Market Bubbles Are Forming Now: Here’s How To Spot Them
Global trend-watcher, equity investor, and Harvard lecturer Vikram Mansharamani is one of the most sought-after market and investing thinkers around today. His columns for PBS and LinkedIn would regularly get hundreds of thousands of readers until he stepped away in 2017. Now he’s back with a book, Boombustology, that posits a way to spot investing bubbles as they’re forming. Anyone who has invested long enough knows bubbles and bursts happen. The problem is they often are unexpected, occurring when it seems nothing can really go wrong. Mansharamani’s book is engaging on its own in its discussion of historical bubbles, from the South Seas Company bubble that ruined Isaac Newton to Bitcoin’s overheated 2017 and subsequent tumble. More useful for investors is his insight on strategies to avoid losing money, from utilizing theories that inspired George Soros to biological and psychological traps as well as economic policies. I interviewed him in the Lexington, Massachusetts, offices of his Kelan Capital earlier this month.
BC: Why a book about bubbles now? The markets are booming – some are saying the bull market could run another decade!
VM: I’d point to the logic I talk about in the book, from Hyman Minsky’s logic, that stability itself generates instability. Minsky frames this in the domain of credit and credit expansion, but I would characterize it this way: Think of the housing market back in 2006-2008: people went from saying ‘housing prices are stable, let me borrow against it and pay it off over 30 years’ to seeing housing prices constantly rising. So then people said ‘Hold on a sec, let me do an interest-only mortgage because there will always be a chance of refinancing. I’ll just pay the interest and the property value will go up because it always goes up.’ Then that became such a sure thing people started taking negative amortization. ‘I’ll pay 75% of the interest I owe you this month, Mr. Mortgage Company. You take that left over 25% and tack it onto the principal, because my house value is appreciating faster.’ That creates a dynamic where you don’t even need prices to fall, you just need them to stop rising and instability will ensue. And that’s what happened, obviously. Could this bull market go on for another 10 years? Anything’s possible, sure. If that did happen, I would be even more concerned, because you’re building up that much excess and that much more misallocated capital over that time.
Q: Plenty of people have written about historical bubbles. What’s useful about your book is using those as a way to frame a way of looking at current and future markets in a way to help predict future bubbles.
Boombustology is an outgrowth of a class I used to teach at Yale. Years ago, my dear friend and mentor Charley Ellis [founder of Greenwich Associates] came up to me at an event in New Haven and said, “What a tragedy!” Confused, I had to inquire, asking Charley what he was talking about. His answer inspired the book: “It’s such a tragedy only 24 privileged Yale undergraduates are getting your multilens ideas as applied to finance. You need to a book?!”
That’s the origin of the book itself. More importantly, though, is that my framework for thinking about the world is that when you are facing uncertainty, it’s better to be a generalist than a specialist. By necessity, I have adopted a multiple lens approach in figuring out a way to navigate uncertainty. Each and every lens – microeconomics, macroeconomics, psychology, politics, biology – is biased and incomplete, every data point is limited. So in times like today, with massive uncertainty, the solution is triangulation through the use of multiple lenses. Look through one lens, does it look like a bubble? Another? Still pointing to the bubble? Once you look through four or five you can see things really starting to line up.
Q: Is there a bubble now?
There are a whole bunch of dynamics that I believe point to instability. One of the ones I discuss in the book is passive investing distorting markets. One aspect of passive is the emergence of liquidity mismatches because of these deeply held beliefs that liquidity is always going to be there. There are ETFs that offer investors the ability to buy and sell daily and have great liquidity. Yet the underlying securities that make up some of these ETFs aren’t liquid –look at some of the bond ETFs and what’s underlying them. You’re getting these mismatches in liquidity and, combine that with a devout confidence in stability, that’s creating these dynamics that are really unsustainable. What else do I think is a bubble today? Credit is stretched today – some areas where people have covenant-lite loans for instance. I’m really concerned about the Middle East and overconfidence. I think, too, there are serious misperceptions about India, which I discuss in the book.
Q: How about technology? The Nasdaq 100 has more than quintupled the past decade and a bunch of impressive billion-dollar “unicorn” start-ups are being minted still.
Do I think there’s some bubbliness in technology? Yes. There’s this belief that technology is changing everything – and it is, in fact. But there is serious exuberance, as you see with the IPOs coming. Every single unicorn is trying to get out and sell – if it’s that good for them, why are they selling? Technology’s transformative, yes, there are some real earnings there, et cetera. But there is serious exuberance, as you see with the IPOs coming. Every single unicorn is trying to get out and sell shares – if it’s that good for them, why are they selling? Technology’s transformative, yes, there are some real earnings there, et cetera. But there is some concern technology is possibly getting ahead of itself and there are areas that I’m convinced are overvalued. The logic of the book is the future doesn’t have to surprise you, so I’d suggest that technology is an area of deep concern that we need to watch.
Disclosure: The interview has been edited for length. In the past, I performed research and editorial work for Mansharamani’s Kelan Capital. I have no financial stake in his book.