Julian Robertson in an interview today speaks about a bubble being blown by the Fed. Like everyone else, he doesn't know when it is going to pop, but he knows it is going to pop.
A bubble is a serially correlated error on a mass scale perpetrated by a blinded marketplace. Herding if you will.
Which leads me to ask myself the question (which I ask periodically), where do I see bubble characteristics?
What are the characteristics to begin with? Substantial increase in leverage and laxity of constraints wrt to access to cheap capital - leads to misallocation of resources and increase in valuation. Unsustainable and undefensible increase in valuation. Area attracts a large flow of new capital. Industry/sector/country is systematically important due to its size and spreading effects throughout the economy.
In financials? No. Capital has been rebuilt. Lending standards have improved.
In energy? No. The bubble, and there was one in shale, has been popped already. There are dead men walking, but no systematic risk impact on the market.
In technology? No. Not if you look at the balance sheets and valuation of the majors (AAPL, MSFT, SAP, ORCL, QCOM, etc.). I definitely see a bubble in next generation tech (TSLA, NOW, CRM, NFLX, N, etc.) but even many of those have seen their valuations shrink as they grow and market price have come off the boil.
In materials? No. If anything, the bubble has been popped already in that space. Just look at gold, copper, coal, etc.
In industrials? No. Valuation is stretched, but not out of this world.
In consumer discretionary? No.
In healthcare? Don't know. It has had a huge run. Definitely biotech side of sector. But biotech is not a systematically important part of the economy.
In utilties? No.
Dollar. No. That is good for everyone else and the US can handle it. Although if it were to throw the US into recession then that would be bad for everyone.
In bonds? Possibly. Massive move to bonds over last six years. But bonds don't really pose a systematic risk unless the underlying defaults. And most of the new debt is govt.
In China? Possibly. But I've been calling that one for years, so I have zero credibility. Like Julian Robertson I believe there is a bubble (in China), I just don't know when it will burst.
China looks to me as the best potential for a "bubble." The massive run in the Chinese stock market may be a sign of things getting out of control, or it may simply be a sign of a soft landing.
Or, it could be the whole global system which has increased its leverage significantly in the last six years and susceptible to a rise in interest rates.
Perhaps that is it. Interest rate risk is the largest risk out there.
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