Three Mini Bubbles Burst. Is One of The Big Ones Next?

The comments above & below is an edited and abridged synopsis of an article by John Rubino

Financial crises tend to start at the periphery and work their way into a system’s core. Think subprime mortgages (a tiny niche of a few hundred billion dollars) that blew up in 2007 and nearly brought the curtain down on the whole show.

There’s no guarantee that the same dynamic will play out this time, but stage one—the bursting of peripheral bubble—has definitely arrived, with three in progress: subprime auto loans, mortgage refinancing and cryptocurrencies.

As for which bubbles make up the core of the system, some obvious candidates are sovereign bonds, Big Tech stocks and fiat currencies. These are different animals from, say, subprime auto loans, and when they go they’ll take a lot of underlying assumptions down with them.

Big Tech looks closest to the edge. The FANG+ stocks have been rising for so long that they’ve become an uncomfortably large part of the overall stock market. Their fate determines that of the Dow and S&P. And lately their situation is looking dicey for a variety of reasons.

They’re all ridiculously expensive, trading at outrageous multiples of earnings, cash flow and book value. They’re behaving in ways that are enraging both competitors and customers, so a backlash of some sort is inevitable. The unlimited future of just a few months ago now looks like an oncoming storm.

A tech crash would be brutal, but survivable. But if the markets lose faith in sovereign debt and fiat currency, that’s the end of the system as we know it. A plausible last act to bring this about might be a tech dislocation that pulls down the rest of the stock market, prompting central banks to respond with massive money creation and universally negative interest rates. Then let’s see what happens to those fiat currencies.