Elon Musk and the Dangers of Another Stock Bubble

In the summer of 1998, I called up Paul Samuelson, the dean of twentieth-century American economics, and asked him what he thought about the U.S. stock market, which had already risen sharply in what subsequently became known as the dot-com bubble. “I define a bubble as a situation in which the level of stock prices is high, and the rate of growth of stock prices is high, because of a self-fulfilling prophecy in which people believe the market is going to go up,” Samuelson said. “On that basis, I have to think there has been an element of a bubble in the market for at least two years, possibly longer.” I then asked Samuelson, an eminent M.I.T. professor who died in 2009, how long he thought that bubble would last. “We have absolutely no theory of the duration of bubbles,” he replied, with a cackle. “Anything that is durable for ‘n’ periods can continue for twice as long.”

History records that the dot-com bubble lasted for nearly another two years. During that time, the Dow Jones Industrial Average rose a further twenty-five per cent, the Nasdaq index doubled, and many technology stocks skyrocketed. Investors bewitched by future profits, not actual ones, backed hundreds of loss-making Internet and tech companies that issued stock through initial public offerings, or I.P.O.s. Then, in April, 2000, the Nasdaq crashed. A year later, when I was completing a book about the bubble, the index had fallen by about two-thirds, and many Internet startups had gone out of business. Others survived the bust, and some of them, including Amazon, eBay, and E-Trade, have grown into enormous and highly profitable businesses.

Is history repeating itself? There are some obvious parallels with today’s market: excitement about new technologies; a surge of trading by individual investors; cheap money, thanks to an accommodative Federal Reserve; eye-popping moves in favored stocks; a record number of I.P.O.s. Earlier this month, Rivian Automotive, an electric-vehicle manufacturer that had yet to report a dollar in revenue, issued stock on the Nasdaq—in one of the biggest I.P.O.s ever. At lunchtime on Monday, the company was notionally valued at close to a hundred billion dollars—comfortably more than Ford, General Motors, or Honda, which between them have nearly four hundred billion dollars in annual revenue. That’s a shocking valuation, but it only begins to capture the current mania for electric-vehicle, or E.V., stocks. In the past month, Lucid, another revenue-light E.V. startup—which went public earlier this year by merging with a shell company—has seen its stock price more than double. Now Lucid is notionally worth more than Ford and is not far behind G.M. Then, of course, there is Elon Musk’s Tesla: the grandpa of the E.V. business, which held its I.P.O. back in 2010. Tesla now has a market capitalization of almost $1.2 trillion. That figure surpasses the capitalizations of Toyota, Volkswagen, General Motors, Ford, Daimler, BMW,…