Bubbles are in the Eye of the Beholder

I wrote about bubbles last month here on the heels of an increasing volume of bubble speak. I don’t know if the volume has increased since then but it feels like the intensity has. At the time, I wasn’t sure we were in a bubble and I’m still not really sure. I think certain assets are potentially in a bubble based on how quickly they ran up, valuation levels and retail investor participation, but I don’t have a formulaic way of determining with any sort of certainty that a bubble does or does not exist. Enter Ray Dalio. He published a post on LinkedIn earlier this week about this very topic that I believe is worth sharing here if you haven’t already seen it. Mr. Dalio’s firm, Bridgewater Associates, takes a data-driven approach evaluating several measures that were common to previous bubbles. Mr. Dalio states his process isn’t 100% accurate in identifying bubbles, but by monitoring the common factors from previous bubbles and their respective levels we can gain important perspective. His aggregate bubble gauge is in the 77th percentile for the US stock market versus 2000 and 1929 when the bubble gauge was in the 100th percentile. We’re still a bit below 1929 and 2000 levels. The post is definitely worth a read.

Barry Ritholz also commented on Mr. Dalio’s piece earlier this week, laying out his own subjective criteria for a bubble which I also think is worth a read.

Confirmation bias alert. I’ve been skeptical of the bubble claims that have been made so naturally I’m gravitating towards analysis and commentary that claims we’re not in a bubble such as Mr. Dalio’s and Mr. Ritholz’s commentaries. While I agree valuations are elevated and risk along with them, I’m not convinced we’re in a bubble of epic proportions. Rising rates are a larger concern from my perspective, the impact of which we have observed over the past week or so. If rising rates push stocks down then I assume the bubble advocates will claim that they were the pin that popped the bubble. We’ll only know in hindsight, but regardless, rising rates are a major concern.