Bubble, Bubble: How Bad Will the Bull Market’s Demise Be?

So, the rally has to end sometime, right? There’s always a catalyst, and the past two days’ drops suggest it might be climbing inflation. And, after all, we’ve been hearing for some time that the market is in a bubble, which makes the situation particularly precarious.

Ultimately, the likes of Nvidia and other tech names have done well of late. And the so-called Shiller P/E Ratio is at a very lofty level. This version of the price/earnings multiple, or P/E, is at a level that surpasses the run-up to the 1929 crash and is nearing the record set right before the 2000 dot-com implosion.

Richard Bernstein Associates in June listed five indications of a market bubble, which kind of matches up with the current stock market: massive liquidity, expanding leverage, more amateurs involved in stocks, an explosion of initial public offerings (IPOs), and increasing trading. The firm’s report is as relevant as ever. “The entire market doesn’t necessarily seem at risk, but momentum strategies focused on the market’s bubble leadership seem very risky to us,” the firm’s research note warned.

Sure, people have been saying we’re in a bubble for a while now. But wouldn’t it have been lovely to have gotten out of the market or, at least, the tech end of it, right before the March 2000 end of the dot-com euphoria? If such a prescient investor shifted money to small-caps, energy, or financial stocks, the ensuing bear market wouldn’t have been too bad.

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Bernstein’s five horsemen of the market apocalypse do—let’s face it—have an eerie air of familiarity about them:

Liquidity. Thanks to the Federal Reserve, with help from the Trump and Biden administrations, the money supply (aka M2) has expanded enormously. To offset the degradations of the pandemic, M2 has grown 35% since January 2020. A lot of it, though, wasn’t deployed as bank lending. The upshot, as Bernstein’s paper points out, has been a ballooning of stocks. As the study puts the matter: “The Fed’s stimulus has increasingly been trapped within the financial markets and fueled speculation rather than healthy economic activity.”

Leverage. Margin lending has been on the upswing. According to a MagnifyMoney survey the report cites, 40% of individual investors overall, including 80% of Gen Z investors, and 60% of Millennials, had borrowed to play the market.

Amateurs. In Bernstein’s view, “Despite the associated noble intentions, every financial bubble includes a democratization of the market: ‘Everyone should get to play.’” The paper notes the proliferation of individual investor chat boards, enlarged trading platforms, and meme stocks suggest “the current speculative fervor includes everyone.”

IPOs. Stock-buying fads help bring down the cost of capital—and low, low interest rates have aided that. Not all of these new issues are great, if the barriers to entry are lowered. Bernstein zeroes in on the increase is special purpose acquisition companies (SPACs), which are easy ways to go public with less regulatory scrutiny.

Trading. The zest of meme stock traders harkens back to earlier eras. The Bernstein report recounts how “day traders boosted trading volume during the Technology Bubble and flipping condos spurred turnover during the Housing Bubble.”

If a bright side exists, Bernstein concludes, it’s that just three sectors in the current market have been in bubble territory—technology, communication services, and consumer discretionary—leaving other areas with less distance to fall.

Jeremy Grantham Thinks the Bubble Will Burst … But He Has Some Stock Picks

You Can’t Spot a Bubble, So Don’t Even Try, Says Eugene Fama

Tags: amateurs, bubble, IPO, Leverage, Liquidity, Richard Bernstein, trading

Caisse de dépôt et placement du Québec (CDPQ) announced this week that it has acquired a minority stake in M3 Mortgage Group, Canada’s largest non-bank mortgage originator. The C$389.7 billion (US$309.7 billion) fund says the move exemplifies its deep commitment to real estate and will help the mortgage group expand even further.

CDPQ currently has approximately C$35.5 billion invested in real estate, making it nearly 10% of its total portfolio. Its largest percentage of real estate holdings is located in the United States, which accounts for 43.7% of CDPQ’s real estate portfolio. Canadian real estate is second, accounting for 25.9%.

The price of housing in Canada has been rapidly rising relative to disposable income, with homes increasing in value by an average of 375% across the country over the past two decades, according to an article in the National Post. Canada has relatively low interest rates, which many experts believe to be the reason behind the steep rise in prices.

M3 recently announced that it had reached annual lending volumes of more than C$67 billion and that it intends to reach a goal of C$100 billion in future loans. However, the mortgage group has not always been able to live up to its ambitious goals. Back in May 2018, M3 Chairman and CEO Luc Bernard told MortgageBrokerNews.ca that his goal was to grow the company to a volume of C$80 billion in 2021, which he was not able to accomplish. This is at least partly attributable to the pandemic. In March 2020, housing prices across Canada dipped down almost 10% in just one month, according to the Canadian real estate website WOWA.

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M3 is the parent company of several other mortgage brokers, including Multi-Prêts Mortgages, Mortgage Alliance, Invis, Mortgage Intelligence, and Verico. M3 also acquired Toronto-based real estate investor Pinch Financial in June.