The other day in the midst of an epic food-fight-rally in the stock market, a younger kid from my office wandered by and expressed his disbelief at the incessant bid. Shaking his head he asked me if I had ever seen something so insane.
Ahhh…. the joys of being young - everything is new.
I explained to him that I had indeed seen this movie play out before. A few times actually.
But herein lies the problem. All the grizzled old guys like me have been burned by so many bubbles, we see them everywhere. Corporate bonds, real estate, sovereign debt, equities - all you need to do is open your inbox to be inundated with research pieces warning about the dangers of sky high asset prices.
Yet there are some differences between today and all the previous bubbles.
One of the twitter guys that I respect immensely said recently, “[German] bunds are not in a bubble. No one is buying them on margin and no one is bragging at cocktail parties that they are long ‘em.”
Yup, I can’t say I disagree. German bunds are nothing like Japanese stocks in the 1980s, dotcom stocks in the 1990s or real estate in the 2000s. There is no public euphoria speculating on German rates going even lower. The long side of the German bund market might be a little crowded within the fixed income community as bond managers hide in supposedly safe bunds, but there is no mania engulfing the average person on the street.
Do I think German bunds are insanely overpriced? You betcha.
But if you use cocktail chatter as the only way to measure bubbles, then there aren’t any bubbles anywhere (except maybe in calling bubbles).
Let’s face it. There is no Gatsby-esque celebration regarding the recent stock market rise. No one is bragging at parties at how much money they are making. In fact it is just the opposite. Most people are complaining bitterly about how the stock market is running away on “terrible fundamentals” and how there is nowhere to invest their money without taking crazy risk.
This “bubble” differs greatly from all the other ones I have experienced. Previously you were labeled an idiot for not embracing it. Not so now. In the late 1990s Warren Buffett was called a Luddite for not buying into the Dotcom bubble, but today he ridiculed as an out of touch Octogenarian for purchasing stocks such as Apple at all time highs.
I understand the rally of the past couple of months has pushed us up into record overbought territory. We have hit a point where there are more bullish newsletter writers than any time since 1987. I have no doubt we are due for a pause, and maybe even a correction that shakes out all the recent buyers.
But I do not buy the idea this is some sort of speculative frenzy. Look at the flow of funds since the credit crisis.
This chart of equity flows over the past decade shows that both institutional and private clients have been net sellers over the majority of the time since the credit crisis. Where is all this speculative froth that has pushed equities up over the past decade?
Yes, the last few months has seen retail chasing stocks, but are they buying in a frenzy? Or are they maybe “short” risky assets in their already depleted savings?
Most investors have saved far too little to fund their ever increasing longer lifespan. They are stuck between Central Banks’ financial repression era minuscule yields and their government’s continual reduction in retirement benefits. Not only that, but they got scared from equities’ collapse in the previous crisis, and have been steady sellers of risky assets, stuffing the proceeds into fixed income at the absolute worse time.
So although it might be fashionable to claim equities are in a bubble, be aware this “bubble” is completely different. It is not driven by speculation, but instead might be the most gigantic short squeeze of all time.
The reason there is little euphoria as stocks push up to new highs is that most investors are “under invested” in risky assets. Sure, the stock portion of their portfolio might be rising, but they don’t have enough to fund their retirement.
This overvaluation is still risky and dangerous, there is no doubt about that. Stocks are stupidly expensive. But they are up here on forced movement out the risk curve - not crazy speculation. There are no shoe shine boy stories.
Who knows what this will mean over the long run. The only thing I know for certain is that is not nearly as much fun…
Thanks for reading and have a great weekend,