Equity Bubble About to Burst?

[GeoffF100]

Here is the latest video from Pensioncraft:

https://www.youtube.com/watch?v=eGSPNWldaFY

Good on the whole, except that an exponential is e^x and a parabola is x^2. The market does look bubbly and it could burst soon. Then again, it might not. I have let it ride up from 60% equities. It is now at 64%, so perhaps I am not in too deep.

[GeoffF100]

Which equity bubble are they talking about? The FTSE is where it was back in 1999?

Particularly the US market, but also the global market. The UK market has been a particularly bad place to put your money, but is only 4.1% of the global market. The UK market is now priced as rubbish (relative to the rest of the world at least). Perhaps it will prove to be good value at that price - or perhaps not. Spread your risk. Nonetheless, if the US market crashes, I expect that it will bring the other markets down with it.

[1nvest]

Which equity bubble are they talking about? The FTSE is where it was back in 1999?

Particularly the US market, but also the global market. The UK market has been a particularly bad place to put your money, but is only 4.1% of the global market. The UK market is now priced as rubbish (relative to the rest of the world at least). Perhaps it will prove to be good value at that price - or perhaps not. Spread your risk. Nonetheless, if the US market crashes, I expect that it will bring the other markets down with it.

2012 to 2016 and the UK tracked world exc. US. Brexit 2016 saw it lag - more so given Remainers throwing spanners into the works for 5 years. Since Brexit the UK has relatively outperformed World exc. US, but still early days. Given the UK has something like 75% of earnings sourced via foreign business activities I wouldn't be surprised to see that "recovery rebound" trend continue. With US inflation now up at 5% levels it could be a US relatively declining more than others, or perhaps the gap closed via the UK rising, US falling.

[GoSeigen]

I long ago came to the conclusion that people who talk about "the bubble" -- which is always about to "burst" -- are a bit sad**. There is pretty much no such thing as "a bubble" which "bursts". That's not how markets work. People have latched onto this word and got completely the wrong end of the stick. I'd bet a decent amount of money that the word has been appropriated from the Japanese -- referring to their 80s "bubble economy" of course. Note there it is an adjective not a noun.

The metaphor for markets getting ahead of themselves before this verbal misappropriation was of "froth": a frothy market. Japanese used the plural English-language concept of "bubbles" for froth and rendered this as "bubble" because plural is not marked grammatically in Japanese. Then ignorant commentators borrowed the Japanese word bubble but failed to understand that it meant froth, bubbles, and invented this stupid concept of "a bubble" that "bursts".


So no, I don't think the market is in any sense "a bursty bubble". Is it frothy? Yes, certainly looks like it in isolated pockets, but as we know froth is generated by something and the first appearance of froth does not mean that is the end of it. It can build up and build up for long periods and I think that we are in an early stage of that process in the markets to day. In some places there is no froth at all, just clear calm water.

Similarly when the froth has reached it's maximum it doesn't just burst. It subsides steadily and that is the same for the vast majority of market over-pricing episodes -- even 80's Japan, where clearing the froth has taken some 20-30 years.

So how about we try to be a bit more perceptive about this on TLF and avoid gratuitous application of this nasty, overused "bubble" word? It's not a good analogue and serves no useful purpose in analysing markets.

GS
** EDIT: Why "sad"? Because first, their bubble does not exist, it is a fantasy; second, because if you believe in bubbles there is an associated anticipation of the schadenfreude, the told-you-so's when it bursts; and third, the evident chicken-licken attention-seeking when actually calling the bubble.
EDIT 2: I'll admit to one legitimate use of the word bubble: to point to an analogue with previous events which are popularly named bubbles: South Sea Bubble, etc

[Aminatidi]

Pick any point on the graph and look at what happened to the right of it.

It's always about to burst.

[GeoffF100]

I am just a passive investor, so I know that I do not know. Here is VWRL over the last 10 years:

https://www.morningstar.co.uk/uk/etf/sn ... entType=FE

That does not include reinvested dividends, and you can do better on costs. My numbers are getting very big. It is natural to wonder when the party is going to end. The answer is, of course, that nobody knows.

[SalvorHardin]

If you strip out the Teslas, Amazons etc..... Does the wider US market look like a bubble? Myself, I don't see any of the "we're going to the moon, it's different this time" etc... in the market generally. Maybe I am not looking in the right places?

My view as well. The markets today remind me of the latter days of the dotcom boom in the late 1990s. There's a lot of frenetic hyperactivity and excessive valuations in parts of the market, fuelled in part by lots of excitable newcomers. The ease in which newcomers are able to buy and sell shares via smartphone apps, encouraged by social media, has without doubt sucked a lot of people into the markets who have little or no idea about what they are doing (e.g. the ramping and short squeeze of GameStop). Quite a bit of this is fuelled by stimulus payments:

"That means nearly half of respondents invested their stimulus check — which was intended to be essential money to help recipients weather the financial storm of the Covid-19 pandemic"

https://www.forbes.com/sites/zackfriedman/2021/06/27/46-of-people-invested-their-stimulus-checks-in-the-stock-market/?sh=696cd00572f0

As mentioned elsewhere in this thread, there's a strong case that the UK stockmarket is cheap. A good example was seen earlier this morning when Morrisons accepted a £6.3 billion bid from a new bidder, that's a premium of about 55% to its share price before the first takeover offer was made.

https://www.independent.co.uk/news/morrisons-takeover-fortress-investment-group-b1877517.html

Compared to the 0.7% yield on 10 year gilts and 1.22% on 30 year gilts, the 3.3% yield on an "old economy" share like Unilever seems pretty good value to me. IMHO outside the technology sector it's still possible to find cheap shares with decent prospects.

One such is my most recent purchase; going back into the media and entertainment multinational ViacomCBS after selling out at more than twice the current price in March during the Archegos Capital scandal (a family office took a massive position in ViacomCBS, causing a short squeeze followed by a collapse in its share price after various banks called in their loans to Archegos). ViacomCBS' shares are on a historic PE ratio of just 9.9, its forward PE is 10.8, its recent first quarter earnings beat expectations and there's even a bit of takeover rumour activity (mostly to due with streaming and speculation that Apple needs to buy someone to give AppleTV a lot more content).

https://www.cnbc.com/2021/04/01/viacomcbs-stock-sales-amid-archegos-debacle-raise-questions-for-banks.html

[Mike4]

EDIT 2: I'll admit to one legitimate use of the word bubble: to point to an analogue with previous events which are popularly named bubbles: South Sea Bubble, etc

Your post prompted me to look up what the South Sea Bubble was all about, and it seems the term "bubble" (in the context of runaway share prices) dates back at least as far as 1720, when the 'Bubble Act 1720' was passed, as a result of the SSB debacle!

https://en.wikipedia.org/wiki/Bubble_Act

[TUK020]

I long ago came to the conclusion that people who talk about "the bubble" -- which is always about to "burst" -- are a bit sad**. There is pretty much no such thing as "a bubble" which "bursts". That's not how markets work. People have latched onto this word and got completely the wrong end of the stick. I'd bet a decent amount of money that the word has been appropriated from the Japanese -- referring to their 80s "bubble economy" of course. Note there it is an adjective not a noun.

The metaphor for markets getting ahead of themselves before this verbal misappropriation was of "froth": a frothy market. Japanese used the plural English-language concept of "bubbles" for froth and rendered this as "bubble" because plural is not marked grammatically in Japanese. Then ignorant commentators borrowed the Japanese word bubble but failed to understand that it meant froth, bubbles, and invented this stupid concept of "a bubble" that "bursts".


So no, I don't think the market is in any sense "a bursty bubble". Is it frothy? Yes, certainly looks like it in isolated pockets, but as we know froth is generated by something and the first appearance of froth does not mean that is the end of it. It can build up and build up for long periods and I think that we are in an early stage of that process in the markets to day. In some places there is no froth at all, just clear calm water.

Similarly when the froth has reached it's maximum it doesn't just burst. It subsides steadily and that is the same for the vast majority of market over-pricing episodes -- even 80's Japan, where clearing the froth has taken some 20-30 years.

So how about we try to be a bit more perceptive about this on TLF and avoid gratuitous application of this nasty, overused "bubble" word? It's not a good analogue and serves no useful purpose in analysing markets.

GS
** EDIT: Why "sad"? Because first, their bubble does not exist, it is a fantasy; second, because if you believe in bubbles there is an associated anticipation of the schadenfreude, the told-you-so's when it bursts; and third, the evident chicken-licken attention-seeking when actually calling the bubble.
EDIT 2: I'll admit to one legitimate use of the word bubble: to point to an analogue with previous events which are popularly named bubbles: South Sea Bubble, etc

Listening to the young adults in our household refer to "bubble with someone" in a post COVID world, gives a very different meaning to the word

[GeoffF100]

The world's economy has just taken a massive hit from the pandemic, so why is the world index higher than it was before the pandemic?

[SalvorHardin]

The world's economy has just taken a massive hit from the pandemic, so why is the world index higher than it was before the pandemic?

A few thoughts:

1) Interest rates have fallen since early 2020, making shares more attractive.

2) Massive government stimulus programmes will increase demand throughout the economy and thus company profits. Some of this stimulus will have increased the demand for shares (and thus share prices)

3) The lockdown has meant that there are a lot of consumers who have been accumulating a reasonable amount of cash thanks to government schemes like the furlough, but haven't been able to spend as much as normal. Markets are anticipating something like the roaring 1920s with a big consumer binge and an expansion of corporate investment on new equipment. Some of this is already priced into the market.

4) Lots of companies have had to innovate at a far quicker pace than they would otherwise have to do so. This creates more efficient businesses and thus boosts future profitability.

5) Overvaluation of technology shares. Much of the American stockmarket's gains in the last year have come from a relatively small number of extremely large companies.

6) Big businesses (which tend to be listed on the stockmarket) have been favoured by governments' policies over their smaller competitors, many of whom have been stopped from trading by government diktat whilst their larger competitors have been allowed to contine trading. It's easy to make more money when the government has stopped some of your competitors from trading.

[Wuffle]

Another thought...

Apart from a couple of high profile divorces (joke!), who in the global elite (who own most of the stock market) need to liquidate to pay their way?
The expansion of ownership is a red herring. Real ownership (in quantity) has narrowed.

W.

[murraypaul]

If you strip out the Teslas, Amazons etc..... Does the wider US market look like a bubble? Myself, I don't see any of the "we're going to the moon, it's different this time" etc... in the market generally. Maybe I am not looking in the right places?

However, FAAMG + Tesla make up ~21.75% of a US tracker and an astonishing ~11.75% of an all-world tracker.
So their influence is widely felt.

[GoSeigen]

EDIT 2: I'll admit to one legitimate use of the word bubble: to point to an analogue with previous events which are popularly named bubbles: South Sea Bubble, etc

Your post prompted me to look up what the South Sea Bubble was all about, and it seems the term "bubble" (in the context of runaway share prices) dates back at least as far as 1720, when the 'Bubble Act 1720' was passed, as a result of the SSB debacle!

https://en.wikipedia.org/wiki/Bubble_Act

Thanks Mike4, and correct me if I am wrong, but didn't that use of the word bubble refer to something empty which contained nothing of substance but was superficially attractive. This might apply well to an isolated phenomenon like bitcoin/crypto, but I don't believe it has application to "proper" markets like property or entire share markets.

GS

[GeoffF100]

The world's economy has just taken a massive hit from the pandemic, so why is the world index higher than it was before the pandemic?

The central banks have printed a lot of money, governments have handed out lots of money and a large slice of that money has gone into asset prices. The natural unwinding of that process is inflation, increasing interest rates and falling asset prices (unless some major disaster happens first). Easy come. Easy go. Impoverished pensioner to multi-milionaire - and back to impoverished pensioner again.

[GeoffF100]

If you strip out the Teslas, Amazons etc..... Does the wider US market look like a bubble? Myself, I don't see any of the "we're going to the moon, it's different this time" etc... in the market generally. Maybe I am not looking in the right places?

However, FAAMG + Tesla make up ~21.75% of a US tracker and an astonishing ~11.75% of an all-world tracker.
So their influence is widely felt.

The world market has more than tippled in the last ten years. Even if FAAMG + Tesla had zero value at the start of that period (which they did not) that would only strip out 11.75%. The world market definitely looks bubbly.

[EthicsGradient]

EDIT 2: I'll admit to one legitimate use of the word bubble: to point to an analogue with previous events which are popularly named bubbles: South Sea Bubble, etc

Your post prompted me to look up what the South Sea Bubble was all about, and it seems the term "bubble" (in the context of runaway share prices) dates back at least as far as 1720, when the 'Bubble Act 1720' was passed, as a result of the SSB debacle!

https://en.wikipedia.org/wiki/Bubble_Act

Thanks Mike4, and correct me if I am wrong, but didn't that use of the word bubble refer to something empty which contained nothing of substance but was superficially attractive. This might apply well to an isolated phenomenon like bitcoin/crypto, but I don't believe it has application to "proper" markets like property or entire share markets.

GS

The 'Bubble Act' was, as the Wikipedia entry indicates further in, an attempt to stop increasingly ridiculous schemes cashing in on the mania driving unfeasible rises in the South Sea Company share price - which hadn't finished when the act was passed. An analogy to crypto is apt - an equivalent of the Act to day would be Bitcoin bribing politicians to outlaw any new cryptocurrencies.

One of them was for a wheel for perpetual motion -- capital one million; another was 'for encouraging the breed of horses in England, and improving of glebe and church lands, and repairing and rebuilding parsonage and vicarage houses.' ... But the most absurd and preposterous of all, and which shewed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled, "A company for carrying on an undertaking of great advantage, but nobody to know what it is." Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project.

https://www.pbs.org/wgbh/pages/frontlin ... bbles.html

(The man running the latter took deposits of £2 per share on shares he said would be sold for £100, and giving a £100 dividend a year later, with a promise to reveal the company details in a month's time. He made a tidy sum in one day, and then skipped the country with the money.)

The South Sea Company's share price itself was inflated by dubious rumours about South Sea trade put about by the Company directors (or anyone else who stood to gain), and an apparent confusion among the public between the extremely limited potential for growth of most of the company's assets (government bonds, effectively) and the 'name on the door' - speculative trade with Spanish American countries. Well-placed bribes by the company to politicians allowed the share price to soar as they sold more stock, they promised unfeasible dividends to support that price, and then eventually everyone realised that could never happen. It was, effectively, a Ponzi scheme, relying on selling new shares at ever higher prices to keep its cash flow going.

I found an SSC director in my family tree.

[NotSure]

I am just a passive investor, so I know that I do not know. Here is VWRL over the last 10 years:

https://www.morningstar.co.uk/uk/etf/sn ... entType=FE

That does not include reinvested dividends, and you can do better on costs. My numbers are getting very big. It is natural to wonder when the party is going to end. The answer is, of course, that nobody knows.

Similar situation myself (mainly passive, largely global, though a bit 'overweight' UK and Europe as it looks more fairly valued to me). I am careful not to use the b-word for some of the reasons GS pointed out above. However, going forward, I am at the least expecting an extended period of less-than-stellar returns as the real economy catches up with equity prices. I'd actrually prefer a sharpish correction followed by 'back to normal' as I am still in accumulation phase, but without some sort of shock, I am more inclined to believe we have a rather weak decade ahead. Come what may, I plan to stay fully invested and just continue to drip feed global, passive trackers (UK/Eurpoean bias will naturally fade as I do), so I try not to think about it too much...

[vagrantbrain]

I don't agree. The difference I see is between now and the 90s tech boom is that these "bubble" tech companies (with the possible exception of Tesla) are established businesses with real revenue and real growth to support valuations.

Taking Microsoft for example - it's biggest revenue stream is now enterprise cloud computing which has been growing by over 50% per quarter for the last 4 years, and these aren't one-off sales but recurring annual revenue from blue-chip companies who are now heavily invested in the Azure infrastructure. On a P/E less than the S&P500 average (33 v 46) with revenue growth in 14 of the last 16 years. Hardly a speculative punt.

Similar story with Apple - right at the start of a technology curve with Apple Silicon chips which are wiping the floor with their competitors.

[GeoffF100]

I don't agree. The difference I see is between now and the 90s tech boom is that these "bubble" tech companies (with the possible exception of Tesla) are established businesses with real revenue and real growth to support valuations.

Taking Microsoft for example - it's biggest revenue stream is now enterprise cloud computing which has been growing by over 50% per quarter for the last 4 years, and these aren't one-off sales but recurring annual revenue from blue-chip companies who are now heavily invested in the Azure infrastructure. On a P/E less than the S&P500 average (33 v 46) with revenue growth in 14 of the last 16 years. Hardly a speculative punt.

Similar story with Apple - right at the start of a technology curve with Apple Silicon chips which are wiping the floor with their competitors.

What are you disagreeing with?