Market Bubbles Everywhere

I don’t do it very often-- for that you can be thankful-- but occasionally I pass along some market commentary by people you might have overlooked but who have excellent track records as strategists.

The last time I did it, in October of 2021, I asked whether Bitcoin was a bubble. In truth, when you see a young man on television who is barely out of college and who has made $26 billion on bitcoin, you can be fairly confident that it is a bubble.

When I wrote my Bitcoin post, the price of the cryptocurrency was around $60,000. The all time high was closer to $70,000. Yesterday, Bitcoin was hovering at around $40,000. Not a bad call, if I say so, even if it was not my call.

Today, I will report on some recent comments by Canadian market strategist David Rosenberg. He is highly respected in the field, so it is worth examining what he has to say.

Business Insider summarizes some of his views, expressed in an interview for something called RealVision.

Rosenberg’s first remark rings true. Speaking of stocks and real estate, he declares that we are suffering enormous bubbles. Of course, it’s not just stocks and real estate. One might add used cars and the art market. Isn’t the obsession with NFTs, the latest art market craze the sign of a bubble.

Rosenberg said this:

We have nutty, crazy, massive bubbles everywhere. In my professional lifetime, and probably going back further, I don't remember there being so many asset bubbles taking place at the same time.

Consider, he continues, the stock market:

We've come off three years with an average 20% increase in the S&P 500. Normally, the stock market goes up in price by 7% per year. We have tripled what is normal three years in a row. It's caused people's brains to get all fuzzy, and the greed is egregious.

Egregious greed-- think about that. In truth, it’s interesting to think that great market performance and unimaginable market gains have made it more difficult for people to think. Fuzzy brains means out-of-control optimism, based on the notion that the party will never end. With everyone jumping in, the chances increase that certain forces in the universe will punish the greedy. When everyone is convinced that nothing can go wrong, something very serious is about to go wrong.

Rosenberg does not believe that inflation is here to stay. In that his is surely a contrary opinion. He suggests that we are looking to suffer something like what Japan went through when a burst asset bubble led to deflation:

 Inflation is going to be a lot lower. I'm talking about Japanification. I think inflation in the next three, five, 10 years is going to be a lot lower than 2% to 2.5%.

The reporter summarized Rosenberg’s views:

Rosenberg argued that the recent inflation spike is transitory, and the tapering of fiscal and monetary support, the recovery of global supply chains, and higher government debt would temper price increases.

Too many people, he adds, own too much stock. Their household balance sheets will take a severe hit once the market corrects seriously. Since the Fed has promised to raise interest rates this year, the chance of a correction or worse is very high:

Households are up to their eyeballs in equity exposure at the peak of the cycle with the Fed about to raise rates. What do you think happens to household balance sheets, savings rates, consumer confidence, and spending if the stock market ends up correcting?

The value of equities on US households' balance sheets has more than tripled to $43 trillion over the past decade, and the percentage of stocks in their asset mix has surged from 14% historically to 40% today.

So, he is advising people to take money out of stocks and to place them in other assets, particularly treasury bonds:

I'm very bullish on 30-year government bonds. Treasuries are a diversifier, they are inversely correlated with the equity market. They are one of the best insurance policies you could have. They are a ballast. They also offer certainty of payment, unlike equities, gold, or bitcoin. There is no default risk.

One imagines that as long as the dollar is a reserve currency, bonds are guaranteed. On the other hand, if you like to think catastrophically you might imagine that default on bonds is not totally inconceivable. You might even think that the only certainty of payment is in gold.

What else does he like:

I would be looking at pipelines, utilities, telecom, industrial REITs, even gold-mining stocks. I would also be taking profits in the US and applying them in emerging markets. — suggesting where investors can earn a yield if they pull their money out of riskier stocks.

So said an important and very savvy market strategist. Consider it a warning.