We are heading into bubble trouble
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We are heading into bubble trouble

Dec 2022
May 2021
Is there a bubble in the financial markets?

The question is: When will it burst? Because if it does not, the natural implication is that it will only get bigger.

The original version of this article first appeared in The Business Times.

Talk of bubbles everywhere — travel bubbles and asset bubbles. Some will burst, some will deflate and then reflate again. Bubbles are a part of life, and cannot be avoided. But it is important to know how to navigate through it — with the help of diversification, proper planning and a long-term mindset.

This is the second time that the travel bubble between Singapore and Hong Kong has been announced, only to be threatened by a Covid-19 outbreak that may cause the bubble to burst before the quarantine-free travel programme even begins. Just when we thought that increased vaccinations would lead to a semblance of normalcy in our lives, new outbreaks of new strains from distant shores arrived on our doorsteps to threaten our daily life. This may be the new norm that we live in — one in which the future remains uncertain and life will never be normal again.

Speaking of bubbles, financial bubbles are also deflating and then reflating just as quickly, driven by news flow, sentiment, and fund flows. The year is only a few months old, yet we have already seen a sharp correction in equity markets due to fears of the tech bubble bursting before bouncing back; a sharp pullback in fixed income markets caused by fear of inflation and rising interest rates; and a sharp fall in many cryptocurrencies from concerns about regulations.

We have also seen the many meme stocks like Gamestop collapse and then rebound, the popular ARK funds suffer extended losses, and Archegos lose US$20 billion in a matter of days.

Yet property and real asset prices are headed to new highs across many parts of the world, and commodities have also seen a major rebound to multi-year highs - with the exception of gold. Gold has definitely lost its lustre as it seems to be permanently losing out to digital gold (read: cryptocurrencies) or other real or physical assets which are not only more exciting but also provide a yield — which does not exist with gold — on top of the returns. It also shows how chasing latest fads in investing does not work. Gold was all the rage for a while, but now it is just so last year.

Despite all the concerns, equity markets have continued to climb a wall of worry and are at or near all-time highs. So, are the financial markets, property market, cryptocurrencies, or commodities in bubble territory?

It is hard to say, but as the commonly used duck test would posit: "If it looks like a duck, swims like a duck, quacks like a duck, then it probably is a duck."

Can we apply the duck test to financial bubbles? We probably can, but the more important question is not whether this is a bubble or not, or how big the bubble is. The question is: When will it burst? Because if it does not, the natural implication is that the bubble would only get bigger.

Normally, asset bubbles tend to get bigger exponentially as they approach a climactic and often cataclysmic end. But that last leg is where all the fun happens — and the biggest returns are seen. That is also what drives the fear of missing out, better known by its acronym: FOMO.

Investing FOMO is driving investment behaviour. That is clearly seen across multiple asset classes and across the various equity markets. Even the Straits Times Index or STI, aptly panned as the "Super Terrible Index" by a friend, has had its day in the sun, rising 30% from its last low in October 2020. While that looks good, it is still barely up from the previous high compared to the MSCI All Country World Index and the S&P 500 index. Both these global indices are more than 20% higher than their previous highs in 2018, and reached new all-time highs this year.

Chart: Straits Times Index underperforms other indices

The STI has lagged major global indices not only throughout last year, but over the past decade. This is not much of a surprise when you look at the type of companies in the STI compared to the S&P 500. Maybe that can be your weekend homework: Use your Apple iPhone to search on Google what makes up these indices, before checking your email on Microsoft Outlook and doing some online shopping on Amazon and then hitting the couch to watch some Netflix. These companies are doing much better as stocks than most of the local companies comprising the STI.

People seem to forget that financial markets are exactly what we say they are: Markets by definition are driven by demand and supply. The demand part of the equation is effectively the quantum of money and liquidity that is available to be invested in the market. If I lose my job and my savings dwindle, then I am not going to have much money to "invest".

However, if I am a freshly-minted crypto millionaire, I may use a few hundred thousand dollars as down payment for my first home and then take some money out and start punting on some stocks in the market.

When every single investment dollar is incrementally boosted by central banks printing more money, and governments are handing out Covid-19 cheques and subsidies, and that money is multiplied in financial markets, then demand will stay stronger for longer than most people think. It does not mean we should chase every bubble. It just means that we should not be bothered by them.

We know that trying to capture the next fad and the next hot stock is not a winning strategy. If this is indeed a bubble, then with each passing week or month, by definition we are getting closer to its inevitable bust.

Therefore we should be doing more to prepare for and to mitigate the risk of the bubble bursting. Time-tested and empirically proven methods such as diversifying your portfolio across various asset classes that are uncorrelated will help mitigate that risk.

Don't put all your eggs in one basket — and certainly not if that basket is Dogecoin. Having a regular savings plan and a strategy to continue to invest in markets through cycles, including being disciplined in downturns, are critical to long-term success.

In the end, the most important thing to have is a long-term perspective on things. Being driven by greed to chase short-term gains is the single most dangerous aspect of bubbles.

You may be able to reschedule your flight to Hong Kong or get a refund from Singapore Airlines (yes, another STI index company). But if the asset bubble bursts and you are not diversified or do not have a plan in place, you cannot blame it on Covid-19 or the blogger who urged you to go all-in on Dogecoin, and who certainly will not be giving you a refund.


Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund. 

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

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