With the Dow recently hitting 29,000 for the umpteenth time, and Tesla (TSLA) breaking through $500 a share, there is no shortage of blog posts, manager commentaries, and articles discussing “bubbles,” says Landon Whaley of Whaley Global Research.
Most, if not all, of these articles are written as “buyer beware” pieces that warn about the risks of buying into specific markets (or stocks) deemed to be bubblicious.
The problem is that what constitutes an asset-class bubble is highly subjective, and it seems as though everyone has a different definition.
Some folks talk about current valuations relative to historical averages. For instance, based on various metrics, the S&P 500 (SPX) is more “overvalued” right now than at any point in history. The problem with the “valuation” approach is that it’s only applicable to equity markets and is fraught with disagreement depending on which valuation metric one chooses to use.
Other people look at the magnitude and duration of a particular price move to indicate at what point a market has entered bubbly territory. This type of definition is also extraordinarily subjective and hard to quantify.
My favorite and the most absurd criteria for a market bubble is that “irrational exuberance” will be present. Maybe irrational exuberance is like obscenity, and you know it when you see it. If not, how do you quantify “irrational exuberance?”
Even if we could all agree on a data-driven definition of a bubble, it would tell you nothing about when the bubble would pop or after it burst, how long it would take that particular market to work off the excesses, and begin to rise once again.
Needless to say, my take on asset bubbles is entirely different.
Do you remember the fun you could have with just a container of bubble solution and the bubble wand? If you don’t, you’re lying to yourself!
For my money, there were two things I enjoyed most about blowing bubbles, big magic bubbles. First, my competitive streak liked to see if I could be the one to blow the biggest bubble of all my friends. Second, once the air was full of bubbles, I loved sprinting around and popping as many as I could before they hit the ground!
Asset bubbles are no different. I like to see how big a market’s bubble can get, and I also love to see that bubble get pricked. Both provide excellent opportunities for high-quality, risk-adjusted returns. At the end of the day, profits that come from an acceptable level of risk-taking are what matter, and the rest is just conversation.
I always laugh when these bubble articles start coming out en masse. I’m generally already long bubbalicious markets because it’s often a market that has been bullishly aligned with the prevailing fundamental gravity for quite some time.
For example, Treasuries (+45.8%), gold (+50.8%), silver (+57.7%), and gold miners (+94.0%) have handily outperformed everyone’s favorite benchmark, the S&P 500 (+28.0%) over the last two years because of the prevailing fundamental gravity environment. Are these four markets in a bubble? Nope. Not as long as the prevailing FG remains bullish for these asset classes.
On the flip side, a bubble usually bursts when a bullish FG environment gives way to a bearish one. I’m not sure if the current bubble in Tesla (TSLA) has been permanently pricked, but as of this writing, it’s crashed -19.1% from its all-time high in early September. Let’s not forget that TSLA also experienced an intra-September drawdown of -34.2%. Yowza! Unfortunately for the Tesla faithful, the US economy has a 50/50 chance of being in a winter fundamental gravity here in Q4, which is extremely bearish for Musk’s company.
The bottom line is that words like “bubble” and “mania” make for catchy headlines. Those words sell newspapers, get clicks, and entice the seven remaining people who watch CNBC to stay tuned. Rather than spending time attempting to decipher if a market is bubbling over, align your portfolio with the prevailing fundamental gravity and let economic and financial market laws do the rest.
To learn more about Landon Whaley, please visit WhaleyGlobalResearch.com.
