The Everything Bubble / Analysis
Everything is one trade now
Assets that look unrelated are increasingly priced off the same variable, which means diversification is doing less than the portfolio says it is.
The phrase "everything bubble" is usually deployed as an accusation. It is more useful as a description of a mechanism: when a single input drives the valuation of equities, credit, property, private assets and speculative instruments alike, those assets stop being independent, whatever their history suggests.
That input is the discount rate, and its effect is not evenly distributed. The further into the future an asset's cash flows sit, the more its present value depends on the rate used to discount them.
Why correlation rises when it is least welcome
Diversification is a claim about correlation, and correlation is not a constant. It is conditional on what is moving the market. When earnings drive prices, sectors separate. When the discount rate drives prices, everything moves together, because everything is being revalued by the same arithmetic.
A portfolio is only diversified against the risks it was diversified for.
The channels that bind them together
- Index concentration. A small number of very large companies now account for an outsized share of major equity indices, so a passive investor holds a concentrated position while believing they hold a broad one.
- Private marks. Assets that do not trade are valued against public comparables. A public repricing therefore reaches private portfolios eventually, with a lag that flatters reported volatility until it does not.
- Collateral. The same securities are pledged in multiple places. A price move becomes a margin call becomes a forced sale in an unrelated market.
- Retirement flows. Automatic monthly buying supports prices in a way that is reliable while employment holds and mechanical when it does not.
What actually pops a synchronised valuation
Rarely a scandal. Usually one of three things: a sustained rise in the real discount rate, an earnings disappointment large enough to break the story carrying the largest index weights, or a liquidity event in a corner of the market that forces selling of unrelated assets to raise cash. The third is the one nobody predicts, because it originates in whichever structure was quietly holding the most leverage.
The argument on the other side
Rates could fall, earnings could grow into the prices, and productivity could do what the optimistic case says. Long-run equity returns have rewarded people who ignored warnings like this one, which is a fact worth stating plainly in any piece written from the pessimistic side.
The point is not to predict a date. It is to be honest about what a portfolio is actually exposed to, so that a bad year is a bad year rather than a surprise.
What to watch
- Real yields, not nominal ones.
- The correlation between equities and government bonds, which is the assumption most portfolios are built on and which has broken before.
- The share of index returns coming from the largest handful of constituents.
- Margin debt and dealer positioning, which describe how much of the price is borrowed.