This is a tech bubble, when's the crash?

Pro tip: confirm reader bias, then act like you just don't care. Styling it out, we have the West Coast index provider Research Affiliates declaring: “Yes. It's a Bubble. So What?”

Its contribution to the bubble-angst-chill genre includes such gems as:

perhaps bubble-like prices can be perfectly rational as long as we accept curiously high volatility in the curvature of investors’ utility functions.

And:

the market constantly creates single-asset micro-bubbles, isolated examples of extreme mispricing which require severe right-tail outcomes to justify the asset’s price.

Stick with it though, as there's some great stats in there which get at a hindsight view of what constitutes a bubble. If many years later it proved to be a terrible time to buy, then it was probably a bubble:

At the beginning of 2000, the 10 largest market-cap tech stocks in the United States, collectively representing a 25% share of the S&P 500 Index—Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun, Qualcomm, and HP—did not live up to the excessively optimistic expectations. Over the next 18 years, not a single one beat the market: five produced positive returns, averaging 3.2% a year compounded, far lower than the market return, and two failed outright. Of the five that produced negative returns, the average outcome was a loss of 7.2% a year, or 12.6% a year less than the S&P 500.

Today think Netflix or Tesla, which Research Affiliates' Rob Arnott and Shane Shepard see as one of those micro-bubbles that illustrates another truism of the phenomenon: buyers must think their actions are rational. It seems unlikely all cars will be electric in a decade and Tesla will make a significant percentage of them, but clearly some investors buy into the grand plan. As Rob and Shane write:

there will always be a cohort that says, “This is no bubble!”

Which brings us to holders of cryptocurrencies and blockchain-y tokens. Those traders might be interested in a lesser-known bubble in the Zimbabwean stock market, which largely ceased to exist after its value dropped 98 per cent in a week. Right-click to open a larger version in a new tab:

Still, the question which really matters is much bigger: is the US stock market in a bubble?

In terms of warnings and worryings, the world is not doing much ~~soul~~ searching. Here's the Google Trends data for the term “market bubble”:

It turns out the peak of interest was June 2005, when there was a prescient but rather early feature on house prices in The Economist:

Unlike some of the other cover stories, the analysis bears up pretty well:

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.

We should also credit Robert Shiller. The Yale professor's book, Irrational Exuberance, which predicted the dotcom crash, had just been republished with an update on the housing market. A Barron's feature on his pessimistic forecast for house prices came a few days after the Economist story.

Still, the recent December peak in Google searches for “market bubble” was the highest since 2006. Possibly of note is that Canada shows the most interest in the term, with a crest of inquiries last May, around the time of the Home Capital Group crisis. The country's housing market has been somewhat bubble-like, but the searches could also reflect a surge of interest in bubble tea.

Taking another method with a longer history, general media usage of the term “market bubble” peaked in 2003, according to the Factiva database, perhaps due to much writing about the dotcom aftermath. The most recent surge came in 2015, when worries about China spooked many investors and prompted an August spike in stock market trading activity:

It may be that many have given up sounding warnings. Attempting to predict the end of a stock market bubble is notoriously hard, and has proved many a pundit wrong.

Research Affiliates has a point when it comes to big tech, however:

At the end of January 2018, the seven largest-cap stocks in the world were all tech fliers: Alphabet, Apple, Microsoft, Facebook, Amazon, Tencent, and Alibaba. Never before has any sector so dominated the global roster of largest market-cap companies. At the peak of the tech boom, four of the top seven companies by market cap were in the tech sector, and at the peak of the oil bubble, five of the top seven were in the energy sector. Only the Japanese stock market’s bubble at yearend 1989 has matched today’s tech sector dominance of the global market-capitalisation league tables.

Take the long view, and it won't be those seven at the top of the table in 2028:

History shows that, on average, just two stocks from the global market-cap top 10 list remain on the list a decade later. The two survivors almost always include the number-one stock. But the number-one stock has never been top dog a decade later, ultimately underperforming and moving lower in the list. The second surviving stock has 50/50 odds of beating the market. If this history repeats, nine of the top 10 market-cap stocks will underperform the market over the next 10 years, and just one has a 50% chance of underperforming.

We should probably mention that Research Affiliates has an interest, among other things, in the business of indices not constructed according to market capitalisation, as most tend to be.

Hence, perhaps, the so-what sentiment to the big-tech bubble. For two years after March 2000, the peak of the dot com boom, the average US stock price actually rose about 7 per cent, while the S&P 500 was losing almost a quarter of its value as the biggest companies plunged.

Still, the average US stock price did then proceed to drop 36 per cent. Everything goes wrong for a bit in the end.

Further Reading:
Amazon is not a bubble - FT Alphaville
Is Google cheap? - FT Alphaville
Canada's housing market flirts with disaster - FT