I believe we, as a general people, are overdue for some good news.
Obviously, I’m excluding the heinous:
Boris Johnson – mainly because he just looks like that, anyone in the past year who said “hope you’re staying positive and testing negative” (or worse, “vaxxed and waxed” – ew), fast fashion, this entire new season of Grey’s Anatomy thinking it was their due diligence to act out the horrors of the Covid-19 crisis (as if we all weren’t living the horrors of the Covid-19 crisis), that pimple on my chin that won’t go away, Will Schuester from Glee who Tik Tok informed me was far more predatory and inappropriate than my 10-year-old self recognized, gluten intolerance in general, Anne Hathaway’s “don’t hate me because I’m beautiful” demeanour in every press interview she’s ever done, the creator of The Human Centipede and, pointedly, the phrase, “these unprecedented times”.
Aside from all of the above, I believe the rest of us are overdue for some good news…
Unfortunately, American investor, hedge fund manager, physician and evident overachiever, Michael Burry has another thing in mind.
Michael Burry’s ominous message:
Michael Burry (better known as the real-life guy who was played by Christian Bale in the Big Short) deleted his Twitter profile last week after issuing a slew of dire warnings. The “Big Short” investor sounded the alarm on a colossal market bubble, predicting the worst crash in history. His exact words: “Greatest Speculative Bubble of All Time in All Things”. (I have to give credit where credit’s due – his level of drama is outstanding).
Burry specifically addressed crypto, meme stocks, inflation and the Federal Reserve, describing the FED as “misguided monsters” for focusing so much on preventing market declines.
What is a market bubble?
A market bubble is a very cute term for a very problematic thing. Put simply, a market bubble occurs when the price of an investment rises quickly to well above its true value and is followed by a sudden, sharp decline in value. People, often driven by emotion, put so much demand on an investment causing the price to rise significantly to more than its actual worth. (*cough* Tesla, WeWork)
The debilitating side effects of FOMO:
We see this sort of bubble, in isolation, with a company like Tesla. A barely profitable business model certainly does not validate its astronomical share price. However, investors hear stories of other investors making a lot of money on an investment, so they throw caution to the wind, run with scissors (everything mom taught us not to do), and jump into a ship that is called the Titanic. And there’s not even a young Leonardo DiCaprioon board.
As prices skyrocket, investors get caught up in the excitement of huge potential gains. News articles and social media may confirm to them in their minds that they are doing the right thing. (Just as it so kindly convinces us all of our respective inadequacies). These same outlets downplay the fact that inflated prices don’t represent the true value of an underlying asset. At a certain point, some investors will begin to sell – either to cash-out their profits or due to a bad news story – which causes other investors to sell and as the selling intensifies, prices collapse and the bubble bursts.
In dramatic Michael Burry fashion, I will warn:
The bigger the bubble, the greater the damage when it bursts…
People often only realize a market bubble existed after it burst.
A market bubble is not new.
One of the earliest recorded examples is the Dutch Tulip Bubble that occurred in Holland during the early 1600s. (This is so quaint it hurts).
Speculation over tulip bulbs increased to such extremes that, at the peak of the bubble, some tulip bulbs cost more than the price of a luxury home. When the Tulip Bubble burst, prices plunged 99% within a matter of months.
The 3 Market Bubbles of Modern Times:
- 1929 Wall Street Crash
Picture this: first-wave feminism, the Harlem Renaissance, flapper dresses, Gertrude Stein’s salon and Hemingway romantically calling it all the “lost generation”. The Roaring twenties brought about an economic boom and the Dow index soared as all types of investors were speculating wildly on the stock market (as one likes to gamble when they feel happy). (I would give a kidney to exist in this time).
However, when it became clear that the economic boom was actually an over-inflated speculative bubble (no real underlying value), investors started selling in panic. When the market crashed on October 28th and 29th, investors instantly lost fortunes and some stocks lost over 90% of their value. (I would still give a kidney to exist in this time).
- Dot-com bubble of the 1990s
Cue the Tech Giant God-complex and welcome to Silicon Valley! The advent of the Internet ushered in a massive wave of speculation in technology-based companies. Hundreds of start-up dot-com companies achieved multi-billion-dollar valuations as soon as they went public (even though they had barely generated any profits).
Investors poured massive amounts of money into high-priced tech stocks with the belief that these firms would be profitable. After the dot-com bubble burst, many of these start-ups went bankrupt and investors were left with worthless stock.
- US housing bubble of ‘07 and ‘08
And here comes our bad news man of the hour: Michael Burry. If you’ve watched the Big Short, you can probably just skip over this section.
In the mid-2000s, many investors felt that owning real estate was a safer bet than tech stocks. (I’d imagine the aforementioned dot-com bubble influenced this sentiment)Interest rates were ridiculously low and banks had reduced their borrowing requirements to (irresponsibly) attract investors. Demand exploded for homeownership, as did risky borrowing, mortgage fraud, and house flipping. The bubble burst when, among other things, home supply outstripped demand, prices crashed, and masses of homeowners defaulted on mortgages.
(Please don’t email any further questions on this – I still am a bit confused about what went down here and can’t bring myself to read about mortgage fraud in this heat).
What to take away from this aside from existential dread:
With all that has gone on in the world and this prophetic white man telling us that everything is about to fall apart, what are we supposed to take away? All I want, at the very least, is a safe place to put my money so that it beats inflation and potentially helps sustainable companies while at it.
This remains a feasible goal. Staying away from “the next hot thing to invest in” type of headline is a good start. Good fundamentals will likely recover after a bubble bursts. Unfollow any meme-stock accounts (my readers are too cool – I know none of you do this no matter what) (I guess unless you have the money to spare in which case, share the wealth). Do your research before you invest (ugh, boring, mom!). And lastly, make sure to diversify your portfolio – this can help reduce your risk of loss from a market bubble (if and whenever it happens).
We are overdue for some good news and the optimist in me truly thinks, even in the face of Michael Burry’s “prophecy”, it is coming.
My chin pimple is already starting to fade.