What Will Remain When and If the Bubble Pops

It’s the 1960s and Hitler is very much alive and kicking.

He didn’t die during the Second World War. In fact, the Axis powers control most of the world now…because they won the war.

The United States doesn’t exist anymore.

The spoils have been divided between the war winners and turned into two totalitarian states.

The empire of Japan controls Western US, now known as the Pacific States of America, PSA for short. On the other hand, Eastern US is now known as the Greater Nazi Reich where the German mark is the currency in circulation.

No dear reader, we haven’t lost our minds.

This is the storyline for The Man in the High Castle, a TV series based on the novel by Philip K Dick.

The series shows an alternative reality in which the Axis powers wins the Second World War. It ponders at what the world could look like if war results had been different.

Sometimes it feels like (much like the TV serial) the world took a wrong turn in the eve of 2020, sending us into a completely different reality to what our world should really look like today.

Yep, we’re still dealing with the pandemic but things are getting bizarre out there.

The economy has taken a hit but there’s a sea of green out there. Confidence is off the chart and there’s a lot of easy money around.

When things turn so ‘irrational’ with a ‘can’t-lose’ attitude it’s usually a good time to take a minute to re-evaluate things.

The one thing we do know is that all the liquidity around is coming from central banks, whose policies have continued to support asset prices. Money has been flowing out of cash and into assets. But all that liquidity could disappear fast if asset prices collapsed.

For the moment though, there’s plenty more money coming from where that came from.

This week the Reserve Bank of Australia said they’ll be pumping in another $100 billion into bonds to keep interest rates low.

Pump up the stimulus

In the US, newly-elected Joe Biden is promising to pump a whopping US$1.9 trillion in stimulus.

With all that’s been going on it was interesting to hear Jeremy Grantham’s views. Grantham is the co-founder and chief investment strategist of Grantham, Mayo Van Otterloo & Co (GMO) in Boston.

In a post at the beginning of the year Grantham said the 2009 bull market has turned into an epic bubble.

As he wrote: ‘Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

A bubble that as he said last week, during an interview with Bloomberg, may not have long to pop even with Biden’s stimulus package:

We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust. When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years.

In my mind assets have been in a bubble for a while.

But the question I’ve been looking to answer is what will remain if and when the bubble pops.

Among all the doom and gloom Grantham offered a silver lining.

When he was asked what investors can do, here is what he said:

If you could do emerging, low-growth, and green, you might get the jackpot.

For a while now I’ve been thinking the decarbonisation of the economy is one of the trends that will reemerge from the ashes.

I mean, no one has a crystal ball here and green energy has been on a spectacular run.

But a bunch of different factors and interests are converging to push the trend.

Governments are on board.

So far, eight out of the 10 largest world economies have set up net-zero emission targets in the next few decades. With the US joining the group that makes nine.

At the same time, technology is advancing and getting cheaper.

Battery prices have fallen 87% since 2010 from US$1,000 per kw hour to US$156/kWh in 2019. BloombergNEF expects prices will reach US$100/kWh by 2023.

And there’s a lot of money flowing into the space, investment in decarbonising the economy reached a record in 2020 at US$501.3 billion, even with the pandemic.

The pandemic has hit the oil industry hard.

Oil producers are tightening supply to put a floor on prices, and so far they’re holding. We may even see oil prices go up if there’s a rebound in demand. I mean, the world economy still very much relies on traditional energy. But higher oil prices only makes renewables more competitive.

And of course, this is a trend helped by central banks’ low interest rate policies.


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

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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