Bubble Bubble Toil And Trouble?

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Barkley Rosser
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 Or maybe not.

So recently there has been a lot of buzz that we may be seeing a variety of speculative bubbles in the US and indeed world economy.  Many asset markets have risen in the last few months, with several of them either reaching new highs or getting close to doing so, with some of them rising very sharply quite recently, with all of this making many eyebrows rise to noticeable degrees and mumble about possible crashes, which could well happen in any of these markets. But probably not in all of them.

One is of course the US stock market, which has hit new record highs recently for most of its indices, with the Dow in particular making headlines when it passed 30,000, where it still is, if not at a record high level at this very moment.  It is ironic that President Trump spent so much time and effort focusing on the stock market, apparently engaging in stupid and ultimately deeply deadly policies regarding the pandemic out of a silly effort to affect favorably almost daily stock market movements.  People were not to be told how serious things were because, wow, the stock market might go down tomorrow and his reelection chances would be damaged!  Well, of course when how serious things were finally became clear in March, we did see a massive plunge of world stock markets, but a combination of Federal Reserve policy actions and a fiscal stimulus, along with the passing of the first wave of the pandemic, led the markets to recover quite rapidly from their horrific fall.  They generally continued to do not too badly even as we had another increase in the pandemic in the summer, which was probably just the spreading of the first wave into parts of the country that did not get it in March and April, especially parts where governors followed Trump in not enforcing masks and social distancing.

Of course it is probably the case that what has driven the most recent surge, including the passing of the 30,000 Dow barrier, has been driven by good news about vaccines becoming available, with this providing hope for a more solid recovery of the economy sometime next year.  However, much as Trump has whined that he deserves credit for all this (and he deserves some) and that if only those naughty companies had made their announcements two weeks earlier he would have gotten reelected, well, the real proof of the pudding is that stock market began moving up sharply in the immediate wake of the election with the word that Biden had won, before the announcement of the Pfizer vaccine, which led to Trump engaging in all sorts of tangled efforts to claim credit for that.

Well indeed the economy probably will improve more solidly eventually next year, and while price/earnings ratios are somewhat high, they are not in territory wildly out of line with what we have seen in more recent times, with in fact profits up substantially, a trend that predates Trump becoming president, although he certainly tried to implement policies to make them go higher.  In any case, while we may not see the stock market zooming all that much further in the near future, there is not an obvious reason to expect some sort of major crash ("corrections" can always happen), so, frankly, the stock market at least does not look wildly bubbly, despite having gotten to such high levels.

Gold has gotten some attention as it has flirted with old long time highs over $1900 per ounce.  It is just below those levels, and could yet go above them.  I have never felt able to explain gold prices very much, and we have seen bubbles in it in the past.  The funny thing is that much commentary on gold has been downplaying it as not performing all that spectacularly, given developments in other markets, including the stock market.  Of course supposedly gold goes up in times of uncertainty or fear of inflation.  And while there is still uncertainty, the appearance of vaccines seems to provide some optimism in general, and not too many are taking seriously a threat of reignited inflation.

Of course the other market that people are comparing gold to, with some claiming it is replacing gold, is cryptocurrencies, most especially bitcoin.  This has indeed surged dramatically recently and gone to more noticeably new highs, breaking through the old clearly bubbly high above $19,000 to surpass $23,000, with it still over $22,000 at the moment.  Other leading cryptos have also moved way up, including Ethereum and XRP, if not quite as dramatically as Big Player bitcoin (btc).

So these have been far more volatile in the past decade than stocks or gold or even oil for that matter, which has also moved up recently from about $40 per barrel to about $50 per barrel, not particularly bubbly.  And unlike any of those btc looks to be almost a pure bubble anyway, with no clear fundamental.  To the extent there is one it is use of btc by criminals to finance their activities covertly, which is certainly something real. But it is not at all clear that the demand for bitcoin for that has obviously expanded.  Ethereum and XRP both have clearly fundamental uses, the former allowing for contractual operations between firms even as that does not seem to have happened much yet, and the latter reportedly being used between commercial banks for settlements, although without its use expanding beyond that.

What seems to have driven this recent price surge in btc and other cryptos have been rumors and reports of central banks possibly establishing their own digital currencies, with other possible ones such as still-in-process Libra possibly appearing. These may or may not happen, but the funny thing is that if they do it seems to me that they would block any chance of bitcoin in particular becoming some sort of general international real currency, the "new gold" some claim it is. They would be the serious cryptocurrencies, not bitcoin, which would remain for use by criminals and the occasional coffee shop in this or that hipster haven.  I do not see these reports as providing some real foundation for a new higher fundamental for bitcoin.  But I do not know what is in the minds of the main traders in it who are reputedly in China and North Korea.

The final item that has been surging has been real estate in the US, which seems to have taken off quite dramatically in several parts of the nation since the pandemic struck.  What is odd about this is that in some major urban areas rents are down, reflecting many people fleeing to more rural or suburban areas to escape the pandemic.  But somehow prices in many areas are rising, with price/rent ratios thus rising.  Some of that may be due to record low mortgage interest rates, but these in turn are perhaps a bit mysterious as underlying interest rates have not moved all that much even as the Fed has maintained an expansionary policy, with certain monetary aggregated rising sharply.  

So, I guess a bottom line I see is that the most bubbly of assets look to be cryptocurrencies and real estate, with stocks and oil not especially so, and with gold perhaps in between those other two groups.  But, of course, who knows?  I may well prove to have all this quite completely wrong.

Barkley Rosser