I sense that a crash in global markets is imminent. Not a startling revelation, of course - lots of people are saying the same thing. Indeed, prices across asset classes and across the world are hitting record highs.
High does not mean unsustainable, however, and no one can say for sure that they know where the bubble is stretched too thin. As was sharply portrayed in The Big Short, markets can stay irrational far longer than anyone can stay solvent. The bubble may burst tomorrow, or it may burst in 5 years, or it may deflate slowly over several years - who knows?
Where will the contagion start? The unicorn tech bubble is one obvious possibility. Incredible valuations on companies that have made nothing but massive losses recall the dot.com bubble at the turn of the century. On the other hand, (1) most of the unicorns are not yet listed (although IPOs have happened/are in the works for a number of the biggest names), perhaps limiting their impact on public markets (2) most of them have significant revenues, unlike the dot.com companies which truly had no more than glossy slide decks, and (3) it is perfectly possible, as Amazon has shown, that profits do gush in at the end of a long tunnel where tech is concerned.
Anyway much has been written about tech unicorns and the possibility of a bubble. What I really think is a risk that has flown under the radar is the “automatic” or “mechanical” investment trend that has really exploded in the past decade. ETFs, regular savings plans, “roboinvestors”, Robin Hood, dollar-cost averaging - people are lapping these up like there is no tomorrow. The common theme of these investments is that people are mechanically putting money into equities, repeatedly and regularly, with little regard for the fundamental value of the underlying companies, driving their prices up. And prices running ahead of fundamentals is ingredient number one in any bubble.
It does sound counterintuitive that ordinary hardworking folk squirrelling money away for retirement or their kids’ university education are actually fuelling an irrational bubble. Furthermore, ETFs and the abovementioned regular savings plans are precisely meant to diversify and reduce risk. However, I would argue that the mechanical investment techniques recently encouraged by governments, financial bloggers, and banks is as irrational as any tulip or Beanie Baby craze.
People are treating ETFs as savings accounts - $100 a month, $1000 a month in SPY/IVV/VOO, or ES3 in the Singapore context. The returns are good, well over any savings interest rate and the inflation rate, and they happily continue putting money in. Everyone from students to working class folk are doing the same thing. On any investment forum, almost every day there’s someone asking “I’ve saved up $2000/$20,000/$200,000, where should I invest?” And the consensus answer is almost always “ETFs”. Just because the money is spread out over many different equities doesn’t mean it can’t be irrationally risky. The whole market can be a bubble (remember, ETFs ultimately hold the underlying, whether directly or by proxy).
I fear the effect this time could be as bad or worse than in the past. For the first time, huge numbers of ordinary retail investors could see their savings wiped out. Back in 2008 and in earlier crises, the man in the street was affected only insofar as jobs were at risk. This time, the effect of any crash would be compounded by panicked retail investors pulling out their money en masse, akin to a bank run. A “robot run”, if you will. Let’s see how things turn out.
