2017 – The Year of Bubbles

Stock market bubble

Every day, investors are scratching their heads, undecided as to where they should be investing their hard earned money (fiat money, cash, not Bitcoin – more on that another time).

And rightly so. Financial markets have trotted along over the last 11 months, without stopping for much of a breather. Here’s a quick wrap up of the dizzy climbs in asset prices:

  1. Leonardo da Vinci painting sells for US$450 million at auction after the owners originally purchased it for less than US$10,000 in 2005
  2. Bitcoin is up 677% from $952 to $7,980
  3. 702: The number of global interest rate cuts since Lehman Brothers collapsed.
  4. Argentina issued a 100 year bond (they’ve defaulted 8 times in the last 200 years)
  5. Sydney house prices have doubled in the last 8 years
  6. The US stock market volatility fell to it’s lowest on record, while prices continued to make record highs

To put 2017 into perspective, here’s how US assets have performed compared to periods 1926-2008, and 2009-2016:

Prior to these “bubble” prices, we saw these bubbles:

  1. The highest known sale price for any piece of art was US$300 million
  2. Between July 2010 and February 2011, Bitcoin went from 5 cents to $1.10, that’s a 2,100% increase
  3. By the end of 2016, global central banks had cut interest rates 690 times since the collapse of Lehman Brothers
  4. Walt Disney and Coca Cola have previously issued 100 year bonds. Venezuela, Uruguay, Peru, Mexico, Ecuador, Costa Rica, Chile, Brazil, and Spain have all defaulted at least 8 times
  5. From 1996 to 2006, Melbourne property prices climbed 148%
  6. The S&P500 made 12 all time highs during 1997

Bubbles have been growing and popping for centuries, as far back as 1637. Since then,┬ámainstream media has had a terrible track record of identifying bubbles accurately, and in real time. In fact, it’s probably quite the opposite.

Investors spend way too much time talking about, and worrying about things that happen 1 in every 4 years. There is no formula or model that accurately identifies bubbles in real time. If there is, it certainly is not public.

Will the market crash? Yes. When? I do not have the fainest idea. If anybody tells you they know when and by how much, they’re taking you for a fool. Or perhaps they’re the fool.

Markets are not cheap, relative to historical averages. The alternatives however, are forcing investors to move up the risk spectrum. Yet, the scars from the GFC have not healed, and this is probably why we haven’t witnessed complete euphoria.

The market is going to crash. We’ll see a decline of up to 60% in stocks. Investors will flee risky assets and pile into the safety of gold and cash (maybe Bitcoin – more on that another time). Unemployment will spike, and we’ll witness a domino of defaults on loans. The property market will shutdown, and sellers will be caught out with their pants down.

There was a study done a little while back now. A study that included bananas and chocolates. Let’s say your attending a conference next week. One week prior to the conference, you’re asked whether you prefer bananas or chocolates as a snack. 74% of you respond by choosing bananas. Fast forward to the day of the conference. The same people that imagined themselves eating bananas, ended up eating chocolates. Self-control is not a problem in the future. It’s only a problem now when the chocolate is in front us.

Design and construct your portfolio as if the market is going to collapse tomorrow. Because whatever you’re feeling and telling yourself now, is not how you’re going to act when the time comes. You’ll tell yourself you’ll have the bananas, but we all know you’re going to each the chocolates, and it’s not going to be good for you.

Don’t say I didn’t warn you.