Financial markets are always interesting in the information age because the narratives change even faster than Ali Larter’s mood swings at a family meal in Landman.1
Two years ago everyone was convinced we were going into a recession. It was the most over-forecasted recession of all-time that never happened.
Now no one thinks a recession is a possibility and the worries have shifted to concerns about a speculative bubble forming. We throw the word bubble around too easily these days. The old joke is a bubble is just a bull market you didn’t take part in.
Howard Marks has a new memo out called On Bubble Watch where he shares his definition of a bubble:
In my view, a bubble not only reflects a rapid rise in stock prices, but it is a temporary mania characterized by – or, perhaps better, resulting from – the following:
-
- highly irrational exuberance (to borrow a term from former Federal Reserve Chair Alan Greenspan),
- outright adoration of the subject companies or assets, and a belief that they can’t miss,
- massive fear of being left behind if one fails to participate (”FOMO”), and
- resulting conviction that, for these stocks, “there’s no price too high.”
A bubble is a state of mind more than numbers. Valuations weren’t all that high heading into the Great Financial Crisis but that was certainly a debt bubble of epic proportions.
Marks went on Odd Lots to offer his verdict on the bubble question. He says we’re not there yet:
In my opinion, it lacks the behavioral aspects of a bubble. And I talk about some of them and I say that a bubble is not just a numerical, it is behavioral. And a bubble is really, it’s not a rise. That’s a bull market. It’s not high prices. A bubble is a temporary mania in which people are so agog at things that they throw over all discipline, all caution.
And it just doesn’t feel to me like we’re there. We’re high price, I say lofty but not nutty.
It’s nearly impossible to gauge these things in the moment but I agree with Marks here. We’ve seen a nice run-up in prices but it would be difficult to characterize the current environment as some sort of insane bubble.
One of the hard parts about the behavioral piece these days is the onslaught of speculation within our society. The 2020s have unleashed a groundswell of gambling the likes of which we’ve never seen before. People can gamble on sports, elections, stock options, the weather, crypto tokens, current events and seemingly anything with an outcome. Parlays, zero-day options and memecoins have exploded in popularity.
It’s understandable people look at this type of behavior as a giant red flag.
Maybe it is or maybe we’ve simply entered an era in which gambling is now a more entrenched part of our culture for the foreseeable future.
And this type of behavior does not necessarily translate into the stock market.
While I don’t see signs of a bubble right now I do think the seeds are being planted for one in the years ahead.
Deregulation is coming. Animal spirits are picking up. And the AI revolution has the potential to take us to dot-com like levels of valuations and excess behavior. There has never been a technological revolution that didn’t lead to a bubble in modern times.
Maybe this will be the time but I wouldn’t bet on it.
If artificial intelligence is everything they say it’s going to be, we could be setting up for a massive technological boom that eventually turns into a bubble. AI could trump rates, tariffs, inflation, presidential policies and everything else investors typically worry about.
I cannot predict the future but everything I know about human nature tells me this is a distinct possibility.
We simply can’t help ourselves.
Michael and I talked about bubbles, the DeepSeek mini-AI correction and much more on this week’s Animal Spirits video:
Subscribe to The Compound so you never miss an episode.
Further Reading:
11 Important Things From Howard Marks
Now here’s what I’ve been reading lately:
- The DeepSeek sell-off (JP Morgan)
- Personal finance lessons from Bruce Lee (A Teachable Moment)
- The implications of an aging housing stock (Fortune Financial)
- Americans are spending more to remodel their homes (Axios)
- Learning how to ignore stuff (Abnormal Returns)
- Minimum levels of stress (Collaborative Fund)
- The elevator to success and happiness is out of order (Contessa Capital)
- Price’s Law (Mental Cents)
- An oral history of Four Weddings & a Funeral (Deadline)
Books:
1It’s a little over the top at times but I like this show (on Paramount+). Billy Bob Thornton is fantastic.
