Are We in a Mega Bubble?

In terms of inflation, this is a very thoughtful piece shared recently on HN: https://www.lynalden.com/inflation/ She talks about the difference between broad money and base money supply.

In terms of stock prices, going by CAPE ratio, US domestic stocks are at dotcom bubble valuations. But there are other markets outside the US that have underperformed this past decade that may be 'reasonably priced'.

Based on that metric, plus the prospect of lower corporate profit margins going forward, people like Bogle and Dalio expect lower US market returns this decade, more like 3-5% IRC.

There could be stagflation, inflation, it's anybody's guess. In developed markets there are many deflationary headwinds like demographic trends and innovations in tech.

I don't know anything about crypto valuations, besides the irrational FOMO I feel when I think about them.

Since the early 2000s, the world is in a savings glut (1) situation. That means you shouldn't ask yourself a question of is asset X worth its valuation?, but rather ask the question do savings have anywhere else to go?.

Also - ignore crypto, it's a distraction. Zooming out, it's just a simple wealth transfer: dollars in => black box => dollars out. Dollars out go to miners, exchanges, scams and the lucky few who cash out. Nothing in the black box can conjure up new dollars. Once the dollar inflow stops, it's over. Crypto is not worth $1.5T, not even close, there's at most a few dozen billions in the ecosystem - a rounding error in the grand scheme of things.

US tech stocks are overpriced, US startups ridiculously so (savings glut faucet flooding a small sector in search of something, anything). Real estate in a few selected locales is a bubble, but not overall.

The worrying part is not the asset prices, but what it tells us - that the largest wealth funds and corporations in the world cannot find anything worth investing in.

(1) - https://en.wikipedia.org/wiki/Global_saving_glut

It's not a bubble it's a greater wealth divide being formed.

Those with money are making a killing, those on the lower end are getting screwed over more and more by the day. Think about who Covid measures impact the most and how.

I think that most of us would say that you are not imagining it. However, predicting the future is hard. The whole system is a fiction and can be patched for a long time with new fictions. The suffering of many get disipated by some sofisticated smoke screens that got perfected hundreds of years. Whithout major environment disruptions, no significant correction will happen because most people are quite clueless and very short term oriented. Even rich people. The complexity is too big for our minds. Do you believe that 25%/year (made up number) inflation is a huge correction?

Due to the lockdown, people and companies are spending less. (Less Traveling, no reason to buy fancy clothes and other luxury items because you can't show them to anyone)

So the savings rate skyrocketed. And it was already very high due to world wide demographic changes: The rapid economic growth in China and other East Asian countries over the last 40 years.

As interest rates fall, retired people earn less. So they save even more. It's a a positive feedback system.

So it's not a bubble, but a long term savings glut: More and more money chasing a fixed pool of productive capital.

Sure, there are a lot of indicators all pointing in spooky directions. The problem is that the time frame in which these indicators actually indicate anything is well out of the planning range of most folks' investment capabilities. You _could_ shift everything into much lower risk investments, but the storm we all see brewing may arrive tomorrow or it may arrive in 15 years. Unless your investment career has many more decades left in it, that's probably not actionable intelligence.

One thing about investments and wealth in the U.S. that became apparent during the last few corrections is that the people that have the most to lose are also the people that have the most control over the regulatory levers. What this means is that no matter what is happening in any particular market, if big fish are losing lots of money, the U.S. government will do absolutely everything within its power to reverse that trend - even if it means socking it to the little guy. As long as you can manage to keep your wagon in roughly the same circle as the investment class, you'll have the best protective fiduciary policy and legislation that money can buy...

I don't know if you're imagining it.

But I have had the same feeling that things are going too well for too long, given the circumstances.

I'm certainly no economist, but here are the explanations I can think up:

1. We have had income inequality rising for a very long time. Where things and processes were getting cheaper, but the spending power of most of us haven't been going up much at all. 2. Instead of taxing our way out of this potential economic disaster, we inflated our way out. Inflation doesn't allow the rich to loophole their way out. So, for once, all the corporations and very wealthy have been paying their share as well. 3. A lot of the inflated money has actually made it to the middle class and lower, causing a boom in spending. 4. An explosion in pricing is the natural result of suppressing a populations growth, then suddenly giving them a ton of economic stimulation.

I hope it's not a bubble, and it's actually the economy jolting to life a bit. But what do I know, could easily be a bubble.

I think that each of those statements sound plausible but dont really have much to do with each other. In fact there is a lot of good news even within some of the bad news.

Stock prices reflect the fact that some elements of our economy are very resiliant, including demand, despite major disruptions. Would a crashing stock market have been better news?

Housing market is definitely a mess though but that has less to do with speculation and more to do with significant constraints in supply, especially in our largest and fastest growing cities. More people want to live in most of these cities (because cities are still generally well functioning and important labor markets) than they can house. We can and should build significantly more housing and make a major boom in more construction in our major cities and that would make the speculation in other parts of the market make more sense. Without building then we are walking down a difficult path.

I believe that Cathie Woods, who is managing one of the most successful ETF funds ever, has some of the most insightful things to say on this topic. Here's her latest video where she explains her current views:

https://www.youtube.com/watch?v=i17erEpctKQ

Basically she is such a believer in technological improvement, that she thinks that the deflationary forces of technological improvement will work faster than the inflationary forces of low interest rates and high amount of money printing. She has been right for the last 5 years at least.

Deutsche Bank just made a statement you may find interesting.

https://www.cnbc.com/amp/2021/06/07/deutsche-bank-warns-of-g...

Not only it's not pure imagination but some folks are starting to bet heavily on inflation:

https://seekingalpha.com/article/4429919-dr-michael-burry-sh...

https://en.wikipedia.org/wiki/Greenspan_put#Everything_Bubbl...

All those markets do feel a bit frothy, but if a global pandemic wasn’t enough to pop the bubble, I don’t know what would be.

If it was real, if we are in a bubble that is about to burst, what would you do differently?

Trillions were printed last year at the drop of a hat. Inflation is just getting started.

Same thing which happened in the past won't happen now. Most the crashes are due to something which haven't been seen before that.

Market might stagnate, less returns. Some startups or new companies valuations are too high. If analysts start to value them truly for their current worth not the distant future worth those prices will drop in a big way.

There was once in late 60s Buffett sold all his stocks and was waiting for market to crash for 2-4yrs. Now sort of he is doing a similar thing. As his cash levels grows he is basically planning to buy something big.

There's always war scenario.

Coins mcap is low.

Low returns is what iam expecting....

We’ve been in a bubble for a while and everyone predicts a crash every other day.

The question is: are you going to not make hay while the sun shines because the weather forecast is unpredictable?

Yes, you are imagining it.

I am confident of this because I read Bogleheads.org. There, we find wisdom of this kind:

"Nobody knows nothing." (Meaning: Nobody can predict the future.)

"It's not different this time." (It often feels ominous. We just forget that it did.)

"Stay the course." (Put your financial plan in place and execute on it. Don't deviate.)

Good Luck.

> I feel either very bad inflation is about to happen to or huge correction, or both

Its really so funny how everyone millennial in the country is now a student of Ludwig von Mises and the quantity theory of money.

Google "pushing on a string".

And economists don't consider asset bubbles to be inflation for a reason.

The more useful question is, why does it matter? Let's say we are in a "mega bubble." What are you going to do with that information? On a long enough timeline, everything goes to zero.

Stock prices are okayish compared to interest rates of other investments. But a lot of money got printed which can/will lead to inflation which in turn pressurizes the FED/EZB to increase interest rates. If interest rates need to be rised we will see a lot of problems: Falling stock rates, defaulting countries, domino effects... Which will keep FED/EZB from doing that...

I expected a crash since more than 6 years and I expected a much deeper fall than March 2020 which kept me from investing enough into stocks :(

The much bigger issue than short/middle term monetary policy though is the demographic change/transition! Look at https://ourworldindata.org/age-structure

In the coming years, the baby-boomers will retire and instead of earning and investing money, they will take money out of the market and I am not sure where this will lead us. But I know this will be huge.

I found this guy's perspective to be useful: https://mobile.twitter.com/DaveHcontrarian

In a nutshell: He views the current situation as the end of a 40 year bull market and predicts a very big market crash in the short term followed by an inflation driven recovery for the next ten years.

It's economic singularity.

It is very hard to assess the situation as we stand in the eye of the cyclone. And there are a few different viewpoints that could be equally enticing, depending on whether you want to have an optimistic or pessimistic outlook. From where I stand, before looking at money supply, prices etc., the key factors are two.

Firstly, Covid and the impact of disasters on economy, which, without sources to support my position, tend to have positive impact on economy as an aftermath. If you look at Black Death scale, the catastrophe improved financials for the lower incomes, so there is hope :-). Nevertheless, the impact of covid on availability of workers is nothing like Black Death as the fatalities are much less and mostly impacting older age groups. On the other hand, if you take Australia for example, with a normal net immigration of 200k per year I believe, the lockdown and isolationism from Covid has huge impact on labor markets. Therefore, my expectation is to have short-term labor benefits in advanced economies that realise benefits of isolation (e.g. substitution of international travel with local vacations etc.), until they find a way to have the dog fed and the pie (i.e. selective opening of borders). At the same time, less advanced economies are to be impacted by limits to immigration with increased unemployment and potentially some political turmoil.

This leads to the second key factor in my opinion, which is the global geopolitical situation which, while people "hope" will end up with something like a second cold war, there is no guarantee that it will not be the preamble to a third world war (maybe we can skip it straight to cold, I doubt it). It does not take more than looking at the news to see that the things are moving in this direction with blatant attempts to bolster nationalistic views from "both" (it's more complex than two in reality) sides.

From this standpoint, we'll either go for an abrupt economic correction in a war, where inflation and economy will be the least concern for most of us, or we'll see a huge re-structuring of the global economic models and paradigms (e.g. more local production, especially for critical products, with potentially a new west vs a new east closed system - I am not sure whether Europe will end up on one side, the other or both as a disbanded union, doubt it can maintain its intended neutrality game given its political immaturity). In this case, western economies might be able to see some huge economic opportunities but they will have to move a bit to the left from an economic principles perspective, which is possible given the positive experience of right-wing politicians with social measures during Covid. While possible, I think it is unlikely, as concentration of wealth is a measure of success for the people whose opinion matters, and they will err on the side of having everyone poorer but with greater divide rather than the opposite...

I have not even touched on demographics, and e.g. the calculation that China might be making with regards to now being the time to have a war if ever, given its aging population...

I wrote quite a bit, but at the end of the day, this demonstrates the complexity of the situation which makes it very hard to make predictions. And therefore, for any economic decision stick with the basics, the expected price is today's price.

Edit: the implicit assumption in my thoughts above is that the greater a closed system the more inequality it enables. This might work in general, but I can think of at least one potential counterexample, e.g. North Korea.

You are right about bubble, and you are right about it expanding.

But it will not correct it self.

Here is why.

Business is based on knowledge. We all know knowledge expands. Since the knowledge expands, so does the commerce bubble.

The commerce bubble will collapse when the knowledge collapse. We are all intellect seeking addicts, while one part of the group builds and expands the intellect, the other group makes money out of it.

It will never collapse. Its part of a circle and the circle will keep getting bigger.