11-06-2021, 05:18 PM
Richard Bernstein - 5 Conditions of a Bubble are Present: Are we in a Bubble?
<!-- SC_OFF --><div class="md"><p>I first want to state I don’t know if I agree with Rich or not but I value his insights and he makes a compelling argument. Second, bubbles are inherently difficult to time and identify because they can persist longer than we may think is rational. I have only been loosely following Rich and his team for a few years because they seem to offer good contrarian points of view and those are valuable to get. Anyone that has long term experience following Rich may be able to provide feedback on his track record. </p> <p>RBA’s team has identified 5 characteristics found in every financial market bubble and they lay out how each one is present in today’s market in the US. I’ll lay out their 5 points and the underlying rationale for each with supporting charts from RBA. </p> <ol> <li>Increased Liquidity </li> </ol> <p>The Federal Reserve has provided enormous levels of liquidity in response to COVID as evidenced by the simple growth in money supply. However this liquidity has been trapped in the financial markets due to bank’s lending and capital restraints implemented post-GFC. Since bank lending is supposed to be the mechanism through which monetary stimulus gets into the economy, their lack of high margin lending from low interest rates has inhibited money from leaving the financial markets. </p> <p><a href="https://imgur.com/a/eNzFzhp">M2 Money Supply</a></p> <ol> <li>Increased Use of Leverage</li> </ol> <p>The increased use of leverage is indicated by the number of investors who have borrowed money to invest in the stock market. RBA references a survey from MagnifyMoney that showed 40% of individual investors have borrowed money to invest in the stock market. Almost half of those that borrowed has borrowed at least $5,000.</p> <p><a href="https://imgur.com/a/M0uuYHR">Individual Investors Debt survey</a></p> <p>Investors have also added leverage through the increased use of options. Option volume still remains elevated compared to pre-pandemic levels. </p> <p><a href="https://imgur.com/a/ArLgTut">Retail Option volume</a></p> <ol> <li>Democratization of Markets</li> </ol> <p>Every bubble has a component of “everyone gets to play”. Chat boards, increased ease of trading, and meme stocks all make this quite evident. Below shows how trading has shifted to individual stocks, leverage is on the rise, and Google searches are driving option volumes. </p> <p><a href="https://imgur.com/a/BGGEoeI">Democratization of Markets</a></p> <ol> <li>Increased New Issues </li> </ol> <p>Investors’ desire to hold stocks or the bubble asset grows and the amount of new issues in a market grows significantly during bubbles. Cheap financing and issuance costs are driving the flood of SPACs and IPOs. Many of these new issues are tremendously speculative and serve the issuer more than the investor. The number of SPAC IPOs and the size of them have both popped. </p> <p><a href="https://imgur.com/a/etMKycD">SPAC volume and size</a></p> <ol> <li>Increased Turnover </li> </ol> <p>Trading volumes tend to rapidly increase during bubbles like day trading popped during the Tech bubble and flipping houses became the rage during the housing bubble. </p> <p><a href="https://imgur.com/a/pylJXwh">Total Trading Volume is elevated</a></p> <p>RBA goes on to emphasize this does not mean the entire market is at risk. They point out only 3 sectors have outperformed the market over the last 3 years (Tech, Comm Svc, and Cons Disc). The rest of the sectors and small-caps have been left behind. </p> <p><a href="https://imgur.com/a/I8TvxAl">Sector Performance</a></p> <p>Lastly, the bubble assets usually take a long time to recover. It took the NASDAQ 14 years to recover from the Tech bubble. </p> <p><a href="https://imgur.com/a/oWtA3B7">NASDAQ post Tech bubble</a></p> <p>However, they also demonstrate timing the bubble is not necessary. You could have been 3 years early selling bubble assets and buying the undervalued segments of the markets and still came out ahead during the Tech bubble. </p> <p><a href="https://imgur.com/a/yrT0fOa">bubble vs anti-bubble assets relative to 2000 peak</a></p> <p>there are valid criticisms to these points but we as humans can often justify why this time is different when it may not be. So are we in a bubble or are markets really changed forever? </p> <p>Link to the full commentary: <a href="https://rbadvisors.com/images/pdfs/RBA_Insights_Bubble_06.21.pdf">Bubble? 5 for 5</a></p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/JLARGE53"> /u/JLARGE53 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/qnzzmj/richard_bernstein_5_conditions_of_a_bubble_are/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/qnzzmj/richard_bernstein_5_conditions_of_a_bubble_are/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p>I first want to state I don’t know if I agree with Rich or not but I value his insights and he makes a compelling argument. Second, bubbles are inherently difficult to time and identify because they can persist longer than we may think is rational. I have only been loosely following Rich and his team for a few years because they seem to offer good contrarian points of view and those are valuable to get. Anyone that has long term experience following Rich may be able to provide feedback on his track record. </p> <p>RBA’s team has identified 5 characteristics found in every financial market bubble and they lay out how each one is present in today’s market in the US. I’ll lay out their 5 points and the underlying rationale for each with supporting charts from RBA. </p> <ol> <li>Increased Liquidity </li> </ol> <p>The Federal Reserve has provided enormous levels of liquidity in response to COVID as evidenced by the simple growth in money supply. However this liquidity has been trapped in the financial markets due to bank’s lending and capital restraints implemented post-GFC. Since bank lending is supposed to be the mechanism through which monetary stimulus gets into the economy, their lack of high margin lending from low interest rates has inhibited money from leaving the financial markets. </p> <p><a href="https://imgur.com/a/eNzFzhp">M2 Money Supply</a></p> <ol> <li>Increased Use of Leverage</li> </ol> <p>The increased use of leverage is indicated by the number of investors who have borrowed money to invest in the stock market. RBA references a survey from MagnifyMoney that showed 40% of individual investors have borrowed money to invest in the stock market. Almost half of those that borrowed has borrowed at least $5,000.</p> <p><a href="https://imgur.com/a/M0uuYHR">Individual Investors Debt survey</a></p> <p>Investors have also added leverage through the increased use of options. Option volume still remains elevated compared to pre-pandemic levels. </p> <p><a href="https://imgur.com/a/ArLgTut">Retail Option volume</a></p> <ol> <li>Democratization of Markets</li> </ol> <p>Every bubble has a component of “everyone gets to play”. Chat boards, increased ease of trading, and meme stocks all make this quite evident. Below shows how trading has shifted to individual stocks, leverage is on the rise, and Google searches are driving option volumes. </p> <p><a href="https://imgur.com/a/BGGEoeI">Democratization of Markets</a></p> <ol> <li>Increased New Issues </li> </ol> <p>Investors’ desire to hold stocks or the bubble asset grows and the amount of new issues in a market grows significantly during bubbles. Cheap financing and issuance costs are driving the flood of SPACs and IPOs. Many of these new issues are tremendously speculative and serve the issuer more than the investor. The number of SPAC IPOs and the size of them have both popped. </p> <p><a href="https://imgur.com/a/etMKycD">SPAC volume and size</a></p> <ol> <li>Increased Turnover </li> </ol> <p>Trading volumes tend to rapidly increase during bubbles like day trading popped during the Tech bubble and flipping houses became the rage during the housing bubble. </p> <p><a href="https://imgur.com/a/pylJXwh">Total Trading Volume is elevated</a></p> <p>RBA goes on to emphasize this does not mean the entire market is at risk. They point out only 3 sectors have outperformed the market over the last 3 years (Tech, Comm Svc, and Cons Disc). The rest of the sectors and small-caps have been left behind. </p> <p><a href="https://imgur.com/a/I8TvxAl">Sector Performance</a></p> <p>Lastly, the bubble assets usually take a long time to recover. It took the NASDAQ 14 years to recover from the Tech bubble. </p> <p><a href="https://imgur.com/a/oWtA3B7">NASDAQ post Tech bubble</a></p> <p>However, they also demonstrate timing the bubble is not necessary. You could have been 3 years early selling bubble assets and buying the undervalued segments of the markets and still came out ahead during the Tech bubble. </p> <p><a href="https://imgur.com/a/yrT0fOa">bubble vs anti-bubble assets relative to 2000 peak</a></p> <p>there are valid criticisms to these points but we as humans can often justify why this time is different when it may not be. So are we in a bubble or are markets really changed forever? </p> <p>Link to the full commentary: <a href="https://rbadvisors.com/images/pdfs/RBA_Insights_Bubble_06.21.pdf">Bubble? 5 for 5</a></p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/JLARGE53"> /u/JLARGE53 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/qnzzmj/richard_bernstein_5_conditions_of_a_bubble_are/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/qnzzmj/richard_bernstein_5_conditions_of_a_bubble_are/">[comments]</a></span>Kind Regards R