No one interested in the history of bubbles will have forgotten the image of two furious divorcees dividing up their Beanie Baby collection on the floor of a Las Vegas courtroom back in 1999. The judge, fed up with their inability to split up their collection of ugly little soft toys themselves, ordered Frances and Harold Mountain to do it in front of him, taking turns to choose. Frances went first. She chose Maple the Bear.
By 2000, as the dotcom bubble burst and took a lot of peripheral nonsense with it, the Mountains must have felt even more stupid than they looked in 1999. Beanie Baby prices were in freefall. By 2010 toys that had changed hands for well over $1,000 in 1998 were going for a couple of bucks on eBay. Maple was all but worthless.
He isn’t any more. Today a vintage Maple with an error on the label (labels are important to Beanie Baby collectors) might go for $60. One with a rare error could make you $2,000 or more (the question of whether the errors are actual errors or deliberate features is for another day). I hope the Mountains had the latter, not the former – and that Frances still has it. I also hope she has Pinchers the Lobster. Get one of those with the right kind of tags and you could be making tens of thousands. The Beanie Baby bubble – one of the oddest ever – is back.
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Rarity does not confer value
Stuffed toys do not have a monopoly in the strange things to fight about in the divorce courts. UK lawyers are reporting frantic settlement negotiations involving handbags, watches and bikes – and, of course, cryptocurrencies – as prices of pretty much everything you could consider to be an asset look like they will rise forever. You could argue that these things have value because of their rarity. But rarity in itself has no value – lots of things are rare but not remotely valuable. And very little without an obvious or somewhat forecastable income stream really has any intrinsic value at all (let’s not forget that the point of investing now is to receive income in the future).
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The sharp price rises of these quite nice consumer goods aren’t about specialness or rarity. They are just examples of mini-bubbles popping up around the more obvious big bubbles in financial assets – think bonds, equities and property. We all know why this is happening. It might be getting boring in its repetition, but markets are going up because central banks have been supporting them for years with super-low interest rates and quantitative easing – and investors are convinced they will continue to do so, to the extent that valuations don’t much matter any more.
Negative real interest rates extrapolated for ever can justify pretty much any valuation of pretty much any asset. That’s why the cyclically adjusted price/earnings (CAPE) ratio for the US market is not far off 40 times – less than when the dotcom bubble collapsed but still around double its historical average – and why US households have a record allocation to financial assets. It is also why, in the words of Jeremy Grantham, co-founder of GMO investment group, we have, in the US at least, “the most dangerous package of overpriced assets we have ever seen”.
There are lots of reasons one might give to justify the boom continuing – more stimulus, fast post-lockdown economic growth, more earnings upgrades. There are also lots of ways to imagine it going wrong. The vaccine is clearly rescuing the UK (with a fast rise in cases and not many deaths) but what if the Delta variant really does bring back lockdowns in the US? What if the recent high inflation numbers are not transient? What if the recent earnings upgrades for big US companies are as good as it gets? Cost pressures are looming. And of course, what if it turns out that governments cannot underwrite all risks?
How long do you have to get out of this bubble?
None of the latter may happen. But the problem is that all the good is priced in and, the odd wobble aside (the S&P fell 2.04% on Monday), the bad is not. You have to look at risk very differently when prices are high than when they are low. So if this is a bubble, how long do you have to get out? Grantham tells me not long. The denouement has been delayed by the excitement around vaccine success and by US president Joe Biden’s vast stimulus programmes.
But comparable bubbles of the past, such as Japan’s in the late 1980s and the dotcom era, have not suddenly collapsed on a piece of bad news. Instead, they sent warning signals in the form of deflation in the prices of the most obviously overvalued assets.
Noticed the falling price of bitcoin? And of the once hot hot hot Spac sector? And perhaps of shares in Tesla – down 10% this year so far? They might fit that mould.
The bubble may well keep going for some time – inflation is great for equities, particularly when companies are highly leveraged and private equity is cashed up and active.
Also on the plus side is the fact that some things are less expensive than others. If you are getting divorced and find yourself invited to pick first from the asset pile, don’t pick Maple and don’t pick the handbag. Pick the least expensive stocks with the most obvious income-producing potential – Japanese, British and emerging-market equities over US equities, and value over growth. It might not feel great immediately, but in the long term you are unlikely to regret it. History is pretty clear on this one.
• This article was first published in the Financial Times
