Bubbles are all different – and all the same

The stories that drive bubbles change – but their structure does not. TS Lombard has a note reminding us of how they usually unfold. Bubbles start with rising awareness of a story driven by growing media attention (this is when the institutional investors move in). Next comes a cycle of growing enthusiasm (as individuals move in), followed by greed and Fomo (“fear of missing out”), before a mania develops and we reach yet another “new paradigm” characterised by academics explaining why markets have now reached a “permanently high plateau”. After that comes the crash, and the denial, fear and capitulation that are required before we can start all over again.

It seems pretty clear that we are now well into the mania bit. You can see it in US valuations. You can see it in the huge pick-up in individual investor activity (small investors are having fun all over markets); in the enthusiastic rise in merger and acquisition activity (see this week's magazine for how even dismal Debenhams is being bought out); in the boom in special purpose acquisition company (SPAC) listings; and in the general bonkers-ness of hardcore bitcoin fans. That people might have gone a bit mad is also reflected in a small story this week – there is a UK market on decommissioned London Underground station lift buttons.

But one particularly interesting place to look for it is in margin debt (the extent to which investors have borrowed to buy). In the 12 months to December 2020, US investor margin debt rose by $200bn. This is “sobering”, say Gavekal analysts. Why? Because the last two times that margin debt hit new records like this (in March 2000 and July 2007), things ended very badly indeed. So is disaster ahead – or third time lucky?

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This brings us to our very own new paradigm: the key difference today is that in 2000 and 2007 the debt met Federal Reserve tightening. This time it does not. Instead, monetary growth is genuinely unprecedented (look at a 30-year chart and you will see that M1 growth rarely goes above 10%. It’s now hitting 70%). “The Fed seems only too happy to add fuel to the fire of rampant speculation.” The reason to believe that the mania has further to run (possibly much further) is as simple as you can get. None of that tricky techy stuff we had to get our heads round in 2000. No, this time it’s just about money. There’s lots of it about. If you haven’t got any, it’s easy to borrow – or in the US just wait for your next stimulus cheque. Too much money tends to produce silliness (not just in markets) – and that’s exactly what it is doing right now. There is no need to try and make it much more complicated than that.

You’ll want to protect yourself a bit. Stay out of all derivative markets (never bet against exuberance) and find some non-bubbly stuff to buy. Note that the not-very-expensive UK market is more than the useless old codger of global investing you think it is and that commodities can give you the same play on the coming explosion of vaccine-released pent-up demand as the equities you love – just at a lower price. Finally I suspect the best thing to do for yourself right now is to book a holiday. Indeed, if you have been or are soon-to-be vaccinated and you can afford to travel, it is almost your duty to the global economy to do so. Just don’t forget to buy insurance first.