The South Sea Bubble in 1720. The Great Depression Bubble in 1929. The Dot-com Bubble in 2000. The Housing Bubble in 2008. History shows us that emerging markets get into serious trouble when big bubbles burst. Billions are lost while fortunes are made. Many analysts believe we are on the verge of another epic bubble in financial history. And it’s getting ready to pop.
Q2 2021 hedge fund letters, conferences and more
Dubbed “The Everything Bubble”, the market is once again showing the familiar characteristics of a bubble. Global debt has ballooned to 365% of GDP. Bitcoin has risen over 300%. Real estate prices have escalated rapidly. P-E ratios are high and continuing to climb. SPAC IPO transactions are constantly streaming in. And massive retail investor-driven short squeezes.
Thanks to this combination of wildly speculative investing, extreme asset overvaluation, volatile price increases, and increasingly chaotic issuance, the markets are experiencing historic inflations where everything seems to be at an all-time high. This is the so-called everything bubble that has the financial system poised on the verge of a potential major reset.
The Fed Bazooka and Inflation Concerns
Confronted with the most challenging economic conditions since the Black Tuesday Bubble, the Federal Reserve fired up their big guns and printed trillions of new money. In addition to Trump’s $2.5 trillion splurges in March and December’s $900 billion pandemic relief bill, Congress also recently approved President Biden’s third stimulus package worth a cool $1.9 trillion.
By suppressing rates and bailing out the market over the short term, the Federal Reserve has effectively created a much longer-term systematic problem of mispricing non-diversifiable risk. Given how elusive economic growth has been since the market crash of ‘08, it’s pretty unlikely that the Fed doubling its liabilities is going to inspire improved outcomes in the future.
Investors Move From Risk-on To Risk-Off Assets
This is a major concern for many investors as the combination of easy money and weak budget policy could spark an era of elevated inflation within financial markets. And as fixed-term savings interest is considerably lower than inflation rates, investors decide to leave their money in hard assets like property and gold to prevent future losses. If the economy looks too good, it's often bad for risk-on assets.
While the actual yields are still pretty low by historical levels, the main source of concern isn’t the direction of these moves but more the speed. Investments in municipal bonds for example have already exceeded the total from last year, with around $53 billion in holdings surging into these tax-exempt funds. But from safe havens, to risk assets, to something in between, all investors should at least be preparing for some more instability ahead.
The Everything Bubble
With the current share market being pumped up artificially by the Fed’s $8 trillion, Michael Burry has an ominous forecast. The iconic hedge fund manager stated that the next market correction will fuel the largest asset bubble of all time. In a series of since-deleted tweets, he also called Bitcoin a speculative bubble which he compared to both the Dot-com and the housing bubbles. Even Rich Dad Poor Dad author Robert Kiyosaki called Bitcoin the greatest bubble in a tweet saying that BTC is going to crash.
These prophetic tweets came after reports of China intensifying their restriction of crypto mining so their new Digital Yuan wasn’t competing with Bitcoin The People’s Bank of China also urged other major banks along with Alipay to crack down on crypto in the region. This is why Burry issued a warning to crypto investors, saying to expect the mother of all crashes with losses the size of small countries.
As investors shift from stocks to hard assets, land prices have been surging to their highest levels in almost 15 years during the peak of the housing bubble. Kevin May, President of LandHub sheds light on this and says that "Investors' appetite for land has seen an uptick in demand. Investors are flocking to 'hard assets' like gold and land to secure their wealth as a means to combat concerns around inflation.” Now, could be the perfect time to sell. Add to that the government’s tsunami of stimulus cash which continues altering most aspects of the market, it’s no wonder analysts are discussing post-pandemic bubbles and the markets crashing.
Overleverage In The System
With the recent surge of retail investors, hedge funds betting against meme stocks like AMC have set themselves up to lose. After continuously shorting with synthetic shares, it’s now all but inevitable that these overleveraged hedge funds will be margin called. Retail investors now have the upper hand, or maybe they’ve had it all along. Especially now that AMC is back open for business, they’re experiencing a massive surge in revenue, and institutional investors are purchasing stock, they’re no longer weak and destined to fail.
And it’s not just the popular or meme stocks that are overleveraged either. There’s simply far too much leverage in the current marketplace, with the valuations of most assets heading sky-high. In fact, analysts have even stated that Warren Buffett’s market gauge has reached new heights. Which is an indication that many of these greatly overvalued global stocks could collapse at any moment over the months ahead.
What To Expect?
In today’s digital age of financial folly, where a handful of billionaires have over half the world’s wealth, the world’s richest person doesn’t actually make a profit? Almost absolutely. If market history tells us anything it’s that we’re more than overdue for another correction. While no one knows precisely when the asset price bubble is going to pop, the markets are going to come crashing down at some point.
Sure, a bear market is often intimidating. But the huge transfers of wealth that they bring are also responsible for making more millionaires than any other type of market. So now there’s a bear market predicted, just make sure you’ve got enough cash in reserve to take advantage of the dips and buy whenever the everything bubble does eventually burst.
