Can anything pop the ‘everything bubble’?

FOR a certain type of investor, last year came as a relief. True, the losses were grim. But at least markets were starting to make sense. Over the previous decade, central banks had pumped out floods of new money to buy bonds. Interest rates were kept unnaturally low, or even negative. The result was an “everything bubble”, a speculative mania in which valuations surged everywhere from stocks to housing to baffling crypto assets. It was never going to end well, and in 2022 it did not: inflation killed off cheap money; the everything bubble popped; asset prices plunged. Some were even approaching rationality. A return to reassuringly dull investing – based on fundamentals, not hype – beckoned.

If this sounds familiar, and you were one of these relieved investors, you may have found yourself wrong-footed by developments over the past few months. It is not just stock markets, though both in America and globally they have risen to within striking distance of all-time highs. It is that risky assets across the board have proved astonishingly resilient to seemingly disastrous news. An index of American high-yield (or “junk”) bonds compiled by Bank of America suffered a peak-to-trough loss of 15 per cent in 2022. It has since recovered half that loss. So has a similar index for junk bonds in Europe. The housing slump already shows signs of petering out, even though global prices have fallen by just 3 per cent from their peak, or 8 per cent to 10 per cent adjusting for inflation, after a boom in which they rose at their fastest rate ever.

The biggest surprise is how well even more speculative assets have held up. Bitcoin – once an emblem of the cheap-money era, seen by many as a digital token with no intrinsic value – has proved indestructible. Anyone who bought it before 2021 and held on is once again sitting on a profit, albeit just a fraction of that which they could have booked two years ago. Even sales of non-fungible tokens, records that represent pieces of digital media, were 70 times higher in 2022 than in 2020, at US$1.5 billion.