After the Bell: Are we witnessing the rise of interrelated market bubbles?

It is, of course, impossible to predict when a bubble is going to pop. Therefore, rather than attempting to time the peak, one should reconsider the definition of bubbles; markets which exhibit simultaneously extremely high valuations and universally bullish, narrative-driven sentiment. According to these, can we therefore define current market conditions as being in bubble territory?

This article is not going to be a reply to the reply of an article. That would enter the realm of Kafka. However, the article penned by Steven Sidley in response to my earlier piece in Daily Maverick was instructive of exactly this narrative-driven phenomenon, and how it relates to Bitcoin. It is a very clearly written, well-expressed summary of the narrative and valuation justification for the cryptocurrency.

Read more: From speculation to status — Bitcoin enters a new era amid Trump’s election triumph

Read more: The bitcoin revolution: why skepticism fades as global leaders embrace a new reserve asset

But this is exactly how not to understand financial markets. Explaining the recent surge in the price of something, like Bitcoin, through a narrative, is addressing it the wrong way. The world is a large and complex place. It is possible to construct a narrative explaining anything by cherry-picking anecdotes and events.

Rather, the first thing to do is to look around at what is happening more broadly in financial markets. The most obvious thing is that there could be three (probably interrelated) potential bubbles happening at the moment – more specifically, markets in which there is extremely bullish sentiment and where valuations, compared with past earnings, are extremely high.

First is the Magnificent 7 of mega-cap tech and other AI-related stocks, which are priced for global domination of AI and a Brave New World of productivity and earnings growth. These enormous companies (Apple, Meta, Alphabet, Tesla, Nvidia, Amazon, Microsoft) make up over one-third of the S&P 500’s entire market cap, and they have accounted for 65% of the index’s 27% gain so far this year, note Bank of America analysts.

Second is the Trump deregulation of Bitcoin and crypto mania, with the crypto benchmark just passing $100,000. Valuation of an asset, like gold or crypto, which does not generate earnings, is of course much harder than say equities or bonds. Here we are in the realm of fine wines and art; it is simply what someone else is willing to pay for it. There does seem to be an intrinsic value of Bitcoin – the level at which drug dealers and money launderers who use it deem an accessible entrance point. I will leave it up to those who know the sector better to opine as to that level, but looking at the chart, I would suggest between $40,000 to $60,000.

Third, and finally, is US Inc and US equities more generally. As Ruchir Sharma writes in the Financial Times, “relative prices [of stock in the US] are the highest since data began over a century ago … the US accounts for nearly 70% of the leading global stock index, up from 30% in the 1980s”.  

The US has been the world’s fastest-growing developed economy as long as one can meaningfully remember. Its productivity has grown consistently faster than any comparable economy over the past two decades. But does that mean that this growth differential will continue, and translate into earnings growth, forever?

“The overwhelming consensus is that the gap between the US and the world is justified by the earnings power of top US companies, their global reach, and their leading role in tech innovation. These strengths are all real. But one definition of a bubble is a good idea that has gone too far. America is overowned, overvalued and overhyped to a degree never seen before.”

Looking past the narratives, what has led to this mania?