There’s Something in the Air: A Property and Stock Market Bubble

Ever since I can remember, my dad has always had a huge dislike for amusement parks. To be honest, using the word ‘dislike’ is putting it mildly.

It’s why, as kids, my brothers and I never used to go to any often. Only on school trips, or during a friend’s birthday party.

In the very rare and few occasions we could convince him to take us to an amusement park, he would never get anywhere near the rides. Instead, he would stay on the sidelines.

And he had a special distaste for roller coasters.

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One day, he told me why.

In his teens, he had often gone to amusement parks with friends.

It was on one of those days that he climbed on the first car on the roller coaster. As the roller coaster climbed towards the highest part of the ride, it broke.

He was stuck, up there at about a 20 to 30 metre height, with the others. In the middle, impossible to get out. No way of moving forwards, or backwards.

The park staff had no idea how to help them.

Climb down’, they yelled.

My dad’s answer was something akin of a less polite: ‘No way. You fix this and get me out of here.

They were stuck up there for hours, until they finally got rescued.

This story came to mind today because…well, it’s weird, you know.

Things are looking very bubbly: stock markets, property.

The chart below shows the different phases of a bubble. It’s typical of bubbles to have a euphoria and even delusion phase, before the collapse.

The Rum Rebellion 13-11-19

Source: Elliott Wave Analytics

[Click to open in a new window]

In 2008, there was a lot of euphoria before things started to go south.

Yesterday I wrote about British artist Damien Hirst and his risky bet in 2008 for his ‘Beautiful Inside my Head’ collection.

It was one that paid off, as the economy crashed down, people were still spending millions on art.

And I’ve often written about the euphoria that preceded the property collapse in Spain. People were snapping up properties quick and paying a high price for it.

There was a lot of FOMO (fear of missing out), much like until recently in the Australian property market. That frenzy is mostly gone now.

And, of course, there was also bitcoin, that recently provided a great example of a bubble boom and bust.

But there isn’t much euphoria out there anymore. Instead, we are starting to see fear.

UBS Global Wealth Management recently ran a survey on people with at least US$1 million investable assets.

Here is what they found, from Bloomberg:

Wealthy people around the globe are hunkering down for a potentially turbulent 2020, according to UBS Global Wealth Management.

A majority of rich investors expect a significant drop in markets before the end of next year, and 25% of their average assets are currently in cash, according to a survey of more than 3,400 global respondents. The U.S.-China trade conflict is their top geopolitical concern, while the upcoming American presidential election is seen as another significant threat to portfolios.

“The rapidly changing geopolitical environment is the biggest concern for investors around the world,” said Paula Polito, client strategy officer at UBS GWM, in a statement. “They see global interconnectivity and reverberations of change impacting their portfolios more than traditional business fundamentals, a marked change from the past.”

As Bloomberg reported, over half (55%) think there will be a big sell-off in the markets before the end of next year. And 60% of respondents are looking at increasing their cash levels and diversifying their asset classes.

We are sitting on a bubble…waiting. We are stuck here, kind of like my dad on the roller coaster. Can’t move up and fearfully looking at the way down.

We are trying to find reasons to be positive. Cheering the possibility of a US-China trade deal before it happens comes to mind.

And we may find some, in the short term.

But, realistically, how much higher can these assets go?

Salaries aren’t really growing. We are pushing debt to the limits, and debt has been propping up zombie unproductive companies. Plus, we are on the verge of diving into negative rates.

And optimism…well, it may already be reaching its limits too.

The only solution I see is to push inflation higher, to make debt quantities smaller. But this so far isn’t happening.

And at the same time, change is in the air.

We’ve had an era of connectivity, globalisation and liquidity.

That’s changing.

We look to be heading into an era of less globalisation and liquidity. There is a lot of instability out there, and anger.

It’s when people start turning fearful that liquidity starts to disappear.

It’s why I think that having some cash when things go south next time will be key.

At the end of the day, it’s all a confidence game.


Selva Freigedo Signature
Selva Freigedo,
Editor, The Rum Rebellion

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Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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