Stocktake: Some market bubbles may be bursting

We are witnessing the "greatest speculative bubble of all time in all things", warned Big Short investor Michael Burry last week. Is he overstating things?

Yes, according to Bank of America’s latest monthly fund manager survey. There is some concern – 18 per cent say asset bubbles represent the biggest tail risk in global markets – although investors are much worried by inflation (30 per cent) and a taper tantrum (30 per cent).

However, there’s no shortage of bubbles right now, according to Morgan Stanley strategist Ruchir Sharma. In a recent Financial Times piece, he discussed his research into the 10 biggest bubbles of the past century. Typically, prices double in the year before the peak, with much of the gains occurring in the “climactic” final months.

By those standards, there are at least five current bubbles, including the cryptocurrency market for bitcoin and ethereum; clean energy stocks such as Tesla; small-cap pandemic stocks; a basket of loss-making tech stocks; and special purpose acquisition companies (Spacs), shell companies that go public to raise funds for private acquisitions.

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Four of the five (small caps are the exception) have already fallen at least 35 per cent. Historically, that was an indicator the bubble was bursting, with the median bubble deflating by 70 per cent over two years after the peak.

Burry may be exaggerating, but it’s clear many speculators are playing with fire.