europe’s formerly communist east and other emerging markets into the global trading system provided the world economy with millions of new workers. As bosses found it ever easier to get their labour done in Guangdong or Bratislava the bargaining power of rich-country workers fell, and price rises to cover increased wages became a thing of the past. 

This fits the finding that much more of the low inflation seen in recent decades has come from stable or falling prices for goods that can have their site of production shifted than has come from services which have to be delivered in situ.

Things are now about to change, the authors claim. As populations in the rich world and China age, the number of dependents per worker will soar, creating a labour shortage in care industries. 

True, Africa and India have plenty of youngsters. But rich-world politics may further increase the barriers to their migration. Workers in the rich world will thus acquire more bargaining power; wages will rise and prices will rise accordingly. 

As well as reigniting inflation, these demographic forces will make Western countries more equal, Mr Goodhart and Mr Pradhan argue: another seemingly inexorable trend reversed.

It might seem that the recent experience of Japan, the rich country that has aged the most, puts paid to this idea. Inflation there has long been lower than anywhere else, despite Herculean efforts on the part of the Bank of Japan. 

Mr Goodhart and Mr Pradhan counter this argument by saying that a “global escape valve” stopped inflationary pressures in Japan from achieving much. 

Rather than stagnate, investment moved overseas as Japanese manufacturing firms took advantage of plentiful global labour. Cheap imports kept goods inflation down and the offshoring of manufacturing jobs reduced workers’ bargaining power.

In fact, though, wage growth in Japan’s manufacturing industries has been comparatively strong. What is more, the authors concede that Japan’s ageing population has not had quite the effect on the dependency ratio that might be expected—because many more elderly people are now working. The same phenomenon could yet contain inflation elsewhere.

The third argument for fearing a return of inflation is political. It rests on the idea that governments and central banks are becoming more tolerant of inflation, and that they will become even more so as the extent of the pressure on government budgets becomes apparent.

Back in the 1970s presidents and prime ministers were happy to strong-arm central bankers into doing what they wanted. Inflation was tamed only after Paul Volcker proved the Fed’s commitment and independence by pushing America into recession to slow price rises. 

A new paper by Jonathon Hazell of Princeton University and colleagues argues that post-Volcker “shifts in beliefs about the long-run monetary regime” have proved more important than any other factor in conquering inflation. 

Their actions in recent decades have built up a firm expectation that central banks will respond to the prospect of inflation rising above its target with higher interest rates, regardless of what politicians and the public might want.

It is possible that these norms are weakening. In recent years there have already been greater attacks on the independence of central banks, such as President Donald Trump’s exhortations that interest rates should stay low. And during the pandemic the relationship between central banks and finance ministries has grown unusually close. 

After it ends, politicians will face the problem of the debts left behind. Where those debts are long-term, inflation would be a handy way to reduce their real value, easing the strain on budgets. 

Politicians may be more willing to entertain such an option for the reason identified by Mr Fergusson—that, after a long period of low inflation, people forget how awful it can be. A third of the people currently living in the rich world had not been born when average inflation last exceeded 5%.

Doubting the future

The Fed’s commitment to deliberately allow inflation to exceed 2% during the recovery is Exhibit A for this belief. Christine Lagarde, the president of the European Central Bank (ecb), emphasises her mandate is to “support the general economic policies” of the eu, as well as ensure stable prices. 

Central bankers everywhere now admit, if only under their breath, that as well as maintaining price stability they are also trying to keep governments’ long-term-borrowing costs low in order to facilitate fiscal stimulus. 

Should inflationary pressure start to rise while they are doing so, will they abandon that effort? Central banks which put up borrowing rates under the current circumstances would undoubtedly face opposition from the finance ministries that would pay the increased costs and suffer in subsequent elections. 

Inflationistas think that the politicians would win, as in many cases they constitutionally should. Central bankers’ independence is granted by elected politicians.

But this political argument, too, has its weaknesses. The ecb’s independence is protected by treaty, and even though it has become more willing to stimulate in recent years, it still exhibits a hawkish bias, tolerating inflation expectations that are well below target. 

Elderly people like to vote and tend to dislike inflation, argues Vitor Gaspar of the International Monetary Fund. That should limit any political pressure for higher inflation in ageing societies.

The doves and the markets currently have the better of the argument. But the case for reflation in the world economy is stronger than it was after the global financial crisis. 

A recovery from the pandemic that is untroubled by excessive inflation looks likely. But it is not guaranteed.

Will wealthy Americans cut the line for the Covid vaccine?

‘Lots of people will try to get it early — even if no one admits to it’

Gillian Tett

© Shonagh Rae

On Monday, I received a text from my healthcare provider, the NYU Langone Health medical centre in New York, with the cheery message: “The Covid-19 vaccine will be here in early 2021. We will contact you as soon as we have info about who can get it when.”

But there was a caveat: since the doctors at NYU Langone Health have no idea when that “info” might arrive, the text also urged me not to contact them — yet.

Even if those inquiries would mostly have come from the worried well, many healthcare providers in New York (and other regions) are reportedly facing a barrage of requests from the rich and powerful, desperate for access to the first round of vaccines. Indeed, the question of how to get a vaccination fast is sparking a welter of gossip in gilded circles.

The most ethical medical groups are trying to hold the line, to implement whatever distribution plan emerges as fairly as possible — even as uncertainty and anxiety mount. “It’s going to be chaos, or close to chaos,” William Haseltine, one of America’s leading medical experts, admitted to me this week. 

Or as Arthur Caplan, a bioethicist at New York University, told the STAT medical journal: “There absolutely will be a black market. Anything that’s seen as lifesaving, life-preserving, and that’s in short supply creates black markets.”

This issue is not unique to the US. However, the ethics are particularly tortured and emotive here for at least two reasons. One is the lack of any single-payer healthcare system. 

This is a country, after all, where 29 million people under the age of 65 lack medical insurance, but where the wealthy have access to cutting-edge treatments, concierge services and are able to amplify their access to the best doctors by taking seats on hospital boards.

There are numerous loopholes which could be exploited — or, to use the language of Wall Street, be prone to arbitrage

The other problem is fragmentation. The UK can roll out a plan because there is a single body in charge: the NHS. In the US, the vaccine will initially be distributed to states according to their share of the national population, and state officials will then decide how to run vaccination programmes. 

In some areas, such as New York, Mississippi and Kentucky, local officials have said they will delegate the rollout decisions to healthcare experts. In many other regions, local cities are expected to take charge.

That makes sense, given how short of resources — and expertise — most state governments are. But this fragmentation means there could be big variation in the tactics used, not least because federal guidance is vague. The Advisory Committee on Immunization Practices, for example, said last week that the first round of vaccines should go to nursing-home residents and carers, followed by essential workers and those who are vulnerable due to pre-existing conditions.

However, definitions of “pre-existing conditions” may vary. As could the concept of “essential worker”. In states such as New York and Illinois, for example, financiers and bankers were defined as essential workers during Covid-19 (which gave them the right to go into the office). So were journalists. The net result, then, will be numerous loopholes which could be exploited — or, to use the language of Wall Street, be prone to arbitrage.

This is even more likely to happen given that the White House itself has given cultural signals that appeared to sanction the idea that the rich and powerful can get better access than others. When Donald Trump got Covid-19, he proudly declared that he had taken experimental drugs that were unavailable to most ordinary Americans.

Will wealthy Americans use their economic and social capital to cut the line? Some say no. One financier in his eighties who sits on a major New York hospital board told me this week that he would “absolutely not”. 

Another New York luminary in his fifties, who also sits on a hospital board, said that he was so appalled by this idea that anyone who does should be “named and shamed”. 

Meanwhile Haseltine derides the idea as not just “utterly unethical” but also “dangerous”, if there is a black market in untested vaccines.

However, almost nobody I spoke to about this would talk on the record — precisely because the issue is so emotive. “Lots of people will try to get it early — even if no one admits to it,” a real estate developer told me.

Could the incoming administration of president-elect Biden change this? Possibly: those such as Haseltine are begging them to create a centralised plan with clear guidance. Some people around Biden are urging him to embrace the “name and shame” tactic as well.

But don’t hold your breath that the Biden team can fix the issue. 

Quite apart from the fact that they will not be in office until late January, they are confronting a system where profound health inequities have become not only entrenched but also culturally normalised. 

The only thing unusual about the looming vaccine row, in other words, is that it could reveal these iniquities with surprising clarity — and in a manner that is likely to provoke a sense of unease and alarm even among the rich.

Banks Need a Pickup in Loans to Prosper

Things may improve for banks, but without loan demand, revenue growth will still be hard to come by

By Telis Demos

Bank of America executives suggested that the bank’s net interest income likely bottomed in the third quarter. / PHOTO: BESS ADLER FOR THE WALL STREET JOURNAL

Heading into 2021, it appears that things aren’t getting any worse for bank stocks. 

But it may be some time before they get much better.

Bank of America BAC -0.32% executives on Tuesday suggested that the bank’s net interest income likely bottomed in the third quarter, rising about 1% sequentially in the fourth quarter, and that the fourth quarter of 2021 will likely look much better than the first. 

JPMorgan Chase JPM -0.19% last week reported 2% quarter-over-quarter growth in net interest income, and expects a pickup in 2021 versus 2020. The two banks had reported 2020 declines of 11% and 5% in net interest income, respectively.

One reason for optimism, widely cited across banks, is how much cash banks can still shift into their securities portfolios. Even absent any pickup in loan demand, banks can continue to put cash generated by deposits into fixed-income securities that pick up more yield.

Still, the road to much improved interest income across banks isn’t straightforward. One challenge is that mortgages continue to be prepaid because of a surge in refinancing, which affects mortgage-backed securities. 

Bank of America cited this as having a significant impact on its net interest yield. Banks have so much cash to deploy that they can still make gains in yields net of this effect. But where mortgage rates go could be a huge swing factor.

There is certainly hope in the shape of the yield curve. 

Banks across the board noted the recent steepening of the curve, as long-term rates have risen, as a big benefit. 

For example, the spread between two-year and 10-year Treasuries is as wide as it has been since 2017. 

However, banks have reasons to be cautious about simply buying longer-term fixed-income securities, as this could cause them to miss out on future rate increases.

So even a steeper curve isn’t as much help as it could be unless banks add more loans, which can have floating rates or generate higher yields at shorter durations. And loan growth remains a wait-and-see prospect. 

Bank of America noted that commercial loans volume stabilized and halted their decline at the end of the fourth quarter, “providing hope that increased loan demand will soon follow.” 

Bigger stimulus may or may not help matters, particularly for consumers, who have used a lot of their payouts to pay down debts.

Meanwhile, banks may possibly have passed the peak in their Wall Street businesses. 

So far, big banks’ trading desks have reported less revenue in the fourth quarter than in the third quarter. 

This matches the typical seasonal trend, but bankers also were signaling that overall gains may be hard to come by in 2021. JPMorgan Chief Executive Jamie Dimon described the fight for growth in trading share, via scale and digitization, as “trench warfare.” 

Citigroup C -0.86% Chief Financial Officer Mark Mason said trading activity was still robust in January, but it will likely normalize going forward.

S&P 500 bank shares are now down just 10% from where they started 2020, but their multiples have actually expanded, from under 12 times forward earnings to nearly 14 times. 

That isn’t unreasonable, given the pent-up capital return that is forthcoming, albeit at an uncertain pace. 

But without some improvement in underlying loan conditions, banks are no longer much of a bargain.

The Costs of Merkel’s Surrender to Hungarian and Polish Extortion

German Chancellor Angela Merkel has been laboring under enormous pressure to prevent a veto of the European Union's 2021-27 budget and COVID-19 recovery fund. But the compromise she reached with Hungary and Poland is the worst of all possible worlds.

George Soros

NEW YORK – The European Union is facing an existential threat, and yet the EU’s leadership is responding with a compromise that appears to reflect a belief that the threat can simply be wished away. 

Prime Minister Viktor Orbán’s kleptocratic regime in Hungary and, to a lesser extent, the illiberal Law and Justice (PiS) government in Poland, are brazenly challenging the values on which the European Union has been built. 

Treating their challenge as a legitimate political stance deserving of recognition and a compromise solution will only add – massively – to the risks that the EU now faces.

I recognize and understand the enormous pressure under which German Chancellor Angela Merkel has been laboring. She has been Germany’s chancellor for 15 years and is now approaching retirement, in September 2021. 

With French President Emmanuel Macron temporarily distracted by the laïcité issue and other serious security concerns within France, Merkel has become something of the sole main decision-maker for the EU.

I also understand why the German chancellor does not want another country, Hungary, to announce its intention to leave the EU on her watch. That is reportedly what Orbán was preparing to do in recent days, because he cannot afford to have the sheer scale of his regime’s corruption exposed, which the EU’s “rule of law” conditionality for the disbursement of Union funds would invariably have done.

Orbán has stolen and misappropriated vast sums during his decade in power, including EU funds that should have gone to benefit the Hungarian people. He cannot afford to have a practical limit imposed on his personal and political corruption, because these illicit proceeds are the grease that keeps the wheels of his regime turning smoothly and his cronies in line.

Threatening to torpedo the EU’s finances by vetoing its budget was a desperate gamble on Orbán’s part. But it was a bluff that should have been called. Unfortunately, Merkel has, it appears, caved in to Hungarian and Polish extortion.

As I write, it seems clear that Merkel has brokered a compromise with Orbán and Poland’s de facto leader, Deputy Prime Minister Jarosław Kaczyński. The deal that Germany made with the EU’s two rogue member states, however, constitutes the worst of all possible worlds. The widely leaked text of the proposed compromise, to be embedded in the concluding statement of this week’s European Council meeting, has three fundamental flaws.

First, the declaration alters in substance and intent the text of the regulation that was agreed by EU institutions on November 5, weakening the rule-of-law conditionality considerably. Neither the European Commission nor the European Parliament, let alone the national governments that made the integrity of the regulation their main concern in the European Council, should allow themselves to be elbowed aside in this way.

Second, some provisions in the deal serve to delay the implementation of rule-of-law conditionality by up to two years. That would be a true coup for Orbán, as it would delay any possible action until after the next scheduled Hungarian parliamentary elections in 2022.

The reprieve would give Orbán’s Fidesz party ample time to change Hungarian laws and constitutional provisions, and allow Orbán to continue redefining what constitutes “public funds” in Hungary in ways that enable him to channel ill-gotten loot from public bodies into private “foundations” controlled by his cronies. The primary victims of the deal that Merkel has reportedly struck with Orbán will be the people of Hungary.

Lastly, the proposed summit declaration is a case of the European Council acting beyond its authority in constraining the European Commission’s ability to interpret and act on agreed EU legislation. That is a dangerous precedent, because it reduces the Commission’s legal independence and may very well contravene the Treaty on European Union, at least in spirit.

The deal, as it is understood to exist, is ugly and flouts the express wishes of the European Parliament. But because of the urgent need to use the €750 billion ($909 billion) COVID-19 recovery fund, the European Parliament may very well approve it.

All I can do is to express the moral outrage that people who believed in the EU as the protector of European and universal values must feel. I also want to warn that this compromise may severely dent the hard-won confidence that the Union’s institutions have gained through the creation of the recovery fund.

George Soros is Chairman of Soros Fund Management and the Open Society Foundations. A pioneer of the hedge-fund industry, he is the author of many books, including The Alchemy of Finance, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means, and The Tragedy of the European Union: Disintegration or Revival? His most recent book is In Defense of Open Society (Public Affairs, 2019). 

From Airbnb to Tesla, It’s Starting to Feel Like 1999 All Over Again. It May End the Same Way.

By Randall W. Forsyth

Airbnb shares soared 113% over the IPO price on the first day of trading. / Courtesy of Nasdaq

Maybe this time is different. Those words, supposedly the most dangerous to utter in the investing realm, came to mind amid the frenzied pops in the highly anticipated initial public offerings of the past week.

They recalled the wild IPOs at the end of the last century, when the public’s enthusiasm for all things dot-com had investors paying crazy prices for new stocks that often lacked earnings, revenue, or, in some cases, actual operations. After the calendar turned over to the year 2000—without the world descending into chaos from the Y2K computer bug, remember that?—the bubble popped, especially after Barron’s published its seminal cash-burn story that March, which showed that the dot-com kids were rapidly running through the liquid assets compliant capital markets had provided to them. 

As it turned out, the Nasdaq Composite had posted its top tick a bit more than a week earlier, although we only learned that in retrospect.

What is different this time is that the current highflying IPOs are coming from innovative companies that have become major businesses, nurtured by their private-market investors while attracting throngs of fans who wanted to become shareholders as well as customers. 

So they clamored for DoorDash (ticker: DASH) and Airbnb (ABNB), sending their shares soaring in their first day of trading by 86% and 113%, respectively, over their respective IPO prices.

So great was the frenzy that there was furious buying of the call options of ABB (ABB), the big European industrial company out of confusion with the ticker for Airbnb, our former Barron’s colleague Mike Santoli amusingly reported on CNBC. That wasn’t the first case of mistaken identity with a hot IPO. 

Instead of getting in on the 2019 IPO of Zoom Video Communications (ZM), which has become one of this year’s stay-at-home winning stocks, punters mistakenly chased penny stock Zoom Technologies (ZTNO) ahead of the former’s IPO.

What does recall the dot-com bubble era are the valuations accorded these IPOs. In his preview of the Airbnb offering last week, colleague Andrew Bary quoted New York University professor and tech entrepreneur Scott Galloway bullishly predicting a $100 billion market value—by the end of 2022. 

At the end of its first day trading on Thursday, its market cap already topped Galloway’s no longer outlandish projection, which was three times what had been estimated just a week earlier.

Another blast from that past is Tesla ‘s (TSLA) 50%-plus jump since Standard & Poor’s announced last month the electric-vehicle stock’s inclusion in the S&P 500 index. That recalled the 64% jump in then-dominant internet search company Yahoo! in December 1999 ahead of its addition to the benchmark index, just a few months before the Nasdaq’s peak.

S&P 500 index funds and portfolios that followed the benchmark will have to buy Tesla without regard to the stock’s value, as colleague Evie Liu reports. But the slavish adherence to this particular market gauge belies the tenet of index investing—that the efficient market distills the reasoned assessments of buyers and sellers of the value of a security. 

“Whether or not [Tesla CEO] Elon Musk will ever deliver autonomous driving, we are drifting closer to autonomous investing,” writes Jim Grant in the current Grant’s Interest Rate Observer.

Even if that’s the case, this episode demonstrates that the S&P 500 doesn’t represent the entirety of the U.S. stock market. 

For instance, the Vanguard 500 Index fund (VFIAX) has significantly lagged the Vanguard Total Stock Market Index fund (VTSAX), 15.64% to 17.8% in the year through Wednesday, according to Morningstar data. 

Over the past 12 months, the gap is 17.41% to 19.14%.

For his part, Musk decried the “M.B.A.-ization of America” to The Wall Street Journal this past week for U.S. corporations supposedly focusing too much on financials. 

Which is ironic given Tesla’s adept financial engineering, including its announcement this past week of a $5 billion sale of stock, its third equity financing this year, for a total $12 billion.

Musk’s criticism seems directed at those skilled at analyzing the EV maker’s income statement and balance sheet, such as Vicki Bryan, who pens the Bond Angle research letter. 

Tesla’s addition to the S&P 500 followed its reporting of a requisite four consecutive profitable quarters, which can be “traced entirely to energy credit sales plus noncash account and unusual items—none of which are its core business,” she writes.

These items provided a $1.6 billion boost to reported free cash flow of $1.93 billion in the four quarters through Sept. 30, which, however, ignored $100 million for solar-equipment capital expenditures and $1.1 billion in capex funded by leases. Taking all that into consideration, operations actually consumed more than $800 million in cash, she concludes.

The entire $9.18 billion year-over-year increase in reported cash, to $14.53 billion on Sept. 30, resulted from net borrowing of $1.5 billion and the sale of $7.7 billion in stock and equity equivalents, Bryan adds. The ebullient stock market, augmented by the index effect, provides the cheap capital to keep the Musk magic going.

That’s what’s different this time from the dot-com era. There seems to be a seemingly limitless font of money to be tapped by hypergrowth companies that promise to change how we work, live, and get around. 

The question is whether it will end differently.