THEY are calling it the “everything bubble”. Once you notice it, you can’t help but worry what will happen if it pops.
All around the world assets have been rising with a beautiful synchronicity. Anyone listening to Donald Trump knows the US stock markets are booming. A portfolio made of Facebook, Amazon, Google and Netflix would have risen over 50 per cent in the last year alone.
Meanwhile, Australia has seen east coast house prices go crazy. We are not alone. A simple home can cost well over a million dollars now in cities across New Zealand, Canada, Sweden and San Francisco.
The everything bubble goes beyond share markets and homes. The global bond market is worth around $80 trillion, 10 times more than all the land and buildings in Australia put together. It has soared to record highs over the past two decades before showing curious signs of weakness in the last year or so, that have been intensifying over the last week.
The Australian stock market may look like it’s not part of the everything bubble — after all, it is still below its 2007 peak. But when you delve into technology stocks you can find valuations that seem blown out of all proportion. For example Getswift, a company with revenue in the last 12 months of $600,000 — comparable to your local pizza shop — but valued at $585 million. (Getswift claims it has a deal with Amazon.)
This everything bubble is so strong it even conjured into existence a whole new class of assets and made them worth billions — cryptocurrencies. Bitcoin is up 226 per cent per cent in the past two months alone. That looks puny compared to ethereum, which is up 397 per cent.
THE TREND BEHIND THE TREND
When just one asset is going up, you explain it by the characteristics of that asset. But if you have an everything bubble, you need to look at the trend behind the trend.
Cast your mind back a few years and you may recall the expression “quantitative easing”. This is where central banks pumped money into the economy to try to help us recover from the global financial crisis. It happened in the US, Japan and Europe.
It worked, more or less. But the effect was similar to what you see in a game of Monopoly. The amount of money in circulation kept going up, but the number of assets to buy remained stubbornly still. As anyone who has forked out $600 in Monopoly money for Old Kent Road knows, asset prices go up as the ratio of money to assets goes up.
Quantitative easing is really just an extreme version of cutting interest rates. In both cases, the idea is to make people borrow more and spend more. So even though Australia didn’t have quantitative easing, low interest rates and the record amounts of household debt Aussies are shouldering represent our part of the everything bubble.
The problem with loose monetary policy is that while it is supposed to make people do productive things like start a new company, it has a side effect of making them buy assets at crazy prices. If the everything bubble pops, it may turn out that the cure for the global financial crisis is what caused the next crisis.
You can see the scale of quantitative easing in the next graph. It shows the assets the US central bank swapped for all the cash it pumped into the system. In return for handing out $4 trillion in cash, it took $4 trillion in assets.
Donald Trump just appointed a new head for the US central bank, dumping Janet Yellen and putting in a man named Jerome Powell. Get used to his name because you’re going to see it a lot this year. The person most likely to pop the everything bubble is Jerome Powell.
Selling those $4 trillion in assets is likely to start in 2018. At the same time, the US central bank is likely to keep lifting interest rates. After all, the US economy now has very low unemployment and quite high growth. It no longer needs stimulatory interest rates to boost it — they can go back to normal.
The effect of all this will be like taking cash out of that game of Monopoly. You could even ask if the recent slowdown in Australian house prices is in part an anticipation of the end of the era of easy money.
WHAT HAPPENS IF AN EVERYTHING BUBBLE POPS
The exciting thing about this question is we don’t know. Immediate panic is not necessary — it is unlikely each asset class will fall together like synchronised divers. More likely, a decline in one will overlap with a decline in another, creating a long period of uncertainty.
Adding to the drama is the role of China in the everything bubble. Many believe 2018 could be the year that country finally does something about its own huge debt problems. If Jerome Powell doesn’t make things go pop this year, then China is the next big threat.
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