Pop goes the bubble

Where is the next one? [Click to view in browser](. Good afternoon, Bubbles burst. That’s what they do. By their very definition, bubbles inflate prices beyond an asset’s intrinsic value. When reality catches up, the market value quickly craters. It’s like the guy from the office who thought he killed it at karaoke last night after a few drinks… [karaoke GIF] ...only to wake up the next morning with a hangover made worse by a horrendous version of Lady Marmalade. Across the markets, warning signs flash. Crypto already took it on the chin. Trendy tech stocks peaked and plummeted in a matter of weeks. What we all want to know is this: where are the next bubbles? Spotting a bubble Not all rapid price increases constitute bubbles. But how can we tell the difference? It all comes down to intrinsic value. You often hear this term thrown around in the options market. Intrinsic value is a measure of an assets worth that most people agree upon should it be traded on the open market. That is very different from the transactional value. Going back to the Great Recession, houses often sold well below their intrinsic value because no one wanted or could step up to the plate. We saw brand-new homes that most of us would happily buy today for $200,000 sell for $50,000. Even though it may be logical or formulaic, intrinsic value is subjective. Extrinsic value is the difference between current price and the intrinsic value. For example, if that same home now sells for $800,000, it has an extrinsic value of $800,000 - $200,000 = $600,000. The relationship between intrinsic and extrinsic value determines whether an asset class is in a bubble. This brings up an obvious question with cryptocurrencies - What is the intrinsic value? That depends on its utility. Think about it this way. If the world needs $30 billion worth of Bitcoin to conduct business, then its intrinsic value is $30 billion. Anything beyond that is speculation about its future. Lastly, we should note that intrinsic value doesn’t move around too much in the short-term. They’re like a company’s profits. It takes time to grow. Current bubbles Two obvious bubbles come to mind - cryptocurrencies and SPACs. Both already showed signs of bursting. Crypto prices took a swan dive, reducing the extrinsic value of the coins. SPAC issuances dropped from 10 in April from 37, 86, 97, and 109 in December through March respectively. Housing is not a bubble. At least not yet. Why? Because prices aren’t driven higher by an imbalance in supply and demand. Over time, supply will pick up or demand will fall. As long as it isn’t rapid, markets will absorb any price changes. The real question is whether stocks are in a bubble. To answer that, we look at the price-to-earnings ratio now versus history for the S&P 500. By this measure, things are certainly frothy. Now, we certainly could be pricing in exceptional growth this year that justifies these prices. However, the extreme exuberance here seems overdone. Our hot take Equity markets appear to be in a bubble. Environments like this place an emphasis on [stock selection.]( That’s not to say they can or won’t go higher or a crash is guaranteed, only that the extrinsic value far outweighs the intrinsic value. With that in mind, check out some of these killer articles from our network of publishers. Power Plays [Michael Burry is Shorting Tesla Inc. (NASDAQ: TSLA) and Buying These 5 Stocks Instead]( In this article, we will take a look at the top 5 holdings of Michael Burry. If you want to read our detailed analysis of Michael Burry’s history, and investment philosophy, go directly to Michael Burry is Shorting Tesla and Buying These 10 Stocks Instead. [Read More]( [Top 5 Stocks to Buy Right Now]( Shares of Alphabet Inc (NASDAQ: GOOGL) outperformed the broader market index year to date, thanks to prospects for increased advertisement revenue. 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