If only every year was this “easy”.
Unfortunately, the old adage of the trend being your friend becomes harder to adhere to as a guidepost as one asset market after another goes into bubble territory. As we discussed here, Alberto Gallo of Algebris Investments has ranked (see here) the top 14 bubbles worldwide, according to characteristics such as duration, appreciation, valuation and the degree of irrational behaviour.
When we started in this industry, we were taught by those with the gray hair of experience that betting against the herd was the key to success. Turning up on January 1, imagine the look on their faces if you’d told them you’d bought a portfolio of everything that had gone parabolic (or almost) the previous year. Luckily for them, markets were relatively free and absent $15 trillion of price insenstive asset purchases by central banks. Fundamentals counted for somethiing – and will again (we hope) – there’s just the small matter of getting to the other side of the current bubble, sorry bubble(ssssssssssssssssssssssssssss).
In 2017, the strategy of buying bubbles has obviously worked almost perfectly or, as Bloomberg notes,“Investors can either buy bubbles or be left far behind”. Indeed, it’s gone to the trouble (see here) of creating ts own “Bubblicious” index, which includes an equal weighting of a host of the “usual suspects”. These include:
- Sunac China Holdings Ltd.: perhaps the poster child of the real-estate frenzy in the world’s second-largest economy, this company’s aggressive acquisition strategy has been met with raised eyebrows among regulators at a time when China is trying to rein in the country’s financial risk.
- Tencent Holdings Ltd.: A 2,600 percent rise in the past decade? Tencent is the leader of the pack when it comes to Asian tech stocks that have made the sector the biggest component of the MSCI Asia Pacific Index for the first time since the internet bubble.
- Tesla Inc. and Netflix Inc.: two U.S. tech companies that have both been branded with the b-word by hedge fund manager Einhorn.
- VelocityShares Daily Inverse VIX Short-Term ETN, ticker XIV: this exchange-traded note is a proxy for the presumed “short volatility” bubble that’s seen investors bet billions of dollars on the prospect of not much happening in markets.
- Bitcoin Investment Trust, ticker GBTC: the cryptocurrency fund that typically trades at a substantial premium to its net asset value. Bitcoin itself has been called a bubble by bank CEOs including JP Morgan Chase & Co.’s Jamie Dimon, ethereum co-founder Joseph Lubin and many more.
- ETF Industry Exposure & Financial Services ETF, ticker TETF: this meta exchange-traded product holds a basket of firms poised to benefit the most from the explosion in ETFs -- a proxy for the “passive bubble.”
- Lots of long bonds: The iShares 20+ Year Treasury Bond ETF has enjoyed $1.8 billion worth of inflows in a year that saw former Federal Reserve Chair Alan Greenspan warn of a massive bubble in the space. Meanwhile yields on German sovereign debt maturing in 2048 and Japanese bonds maturing in 2050 have dipped ever lower, sealing the latter’s reputation as a ‘widow maker’ for frustrated shorts. The portfolio also includes the infamous Argentinian century bond.
Bloomberg observes that its broad range of choices mean that its Bubblicious portfolio is “fairly well diversified” across the many bubbles. Actually, it could have been more diversified. While we don’t disagree with the inclusion of any of Bloomberg’s picks, it’s worth noting that compared with Gallo’s list, the Bubblicious portfolio does not include European high yield, EM high yield or any of the obvious property bubbles outside China. London, for example, and Australian cities, such as Sydney and Melbourne. Unlike Gallo, we might have chosen New Zealand property instead of London property (where prices have started falling) and, while Bloomberg has chosen Sunac as its “poster child” for Chinese real estate, China Evergrande and others would be equally valid.
Anyway, as Bloomberg explains, the “Bubblicious” index has risen by well more than 120% so far this year.
The best way to crush the crowd in 2017? Buy the things everyone insisted would never keep going up. A portfolio stuffed with allegedly over-inflated assets would have returned more than 120 percent so far in 2017, trouncing the S&P 500 Index and underscoring the challenge for investors facing a plethora of pricey securities.
The hypothetical ‘Bubblicious’ portfolio includes Chinese real estate and internet names, a pair of U.S. tech behemoths, a cryptocurrency fund, the ETF industry, bonds that mature decades from now, and a dash of short volatility bets just to make things more interesting.
The out-performance is a testament to the momentum mania prevalent in today’s markets, a dynamic which has prompted the likes of Greenlight Capital’s David Einhorn, Goldman Sachs Group Inc., and Sanford C Bernstein & Co. LLC to mull whether value investing is in the midst of an existential crisis given ultra-low interest rates and abundant liquidity.
Of course it is, but the nature of markets is that they move in cycles. This cycle happens to be the most unpleasant cycle for value investors, active managers and contrarian thinkers, but it’s still a cycle.