Bursting Bubbles – Correction or Catastrophe?
This paper asks questions about bubbles and sets up a framework to answer them. The questions: are there significant bubbles around? If so, what would make them burst? And if they burst will the result be a market correction or an economic catastrophe? What makes the difference?
What this paper does not do is tell you what to think – it is just a framework to inform your judgement.
I will, however, tell you what I think. There are substantial bubbles set to burst within a year. Rising interest rates may be the cause or random events that damage the Trump Administration’s cash generating policies. The “Burst” will cause significant economic disruption. Not 1929 style. But not like the 2001 dot.com bust either. More like the Housing Crisis in 2008. I don’t think the equity market (overvalued as it is) will be the cause of the burst. But it will be the victim of it. The cause lies elsewhere.
To defend against the coming “Burst” I would hold real assets: Energy, Land in safe places (New Zealand not Ireland!), selected Commodities and Gold. I would not treat Europe as a safe haven from the excesses of the US. Some of the potential bubbles are more extreme in Europe. So I would own the currency and assets of China, Japan, Australia and Singapore. This for both economic and geopolitical reasons (see below).
I wrote this paper having had many chats and debates with Andrew Hardacre. Andrew is a retired banker with a background in restructurings. He has also worked in private equity, and at hedge funds and as an Independent Non-Executive Director (INED). He is also one of my last really cultured friends left standing.