Bubbles aren’t new—they’ve been around since Dutch tulips—but it’s only recently that they’ve worked their way into the average investor’s lexicon. That’s probably because bubbles happen much more frequently these days.
We never used to get a giant speculative bubble every 7–8 years. But that has been the case since the new millennia.
In 2000, we had the dot-com bubble.
In 2007, we had the housing bubble.
In 2017, we have the everything bubble.
Why do we call it the everything bubble? Well, there is a bubble in a bunch of asset classes simultaneously (I delve deeper into this topic in my free exclusive special report, Investing in the Age of the Everything Bubble).
Let’s look at some of them.
Real Estate
You can spot real estate bubbles all around the world now. Canada, Australia, Sweden, Hong Kong, China—and California—to name a few.
Home prices in California have risen by 69% since 2010. Meanwhile, Canadian housing has shot up 1040% over the same period.
Why do these bubbles exist? For starters, ultra-loose monetary policy (which is also the reason that the bitcoin bubble exists).
What will be the catalysts that deflate these real estate bubbles? I’m not sure, but usually there isn’t a catalyst. The marginal house price just gets too expensive.
It seems pretty nutty that another real estate bubble is forming just ten years after the last one that nearly wiped out the planet. But real estate has been part of the food fight in asset prices and it appears to be peaking.
Cryptocurrencies
You have probably heard about the madness in cryptocurrencies, like Bitcoin, Ethereum, and ripple. Ethereum is up about 3,600% this year. As for bitcoin, it is old and boring and up only 343% this year.
Alt-currencies are being launched left and right, in initial coin offerings (ICOs). These ICOs explode on the first day of trading, and everyone gets rich. Free money!
When people are making free money, you are pretty close to the end. These ICOs conjure memories of the IPO craze in 1999. That’s the funny thing about free money—everyone wants in.
Cryptocurrencies are a massive bubble because people are making money all out of proportion to their intelligence or work ethic, which is one of the hallmarks of a bubble.
Of course, you could just buy all these cryptocurrencies and ride the bubble. But I’m a little suspicious of buying just electrons or computer code—I like things with cash flows or that are tangible. Call me crazy.
Stocks
It’s also hard to get excited about companies that are generating cash flows. I hate to pick on FAANG stocks—at least they more or less make money—but these five stocks account for too much of the market gains.
Facebook, Amazon, Apple, Netflix and Google are responsible for over 30% of the S&P 500 index gain in market capitalization in 2017.
I talked about another rationale behind these stock prices back in June.
Still, investing in FAANG stocks is a fad like the Nifty Fifty was in the 60s. We may still be talking about the Nifty Fifty today, but nobody is investing in those stocks.
FAANG stocks are hard to short, because:
1.They are gifted and talented camps—companies whose sole purpose it is to hire the smartest people and turn them loose to solve hard problems.
2. They are passively engaged in surveillance.
3. CNBC talks about one of the FAANG stocks 90% of the time.
4. It is a frenzy.
But I assure you, the FAANG stocks will turn. These companies might be changing the world, but that’s not the point. They’re overpriced.
See the rest of the story at Business Insider
