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Market analysts have predicted for most of this year that U.S. markets – stocks, bonds, crypto, real estate and venture capital – are entering a speculative bubble that could burst and cause serious economic pain for Americans and investors globally.
A bubble occurs when an asset’s price increases in a short period to unprecedented levels, driven by demand that results in a price surge often uncorrelated with the asset’s fundamentals.
Eventually, some event triggers a bubble burst rendering the asset held by investors worthless.
Prices of U.S. stocks, bonds, crypto and real estate listings have reached stratospheric levels in an ever-expanding asset bubble in recent months relative to historical levels, some experts have warned.
The stock market is already showing signs of weakness. The S&P 500 has rallied for seven straight months and has not had even one 5-percent pullback so far in 2021.
A cryptocurrency pullback caused by China’s crackdown saw some coins shed as much as half their value in June. Prices on the cryptocurrency tokens have however ticked back up on the back of increased speculation that institutions and some governments are warming up to cryptocurrencies.
Real estate prices have also soared throughout 2021, with home prices rising 19.9 percent year-on-year in July 2021, the largest gain on records dating back to 2000, according to the S&P CoreLogic Case-Shiller 20-city home price index, which measures home values in 20 major U.S. metro areas.
President Joe Biden weighed in on speculative assets and proposed capital gain tax hikes as high as 39.6 percent in his tax plan that would push federal tax rates for some investors as high as 43.4 percent, to help address widening inequality and keep speculators in check.
Here are five risk factors that can blow up America’s asset bubble in stocks, crypto, venture capital and real estate:
As China’s Communist Party cracks down on local and global crypto companies, the country’s brewing financial crisis could send shockwaves to the U.S. and globally. Worries about a possible collapse of Evergrande Group, China’s second-largest real estate developer, had already sent markets down before China announced its blanket crackdown on crypto activities. China has also been hit by power outages that are causing massive factory closures as an energy crisis threatens to cripple industrial output in the world’s No. 2 economy.
U.S. consumer spending has surged as the economy emerged from the covid-19 lockdown thanks to increased mass vaccinations. This has pushed inflation higher than the 2 percent target set by the Federal Reserve. Inflation hit 5.4 percent in September. Fed Chairman Jerome Powell has downplayed inflation risk on the U.S. economy even as several indicators and prices continue to spike
Economists such as gold investor Peter Schiff have warned that the U.S. government has inflated the mother of all bubbles and is now a sitting duck as inflation rises and heightened debt levels threaten the world’s No. 1 economy.
The global supply chain that keeps factories open and goods on the shelves is facing a crisis as the pandemic eases and economies recover. With the holiday season approaching, retailers worry that a global shipping crisis will leave store shelves empty, send prices sky-high, and impact inflation and the U.S. economy. The supply constraint has also affected car and electronics prices as manufacturers cannot produce parts without semiconductor chips.
Crypto has been following stocks. If stocks sell off 30 percent, this could mean a 50 percent broader crypto crash. The correlation between the two has been tight. More Americans are taking out loans against their crypto assets. If the collateral is reduced on a crash, it could cause a chain reaction as assets must be sold to support loans backed by crypto. Crackdowns on crypto by Chinese and U.S. regulators also pose a serious risk to the market.
While U.S. government stimulus helped protect the economy from some of the harshest effects of the covid-19 lockdown, states are now pulling back on unemployment benefits and eviction moratoriums. With the U.S. witnessing a resurgence of covid-19 cases driven by the delta variant, the pandemic could continue posing a serious risk to the economy.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?
