Earlier this week, I expressed some consternation at the frequency with which the word “bubble” is floated.
(And, yes, that’s an example of a sentence accidentally coming together perfectly — bubbles being things that float and such.)
I turned it into a semantic, borderline philosophical debate, but you needn’t be familiar with Yuval Noah Harari to have gleaned something useful from the linked article. Setting aside the existential questions it posed (and those I posed in the comments) one simple takeaway is captured in the following comedic excerpt:
This is why people like Jeremy Grantham and Stan Druckenmiller have to keep adding superlatives the higher risk assets go. Last summer, Grantham saw a “Real McCoy bubble.” Druckenmiller saw the worst risk-reward for equity in my career.
As both of those legendary investors know all too well, attempting to cast aspersions or otherwise call the top during periods when asset prices are rising in something akin to exponential fashion is a fool’s errand. Grantham explicitly acknowledged as much on multiple occasions in 2020, but that didn’t stop him from trying to do it anyway, if not in deed, then certainly with his pen and in interviews.
The problem with “bubble” as an adjective for speculative excess is that, through overuse and ubiquity, it’s often accepted as an objective term rather than a subjective judgment. When someone with clout calls something “a bubble,” the media, and very often investors, accept that as a statement of fact rather than what it is — namely, one person’s attempt to express an opinion.
We need better, more precise language if we’re to have more success when it comes to identifying instances where exponential gains have become truly unsustainable.
With that in mind, BofA’s Michael Hartnett offered a far superior assessment in a note dated Thursday.
“There are two types of investors: Those who want to get rich, and those that want to stay rich,” he wrote. “When those who want to stay rich start acting like those who want to get rich, it suggests a late-stage speculative blow-off.”
Is that “new”? Well, no. Is it a monumental feat of profundity? Again, no. But, it’s infinitely better than just tossing out random superlatives (e.g., Grantham’s “fully-fledged humdinger”) and it has the advantage of being completely amenable to use with just that kind of balderdash. Indeed, Hartnett employs his own bombast (“late-stage speculative blow-off”) but, perhaps realizing that’s not a scientific term, he gives you a handy (if not entirely new) way to conceptualize of things.
Again: “When those who want to stay rich start acting like those who want to get rich,” we might have a problem.
As you can imagine, he cited Bitcoin, but also CRSP and froth in Chinese tech and renewable energy.
Investors should watch those for weakness, while keeping an eye out for a dollar rally and/or weaker corporate bonds, as those would be signs of tightening financial conditions, BofA went on to say.
Meanwhile, in related news, Bitcoin’s most recent slump collapsed the NAV premium in GBTC:
As WallachBeth’s director of ETFs told Bloomberg Friday, “when there is a big move to the downside, bids tend to drop and that premium ends up collapsing because investors are trying to get out of positions.”
There is perhaps no better example of “those who want to stay rich acting like those who want to get rich” than institutional investors diving into Bitcoin.