Ten investment bubbles inflated by a decade of cheap money

More than a dozen years of near-zero interest rates and constant fiscal and monetary easing have blown up huge investment bubbles all over the world. As interest rates rise and central banks tighten their monetary policies, those bubbles are now set to burst. Here are 10 that may go pop — or already have. But which ones have the potential to recover? Under last year’s meme stock craze , traders charged into companies such as AMC Entertainment and GameStop to make quick money and destroy the hedge funds shorting them. GameStop’s share price shot up more than 2,400 per cent to an intraday peak of $483 on January 28, 2021, which was “nuts”, says Ian Lance, co-manager of Temple Bar Investment Trust. “GameStop was a loss-making American video game retailer with just $6 billion of sales. At its peak, market cap hit $34bn and it briefly became the largest member of the Russell 2000 Index.” At the time of writing, it trades at only $26. Will meme stocks rise steeply again? This summer’s bear market rally briefly revived the meme stock craze. It seems you can’t keep a bad idea down. ____________ Electric car maker Tesla also rocketed on a heady cocktail of cheap money, tech froth and founder Elon Musk’s tweets. Its stock rose 1,600 per cent between March 2020 and November 2021. “Tesla was worth as much as the next 10 largest car makers, including Volkswagen and Toyota, despite making up less than 1 per cent of global car sales,” says Mr Lance. Tesla traded at $410 on November 4 last year but has fallen to $238, a drop of 40 per cent, as sentiment shifts and investors worry about Mr Musk buying Twitter. Will Tesla turn around? Mr Musk’s Twitter venture divides analysts, while Tesla is struggling to master self-driving technology. It could be worth a punt but is still expensive, trading at 89 times earnings, against only 6.58 times for General Motors and 5.17 times for Volkswagen. When a group of companies get their own acronym, it is time to be worried. After emerging markets Brazil, Russia, India and China were lumped together and labelled the Brics, the subsequent bubble could only end one way. It was the same with the FAANGs, which stands for Facebook (now Meta Platforms), Amazon, Apple, Netflix and Google-owner Alphabet. All five have been chewed up and spat out by the cheap money bubble. So far this year, Netflix has crashed 59.82 per cent and Meta is down 58.92 per cent. Alphabet (30.05 per cent), Amazon (29.4 per cent) and Apple (20.10 per cent) have also deflated at speed. Will the FAANGs bite back? Each stock should be viewed as single entities in the future rather than a trend, as performance may diverge. Fundamentals now matter again. Meta and Netflix have the most to prove. Government bonds have enjoyed a 35-year bubble, fuelled by constant monetary easing by global central banks. The trend began under former US Federal Reserve chair Alan Greenspan, who intervened to protect markets in times of trouble, a process known as the “Greenspan Put”. The Fed funds rate opened at 14.35 per cent in 1987, the year Mr Greenspan was appointed to the Fed. He left in 2006, when it closed at 5.17 per cent. After the financial crisis, the Fed funds rate hit 0.05 per cent but now stands at 3.25 per cent and could hit 4.5 per cent by the end of the year. Bonds pay a fixed rate of interest, which means they are much less attractive when interest rates are rising and returns on low-risk rival cash are higher. Prices have crashed, with the iShares US Treasury Bond ETF down 12.82 per cent so far this year. Can bonds fight back? Government bonds will no doubt recover, but only when inflation is under control and the interest rate cycle peaks. Investing in Bitcoin and other cryptocurrencies has always been a rollercoaster ride, so recent turbulence is nothing new. Bitcoin peaked at $67,582 on November 8 last year but is trading just below $20,000 today, having lost two thirds of its value. Regulatory uncertainty, price volatility, fraud and platform crashes have all played their part, but the truth is that Bitcoin lives and dies by investor sentiment — and that is highly negative this year. Can Bitcoin bounce back? While the cryptocurrency sector has crashed, it hasn’t burned. When sentiment recovers, Bitcoin is likely to follow, even though nobody has found a worthwhile use for it yet. ____________ We aren’t there yet, with Bitcoin stuck in a range between $17,500 and $25,000, says Vijay Ayyar, vice president of Asia-Pacific and global expansion at crypto wallet Luno. “For a sustained recovery, it would need to close above $25,000.” Non-fungible tokens (NFTs) appeared overnight and were suddenly worth millions of dollars. NFTs are digital assets that cannot be copied, stolen or replicated. Artists use them to create unique artworks, the NBA sold video clips of great moments in basketball history and Twitter founder Jack Dorsey sold a digital version of his first ever tweet for more than $2.9 million. In January, sales peaked at $12.6bn, according to cryptocurrency research company Chainalysis. By June, they had declined to $1bn. Will NFTs rebound? The cryptocurrency crash hit sentiment as many bought them using digital coins. They may bounce back when Bitcoin recovers, but this may only be a token recovery. Investors were so flush with easy money last year that they were willing to buy assets without even knowing what they were. Enter the Special Purpose Acquisition Company, or Spac. Spacs are “cash shell” businesses that list on the stock market despite having no commercial operations, in the hope that something turns up. Hopeful investors poured billions into them, but nobody feels lucky today. Tastes change, especially when it comes to food, and last year many were heralding the death of the traditional burger, replaced with a plant-based version. The hype extended to New York-listed Beyond Meat, whose stock rose steeply to $234 in July 2019 before losing muscle. It opened this year at around $65 and has since fallen another 77 per cent. Today, you can flip Beyond Meat into your portfolio for only $15. Can meat alternatives regain their flavour? When money is tight, people want the real thing. Beyond Meat is mince. Disruptive tech fund manager Cathie Wood was 2020’s stock market star, as her flagship fund Ark Innovation ETF rocketed 152.52 per cent. Its descent began last year, when it fell 23.35 per cent and this year it has crashed another 56.9 per cent, dragging Ms Wood’s reputation south. Can Ms Wood recover? It won’t be easy as the cheap money era isn’t coming back soon. Property prices have rocketed for years but surely must fall as mortgage rates head towards 7 per cent. Moody’s Analytics now expects US home prices to fall 10 per cent from their peak, while Capital Economics predicts a crash of 10 per cent to 15 per cent in the UK. Prices, buyer inquiries and mortgage demand are all slowing, yet markets haven’t melted yet, says Tom Brown, managing director of Ingenious Real Estate. Price performance will vary according to regions and subsections. “It can be quite misleading to look at the market too broadly,” he says. Will property crumble? People still need somewhere to live. A full-blown house price crash may, therefore, be averted, but falls are inevitable.

Ten investment bubbles inflated by a decade of cheap money

As central banks continue to raise interest rates, the most popular asset classes including meme stocks, property and Bitcoin may struggle to regain momentum