Humans are by nature optimists and that optimism is reflected in the false “justification “occurring to explain why everything is rising from Property to Bitcoin.
We have seen the tell tales signs of a growing bubble, whether it has been the surge in public offerings occurring (especially in the US where the levels of offerings are now at that of the dotcom bubble), closer to home, private equity investors trying to offload assets at greatly inflated prices, the US S&P500 up some 16%, the tech heavy NASDAQ up close to 40%, the Tesla electric car stock up eight times its values in less than a year and Bitcoin up four times its value since October. Closer to home we see property prices on the coasts rising. On the Sunshine Coast we see property prices moving up some 30% in the space of less than a year on the back of interest rates that are expected to remain low and the belief that our cities are being vacated as the population moves to the Coast.
The air of optimism that we enter 2021 must be tempered, given the seeds of the next bubble have been planted. That optimism will depend much on whether COVID19 can be contained by the global vaccination program occurring as we speak. I personally have my doubts as talk of mutant strains intensifies and the third wave rages through Europe and the Americas.
Certainly much of the rationalisation is explained away by the ongoing belief that interest rates and therefore government bonds will remain low and indeed negative for many years to come. And that governments will keep on spending (note the incoming Biden administration is looking at a two trillion dollar spend) and that all of this will not lead to inflation and so the equity/property markets will just keep on rising and there will be a bigger fool coming down the line who is prepared to pay these inflated values (usually with borrowed monies).
We are in a rising bubble but like the proverbial frog in the slowly heating pot, we just don’t notice the temperature change.
So what do I believe? I believe that we have a way to go yet in this party. The music hasn’t stopped yet. Why…because no one is going to do anything to endanger the re-floating of Western economies. Markets, property prices and Bitcoin have got ahead of themselves big time. But….and this is a big but….the end of rationalisations will come and then there will be a savage turn as there always is as investors retreat and market prices sharply retract.
Prices for a lot of assets are now back at 2008 pre Global Financial Crisis (GFC) levels. It doesn’t mean that they don’t have a way to go upwards at this stage. Translated, this means that while you need to be invested, you have to be aware of how much you have invested in growth assets and correspondingly how much you have invested in particularly overinflated markets like the S&P 500 and the NASDAQ. In that regard we all need to remain vigilant.