Today we will look at the results of last week’s DataTrek Asset Price Bubble Survey. Thanks to all who participated! We had a total of 394 responses, with the vast majority coming from the DataTrek community (98 percent). To the 9 people who responded from social media and are seeing our work for the first time with this note, a hearty welcome.
We’ll go through the questions in the order they were posed, highlight the most common replies in bold and offer our thoughts immediately after each point. The percentages we list may not add to 100 due to rounding.
Q #1: Think back across your professional/personal investment career; how many asset price bubbles do you think you’ve seen in total? (Choose one)
- 0 – 2: 22 percent
- 2 – 4: 49 pct
- 4 – 6: 20 pct
- 6 – 8: 4 pct
- 8 – 10: 2 pct
- More than 10: 4 pct
Our take: the term “bubble” carries a lot of baggage, so we wanted to start off with a baselining question to determine if respondents see them as pervasive/common or relatively rare. Since our average community member is 40 – 60 years old, the modal response could easily have been 10 or more. Instead, it was 2 – 4. This tells us that a “capital B” bubble signifies an asset price dislocation that, when it unravels, creates a memorable systemic shock.
Q #2: Which statement best fits your personal definition of an asset price bubble? (Choose one)
- The asset’s price has risen too quickly relative to fundamentals: 34 percent
- Valuations simply make no sense to me: 30 pct
- Low quality assets enjoy access to capital at similar terms to high quality assets: 19 pct
- Uneducated investors seem to be setting the marginal price: 15 pct
- The financial media is giving the asset excessive attention: 3 pct
Our take: there was no single definition of a bubble that captured a majority of responses. Even the 2 most popular – rapid price appreciation and valuation – did not get 2/3rds of the votes. People give the Fed a lot of grief for saying bubbles aren’t easy to spot ahead of their eventual unwinding, but the results here show even defining “bubble” is not straight forward.
Q #3: In your opinion, roughly how much of a premium to underlying value defines an asset price bubble? (Choose one)
- At least a 100 percent premium: 50 percent
- At least a 50 percent premium: 45 pct
- At least a 25 percent premium: 5 pct
Our take: we were a little surprised at the charitable nature of these responses, because half of respondents don’t think an asset is in a bubble unless its fundamental value is half (or less) of the last trade. Our inclination is to say this is due to the relatively long tenure and experience of the typical DataTrek community respondent. Valuation is as much art and psychology as science, and no thoughtful investor thinks math like PE ratios is an edge. Our personal definition is a +50 percent premium, which we used in a later question.
Q #4: In your opinion, which of these assets (if any) fit your personal definition of an asset price bubble at today’s price levels? (Check all that apply)
(Recall that we don’t use the full name of the popular online currency that starts with the letter “B” since email systems don’t like the word and mark messages as spam or block them altogether. We just call it “B” in these pages.)
- “B”: 283 votes
- US Large Caps (S&P 500): 96 votes
- US Small Cap Stocks (Russell 2000): 64 votes
- Emerging Market Equities: 17 votes
- Crude Oil: 12 votes
- Gold: 3 votes
- None of these assets are in a bubble: 71 votes (out of 394)
Our take: 82 percent of respondents feel there is a bubble in at least one of these assets, and of those 88 percent say it’s in “B”, which is the big takeaway from this question. Other popular choices were US large caps (30 percent of those who saw a bubble) and small caps (20 percent). EM stocks, oil and gold don’t generally hit respondents’ definition of a bubble.
Q #5: Thinking now specifically about debt bubbles, where markets misprice fixed income instruments relative to the risk of eventual repayment, do you think any of these are in a bubble currently? (Choose all that apply):
- US sovereign debt: 110 votes
- US corporate debt: 103 votes
- European sovereign debt: 93
- Chinese corporate debt: 84
- Japanese sovereign debt: 60 votes
- None of these are in a bubble: 202 (out of 394)
Our take: respondents were split 49/51 on whether there’s a debt bubble in any of these major assets, with a very slight “no” bias. The two most common responses were both in US fixed income asset classes, which we would chalk up to both Federal and corporate debt issuance during the Pandemic Recession. These have been far larger than the other choices offered in this query. If we had asked this question a year ago, we suspect European and Japanese sovereigns would have gotten more votes than US sovereign/corporates. The world has clearly changed, and that’s something to keep in mind in terms of the recent selloff in long-dated Treasuries.
Q #6: Do you think Federal Reserve policies over the last year have created any financial asset bubbles? (Choose one)
- Yes: 71 percent
- No: 29 pct
Q #7: Do you think US fiscal policy over the last year has created any financial asset bubbles? (Choose one)
- Yes: 62 percent
- No: 38 pct
Our take: both questions saw a healthy majority of respondents say US government policy has created asset bubbles, but the Fed is getting more of the blame for creating them. It is called a “Fed Put”, not a “Fiscal Policy Put”, after all.
Q #8: SPACs have become quite popular recently. Does their increasing use as a financing vehicle signify a bubble in larger parts of the US equity market? (Choose one)
- Yes: 60 percent
- No: 40 pct
Our take: we were surprised this one was as close to 50/50 as it was, given all the press around this topic. If we had asked a follow-on question about “is the larger bubble you’re thinking about in EVs/AVs and other disruptive tech stocks?” the overwhelming answer would very likely have been “Yes”.
Q #9: How much do you worry about any current asset bubbles you may be watching posing a systemic risk to either capital markets or the US/global economy? (Choose one)
- A great deal: 10 percent
- A lot: 19 pct
- A moderate amount: 41 pct
- A little: 25 pct
- None at all: 5 pct
Our take: there’s bubbles and then there’s BUBBLES, and respondents see the current environment as much more the lower-case sort than all-caps. Given the amount of attention on this topic in recent weeks (the reason we did this survey in the first place), seeing less than 30 percent of respondents answer “a lot/a great deal” was surprising. Perhaps this is a function of the “Fed/Fiscal put”, or confidence in a global economic recovery, or a belief that the current bubble assets are not large enough to upend things if they break. For what it’s worth, we’d be in the “A lot” camp, but mostly because that’s what clients pay us to do. We ferret out the downside cases. The upside usually takes care of itself, after all.
Q #10: Let’s assume for a moment that US stocks are in a bubble. What, in your opinion, would be the MOST LIKELY catalyst that pops that bubble in the next 1 – 2 years? (Choose one)
- Federal Reserve raising rates 40 percent
- Higher long term interest rates: 30 pct
- Disappointing US/global economic growth in 2021 – 2022: 25 pct
- Discovery of corporate fraud at a/several high profile companies: 5 pct
Our take: these responses explain quite neatly why stocks sold off last week as 10-year Treasury rates moved higher. Even though the Fed has promised to keep rates low until there is a robust recovery, it’s reasonable to expect the long end of the curve to move first. And the more rates rise, the closer we are to a Fed rate up cycle. For what it’s worth, Fed Funds Futures for December 2021 have cut their odds of a rate increase by then to just 2 percent. Last week they were at 10 percent.
Q #11: If I told you that US stocks were in a bubble and that it would burst within a month, which asset would you buy today? (Choose one)
- Cash: 52 percent
- 10 Year Treasuries: 21 pct
- Gold: 16 pct
- “B”: 5 pct
- US Investment Grade Corporate Bonds: 4 pct
- Silver: 3 pct
Our take: Cash was the preferred hedge among respondents, and for good reason. Yes, Treasuries usually rally in a crisis but at present there’s the question of future inflation to consider. This may dampen their hedging qualities. As for the other options, just remember that correlations go to 1.0 in a crisis for everything except cash.
Q #12: Do you think US Big Tech stocks are currently overvalued, and if so by how much? (Choose one)
- They’re in bubble territory (+50 percent overvalued): 16 percent
- They’re quite rich (20 – 50 pct overvalued): 55 pct
- They’re pretty fairly valued (+/- 20 pct of intrinsic value): 28 pct
- They’re undervalued: 1 pct
Our take: even though these results may appear benign, some 71 percent of respondents think Tech is at least 25 percent overvalued. This explains a lot about why the S&P 500 got so many bubble votes in Question #4.
In summary, three things really stood out to us from these answers:
#1: The S&P 500’s fast move off the March 23rd, 2020 lows combined with current lofty valuations are exactly the sort of datapoints that spark “bubble” chatter because these 2 features were at the top of respondents’ personal definitions (Q 2). Given how well Tech has done, that observation is especially true for this sector (Q 12), as even more so for its frothier bits (Q8). And since higher interest rates are generally bad for high multiple equities, they will deflate overvalued Tech stocks even if they’re not necessarily in bubble territory (Q 10).
#2: At the same time, respondents are not generally worried about an asset bubble so large that if it bursts the US/global economic recovery post-pandemic will grind to a halt (Q9). That’s why we’re seeing cyclical groups outperform, and that trend should continue. This may not be enough to keep pushing the S&P 500 higher, however, and our 2010 Playbook says we’re in for a few months of churn as this Tech-to-cyclicals rotation occurs. We recently read that a high-profile sell-side strategist said the VIX was in a bubble and had a good laugh about that. As we’ve seen, it is not.
#3: “Bubble” is such a powerful, emotional word that it can skew our perceptions of reality:
- At the start of the survey (Q1) we asked respondents how many investment bubbles they had seen in their lifetimes and most (71 pct) said between 0 and 4.
- Many of the same respondents then called out “B”, US large caps, US small caps, US sovereigns, US corporates, and SPAC-related equities as being in some form of a bubble right now.
- That’s a total of 6, which is obviously more than 0 – 4.
And that’s why we try to use the word “bubble” sparingly in these notes… Because once you start looking for them they’re everywhere, and nowhere, and somewhere in between. Better, we think, to leave that word to one side and just look for improving/deteriorating fundamentals instead.