Market bubbles are in for trouble

The US$6.2 billion-an-hour (186 billion baht) rise in the value of world stocks since March was dubbed the “mother of all asset bubbles” by Bank of America (BofA) analysts last week — and all of a sudden there is a high-pitched hissing sound.

Electric car doyen Tesla, which raced up 750% in last year’s frenzy, skidded into the red for 2021 on Tuesday, hit by a selloff of tech stocks and a plunge in Bitcoin, in which the carmaker recently invested $1.5 billion.

Both are technically in bear markets, defined as down 20% from their latest peaks, although for ultra-volatile Bitcoin which has surged well over 1,000% since March, that was admittedly only a few days ago.

More broadly, Tesla and the bellwether FAAMG quintet — Facebook, Amazon, Apple, Microsoft and Google — have seen half a trillion dollars, or around the equivalent of Austria’s economy, top-sliced off their combined value this year.

Meanwhile 10-year US Treasury yields, a key driver of global borrowing costs, have gone up from just under 0.9% to just shy of 1.4% which, while barely visible in a historical context, is nevertheless a 50% increase. For UniCredit’s Co-Head of Strategy Research Elia Lattuga, the quick rise in benchmark yields represents “a significant risk for equities in general but especially for the parts of market like growth and tech stocks that have seen the sharpest expansion in valuations.”

He added that the 80% rise in world stocks since last March’s Covid-19 meltdown — at a pace almost 10 times faster than that seen after the 2008 global financial crisis — had been driven by the well over $20 trillion worth of aid provided by governments and central banks.

Since the start of the year, hopes that vaccines will help overcome the coronavirus and curtail the need for so much support have been building.

Tracking the trend in US Treasuries, Europe’s still deeply negative German Bund yields are set for their biggest monthly jump in three years, and yields in deflation-plagued Japan are at their highest in more than two years.

There are echoes of the ‘taper tantrum’ of 2013, when world stocks saw a number of 3-5 percentage point drops as global yields began to climb.

Stocks did recover, though, and were climbing again when US yields topped 3%, and for SEB investment management’s global head of asset allocation Hans Peterson, any danger signs from the current rise in yields should also come with caveats. “I don’t see it as a fundamental threat to the markets. But it is up for discussion,” he said. This time, however, as nearly 90% of respondents in Deutsche’s Bank most recent money-manager survey concluded, bubbles are building in many market segments.

Bond bubbles, biotech bubbles, Special Purpose Acquisition Companies (SPAC) bubbles, shorting bubbles, space travel ETF bubbles. You have to search pretty hard to find an asset class that hasn’t been flagged up.

Ray Dalio co-chief investment officer of the world’s biggest hedge fund,

Bridgewater, posted on Monday that around 5% of the top 1,000 US firms were in bubble territory, which while high is well off dot.com boom levels. Climate change worries also mean anything green has turned red hot. Tesla’s rise has been a staggering 16,000% over the last decade. It is worth the majority of the world’s other carmakers combined and even with its drop this month, its shares still trade at 163 times this year’s expected earnings. It’s a multi-storey bandwagon that increasing numbers are climbing on.

GMO’s veteran bubblecaller Jeremy Grantham has warned of a massive rise in SPACs — blank check companies that merge with privately-owned firms specifically to float on the stock market — and initial public offerings (IPOs). SPAC-led Tesla-wannabes seem to emerge almost daily. S&P’s Global Clean Energy index has nearly doubled in value over the past year, giving it a valuation of 41 times its companies’ expected earnings.

There were 480 initial public offerings (IPOs) last year, more than the height of dot.com mania. Some 248 were SPACs and there have already been over 150 this year according to Spacinsider.com data.

Green bonds are roaring, along with solar, wind and hydrogen stocks. Hydrogen fuel cell manufacturer Plug Power is trading at nearly 65 times its expected revenue and its share price surge over 1,000% in the last year. “These great bubbles are where fortunes are made and lost,” Mr Grantham said recently. “...This bubble will burst in due time, no matter how hard the Fed tries to support it.”

‘‘ This bubble will burst in due time, no matter how hard the Fed tries to support it.