We had the dot com bubble at the start of the millenium and the financial crisis in 2008.
Where is the next bubble building and when could it pop?
Markets are now highly correlated – information is plentiful and most people know most of the same things about what is going on, and so make pretty much the same decisions about what, when and how much to buy.
Whether it’s shares, bonds or commodities, the large players all have more or less the same approaches and strategies.
And that leads to a problem.
If everyone were suitably diversified, and held enough different things, then no one thing should be enough to cause a crash.
But this isn’t how it seems to work in practice.
The financial crisis showed that all the major financial players were exposed to the same kinds of toxic products that they didn’t understand.
Like elephants in a rowing boat, when they all tried to get to the other side to escape, the whole thing tipped over and was in danger of sinking.
Governments had to step in and bail them out.
Apparently its easier to let markets blow bubbles and pick up the pieces when everything falls apart than it is to try and stop them before they get out of control, according to Alan Greenspan, once the U.S Federal Reserve Board Chair.
Since bottoming out after the financial crisis in 2008, stock markets recovered steadily and hit new highs.
Many investors, wary of overvaluated stock markets, began piling into bond markets.
That has led to higher bond prices and lower yields. Many bond yields are in fact negative in real terms.
The actual yield, however, is not always the main criterion. Having bonds in your portfolio acts as a hedge against the stock component.
If you could have had a 100% stock portfolio and it would have fallen by 50%, you might feel relatively happy if you actually had half your portfolio in bonds, and the actual drop was 25%.
Bonds have traditionally been your friend when things go wrong.
It’s not at all clear whether high valuations are a threat to markets.
Some people say that if interest rates rise, then all bets are off, markets will crash and values will fall.
Others say that just having valuations move higher is not the problem – the risk comes from increased lending for dodgy purposes.
Or in a slightly more technical words from Jim Chanos, a prominent short seller, “Bubbles are best identified by credit excesses, not valuation excesses.”
The existence of new and risky lending practices, however, is often hard to pinpoint until after they have wreaked havoc on the system.
Until then they are likely to be hailed as the best thing since sliced bread.
The rule of thumb is that a crisis happens every decade and a depression every seventy or so years.
Ten years after the last crisis, we might do well to be wary.