Disclaimer — this is in no way my idea. I have picked this up from a number of commentators, not least Ray Dalio, that are much better informed. This is an attempt to summarise some of the key parts of this view. Links to some useful sources are below
Three bubbles and two crises in the last 20 years …
This story starts with the dot com bubble of the late 1990s.
The dot com bubble burst in the early 2000s. Many investors lost money at that point. There were reports of investors taking on debt to buy into the bubble.
Western governments, concerned to avoid recession, had a freer monetary policy. This led to the start of the debt bubble because banks were given a lot of freedom in extending credit. The property markets in many western countries boomed throughout the 2000s. Credit was cheap.
In the 2000s, the problems of the dot com bust, were ‘fixed’ by pushing into the banking system creating a credit bubble.
Then in 2008 the bubble burst and we had the credit crisis. Many banks, and some countries, lost a lot of money and were essentially bankrupt.
Western governments, concerned to avoid financial meltdown, bailed out banks and some countries. ‘Bad assets’ were separated off and isolated. Quantitative Easing programmes were started which took debt assets off banks’ balance sheets and transferred them to the governments. At the same time this pumped cash into investors’ hands which has created the strong market performance across almost all sectors in the 2010s. This started the ‘everything bubble’.
In the 2010s, the problems of the credit crisis, were ‘fixed’ by pumping the system with cash through QE , fuelling the current asset bubble. The problem has been pushed onto governments themselves, creating a mountain of debt.
Where are we now?
As of August 2019:
- Governments are very indebted, and have significant commitments to fund in the future — healthcare, pensions, and repaying the mountain of debt
- Populism has been on the rise, fuelled by a widening wealth gap fuelled by QE — those with assets (the wealthy) have done well and those without have not done well the last decade
- Tensions are rising between countries — trade wars, Iran, even Brexit
Will the current bubble pop soon?
Some analysis and commentators imply that we may be at the top of the current cycle. I’ve attached a few links at the bottom with interesting views that support this thesis.
Of course this is just one view, there are other commentators who believe that the markets can and will continue to rise for some time yet. So you need to make up your own mind.
If it does pop, where can the problem be pushed next?
Some commentators are suggesting that the issue is pushed up into the currency level. A way out of government debt is devaluation and inflation. Inflation erodes away the value of the debt to be repaid, and so allows the debt to be managed down over a period of years and decades.
Other commentators see a starker view which includes geopolitical conflict and defaults on government debt. This pushes the the problem back to the investors who fund the debt via government bonds.
What should I invest in through the 2020s?
If either ‘pop’ scenario comes to pass, Government bonds will be an uncomfortable position to be in as the value would be eroded by inflation. In fact you don’t want to be a fixed lender to anyone in this scenario. Pensioners will also be massive losers in this scenario as much of their income is essentially funded by government bonds.
Equity markets will probably take a dive on the uncertainty, but might later recover well as company revenues will benefit in nominal terms from inflation.
Property may or may not do well. It is likely to benefit in time due to the higher inflation feeding through to property.
Commodities may do well as there is a base demand for them benefit from the uncertainty and the need for the basics to continue. This will be particularly important if geo-political conflict features strongly.
Would the USD remain a safe haven? Perhaps. But if the USD also needs to devalue and there is high US inflation, then this will undermine the attractiveness of being in USD assets. Gold and precious metals with limited supply are likely to do well. Potentially Bitcoin as the only crypto-asset that could be seen as a potential safe haven with a very restricted supply.
Want to read more about this view?
There are many sources of insight into this viewpoint. The following links are informative:
- Ray Dalio blog post on Paradigm shifts — https://www.linkedin.com/pulse/paradigm-shifts-ray-dalio/
- Crescat Capital — some charts illustrating where we may be in the current cycle — https://www.crescat.net/perspectives/current-views/
- Macro Voices podcast — a great resource on macro-economics and how it affects markets — https://www.macrovoices.com/