Why the Everything Bubble keeps on inflating

SPEAKER_1 (0:00)

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Peter Thal Larsen (0:34)

The word bubble gets thrown around a lot in finance. When investors start to show signs of exuberance, it's usually only a matter of time before someone declares valuations to be unsustainable. At some point, the bubble will deflate. We lived through one of those moments in the years after the pandemic. Now we're in another one, courtesy of the artificial intelligence boom, or should that be bubble? My guest on this week's show has been a lot of time studying, thinking about and writing about investment bubbles, what creates them, how they develop, and what happens when they pop. Edward Chancellor is a financial historian, the author of several books on finance, including most recently, The Price of Time, A History of Interest, and last but definitely not least, a regular contributor to Reuters Breakingviews. And he joins me here in the studio in London.

Edward Chancellor, welcome to The Big View, or welcome back to The Big View, I should say.

Edward Chancellor (1:36)

Thank you for having me, Peter.

Peter Thal Larsen (1:38)

Well, and I say welcome back because actually, I was looking it up and you were, it's almost exactly a year since you were last on this show.

And so, and we talked about bubbles and historical, you know, kind of investment manias and stuff. So, and since then, the S&P 500 has gone up by another 16 percent. SpaceX has completed the largest IPO ever. Big AI startups have been raising money at even more elevated valuations. So, if you had to sort of, if there was a scale of like the worst bear market at one end and sort of March 2000, you know, at the other end, instead of, would you, if you had to sort of call it, where would you, where would you say we are at the moment?

Edward Chancellor (2:23)

Um, well, I would say, as you know, because I've been writing columns for you, that, that we are in the most speculative market of all time. When I say we are in, I'm talking mainly about the American market. The, you know, the European markets are sort of back, sort of semi-dead backwater.

But the American markets on a number of different metrics. Even if you pay no attention to valuation, even if you pay no attention to valuation and pay no attention to the AI story, it still looks hyper-speculative.

And as you know, my, my last column, actually my column before, before one was my penultimate column. Was looking at the revival, the so-called everything bubble that we saw in 2020-21. And I cited, I cited this professional investor called Rich Bernstein who used to be the Merrill Lynch quant strategist, very smart guy. And I remember that in July 2020, Rich had put out a note, which was called bubble question mark, five out of five. And what Rich did is he looked at five measures. So he looked at the monetary liquidity conditions. He looked at the turnover in the stock market. He looked at leverage of people playing in the market.

He looked at new issuance, IPOs, and back then in 2020 Sorry, this note is July 2021, to be clear. And this was the sort of butt end of the sort of SPAC bubble at the time. And he looked at this thing, sort of nebulous, which he calls the democratization of finance. And as I say in my piece, you know, that's an important point because every bubble, by its nature, having to track new people into the market and the financial entrepreneurs, as we call them, the promoters, will often talk about democratization. So there was Rich with making those five points back in the summer of 2021 and within a few months.

Peter Thal Larsen (4:49)

And he was saying all the signals were flashing red, basically? Yes.

Edward Chancellor (4:54)

And what was, and actually what you'll note is he doesn't talk about valuation.

Peter Thal Larsen (4:57)

Yeah.

Edward Chancellor (4:58)

And actually Rich, and it reminded me that Rich, when he worked for Merrill back in the 1990s, he, as a strategist, he didn't use valuation. He actually used a beautiful contrarian measure, which was if all the other Wall Street strategists were bullish, he was bearish.