Are We in a Bubble Economy?

Thoughts and economic commentary by our own Chief Investment Officer, Jesse T. Ellington, III


 
We’ve been talking to clients recently about the question, “Are we in a bubble economy?” I think money moves around so fast these days, that it is easy for it to move into pockets and create this bubble effect. If you look back at over the last 20 years, we have the internet bubble of ’99 to 2001, then came the real estate bubble of 2007, 2008, 2009, we are of the general opinion that we are working towards a bubble. We look at these esoteric signs or what we call bubble indicators.

For example, a da Vinci [painting] just sold for $500 million. The art market tends to correlate with a market that is topping out and sometimes when you see these outrageous prices for art, it tends to be a signal.

Some of the signals are more tangible, statistical things, like price earnings are getting a little bit high. In the US, we are pushing towards a price earnings ratio in the high 19s. The highest we have ever had is in that 22-23 range which happened during the dot com bubble.

We also look at the bitcoin phenomenon as a bubble sign. This was a currency that was created out of nowhere. It has no good-faith backing from any government, and yet it shot up over 1,000% this year. The crypto currency market is in the $500 billion range, bitcoin is around $300 billion. So when we have money flowing into something like that, it’s like capital created overnight. That gives us a little signal that there are some excesses.

Another interesting one that our investment team uncovered recently was that the Argentinian government floated a 100-year bond, which was oversubscribed. Meaning there were many more people who wanted to buy the bond than was available. And Argentina has defaulted 5 times over the last 150 years. We find it very ironic that someone would be willing to buy something like that when the country has already defaulted 5 times in the past.

Overall we think this bubble is somewhere out in the future, 2-4 years, so we are going to monitor it closely. We still think the economy is strong, we still think that valuations are not too high. So we are bullish for this year, but we are going to keep this bubble watch on and keep a close eye on it.