I am sure the Title of the Biggest Bubble Surprised you as we are in the Largest Recession since 1929 & it’s Crazy to Expect a Bubble!
This Blog is Divided in four parts:
B) The Last Bubble
C) The Next Bubble
D) The Game Stops!
Let’s start with Liquidity – The Thesis of a Bubble Starts with what the FED has been doing, the FED started in 1912, Between 1912 & 2008 the FED Printed 900 Billion$ in total. FED started Quantitative Easing after 2008 & Between 2008 & 2019 the FED’s Balance sheet size increased from 900 Billion$ to 3.7 Trillion$. In the Last 6 Months the FED has Printed more money than that was printed in last 108 Years Combined & it has increased its balance sheet size from 3.7 Trillion to 7.1 Trillion$ in a 6 month Period.
The FED has Made it’s Mind Up, The Only way to come out of a Bubble is to Create an Even Large Bubble.
How does the FED Print Money – The FED Buys bonds from the Open Market which flushes the Banks with Excess Liquidity, the Banks typically lend it to Business & Individuals or start investing in Financials Markets.
The Scenario is Same in Europe & Japan where even with Negative Interest Rates the Printing machine doesn’t Stop. Bank of Japan has increased it’s Balance sheet size 570% in last 10 years from 1 Trillion$ to 5.7$ Trillion.
What did Excess Liquidity do Between 2009-2019.
We saw Four Large Trends
Trend 1 = Big Tech (Nasdaq)
Trend 2 = Growth Stocks
Trend 3 = European Bonds
Trend 4 = Cryptocurrencies
Trend 1= NASDAQ
The Nasdaq 100 went up 9x From 1000 in 2009 to 9800 in 2020.
Trend 2 = Growth Stocks – Growth Stocks have outperformed Value Stocks from 2009-2019. The MSCI World Growth Fund has given an 10 Year CAGR of 10.63% v/s MSCI Value CAGR of 5.83%. The Returns for last 5 years Returns for the MSCI World Growth is 9.2% v/s only 1.6% For MSCI Value.
Goldman Sachs showed in the Below Chart Shows how Growth Stocks are performing better than Value & are highly correlated to the 10 year German Bond Index.
Trend 3=European Bonds
There was a popular term in 2012 when European Nations were about to collapse & they were termed as PIGS – Portugal, Italy, Greece & Spain. The Bond yield on Greece bonds went from the Peak of 42% to 1% as the ECB kept buying these bonds via consistent Printing of Money. European bonds delivered 30-35-40% CAGR. The Situation was such the all German bonds were trading in Negative Territory. Last week the England Central Bank auctioned CoronaVirus Bonds at 0.5% yields for 41 years ending 2061 & you would be surprised to know that the bonds were sold out in 60 Seconds.
Trend 4= Cryptocurrencies
We have Seen an Emergence of New Asset Class i.e. Cryptos in last Decade as the trust of Central banks decreased, the Market cap of Bitcoin today is 161 Billion, Ethereum is 22 Billion. Market Total Market cap of top 100 Crypto’s is less than 250 Billion$ today.
We are going to Witness a Bubble, the Question is where? All MegaTrends or Bubbles start with Strong Fundamental Reasons & then it’s just Rising Prices that attract more liquidity.
1)Gold – With Massive Printing the US Dollar continues to be strong & it isn’t Going to Depreciate against the EUR or Yen, Can it Depreciate against Gold?
2)Nasdaq 100 – What was Growth in the Previous Bull Market, Technology has become a utility just like Electricity, Telecom etc.
3)Developed Market Bonds – Fed Futures are Pricing in a Negative Interest Rates from January 2021 & yields on bonds are already near negative & hence Upside looks Limited in most developed market bonds.
4)Emerging Markets – Typical needs high Commodity Prices & High Global Growth to do well.
5)Crypto – Is Digital Money is the Future without Manipulations by Central bank?
The End game of Printing Money by central banks won’t stop till there is a return of Inflation, that’s the only possible thing that can stop central banks printing money. Unless Inflation comes we will keep seeing that FED’s wont stop printing money & the Markets will cheer it every time.
There is always a Bull Market, There is always money to be made & with FED Printing more money in last 6 months than that was printed in Last 108 years combined tell you it will be a proper Bubble soon, the only question is are you going to ride it?
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The Above Blog is for educational purpose only, Consult your advisor before making any investment decisions.