Goldman: There Is No Bubble, There Is No Bubble, There Is No Bubble

March 22, 2021

When the most respected bank in the US feels compelled to publish A 42-page “guide to bubbles and why we are not in one” in response to what is a clear outpouring of client concerns that we are, in fact, in one we repsectfully leave it up to readers to read between the lines and reach the obvious conclusion.

We say that because reading Goldman’s actual lines is quite painful: in his (futile) attempt to convince the bank’s clients that US stocks are not, in fact, in a bubble, Goldman strategist Peter Oppenheimer writes that “in recent weeks there have been growing concerns about a bubble building up in the equity market and across financial markets in general” before eventually concluding that “while there are pockets of excessive valuations in equities, and parts of the market are justifiably de-rating as interest rates adjust, in our assessment only a few of these common characteristics are currently present or being partially met. Importantly, the absence of significant leverage (outside of the government sector) and the early stage of the cycle suggest that the risks of an imminent bubble with systemic risks to the financial system and economies is relatively low.”

The Goldman strategist was kind enough to remind readers that it’s not just a figment of their imagination that things are bubble, as just one month ago China’s top banking regulator Guo Shuging, Chairman of the Banking and Insurance Regulatory commission/party secretary of the central bank, said he was “very worried” about “emerging from bubbles in global financial markets and the nation’s property sector… Bubbles in US and European markets could burst because their rallies are heading in the opposite direction of their underlying economies and will have to face corrections sooner or later,”

To counter the Chinese concern, Oppenheimer shows that while internet searches for the word financial bubble are rising, they are not at the levels that were seen in the run-up to the financial crisis (because google trends are more important than valuation metrics in the reddit age, perhaps).

So how does Goldman assess and measure the risk of a bubble – especially if the bank’s apriori conviction is that there is no bubble – and is evidence of sharply rising asset prices and signs of speculative behavior the same as a bubble?

Well, the easiest thing one can do is look at history: here, as Goldman writes, despite widely varying economic conditions and social and political environments, history is littered with examples of bubbles. Some have had a broader and more far-reaching impact on the broader economy than others. Among the most notable broad-based bubbles that created significant economic consequences were:

1630s – The Tulip Mania in Holland
1720 – The South Sea Bubble in the UK, and the Mississippi Bubble in France
1790s – The Canal Mania in the UK
1840s – The Railway Bubble in the UK
1873 – The Railway Bubble in the US
1920s – The Stock Market Boom in the US
1980s – The Land and Stock Bubble in Japan
1990s – The Technology Bubble, Global
2007 – The Housing / Banking Bubble in the US (and Europe)

Here, Goldman generously inserts a chart…

… which is pretty and all, yet inexplicably fails to shot the biggest bubble of all – that of central bank balance sheets. Maybe they just forgot, or they simply think their clients are all idiots, and as long as nobody mentions the $64 trillion elephant in the room, nobody will care.

But wait, it gets even dumber, because in the very next attempt to refute the existence of a bubble, Goldman says that there are only “a few” consistent hallmarks of financial bubbles, with the majority “characterized by many, if not most, of the following”:

Excessive price appreciation & extreme valuations
New valuation approaches justified
Increased market concentration
Frantic speculation and investor flows
Easy credit, low rates & rising leverage
Booming corporate activity
New Era narrative and technology innovations
Late Cycle economic boom
The emergence of accounting scandals and irregularities

Hilariously, despite admitting that there are bubble signs of 7 out of 9 categories, Goldman claims there has been no emergence of accounting scandals and irregularities..

… even though it was Goldman itself that recently participated in the biggest sovereign bribery scandal of all time (Malaysia’s 1MDB sovereign money laundering fund) where Goldman ended up paying $3 billion for its orchestration of this massive corruption scandal.

If we had to summarize Goldman’s thesis it would be that while pockets of exuberance and excessive price rises increase, they do not necessarily mean that a broader and systemically dangerous bubble is forming more broadly.

In the S&P 500 — the best- performing of the major equity markets — the rise of the past few years has been impressive, particularly in technology, but it’s not nearly as extreme as the explosive rise that accrued during the late 1990s
Fundamental EPS for the leading technology companies and for the more widely owned retail stocks have significantly outstripped those of the rest of the market, so outperformance has been supported by superior growth and fundamentals
The rally has been based on achieved reality, not purely on hope and possibility (Goldman must be referring to the 21x forward PE multiple here which is based on some form of “achieved” future reality).
While high valuations imply lower longer- term returns, they don’t point to a broad-based valuation bubble in equity markets

In any case, it was around point that we gave up on reading more of this drivel, and sent our condolences to the junior analysts who had to work a soul-crushing 100 hours a week (even though there are millions of 25-year-olds who would kill to work 200 hour weeks for half the pay of a Goldman analyst) to put this together.

That said, there is much more in the full 42-page report (available to professional subs in the usual place), but Goldman’s goalseeked conclusion – in case it wasn’t obvious – is that while there are signs of complacency and heightened optimism, the fundamental factors that drive the market and the early stage of the economic cycle would suggest a bubble or bear market are far away.”

While there are pockets of excessive valuations in equities, and parts of the market are justifiably de-rating as interest rates adjust, in our assessment only a few of these common characteristics are currently present or being partially met. Importantly, the absence of significant leverage (outside of the government sector) and the early stage of the cycle suggest that the risks of an imminent bubble with systemic risks to the financial system and economies is relatively low.

Translation: there is a bubble, and it is the biggest Wall Street has ever seen, which is also why the current distribution phase which always takes place before the rug is pulled from under the market, is the biggest anyone has ever seen.