Key Points

  • Investment bubbles are a regularly occurring feature of the financial markets. The specific set of conditions that have historically characterized the start of an investment bubble appear to be forming.

  • While notoriously hard to pinpoint in real time, a theme with the potential to become the next bubble is “green” infrastructure.

  • The green infrastructure theme spans many sectors and markets around the world.

    Hundreds of years of history shows us that investment bubbles have been a regularly occurring feature of the financial markets. For as long as humans have been trading investments, whether in commodities, real estate or equities, there have been periods of time when the prices of assets have become disconnected from their underlying value. Although bubbles typically are identified after they have popped, there is a repeating pathway characterized by a specific set of conditions that helps to predict them. The conditions appear ripe again for the start of the next investment bubble.

Conditions are ripe

Investment bubbles often begin as a natural byproduct of extremely stimulative polices enacted in the wake of global recessions. They are born of easy money, grow on speculation fueled by a strong fundamental theme and high investor confidence, and collapse as money tightens, usually well after disconnecting from intrinsic value. The specific set of conditions that characterize the start of an investment bubble appear to be forming.

  • Easy money. Currently, signs of easy money abound in the form of record-breaking fiscal and monetary stimulus around the world, abundant private sector investors seeking investments (ex. Special Purpose Acquisition Company (SPACs), the GameStop retail trading frenzy, Non-Fungible Token (NFTs), cryptocurrencies), and the return of corporate share buybacks as excess cash burdens corporate balance sheets after last year’s precautionary pause.
  • Strong fundamental theme. Speculative bubbles generally start with strong fundamental theme accompanied by a high degree of investor confidence in this theme becoming a new paradigm or new normal. Examples from past cycles include: Japanese real estate in the 1980s, tech stocks in the 1990s, and home prices in the 2000s. An investment theme with the potential to become the next bubble may be “green” infrastructure. Investment bubbles often include infrastructure: e.g. the South Sea Company in the 1700s, telegraph companies in the 1800s, railroads in the early 1900s, and internet companies in the late twentieth century. The massive green infrastructure spending plans from the U.S. Biden administration, the ambitious “Green Deal” by the European Union, and China’s proposal to improve on the impacts of economic growth through cleaning up production, all to be deployed in the years ahead, point to a strong fundamental theme with rising confidence by investors in green infrastructure.