Having spent pretty much all of 2021 insisting that we are in an ‘everything bubble’ where stocks, bonds and real estate are all trading at unsustainably high valuations, a few people have gotten tired of my repeated dire warnings that have not come to pass. I understand. I certainly am surprised that the bubbles (plural deliberate) have not burst yet, but only because the high valuations have persisted longer than I thought likely. In fact, high valuations have only gotten higher – so the risk of a major set of drawdowns is not only nearer, but also likely to be more severe than it was when I started with my warnings.
I have spent a great deal of time thinking about this over the past while and am now able to offer my considered opinion as we head into 2022: I’m doubling down. However valid my concerns were a year ago, they are even more valid now. When I say I think markets are set for a big drop, the first question I usually get is: what will cause it? I have no idea. I have plenty of guesses though. Do those count? Here’s my abridged list of A List suspects:
- Increased Covid outbreaks
- A debt ceiling impasse in the U.S.
- High valuations simply causing ‘Animal Spirits’ to wane
- A policy error (too many rate hikes too soon)
My all-time favourite suspect remains ‘none of the above’. Guessing games are fun, right? How should I know what will cause the pop? How could anyone credibly purport to know? And why would anyone care? If someone were to lose (say) 50% of their invested assets in a major market bubble popping, does it matter if the pop was due to Covid or inflation or rate hikes or bull market fatigue? Surely to goodness, what matters is preparedness before the pop and the actions taken afterward.
Back to “what will cause it?” Those who ask that question simultaneously insist they cannot time markets. If they are sincere and ethical in their inquiry, why ask? It seems to me that the question is a kind of logic jiu jitsu. Everyone knows they can’t reliably time markets yet can’t resist trying to goad others into… you know… trying to time markets.
Like my intrepid interrogators, I also insist that I cannot time markets. Questions that demand causation about an unknowable event are inane. Merely asking them belies your stated position. Consider: if you honestly don’t think anyone can time markets, why are you asking people to time markets? If you ask and someone offers a serious opinion, there’s a good chance that person answering (if she insists she cannot time markets) is a hypocrite. Then again, if the inquirer honestly expects any answer other than “no one can reliably time markets”, maybe the inquirer is a hypocrite, too.
This reminds me of a classic question once posed by the Unknown Comic:
- What do you get when you cross an elephant with a rhino?
‘Hell if I know’ is the only honourable answer to the question “what will cause the bubbles to burst”? Anyone who purports to offer a serious prognostication about something that cannot reliably be foreseen is at least a bit of a charlatan. Speaking for myself, I remain convinced that we are not merely in a bubble but are in multiple simultaneous bubbles – of epic proportions. I have offered my rationale for this viewpoint on countless occasions. Most of all, I believe there will be severe pain because of the popping. I have no idea when or why it will happen, though. All I know is that throughout history, whenever valuations have gotten this extreme, the end of the story involves devastation. The next exception will be the first.