Who wants to invest in some kind of boring old blue chip stock
when you can go and buy Dogecoin or you can go buy some great
meme stock and earn 400% on your money in three hours.
These retail investors are cheering the gains with hashtags
on Twitter like AMC strong and Occupy Wall Street.
And you just kind of hope, I guess, that nobody gets hurt,
but somebody is always going to get hurt.
Be afraid, be very afraid.
When valuations heat up to the point of boiling over, prices
can come crashing down, and those investors get burnt, like
Gamestop.
The quote unquote meme stocks turned over Gamestop is the
poster child. Dogecoin.
You know currency nearing tumbling over the past week
alone. It's ahead of Elon Musk's appearance on SNL.
Yeah it's a hustle.
Why didn't you say that, man?
These are often referred to as bubbles in the stock market.
Oftentimes it's surge in pricing, whether it's an asset,
a sector of the market that's driven by exuberant behavior.
So, what bubble is next?
There's a whole series of bubbles going on right now.
Investors are making money on companies that make no money.
That's never a good sign.
But one by one we've checked off every condition that a glorious
bubble needs.
And bubbles, bubbles are known to pop or at the very least
If it's not something that has value and the price is going
deflate.
crazy on it, yes, it's probably in a bubble.
There is no spotlight that shines like the bat sign that
says we are now officially in bubble territory. I wish there
were.
Here's a look at what bubbles may be next a pop and where
investors can find safety. Some bubbles have already burst in
2021. Take meme stocks as an example.
Meme stocks are silly. But we take them seriously. They are
indicative of something.
Gamestop led the meme stock march to record highs soaring
from $17.25 a share on January 4 2021. To its all time high of
$347 a share on January 27 2021. That's nearly a 2,000% surge. It
exploded Wall Street and it's hedge funds. Gamestop is down
about 50% from its high, retail investors and hedge funds alike
lost millions when that bubble popped. Another meme stock that
flew too close to the sun, the more than 100 year old movie
theater chain, AMC Entertainment, AMC is now
trading closer to $40 a share. And that's down about 40% from
its high of $62.55 on June 2 2021. Not to mention meme
cryptocurrency.
Dogecoin was started as a joke, and has become less of a joke
recently.
Dogecoin hit a high of nearly 74 cents on May 7 2021. Since then
it's down over 90%. Now it's closer to 20 cents. It's
important to note that not every surge in prices equates to an
asset or stock being in bubble territory.
Some of the other things that kind of went parabolic in price
doesn't necessarily mean that they were a bubble.
One example of this is what happened to lumber prices. It's
more of a supply and demand story rather than a
quintessential bubble.
Spiking lumber prices were not not part of our bubble thesis.
Lumber is a thing. Lumber is something that you can put your
hands on. It's something that's that that's got tangible value
to it. It's part of a bigger story about what was happening
with the real estate market.
Lumber prices hit a high of $1,670 on May 7, now it's
trading closer to $750. Experts predict other bubbles may be
forming but it's hard to say what is really a bubble in the
moment. The largest possible bubble right now, according to
GMO is in global growth stocks.
We would urge caution, severe severe caution, be afraid be
very afraid of the valuations of these growth companies.
Today, over 25% of the US stock market is trading at 10 times
sales. And the number one story we always hear is Amazon traded
at 10 times sales, which is true. The problem is today they
can't all be Amazons and yet the market is pricing it as all
these companies trading at 10 think we are going to be just as
successful as Amazon and history is not on their side.
One example, the most valuable automaker in the world,Tesla.
The electric carmaker recently crossed the $1 trillion market
cap threshold, with its stock reaching an all time high of
over $1,200 on November 1 2021. That high came after Hertz
announced it was buying some Teslas.
You know, when a rental fleet is buying cars from an auto dealer,
this is traditionally low margin business. But you saw Tesla add
almost 200 billion in market cap in a week span when you when you
see that type of euphoria, in particular name, those could be
potential examples of bubbles soon to burst. You know, and I
believe in the company, I think there's a lot of great runway
for them, but it's trading far beyond intrinsic value is today.
Shares of Tesla gained about 50% in October 2021 and roughly 200%
in the past 12 months.
Not to mention all the all the Bitcoins of the world, which are
a couple of trillion dollars, all based on confidence that
other people will pay for what you have
Bitcoin right now doesn't have fundamental value. So you can
certainly classify that in bubble territory. The investors
in Bitcoin right now are betting on the future of it. They're not
betting on what's happening today.
Famed investor Michael Burry, who is most well known for his
prediction of the financial crisis, told CNBC he isn't
shorting Bitcoin, but he does believe it's in a bubble. Then
there are commodities that have seen skyrocketing prices, kind
of similar to the lumber bubble. For example, steel prices spiked
300% over pre pandemic levels, at one point pricing, over
$1,900.
They have turned into a bubble.
That's up from Steel's pre pandemic price range between
$500 and $800.
There's a supply deficit that's supported prices, and that
supply deficit is easing, going away. And as that happens, we
should see prices move back probably in a pretty violent
manner.
Meanwhile, there's a hotly debated bubble, the housing
market.
The house price is multiple family income, which is higher
today than it was at the peak of the housing bubble. And it's
even higher than the US in Australia, Canada, England, Hong
Kong, Shanghai, you name it. This is a global housing bubble.
During the pandemic, home prices climbed at a record pace. Now
the median price of an existing home is around $350,000. That's
13% higher when compared with October 2020.
Home prices they're now accelerating more than what you
saw during the housing bubble.
I would hesitate to say housing in a bubble. I think we're
starting to build more homes. So I think some of these issues are
supply chain issues. So once once we kind of get past that I
don't believe this is the same story that maybe when we started
the Great Recession.
How does one make money in a growth bubble?
There is a world of opportunity out there right now outside of
the small little bubble sector of tech innovation, disruption,
cryptos that type of thing.
Bernstein told CNBC he sees an urgent need for investors in
some of the most popular trades to diversify.
We think there's three things one can be doing, the three
things are exploit it, avoid it, and dance around it. The exploit
it piece is a strategy where you literally are trying to exploit
this very unique phenomenon. These things happen. They don't
happen often. But when they do happen, it can be exciting. You
can make lots of money in these environments. The avoid it piece
is looking to market neutral type strategies, long, short,
and other long, short strategies in equity, other long, short
strategies and bonds, other long, short strategies and
commodities in currencies. And then dance around it, believe it
or not, despite all our warnings, there are some narrow
pockets of I'll call them traditional equities that look
cheap, there aren't many. And they're a little obscure, but
invest in them.
What I would focus on are value oriented names, you want to look
at companies that are potentially cheaper, where the
market is running right now. I think those are the companies
that will be able to stand the test of time. There are areas
financials there's also areas of healthcare, like United Health
is a name that we like that I think will benefit and be able
to handle a raising interest rate environment. This won't be
the first and last time we'll see bubbles, they will continue
to happen. Just part of cognitively the way we work and
operate. We see opportunities, there's a herd mentality. And
then there's a shift. You know, oftentimes when you're the last
to the party, those those are the folks that really feel the
pain. So it's an unfortunate reality, but that's what we do
as investors.