Contributors: Eric Lam
Updated on January 28, 7:46 PM EST
What You Need To Know
It seems like asset bubble warnings are emerging everywhere you look these days. In the U.S., big names including Tesla Inc. have soared to dizzy new heights, while Bank of America Corp. strategists have warned that a bubble is forming in asset prices and a market correction is looming. Meanwhile, a growing legion of retail investors are challenging Wall Street orthodoxy and sending shares of previously unheralded stocks into the stratosphere (yes, of course we mean you GameStop Corp.).
Trendy bets are all over the place, with cash pouring into assets from solar power and cloud computing, to exotic new investment vehicles like special purpose acquisition companies (SPACs). And of course, who could overlook the rollercoaster ride that is Bitcoin, everyone’s favorite bubble from 2017, back at it again and hitting new highs early in 2021 after quadrupling in value last year.
So what’s behind all the speculation? In a nutshell, the global pandemic. Policy makers have rolled out trillions of dollars in stimulus to cushion the economic blow, money that could well end up pumping asset bubbles. Governments have spent some $12 trillion in fiscal support alone, while the U.S. Federal Reserve is buying $120 billion of bonds monthly to keep borrowing costs low in the world’s top economy.
Why It Matters
With even the riskiest debt now paying less than ever, investors are chasing every catchy extreme in search of the next big payoff. Nobody knows for sure whether these bubbles will pop, but the warnings keep growing louder.
History has already shown us just how damaging the biggest bubbles can be when they do burst: from famous early crashes like the Dutch tulip mania of the 17th century to more recent examples including the 2001 dot-com bubble and the subprime mortgage disaster that spurred the 2008 global financial crisis, the effects of which continue to be seen to this day.
At the moment, the world is pinning its hopes on the distribution of vaccines to allow economies to get back on track. Any hiccups in that process, however, could potentially spook investors into selling, which could in turn spiral into a wider loss of confidence across asset classes. A market collapse and depression now, as much of the world already grapples with the effects of the pandemic, could have dire consequences for years to come.
Even if the global economy does recover strongly, that too could present a challenge, given that assets like stocks are now often very expensive. Central banks and governments could start dialing back on stimulus to keep debt loads and the risk of inflation in check, which again could spook investors who have gotten used to loose monetary policy.
For now, at least, the euphoria continues.
Easy money? Check. Exciting narratives? Check. Excessive valuations? It depends where you look.
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