Wall Street Warns "Bubble in All Global Assets"

Stock, Cryptocurrency, Housing, and Commodity Prices Rise Together: "Different from Bubbles Experienced So Far"

[Asia Economy Reporter Park Byung-hee] "People believe their investments have immunity."

Byron Wien, Vice Chairman of Blackstone, the world's largest private equity firm, recently explained the financial market situation where prices of all kinds of assets?from stocks to housing to commodities?are rising despite the COVID-19 situation. It points out that investors are pouring money into assets as if they are confident that asset bubbles are immune to collapse.

According to the Wall Street Journal (WSJ) on the 25th (local time), the New York Stock Exchange's Standard & Poor's (S&P) 500 index has broken its all-time high 23 times this year. The Dow Jones index also hit an all-time high 21 times. It is not just the stock market. U.S. home sales are comparable to the historic boom of 2006, and countries around the world such as the UK, Canada, Sweden, and New Zealand are suffering from soaring housing prices. Cryptocurrencies like Bitcoin and Dogecoin also consecutively hit all-time highs until a week ago.

[Photo by AFP Yonhap News]

WSJ diagnosed that the phenomenon of simultaneous price increases in various assets like now reminds one of the 1920s just before the Great Depression. It also added that the excessive prices of tech stocks recall the dot-com bubble 20 years ago. In both the Great Depression and the dot-com bubble, the stock market eventually collapsed and took a long time to recover.

Jeremy Grantham, co-founder of GMO, who gained fame for accurately predicting the Japanese bubble economy in the late 1980s, the dot-com bubble in 2000, and the U.S. housing market bubble collapse in 2006, said, "This bubble is very different from the bubbles I have experienced so far." In the previous three cases, bubbles occurred when the economy was doing well, but this time market prices are rising unbelievably while the economy is wounded.

As Grantham pointed out, this bubble is different from previous ones. A clear example is the monetary policy of the U.S. central bank, the Federal Reserve (Fed). During previous bubbles, the Fed raised the benchmark interest rate to curb asset price increases. During the dot-com bubble, the Nasdaq index hit an all-time high in March 2000, and the Fed had raised the benchmark interest rate to 5.7%. But now, the Fed is rather allowing asset price increases through stimulus policies.

Wien pointed out that strong fiscal and monetary policies are the reason people feel immune to the risk of bubble collapse. Wien noted that excessive asset price bubbles can be confirmed in any market now. According to FactSet Research, Tesla's stock is trading at a price-to-earnings ratio (PER) of 1130 times. Nvidia is trading at 86 times. Amazon, although much lower than the 5-year average of 175 times, is trading at a high level of 79 times over the past year. Netflix traded at a PER of 195 times over 5 years and is still trading at 62 times.

[Photo by AP Yonhap News]

In the case of Japan's bubble economy, the Nikkei 225 index collapsed after rising to a PER of 60 times in 1989. Of course, it is difficult to point out overheating for the entire market. According to Dow Jones Market Data, the current S&P 500 index PER is about 26 times.

WSJ pointed out that historically, markets with bubbles usually rose more than pessimists expected before collapsing. Just because the current S&P 500 index PER is not excessive does not mean it is not a bubble.

The Shiller Cyclically Adjusted Price-to-Earnings ratio (CAPE) is another indicator to judge whether stock prices are overheated. The current S&P 500 index CAPE is at 37.6, the highest in the past 20 years. The all-time high for the S&P 500 CAPE was 44.2 in December 1999.

In an early this month E*Trade survey, 70% of U.S. investors responded that they think the market is completely or somewhat a bubble. However, last month, U.S. mutual funds and exchange-traded funds (ETFs) saw an inflow of $98 billion, the largest monthly inflow ever.

This content was produced with the assistance of AI translation services.