We begin 2025 with a fresh slate. And while there is talk of the US being in a bubble, what is evident is that very few people seem to think so. Some would say that’s what makes it so. But using that line to claim something is a bubble when it may not be can also be true. Few would agree the UK is in a euphoric phase, as all metrics show it to be undervalued rather than overinflated. A case could be made for the US, but then it has some of the best companies in the world listed there.
The issue with bubbles is that by the time everyone agrees, the price has already crashed. So if you want to call something a bubble – be prepared to look wrong and foolish for some time as the price moves against you. If you’ve ever seen The Big Short (and if you haven’t, I recommend watching it) then you’ll be aware of Michael Burry’s buys of credit default swaps (CDS) on mortgage-backed securities.
You’ll also be aware that the ratings agencies continued to rate these bonds highly even as they were starting to fail. But Burry’s positions led to his main client and other investors being angered by the monthly premiums he had to pay to maintain his short positions and they demanded that he close them. Eventually, Burry is vindicated as the market collapses and Scion Capital’s value increases by 489 per cent. Naturally, you can be sure that very few investors bothered to apologise or thank Burry for his actions. But the story shows the dangers of betting against established trends: Burry was the butt of the banks’ jokes as he set up his positions.