The Bubble Economy- When will it Pop?

“So we had these two gigantic bubbles and we were all affected and the culture was...we don’t really acknowledge how affected we were and how the remnants of those events shade our interpretations of present experiences.”

-Phil Pearlman

The world's economies have been rocked by the pandemic, and before the lockdown the world stood at the precipice of a debt bubble.

Bubbles are impossible to adequately gauge when you are inside of them. We can use measures including record high p/E ratios on the S&P and a disconnect between the tens of millions of unemployed worldwide and current assessed economic metrics. How could so many be out of work and not spending in our consumer society with such asset prices?

The Federal Reserve's injection of capitol into the American economy on the scale of trillions of dollars has put us in serious risk of economic bubbles. Major sectors including airlines, manufacturing and hospitality have been gutted while tech and real estate have boomed during the same time frame due to Capitol infusion. Is this not the definition of a "bubble".

The real estate bubble is being inflated as the Federal Reserve has been buying mortgage backed securities and maintenance of 0% interest rates. The mortgage market is being propped up through financial means, and the reduction in real estate supply due to pandemic lockdown has also had a mechanical impact on the market.

With bubbles all around, when will we see a pop? When will we face the music like we did in the Great Recession of 2008? The answer is that we just don't know. The constant infusion of the world's interconnected economies with cash and low interest rates are like steroids. We can estimate that asset prices are inflated after the March crash, but when will it overheat? We shall see.

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Image from Pixabay.

Quote from Phil Pearlman: https://abnormalreturns.com/2014/01/14/ten-quotes-financial-bubbles/