A few weeks ago, we observed a bubble in fears of a bubble. The fearmongers see an "everything bubble" that will soon burst. The expression "the bubble in everything" began gaining traction during the tenure of Federal Reserve Chair Janet Yellen (2014–2018), but it became widely associated with Jerome Powell's leadership and the monetary stimulus of the 2020–2021 pandemic era.
A few weeks ago, we observed a bubble in fears of a bubble. The fearmongers see an "everything bubble" that will soon burst. The expression "the bubble in everything" began gaining traction during the tenure of Federal Reserve Chair Janet Yellen (2014–2018), but it became widely associated with Jerome Powell's leadership and the monetary stimulus of the 2020–2021 pandemic era.
In other words, we've seen this movie play out only a few years ago. Numerous bubbles burst, but they didn't cause a financial calamity or a recession. And here we are today, with the US MSCI and many other stock markets around the world at record highs (chart). Here we are today, with US real GDP at a record high. Except for the two-month pandemic lockdown recession in early 2020, the last US recession occurred 16 years ago!
There are bubbles out there. They will burst because that's what bubbles do. However, they are unlikely to follow the script of the Great Financial Crisis. They are more likely to create buying opportunities in various asset markets, which is what happened when the previous everything bubble burst.
Consider the following:
(1) Margin debt rose over $1.0 trillion for the first time during the summer (chart). In the event of a severe pullback, the stock market becomes more vulnerable to margin calls and a bear market. That's what happened during the previous bear market in 2022. However, it didn't last long, despite a sharp decline in margin debt.
(2) Everyone agrees that valuation multiples are stretched. The S&P 500 forward P/E was 22.6 in September (chart). But that's where it was a few months after the end of the lockdown recession. Along the way, it fell to around 15.0 during the 2022 bear market and to 18.0 during the correction this past spring. Again, these selloffs provided great buying opportunities.
Fears of a recession and actual recessions cause P/Es to drop. The economy has demonstrated its resilience since the pandemic. It is likely to remain resilient through the end of the Roaring 2020s, in our opinion. So P/Es may also stay resilient. The S&P 500’s median forward P/E was 19.2 in September, because it gives less weight to the elevated valuations of the Magnificent-7.
(3) In recent weeks, there have been widespread concerns about a bubble in capital spending on AI infrastructure. In January of this year, Deep Seek threatened to deep-six the expansion plans of the US hyperscalers (chart). But during the Q1 and Q2 earnings reporting seasons, they stuck to their grand plans.
What if they are building too much capacity, relying on so-called "circular" financing? Won't that be like what happened in 1999, when telecom companies borrowed excessively in the junk bond market to provide seller financing to their customers? Not necessarily since much of the funding today is coming out of the strong cash flows of the hyperscalers. If they are forced to reduce their spending due to excess capacity, their profits and cash flows will be improved.
(4) There was a bubble in the ARK Innovation ETF, managed by Cathy Wood, during 2020 (chart). It burst in 2021 and 2022 without causing any collateral damage. Now the ETF is doing well again since April.
(5) There was a bubble in SPACs in 2021 (chart). It burst without causing any trouble. They may be coming back again. So what?
(6) Some of the air came out of Bitcoin's 2021 bubble during 2022. However, it is now over $100,000 (chart).
(7) There may be a speculative bubble in gold this year (chart). Or gold is viewed as a hedge against the bursting of other bubbles, like the bubble in government debt.
(8) US government debt is at a record $38 trillion (chart). Yet, US bond yields have been falling lately on expectations that the economy, in general, and the labor market, in particular, need monetary stimulus. We don't think so. But if Fed officials proceed to deliver two more rate cuts before the end of the year, the everything bubble will continue to inflate. A similar everything bubble burst only a few years ago. And here we are at record highs in almost everything.
