The 5 Biggest Bubbles In Markets Today

Tyler Durden's picture

Authored by Jared Dillian via MauldinEconomics.com,

Bubbles aren’t new - they’ve been around since Dutch tulips - but it’s only recently that they’ve worked their way into the average investor’s lexicon. That’s probably because bubbles happen much more frequently these days.

We never used to get a giant speculative bubble every 7–8 years. But that has been the case since the new millennia.

In 2000, we had the dot-com bubble.

In 2007, we had the housing bubble.

In 2017, we have the everything bubble.

Why do we call it the everything bubble? Well, there is a bubble in a bunch of asset classes simultaneously (I delve deeper into this topic in my free exclusive special report, Investing in the Age of the Everything Bubble).

Let’s look at some of them.

Real Estate

You can spot real estate bubbles all around the world now. Canada, Australia, Sweden, Hong Kong, China—and California—to name a few.

Home prices in California have risen by 69% since 2010. Meanwhile, Canadian housing has shot up 1040% over the same period.

Why do these bubbles exist? For starters, ultra-loose monetary policy (which is also the reason that the bitcoin bubble exists).

What will be the catalysts that deflate these real estate bubbles? I’m not sure, but usually there isn’t a catalyst. The marginal house price just gets too expensive.

It seems pretty nutty that another real estate bubble is forming just ten years after the last one that nearly wiped out the planet. But real estate has been part of the food fight in asset prices and it appears to be peaking.

Cryptocurrencies

You have probably heard about the madness in cryptocurrencies, like Bitcoin, Ethereum, and ripple. Ethereum is up about 3,600% this year. As for bitcoin, it is old and boring and up only 343% this year. 

Alt-currencies are being launched left and right, in initial coin offerings (ICOs). These ICOs explode on the first day of trading, and everyone gets rich. Free money!

When people are making free money, you are pretty close to the end. These ICOs conjure memories of the IPO craze in 1999. That’s the funny thing about free money—everyone wants in.

Cryptocurrencies are a massive bubble because people are making money all out of proportion to their intelligence or work ethic, which is one of the hallmarks of a bubble.

Of course, you could just buy all these cryptocurrencies and ride the bubble. But I’m a little suspicious of buying just electrons or computer code—I like things with cash flows or that are tangible. Call me crazy.

Stocks

It’s also hard to get excited about companies that are generating cash flows.  I hate to pick on FAANG stocks—at least they more or less make money—but these five stocks account for too much of the market gains.

Facebook, Amazon, Apple, Netflix and Google are responsible for over 30% of the S&P 500 index gain in market capitalization in 2017.

I talked about another rationale behind these stock prices back in June.

Still, investing in FAANG stocks is a fad like the Nifty Fifty was in the 60s. We may still be talking about the Nifty Fifty today, but nobody is investing in those stocks.

FAANG stocks are hard to short, because:

1.They are gifted and talented camps—companies whose sole purpose it is to hire the smartest people and turn them loose to solve hard problems.

2. They are passively engaged in surveillance.

3. CNBC talks about one of the FAANG stocks 90% of the time.

4. It is a frenzy.

But I assure you, the FAANG stocks will turn. These companies might be changing the world, but that’s not the point. They’re overpriced.

Credit Bubble

Likewise, corporate bonds—particularly high yield, and especially European high yield—are a bubble.

Credit spreads are tighter than they have ever been, just as global central banks attempt to coordinate a tightening of monetary policy. Central banks tend to become most hawkish right as the economy is about to roll over. Aggressive tightening now could cause a financial accident.

I think corporate credit is on the edge. If you have other corporate credit in your portfolio (including sovereign emerging market credit), I suggest you eject it now.

Indexing

Lastly, the indexing bubble is very important. And there is a commodity market precedent for what is going on with indexing in the stock market.

During 2006–2008, swaps on commodity indices were very popular. Commodities were seen as a new asset class, uncorrelated to everything else.

The problem was that commodities were lumped together as a singular “thing.” Yet, the fundamentals for corn and oil and copper are very different. But the fundamentals were ignored, all commodity prices rose together, and money kept plowing into the space. It didn’t make sense.

Investors believed that commodity investing had entered a new paradigm. You know what happened next. There was a global recession, flows into commodity index swaps reversed, and the price of oil and most other commodities crashed.

Everyone who thought commodity indexing was a new paradigm got carried out. I think the same thing will happen in equities. In a year or two, we’ll be taking a hard look at indexing. We’ll stop thinking of stock and bonds as an asset class, and return to thinking of individual stocks and bonds.

When equity index fund flows reverse—and they will—it will end very badly.

Get Ready

I hate being that guy who calls everything a bubble, but it's the truth. There are lots of things in the world whose prices cannot be sustained by economic fundamentals. And bubbles are often highly coordinated.

We have all the classic warning signs of a big market top:

  • Extra-tight credit
  • Extra-low volatility
  • FAANG
  • Complacency in general
  • Retail looking smart, pros looking stupid
  • Short rates rising, curve flattening
  • Pain trade is probably lower, not higher

And yet people are mostly ignoring them.

*  *  *

Grab Jared Dillian’s Exclusive Special Report, Investing in the Age of the Everything Bubble. As a Wall Street veteran and former Lehman Brothers head of ETF trading, Jared Dillian has traded through two bear markets. Now, he’s staking his reputation on a call that a downturn is coming. And soon. In this special report, you will learn how to properly position your portfolio for the coming bloodbath. Claim your FREE copy now.

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balz's picture

I don't think Canadian real estate is up 1040% since 2010.

Haus-Targaryen's picture

"Extra-tight credit"

Um ...?

Creepy_Azz_Crackaah's picture

"Cryptocurrencies are a massive bubble because people are making money all out of proportion to their intelligence or work ethic, which is one of the hallmarks of a bubble."

Oh, dear.  tmosley is going to be calling you stooooopid over that one.

The truth shall not be told.

The_Juggernaut's picture

What's the difference between an "everything bubble" and the dollar sinking into the shitter?

Ramesees's picture

This guy is right, of course. There's a "bubble" in every asset class. 

But then again, the Fed put $X trillion into the economy over the past 10 years, and it's just starting to filter out. Should we be surprised that assets are priced at $price + $X?

 

^Juggernaut gets it right. But for the fact that every other central bank is doing exactly what the Fed is doing, so relative to other currencies the Dollar is only partway down the shitter. In the bowl but not past the S curve.

grasha87's picture

I've reviewed several Austrian Economics books and have more coming up for those of you interested on my channel:

 

https://www.youtube.com/watch?v=jTDoPlqUYZE

The_merovingian's picture

Must be a bubble because I mist it and it could make me redundant?

Best argument ever.

Don't worry, he'll change his tune soon, every single retail investor I know that has spoken against BTC had to eat some humble pie.

 

Serfs Up's picture

I don't think Canadian real estate is up 1040% since 2010.

No, that's just either really dumb or a typo.  104% I could believe.

NoDebt's picture

It's a bubble in exaggeration of the size of bubbles, apparently.

 

grasha87's picture

I've reviewed several Austrian Economics books and have more coming up for those of you interested on my channel:

 

https://www.youtube.com/watch?v=jTDoPlqUYZE

canisdirus's picture

Probably not since 2010, but I'd buy this century. They haven't had any serious retreats in Vancouver housing prices recently.

We're talking crap shacks that were $150k in 2000 are now selling for $2M+.

Hkan's picture

Your right its a lot more!

The Real Tony's picture

Richmond Hill residential real estate is up 4,000 percent since 1984.

Solio's picture

Criminality?

NoDebt's picture

"Retail looking smart, pros looking stupid"

Hasn't that already been going on for some number of years now?

 

junction's picture

The current biggest bubble now is the news bubble concerning the Las Vegas lone gunmen.  Now we have stories that Paddock was gambling millions of dollars on video poker.  What news is based on real facts and what news is propaganda to mask what really happened?  News reporters, even those not also on the government payroll, leave out facts that would show monsters run the United States.   

Ben A Drill's picture

Everything that is over 15X earnings is overvalued.

NoDebt's picture

NoDebt's standard company valuation metric:  It's worth 1X sales.  Every other factory you introduce makes it worth less than that.

 

 

Ben A Drill's picture

Good reply. Especially with all the snowflakes entering the work place.

DerdyBulls's picture

At some point, FAANG's gotta justify valuation. Tangible only at this point.

The Real Tony's picture

The average P/E ratio must be pushing the 50 mark without all the bullshit accounting and stock buybacks.

tribune's picture

for me the jury is still out on cryptocurrencies. bitcoin was the first in the primordial soup. it came from nothing. it is hard to say what its true value is, but rick falkvinge may have been closest with his articles from 2011. bitcoin is almost a drop in replacement for the us dollar. it could be that cryptocurrencies are still wildly Undervalued!!.

tribune's picture

i think people are trying to value cryptocurrencies like they value stocks. we dont know their true value yet

BallAndChained's picture

> i think people are trying to value cryptocurrencies like they value stocks. we dont know their true value yet

Their true value is zero.

Bitcon, Ethereum, and other cryptos are FREE open source code. You can download the code for FREE on GitHub.

Out of all the FREE open source code out there, do you pay $5000 to use any of them?

Txpl9421's picture

If I thought it was just Mrs Kim and her Japanese counterpart buying I would agree with the bubble assessment.  Institutional buying is starting.  THAT is going to be huge.  Much like the dot com bubble, the ICOs are crap for the most part.  But the "internet" was real.  Bitcoin is the internet off which the ICOs pretty much run.

 

ICOs are a bigger scam than the dot coms ever were.

WhosJohnGalt's picture

"Bitcoin is the internet off which the ICOs pretty much run."

No, Ethereum is.

Bitcoin (in its original whitepaper form) is simply incapable of implementing / executing / hosting smart-contract driven ICO functionality.

The fact that people still can't figure that out (or don't know it yet) tells me that we're still waaaay early in the cryptocurrncy cycle.

Let's be honest, most people calling cryptos a "bubble" right now are the ones who missed the early boat and are butthurt over that fact.

The hilarious part though, is that there's plenty of time left to catch a later boat. But instead they are going to pout around, stomp their feet, and double-down on the "bubble" narrative while yet more boats pull away from the dock.

Real estate, equities, and bonds -- absolute, 100% bubbles.

Oh, and the dollar is losing value / purchasing power by the day.

BallAndChained's picture

You really pay $5000 to use your internet??

Silver Savior's picture

I like free money. I bought Ripple hard when it was 15 cents. Now I make hundreds of dollars every cent it goes up. I can't even tell you how many people told me not to buy it. I just see no reason putting thousands of dollars into just one Bitcoin. 

Especially since Ripple is going to be a break though for the bankster elite who have all the wealth. A fucking no brainer if you ask me. All this money will eventually flow to buy more silver. Digital currency sucks.

DerdyBulls's picture

What currency do you buy it in?

Silver Savior's picture

I buy bitcoin with with USD then buy Ripple with Bitcoin. I start at coin base and end at kraken or gatehub.

AlZo's picture

Let's talk about a bubble in cryptocurrencies when the marketcap is above 5 trillion USD. 

ICO tokens are not strictly speaking cryptocurrencies but just cryptotokens of immature projects being used for speculation. Many many useless projects are in a bubble, but the future winners are way undervalued. Many cryptotokens already crashed 90% from their highs reached last June. Their buble already popped ! But bitcoin is again near all time high ! Don't put cryptocurrencies and cryptotokens in the same basket.

Calling a bubble in cryptocurrencies and "cryptoshares" or cryptoassets right now is way, WAY premature, it didn't even get started. Wake me up when Bitcoin hits 100K USD. 

BigWillyStyle887's picture

Why when it hits 100K and not when it hits 50k, 75k, 99k, or 101k? Is 100k the magic number for you that defines a bubble or is that just much simpler for you to understand than the fundamentals?

WhosJohnGalt's picture

Why not when it's at those values?

Because it's not about the nominal price per unit -- it's about total market cap.

That's what's so amazing about so-called "investors" -- they speak so authortatively about things, yet they have no clue about things like market caps.

The current crypto market cap is hovering between $100 billion and $150 billion.

The dot com era bubble priced in today's dollars would have been around $4 trillion -- yes, you heard that right -- $4 trillion.

People calling cryptos a "bubble" are clueless and exposing their complete and total ignorance about history and markets in general.

RedDwarf's picture

Oh, and it's even worse than that.

Cryptotokens are basically equities.  They represent ownership of a particular implementation of a decentralized application.  The cryptotoken market is analogous to the stock market.

Cryptocurrencies are as the name implies currencies.  They are analogous to the forex markets.

They are different animals, serving different needs.  This means the market cap for the two is largely independent.  We will see a market cap of trillions of dollars for one or possibly even several cryptocurrencies.  We will also see a market cap of trillions of dollars for the cryptotokens.

Yellow_Snow's picture

Hyperinflation = When everythings a bubble

Deep Snorkeler's picture

Our economy is a techno-environmental system

running out of time, space and gimmicks.

Son of Captain Nemo's picture

"We have all the classic warning signs of a big market top...And yet people are mostly ignoring them."

GOOD!

When it bursts I want to see my investment in Remington and Smith & Wesson go through the roof as people that prayer to the "One-eyed Pyramid" go "Stephen Paddock" on each other and themselves when they lose it all!...

jin187's picture

California isn't a real estate bubble anymore than D.C. The increased prices there are due to people with obscene incomes being funneled there, and the Silicon Valley companies they work for aren't likely to announce mass layoffs any time soon.

Real estate seems pretty normal to me in all the locations that don't have wealthy elites flooding them, and displacing all the people they feel so terribly guilty over.

Pop3y3too's picture

What housing bubble? I bought my 1600 sqft, not including unfinished basement, 1914 repossessed two story home in 2015 from the bank for 7500.00 cash (retrieved from my safe).  Hell, my 2006 pickup is worth more than that. My road bike is worth almost as much and I'd wager that this house will outlast any house built today. Hardwood floors throughout and well insulated by a previous owner.  Built when a 2x4 actually measured 2x4.

 

The only thing I paid to have done once I bought it was to have a wood stove installed. I lived through the blizzard of '78 as a kid in the same area and know how essential that is. I did all the other updates myself (electrical, plumbing).

 

Being debt free is liberating.

 

Pop3y3too's picture

No, sir. At least not the one that I was in. http://www.toledoblade.com/gallery/The-Blizzard-of-1978

Snow drifted so high I could walk up the drift to the roof of the house.  When they finally got the road clear enough to drive busses through to take the kids to school, I remember sitting in the bus looking out the window and not being able to see past the snow drifts of the tunnel the plows had made.

RedDwarf's picture

This article is shallow.  We have a bubble in the dollar, not in 'everything'.  It only looks like that because the dollar is the world reserve currency.

When the dollar bubble pops, all the off-shore USD will come flooding back in to buy real assets.  Then you will see real estate and other tangibles (including precious metals) go up dramatically in price while wages fall.  The dreaded crack-up boom.  The dollar will become worthless.

As for crypto, very few people are invested in crypto yet.  Calling it a bubble just because it has gone up massively in value on early adoption is also shallow.  In the places where fiat has collapsed, crypto has in fact moved in and done very well.

Juliette's picture

Bitcoin to da moon!

Grizzlybear's picture

Cryptocurrencies are a screaming bubble and it is awesome to see how people are hooked on it. 

Just some comments from a nobel laureate, who seriously spent lots of time thinking about bubbles and called two of them (without trying on 36 occasions before):

http://time.com/money/4927041/bitcoin-bubble-robert-shiller/

Also our 2 cents to the topic:

http://www.scienceinvesting.com/technical_analysis/fx/bitcoin/

It is just hilarious: These days my neighbor came up told me he's looking to rent an apartment in Eastern Europe in order to install an etherum production facility there. He wanted to profit from low energy costs for his dozens of computers mining 24/7. LOL!!!

That stuff is gonna leave back widow's tears

studfinder's picture

Around here (in my area wisconsin) house prices are a bubble.  I'm seeing neighborhood houses sell for way more then what they are really probably worth in a "typical" market.  10's of thousands (and these are $100-150K homes) more then they would have sold just a few years back.  I don't like it.  A young person is going to be swallowing a huge amount of debt to jump on the home ownership bandwagon right now.   I see many a foreclosure in my crystal ballz. 

The Real Tony's picture

A bubble in housing is when the only buyers are speculators and the Chinese. That no one can afford a house is irrelevent home prices will still go higher.

Juliette's picture

Plus American houses are usually made of plywood, plastics and papier-mâché. Which is why they degrade a lot rapidly, unless you put a fortune into maintenance, bug fumigation and repairs. Add to that confiscatory property taxes. And then all the trouble with the HOA. Sheesh. You would be way better off buying a big Winnebago RV with all the modern comforts and a small Mercedes SLK in its trunk. Not much tax to pay there and you're truly mobile ... may go to Canada or Mexico as well.

 

 

Akdov Telmig's picture

Did you know Ralph Lauren's original name was Ralph Lifshitz.

Exponere Mendaces's picture

Another fossil beating the gong about Bitcoin.

Cool story, bro.