The Everything Bubble: Overreaction Or Fair Warning?

It's easy to imagine why the phrase "everything bubble" might strike fear into investors across the globe.

Just the name is nerve-wracking. Could there really be a bubble affecting everything? Everything?

Well, maybe. Certain high-level players with strong track records seem to think there is, i.e. Mike Burry, the famous visionary of The Big Short fame.

In this article, we'll take a look at the reasons people believe there's an everything bubble, reasons people believe there isn't an everything bubble, and steps that anyone can take to strengthen their portfolios whether there is one or not.

What's the Everything Bubble?

The everything bubble refers to a broad pattern of overvaluation across asset classes, economic sectors, and geographic regions. In simple terms: thanks to overspeculation, excess liquidity, and persistent near-zero interest rates (until recently), nearly everything is overvalued.

You may have noticed that although inflation is severe and economic growth seems sluggish, asset prices have soared over the past few years. Burry, Summers, and other analysts believe that the Fed's prolonged ultra-low interest rates and unprecedented quantitative easing during COVID have inflated asset prices in stocks, bonds, housing, and other markets to unsustainable levels. They worry this disconnect from reality could lead to a widespread market crash if interest rates continue to rise or we hit another downturn.

On the other hand, some argue that although asset values are high, this is largely justified and growth could continue – keeping the bubble growing for some time.

For example, some current valuations appear to be supported by strong fundamentals. Unemployment rates are low, corporate earnings are high, and consumer confidence levels aren’t so bad. Furthermore, many believe that an “everything” bubble is too broad: the economic system is massively complex and varied, so while some assets may be overinflated, others may not be. For example in real estate, experts note that while property values on the coasts do indeed seem overvalued, others may be undervalued, such as cities in the Midwest and other regions.

Regardless of the whether it’s an everything bubble or just a series of smaller, more isolated bubbles, it’s clear that decades of easy-money policies, massive money printing, and rampant speculation will eventually have consequences. The proverbial chickens are going to come home to roost sooner or later.

If there is a bubble, what caused it?

The everything bubble - if it does in fact exist - is due to a combination of factors that have created a perfect storm of economic circumstances.

Long-term near-zero interest rates

The Federal Reserve kept interest rates at near-zero for over a decade in order to stimulate the economy after the 2008 financial crisis. From the end of the crisis to the end of the pandemic, the Fed made easy money a cornerstone of its policy. Low interest rates and easy credit tend to make people think they’re playing with house money and encouraging investors to take on more risk.

Seems strangely familiar, right? Wasn’t easy credit and loose monetary policy a factor in the 2008 crisis?

Massive liquidity injected into the markets

Another driver of the everything bubble phenomenon could be persistent fiscal stimulus, which peaked during the pandemic but has actually been ongoing for decades. The Fed's bond-buying programs, known as quantitative easing, have injected trillions into the financial system over the past few years.

This extra money didn’t do much to help ordinary citizens stay afloat through the COVID-19 lockdowns, but it did have an outsized effect on markets, driving asset prices to unsustainable highs.

This enormous liquidity has filtered to virtually all asset classes, even alternatives like crypto. Some say that certain assets like NFTs might never have existed if not for the excess liquidity pumped into markets.

Rampant speculation

It’s said that market speculation, rather than fundamentals, drives a growing share of trading in assets like stocks and housing. An influx of cheap capital into speculative investments fueled a boom across nearly all investment classes, from stocks and real estate to SPACs, cryptocurrencies, and NFTs.

Further, technology has allowed traders to bet much of their excess liquidity on purchases with questionable underlying value, like NFTs and SPACs, pumping more money into the everything bubble.

How else could people justify paying millions of dollars for .jpegs?

The cost of propping up the economy

Others suggest that this “dangerous reliance on the fed” interferes with price discovery and fair market competition by removing the links between economic prosperity and market behavior. Cheap capital can distort prices or prop up unstable companies by driving investors toward assets that only seem to go up in spite of their unsound fundamentals. Remember the Gamestop short-squeeze in 2021?

Although the logic behind quantitative easing and low interest rates may be sound during crisis times, this constant state of excess liquidity and fiscal stimulus limits the Federal Reserve's power to respond in more difficult economic times.

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What happens if the everything bubble bursts?

If the everything bubble bursts, the repercussions could be dire and long-lasting. It would almost certainly lead to declining household wealth, reduced spending, and slower economic growth. Much like we’ve seen in previous financial crises, a large-scale burst could trigger massive bank losses, disrupt credit markets, and cause extensive unemployment — especially in industries closely tied to the assets in the bubble.

The warning signs of unsustainable growth are visible in many areas of the economy, from rapidly rising tech stocks to stalling housing prices and ballooning government debt. While it's difficult to predict exactly when a bubble will collapse, unprecedented monetary policies from central banks have almost certainly led to inflated asset prices, and a correction could be painful and lasting.

How can you hedge against the everything bubble?

Whether or not Michael Burry is right about the everything bubble, it’s difficult to deny that America's dangerous reliance on low interest rates and fiscal stimulus has led to bloated prices across many asset classes.

Of course, Burry has been warning of a collapse for almost a year. But, to quote The Big Short, it’s entirely possible that he’s “early, but not wrong.”

One strategy that Burry has taken is to allocate heavily to tangible assets such as farmland. He believes, as we do at Farmfolio, that productive assets based in real-world value creation are going to be the big winners over the long term.  And the historic track record of farmland demonstrates that, bubble or no bubble, farmland is a winning play in general terms.

But how to get into farmland? Where do you look? What do you plant? How do you farm? Where do you sell?

These are tough questions. Fortunately, Farmfolio has developed an integrated, plug-and-play farmland ownership system that can answer all of these questions for you. To learn more, click the link below to speak with a Farmfolio specialist: