‘Things Have Been Going Up For Too Long’

The B word is something which is almost whispered in financial circles. To acknowledge there might be a bubble somewhere is like admitting the proverbial elephant is in the room.

But, like many taboo words, it seems the mainstream are coming around to the idea that it is ok to mention the word ‘bubble’ and express their concerns about the possibility of at least one existing.

This week Goldman Sachs’ Lloyd Blankfein, Deutsche Banks’ CEO John Cryan and strategists at Bank of America Merrill Lynch have separately expressed concerns that there are signs of bubbles in the markets – from the obvious bitcoin bubble to the less obvious bubble in London and other property markets and bubbles in many stock and bond markets.

The most obvious one is bitcoin. Bitcoin is up 380% this year whilst the combined market cap of cryptocurrencies is up by 800%. However these are by no means anomalies according to analysts at BAML.

Cryan and Blankfein agree, thanks to central bank money printing and low interest rates, they too are expressing their concerns over the state of markets.

“When yields on corporate bonds are lower than dividends on stocks? That unnerves me … “
Lloyd Blankfein

There’s no bubble here

Professor Robert Shiller has been calling a bubble in bitcoin for a couple of years, for him it is the latest sign of ‘Irrational Exuberance’.

“The best example right now [of irrational exuberance] is Bitcoin. And I think that has to do with the motivating quality of the Bitcoin story. And I’ve seen it in my students at Yale. You start talking about Bitcoin and they’re excited! And I think, what’s so exciting? You have to think like humanities people. What is this Bitcoin story?”

The bitcoin community was not best pleased when the man who is credited with being able to spot speculative manias decided to single out the cryptocurrency as the latest one.

In response CoinTelegraph wrote an article entitled ‘Bitcoin So High Above the Bubbles They Can’t Be Seen’. The author claims that bitcoin is failing to follow the pattern of other bubbles.

In fact, a closer inspection of the growth, and the eventual burst of the associated bubbles shows that Bitcoin is so far off the charts that it looks like an absolute outlier.

The bitcoin crowd are doing exactly what so many tend to do when a market is massively outperforming – they build a narrative from it and begin to fuel the belief that the price can only go up.

A BBC Capital article on the bitcoin phenomenon quotes a small bitcoin investor as saying ‘“I don’t know how far it’s going to grow,” he explains, “but if something is growing at hundreds of per cent, that’s a pretty valuable return.” Note ‘I don’t know how far it’s going to grow…’ The investor is convinced this can only go one way.