Aug. 22, 2022


We're back to blowing bubbles, the original source of this inspirational podcast, and we deep dive into the force that's driving markets to record highs. Peak FOMO, fear of missing out. (Repeat)

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We're back to blowing bubbles, the original source of this inspirational podcast, and we deep dive into the force that's driving markets to record highs. Peak FOMO, fear of missing out. (Repeat)


Will Page: [00:00:00]Welcome to Bubble Trouble, conversations between the economist and author Will Page, that's myself, and the independent analyst Richard Kramer, where we lay out some inconvenient truths about how the financial markets really work. Today, we're back to blowing bubbles, the original source of this inspirational podcast, and we deep dive into the force that's driving markets to record highs. Peak FOMO, fear of missing out. More in a moment.

So welcome back, Richard.

Richard Kramer:Thanks, Will, and I'm glad to see that you finally learned how to pronounce the word "truths."

Will Page:Three o's or four? So this week, we're just gonna break it back down to basics. We called this podcast Bubble Trouble. The driver was bubbles and why they get themselves into troubles, and we're looking now at MSI all well share index doubling since lockdown March 2020. I want to use that as our- our bridge to try and get a header into bull market, and the second half, aptly, to work out where a bear market might creep in.[00:01:00] 

So just gut reaction. When you learn that the all well share index has doubled since lockdown, what's your gut response to that observation, Richard?

Richard Kramer:Well, first of all, Will, I think when markets go to record highs, it's usually because someone's surprised. And, of course, as we talked about in the early episodes of- of Bubble Trouble, we all thought we were facing an existential crisis last year.

Will Page:I remember.

Richard Kramer:Not just in our lives but in a number of sectors in the market. And whether it was transport, and airlines, and hotels, and that whole travel sector, or it was all sorts of industrial companies. Everybody was worried that life afterwards would never be the same.

Will Page:So if we come back to where we've got to, this bull market reaching record highs, the first question I want to probe is a geographic one. Is it fair to say that this bull market is restricted to the US, and if so, why are we not seeing the same[00:02:00]record highs here in the UK or across Europe?

Richard Kramer:Well, Europe is also reaching record highs. Many emerging markets are not. But I think you have to look at the distribution of types of companies across the markets. Now, remember, the US is now 40-plus percent heavily weighted towards tech companies, and Europe and most of the rest of the world doesn't have those same sort of big tech giants.

Will Page:Mm-hmm [affirmative].

Richard Kramer:They're much heavier on old economy companies. And there's also a perception, rightly or wrongly, that the US economy is going to outgrow markets like Europe and the UK, so you're paying in that market performance for exposure to future earnings.

Will Page:Interesting. I wonder if I could just probe this a little further here. If I think about a typical listener might have some money in a US tracker fund, and some other money in a tech tracker fund. Can you draw me a Venn diagram? How much overlap is there between a tech tracker and a US tracker? Are they kind of much the same thing now?

Richard Kramer:Well, again,[00:03:00]by market value, tech is now constituting well over 40% and perhaps closing in on 50% at this rate of the total value of the US market.

Will Page:Geez.

Richard Kramer:So you just don't have in sectors like banking, or energy, or retail, or industrials, you just don't have companies with $1 trillion or $2 trillion market values. So that US tracker fund, by nature, will have to follow and invest in a lot of tech companies.

Will Page:I remember somebody in San Francisco saying to me, "You might as well just invest in Apple stock, because Apple is a tracker fund." I thought that was a very apt comment as well.

Richard Kramer:Well, and also the other thing you've got to bear in mind is if you look at all of the many companies that have come to market in the past year or more, they've often been tech companies because those are the ones likely most nimble and most able to take advantage of this new environment[00:04:00]that we're in post-pandemic.

Will Page:Mm-hmm [affirmative].

Richard Kramer:Whereas bringing out a- a new energy company or a new industrial company is- is gonna be much less likely to happen.

Will Page:Let's take it from geography from where on the planet Earth is the money flowing into to something which kind of crosses borders, which is cryptocurrencies and the crypto market. Currently valued at $3 trillion from less than $500 billion at this time last year. Break it down for me, cryptocurrencies, crypto market values. A- a lot of listeners are gonna get lost in the jargon here, but what's behind this? Is it the whole retail trading thing? We did a podcast a few episodes ago on Robinhood. Is this what's driving the crypto market?

Richard Kramer:Well, look, I- I'm not gonna be one to preach about or opine on some of the flights of fancy behind crypto, whether people have lost faith in the traditional banking system, or they're looking for alternatives to traditional finance.[00:05:00]But there's a couple of key important points that mark out the differences from the many traditional asset classes.

First of all, we don't have the decades or even centuries of historical precedent about valuations, about business cycles, uh, about company performance that we have to fall back on in- in all those other asset classes. We know how real estate is likely to perform over time, or- or commodities, or, uh, or- or various asset classes within the stock market, but we don't have any of that history in crypto.

And I think another real question that we've got to ask in crypto is how much real money is at stake, because a lot of these assets in alternative currencies may not be backed by full investment. They may be highly speculative. For example, the cost of creating an NFT might be very low, but if someone is willing to pay $3 million for it right out of the gate, well, already you've[00:06:00]created value where, in other asset classes, that process might take years.

Will Page:Interesting. So to your first point, what you were saying is there is no sort of academic, textbook or MBA course telling you how this is gonna play out, so you really are at the races in the sector.

Richard Kramer:While every investigation prospectus will start out by saying "Past performances is no guide to future returns," really, in crypto, they mean it.

Will Page:[laughs].

Richard Kramer:Because even though they start with that proviso, you are gonna look back and say, "Well, gee, in times of economic trouble, if I think we're gonna head into that, real estate maybe outperforms," or "In times of- of bull markets, commodities will underperform, but then rapidly catch up because bull markets suggest that people have a lot to spend, and that spending needs to end up in products, which require commodities." So you can observe the- the long term trends of some of these cycles of asset classes, but we don't have[00:07:00]any of that in crypto because it's so new. And even three or four years ago, half a trillion dollars is a drop in the ocean of the global asset base.

Will Page:So economics is all about trade-offs, and I'm often fond of saying "one man's gain is another man's pain." And if crypto really doesn't have an academic, conceptual ceiling on how high it can go, one sector that seems to be struggling to find a floor, the area that's suffering and feeling the pain of all this, is the bond market. Now, I estimate we're now into year 12 of inflation being above the rate of interest, which you learn at university is one weird thing in economic history which happened that will never happen again.

Richard Kramer:Hmm.

Will Page:We've now had 12 years of nothing but this phenomenon happening. And I struggle to understand the bond market. I'm sure a lot of listeners struggle to get their head around the bond market, but presumably, when inflation is above the rate of interest, you want to get out of bonds and into stocks.

Richard Kramer:Mm-hmm [affirmative].

Will Page:Is that the basic kind of value migration shift that we've seen here?

Richard Kramer:So if we go[00:08:00]back and refer to one of the topics we covered in our earliest episodes of Bubble Trouble, this notion that investing in any asset class is designed to give you returns over time, then a bond is something- is an instrument that was designed to have some of the simplest return profiles. In other words, if you were the sole issuer of bonds to a company, you would lend them 100 of whatever the Scottish currency back in the day was, and they would promise to pay you back with interest over time. And you would have a good sense that, every year, they would pay you one or 10 or whatever the rate of interest was percent more than you had lent them. And that was usually backed by some assets, property or- or industrial assets, or whatever they were gonna use the 100 to buy, that you[00:09:00]would get that money back over time.

Now, that relationship between lending money and expecting a return has broken down on multiple levels, where you have very stable countries, like Germany or Switzerland, having negative yields on their bonds for 50 years. So you assume that by holding Swiss or German debt, that losing only two percent is going to be a good outcome compared to inflation.

Will Page:Crazy. That's crazy. That's upside down economics.

Richard Kramer:It is. But, remember, one of the most important things in any investment scenario is to protect yourself against loss. So maybe you think the Swiss will do a better job of protecting their currency by having it only go down two percent over 50 years versus some other speculative currency that might go down 50%. And the one thing we don't know, coming back to bitcoin and cryptocurrencies, is[00:10:00]whether the world is prepared to stomach the kind of volatility that we see in cryptocurrencies in a regular basis because they certainly would never, as any corporate treasurer would attest, allow or be able to stomach that kind of volatility in traditional currencies.

Could you imagine if the pound or the dollar or the yen fluctuated 10 or 15% during a week? It would be absolute chaos.

Will Page:So I, uh, just one point of clarity. You mentioned back in the day it was Scottish currency. I should remind our listeners, Scotland still does have a currency. And if I check the current exchange spot rate, it's one Scottish pound to the pound. And it's been that way for awhile, 300 years e- exactly.

What thing I want to get into before we get to the break here is that observation, inflation above the rate of interest, and inflation's rising, and interest rates are barely moving. This gap between the two seems to be widening, not narrowing, contrary to economic theory.

Richard Kramer:Mm-hmm [affirmative].

Will Page:It has the potential to widen further because we have this topic, which we're going to get into in[00:11:00]future episodes, and for our listeners, I'm lining up some special guests for this, the great resignation. Like, 4.5 million Americans quit their jobs recently. Hundreds of thousands of British people are quitting their jobs. What I think people are sleeping on in terms of the economics of this great resignation is if you want to get them back into work, you're going to have to bid wages up even higher.

Richard Kramer:Mm-hmm [affirmative].

Will Page:Which is gonna push inflation up even higher, which is gonna widen this gap between the rate of inflation and interest rates. So if people are getting out of bond markets and equities now, what's left is gonna have more exitus in the future surely?

Richard Kramer:So one thing I would hark back to is the fact that, in the past 12 years, since the global financial crisis, all of the major central banks in the US, in Europe, in the UK, in Japan have all been engaged in printing money. So they have flooded the zone in terms of the money supply, and I'm sure when you were studying macro economics as a young lad, you learned a lot about M1 and M2,[00:12:00]money supply, and so forth. And- and the more money you pump into the economy, the natural hum for it is to be- and to see inflation across the board. Whether it's what you paid for a pint of milk or some digestive biscuits, what you paid in university from what you pay today, what happens in wages, what happens to a range of goods, we are clearly seeing inflation across the board in labor, in commodities, in a whole range of areas. And some of that has been sparked or pushed forward by the fact that we effectively took a year out of producing additional products or commodities.

So when all those factories were mothballed during COVID, well, they don't just hop back into production. And, instead, you have a gap in the market, which leaves less supply, and that creates greater[00:13:00]demand and inflation in the prices people are willing to pay for the demand. And that's fundamentally what's happened in the labor market. We have fewer people who want to go back to work, and just as much if not more demand for those workers. And, all of a sudden, people are wondering why wages go up.

Will Page:They key things for me here is that you got this exitus of the bond market, because inflation is above the rate of interest; you've got supply side shortages, which are going to place inflation up more; you've got wage price inflation, which is driven by expectation, which will push it up even more. So this stock market bubble that we're seeing could be bubbling for months and years to come.

Then, there's part two. Let's take the opposite perspective here. Let's see how this could turn from bull to bear. Back in a moment.

Welcome back to Bubble Trouble, conversations between myself and my colleague, Richard Kramer, where we're hitting on the subject[00:14:00]of peak FOMO, F-O-M-O, fear of missing out. The behavioral psychology of what's taken us this incredible bull market over the past 18 months, which has seen the world's stock market double in value.

Now, we're gonna go from bulls to bears. We're gonna flip the coin, and I want to understand what could turn this into a bear market. We should bear in mind, Richard, that our listeners get to hear this two or three weeks after we recorded it.

Richard Kramer:Huh. [laughs].

Will Page:So if this market pops, [laughs] clairvoyant credibility could rise. But let's start with this tentacle discussion. I want to get my head around options trading, which I struggle with. Coals, puts, betting on someone else's stock with somebody else's money. Option tradings are at record highs right now, and they're optimistic option tradings. How do I understand those option trades, and what's it telling me that we're still bidding with other people's money on other people's stock that things are gonna go up? Is that a bellwether for the future? Walk me through it.

Richard Kramer:So the options markets, or[00:15:00]broadly spoken the futures markets, are simply placing bets on what you think might happen in one, six, 12, 24 months' time. And the simplest way to break it down is to say rather than buy a stock with $100 because you think it's gonna go to $120, I'm just going to try to bet on the difference, on the $20, when it goes from $100 to $120. And actually I might be buying an option to protect myself to sell it at $80 in case it falls by $20.

Will Page:Mm-hmm [affirmative].

Richard Kramer:Or I might believe that it could really go to $200, but want to lock in the- some of the gains. So you're really just betting on some event that happens in the future with some time you have in your mind. So either a period of time in the market,[00:16:00]or you can buy options around a company's reporting date, because you think their results are gonna be better or worse than expected. But it's a way to bet on the movements of the market without staking the money directly in the companies themselves.

Will Page:Now, that is clearer than any textbook or lecture I've ever been given, so my thanks to you for that. But the options trading going on right now is, A, record highs, and, B, in a positive direction. What does that tell you? Do you buy into that trend and say, well, clearly this bull market's got a ways to go? Or do you start getting worried?

Richard Kramer:Well, this tells you that, unsurprisingly, no one wants to be left out of a staggering, speculative rally in literally every asset class. And whether it's real estate in every market in the US, or UK, or- or around the world, or a- a range of stocks that are simply at- at[00:17:00]valuation levels that have previously unthinkable, no one wants to be left out. And that FOMO is a powerful force, especially when you feel that specter of inflation haunting you. "Hey, inflation is gonna come along and massively increase my cost of living, and all that savings that I've painfully accumulated is gonna be worth a lot less. So I better hop in, like everybody else, and make a ton of money on the markets, or else I'm gonna be left behind."

Will Page:That's clever. That's really clever, because what we're taking here is not expectations of inflation driving wages, it's an expectation of inflation driving equities.

Richard Kramer:Absolutely.

Will Page:If I'm gonna stay ahead of this curve, and I know that everybody on my street knows that we gotta stay ahead of this curve, so everybody, let's just go have a party at equity so we can all help each other stay ahead of this curve.

Richard Kramer:And back to our previous segment, that may be one good reason why the dowdy old bond market, where 10 year treasuries offer you a percent-and-a-half return,[00:18:00]don't feel too exciting. Instead, I'd rather roll the dice or take a chance, if you will, on the stock market, which seems to go up a percent-and-a-half every day.

Will Page:Mass appeal.

Richard Kramer:And, of course, we all have the Dunning-Kruger effect I think it is where we all overestimate our own competence in areas. We all think we're gonna be the clever traders who know just when to hop off at the top of the rollercoaster, so you miss that sort of sickening, gravity-led drop at the bottom of the rollercoaster ride.

Will Page:It's really, really insightful what you said there, and it- it's not a digression to point this out, but just to say that there's a big re-think in economics now around expectations.

Richard Kramer:Mm-hmm [affirmative].

Will Page:And I think one of the greatest ways to create inflation is to raise interest rates, because what you do is you say to your average consumer that one large, unavoidable cost you've got, your mortgage payments are gonna get more expensive. So raising interest rates forces the consumer to demand higher wages, which is a contradiction of everything we've been taught since[00:19:00]Robert Lucas wrote his famous prize-winning paper.

Richard Kramer:But the flip side is happening right now, because interest rates have been low for 12 years, and yet people are demanding higher wages, and real estate prices are going through the roof, partly as a function that if money is effectively free ... And, by the way, there was some terrific reporting in the UK about how for the wealthy, they can buy those real estate, uh, uh, assets with offshore money where they don't even have to pay tax on them. There's a whole system of enablers allowing them to buy real estate without taking any of the risk. So why shouldn't they park that money in an asset class which seems to be incredibly prone to inflation in the positive way, and how can you go wrong buying those prime London, New York, or Edinburgh properties?

Will Page:And, add to that, that's problematic for policymakers, because much of the activity will be off their radar, right?

Richard Kramer:Absolutely, and it doesn't help the wages of the[00:20:00]ordinary workers because they get priced out of those markets.

Will Page:Let's wrap up with smoke signals. One on the bull side, one on the bear side.

Now, on the bull side, Jim Cramer's often f- you know, CNBC's Mad Money show. He's often fond of saying, "Nobody got hurt taking a profit." This is fear of missing out again. Nobody got hurt getting off that train before it came off the tracks itself. And I'm thinking about this, I'm sure you're thinking about this. Our listeners will be thinking about this. When should you get off that train? And if I was to say to you that $865 billion of new money was pumped into equity funds, three times the previous full year record, I mean, that money's gonna be working its way into markets. Surely there's a way to one. Give me the case for the bulls, Richard.

Richard Kramer:Well, the case for the bulls, if you remember back in the global financial crisis, the Citibank CEO stood up and said, "When the music's playing, you gotta get up and dance."

Will Page:[laughs].

Richard Kramer:And with so much money being pumped into the markets, being printed by[00:21:00]central banks ...

Will Page:Where else could it go? That's what you've taught me in the past 20 minutes.

Richard Kramer:Where else could it go? Well, it certainly- it's-

Will Page:Where and- else can it go? Let's get bullish about bulls.

Richard Kramer:Has gone into real estate. It has not gone into the emerging markets. It certainly has not gone into the bond market. And, of course, this is an issue and it's going to be a fascinating challenge to see how this plays out, meeting expectations, because this is an issue where expectations will rise to meet the stock prices. The higher the prices go, the more the expectations will go up. And, eventually, companies will simply collapse under the weight of those heady expectations because, whereas we had a few companies that came along and changed the world, and we now know them as the big tech companies, now we have hundreds of companies pledging that they're going to be the disruptive ones. And we certainly discussed that at length in previous Bubble Trouble podcasts.

When we've[00:22:00]looked back at bull markets in the past, we saw similarly frothy expectations. But, remember, there were companies that looked like they were the colossuses, or collossi, that could bestride the Earth. I used to call the smartphone market "Apple, Samsung, and the seven dwarves."

Will Page:[laughs].

Richard Kramer:Blackberry, Sony, LG, Motorola, Nokia, Huawei and HTC. Blackberry and Nokia were $100 billion-plus companies, and where are they today? And it just shows that the confidence that we have in our own ability to spot the trends and to rationalize that bubbles that we're seeing can so easily be swept away in less than a decade.

Will Page:So many things swirling in my head on the bull side. Am I gonna be on this train for another matter of weeks, another matter of months, another matter of years? When do you get off? And, to repeat, you don't get hurt by[00:23:00]taking a profit, but the amount of new money pumping into equities with nowhere else to go, the amount of expectations, it feels like there's ways to go still at present.

On the bear side, I want to quote from piece the closing piece of a fantastic article in this weekend's Financial Times. The article's titled The Fully Rally: Fear of Missing Out Helps Fuel Soaring Markets. Robin Wigglesworth on the- the byline. Closing remarks say, quote, "'Everything seems crazy. There are bubbles here, bubbles there, everywhere,' said Erik Knutzen, Chief Investment Officer of Neuberger Berman. 'It's become a cliché, but we really are in uncharted waters. Very unusual territory.'" Sounds like he should be on the podcast with a quote like that, but take me through the bear case. Where should you be spotting those bubbles to know there's a tsunami coming down?

Richard Kramer:So I want to break this down into three specific elements. First of all, no one ever sees the way the punch bowl[00:24:00]gets taken away. For all of the prescient people that you saw profiled in The Big Short, most people at the time felt we were in this Goldilocks market, where things would go on forever, until the global financial crisis hit. And that typically is what happens when you have these periods of what Alan Greenspan in 1997 famously called irrational exuberance. That when everything seems great, no one is going to be standing up and pointing to the flaws in the system.

The second point I think is important is we are now, as I said about crypto, in several different aspects looking at a market without historical precedence because of the retail participation and gamification of the stock market, because we've had never ... Well, we've never had before the outcome of 12[00:25:00]years of effectively zero interest rate policy. Because we've never seen what happened when the world built up these huge stores of assets that we're having a difficult time putting to work in a productive capacity.

So the second point I would say is we don't have a roadmap for how things go sour here because so many of the things that we're dealing with are unprecedented. And I think the third is that there is an element where we're all going to be fooling ourselves even long after the bubble has burst.

Will Page:That's interesting.

Richard Kramer:I mean, someone was left in t- a year later still holding all those stocks that had collapsed 90% because some people are never going to be shaken from their belief. You know about that effect when the leader of the millennial cult is shown to not have predicted the end of the world, and[00:26:00]everybody looks around and says, "Well, what do we do now?" Well, a lot of people just hang onto the same stocks, and we've all had that happen. It's a classic of behavioral psychology that when you anchor on something, when you believe- you've convinced yourself that this NFT with a- some ape in a sailboat is going to be worth $1 billion, that you're gonna hang onto that belief.

And so even that bear case, those first two points that I mentioned, which are we- it's always going to come from left field, something we haven't predicted, and that we don't have a historical precedent for it, there will still be some people after all those things come down that don't want to know, that still believe their NFTs have intrinsic value, or still believe that the crypto asset that turned out to be a- a- a scam is going to be saved or rescued somehow.

So I'll give you one other analogy to close with it. When[00:27:00]you think about these NFTs, think about the art market. So Picasso made a million drawings, 100,000 paintings, and several 100,000 pieces of sculpture in his close to 70, 80 years of works. Museums show a fraction of a percent of the collections they have worldwide. Were the museums to put all of that Picasso artwork on sale immediately, it would crash the market. So you're creating some artificial scarcity to keep the price up.

Will Page:Right.

Richard Kramer:Now, if we have a rush to the exits, as you typically see in bear markets, you will have no longer a period of artificial scarcity. You will have a period of unwanted abundance. And there will be shares for sale left, right and center in all manner of companies. And that's typically what happens in the unwinding of bull markets, that, all of a sudden, people realize they've hit that parabolic[00:28:00]peak, and they better get out before the- the- the steep decline, the collapse, comes.

And all of those museums sitting on all of this precious artwork, they better hope that there's going to be a generation or two generations down the road that still want to buy all that precious artwork that they have, or they may find that their collections and their endowments are not worth nearly as much as they thought they were.

Will Page:Well, I gotta thank you, Richard, because this has been an illuminating one. You know, for me, I take away two things. One, the bear case lacks precedent. Like you said many times, there's no academic book on the shelf telling us how this is gonna work out, and without that precedent, I kind of feel the bull's gonna run away with it. I wouldn't take a profit just yet.

But, secondly, fear of missing out psychology really, really [inaudible 00:28:50] and, Richard, we've spent the past five, six episodes delving deep into hyper competition. It makes me think the next five, six episodes coming up should be delving to the psychology of fear of[00:29:00]missing out. Behavioral economics, not just economics.

Richard Kramer:Absolutely.

Will Page:With that, I want to thank myself, my cohost Richard Kramer. You've been with Bubble Trouble, and see you next time.

Richard Kramer:If you're new to Bubble Trouble, we hope you'll follow this show wherever you listen to podcasts. Bubble Trouble is produced by Eric Nuzum, Jesse Baker and Julia [Natt 00:29:20] at Magnificent Noise. You can learn more at Will Page and I will see you next time.