Trump’s Tech Bubble Talk Makes My Head Hurt

May 18, 2016, 10:50 PM UTC
Donald Trump Holds Campaign Rally in Cincinnati Ahead Of Ohio Primary
Photograph by John Sommers II Getty Images

Donald Trump had a lot to say about finance in a Reuters interview yesterday, including his opposition to most of Dodd-Frank, his desire to audit the Federal Reserve, and his apparent concern that we could be in the midst of a tech stock bubble.

His first two points are fairly standard GOP dogma. The third one, however, is pretty confusing.

Here is what Trump told Reuters:

“You have a stock market that is very strange. Could be a little bit similar to, would you say it’s nine years ago now? I guess it’s sort of nine years ago. But you know, you look at some of these tech stocks that are so, so weak as a concept and a company and they’re selling for so much money. And I would have said can that ever happen again? I think that could happen again… I’m talking about companies that have never made any money, that have a bad concept and that are valued at billions of dollars. So here we go again.”

Nine years ago? Surely Trump must know that the tech stock bubble burst 15 years ago (i.e., 2001). Moreover, he also must know that the dot-com boom and bust was largely driven by a glut of infant tech companies going public, whereas the current tech market has seen a dearth of such offerings (let alone by issuers “that have never made any money” ― a metric that Trump is known to have used as a reference to revenue rather than income). Hot tech startups are staying private longer, if ever choosing to go public at all.

Is Trump instead trying to compare the current prices of tech stocks to the 2007 prices of financial stocks (and, in particular, those involved in residential mortgages)? Even if we grant him that, he seems to be suggesting that a 2016 tech stock crash could result in the same sort of economic contagion that occurred nine years ago (i.e., the Great Recession).

Fairly bizarre given that the tech sector does not have the same type of systemic risk profile as does finance. Moreover, the valuations of listed tech companies seem to have actually gotten more conservative over time, not less. According to Ycharts, the Nasdaq’s current P/E ratio is 19.55. That’s lower than it was at this time last year, around 45% lower than it was nine years ago and a whopping 91% lower than it was during its dotcom peak. The overall Nasdaq Composite also is lower than it was just one year ago (albeit higher than nine years ago).

Or is Trump including still-private “unicorns” like Airbnb and Uber? If so, it would make even less sense from a macro contagion perspective.

Unfortunately, Reuters does not appear to have followed up. So what we’re left with seems to a major misunderstanding. Either on my part about what Trump is really trying to say, or on Trump’s part about what is actually happening with tech stocks.

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