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The Everything Bubble

The Everything Bubble

Update: 2020-03-11
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On today’s show we’re talk about the Everything Bubble. Bubbles have formed throughout history and all it takes it a pin prick to burst a bubble.


On today’s show we’re talking about all kinds of bubbles and how they form. The year was 1554 and tulip bulbs were sent from the Ottoman Empire to Vienna. By 1593, a botanist in the Netherlands figured out how to create a varietal that would be hardy in colder climates. The tulip mania was on. By 1636, there was a derivatives market trading in Tulip bulb futures. Tulip mania reached its peak during the winter of 1636–37, when some bulbs were reportedly changing hands ten times in a day. No deliveries were ever made to fulfill any of these contracts, because in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt. It sounds silly in retrospect. But at the time, those in the Tulip trade took it very seriously.


Back in 1997, 98 and 1999 we had the dot com bubble. Any business that had an internet component was worth gazillions. Some of those businesses had no revenue, only a promise of bringing internet technology to some aspect of commerce. Buying pet food online made no sense. We can see that in hindsight. But at the time, investors flocked to buy up those shares.


In 2004-2006 we had the housing bubble. In that scenario, it wasn’t really a housing bubble, but a debt bubble. Irresponsible lending practices in the subprime market caused stated income loans to be written against real estate using valuations that had been bid up beyond the level of affordability. The increase in asset prices was fueled by the lending practices. If you couldn’t get an appraisal at that higher value, then the bank shouldn’t lend you the money.


Over the past two years we’ve had numerous bubbles forming. We’ve had businesses that have not generated a penny of positive cash flow like Tesla, Netflix, Uber, Lyft, and WeWork getting valuations in the tens of billions of dollars. Companies that haven’t demonstrated their ability to have a profitable business model were worth gazillions.


We have another bubble in the shale oil business. Shale oil wells have a very steep decline in production volume after they start producing. After 12 months in production, they are typically producing about 15% of the oil that was gushing on the very first day of production. That well might continue to produce for another 20 or 25 years, but at very low volumes. The problem is that the break-even on the debt for that well is a function of the price of oil. At prices below $45 a barrel, these wells will never break even in their lifetime. The only way these oil companies stay afloat is to drill more wells at increasingly higher levels of debt. We’ve had oil prices fall nearly 40% in the past week. These companies will not be able to service the debt on those bonds for long if the price war between Russia and Saudi Arabia continues. 


Well here we are in March of 2020. Central banks all over the world have been pumping liquidity into the system during supposed boom times. These are the actions to be taken during a crisis. But they were being taken during good times. We’ve known for a while that there would be a breaking point eventually. I thought the trigger event would be a sovereign debt crisis. I was wrong. It turns out that the trigger was the outbreak of a virus. The impact of that additional liquidity was to for cash to make its way into the debt markets which in turn was used by companies all over the world to buy back stocks through additional leverage and in turn increase the asset prices in the stock market. Even now, after the pin has burst the balloon, the central banks think they can re-inflate the balloon by pumping more cash into it.


This bubble was not a single asset bubble like before. This is the Everything Bubble. 

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The Everything Bubble

The Everything Bubble

Victor Menasce