Bank of America Merrill Lynch analysts provoked a bit of bubble alarmism with a research note this week that asks "are bubbles becoming more bubbly?" They included a chart comparing various historical bubbles to the current market zeitgeist. It got passed around a bit:
As the chart shows, those assets that appear to be bubbly today have seen a far steeper rise than those bubbles of the past. This year's dramatic bitcoin and short-volatility spikes make the mid-2000s housing rally and 1980s Japanese equity binge look mild in comparison.
What's changed? Monetary policy of course!
“Post the financial crisis, the largesse of central banks appears to be inducing quicker and steeper price gains in assets compared to the case historically,” analysts including Barnaby Martin said. “Speculative behavior in assets is cropping up more frequently and in more places than just credit markets.”
Left unclear is what, exactly, the relationship might be between the Fed and bitcoin prices. Do we really think that the techno-utopian narratives and speculative euphoria driving bitcoin's relentless surge are just side-effects of the federal funds rate? Put another way, would you think bitcoin prices would be muted right now if borrowing costs were closer to those of the 2000s or 1990s?
If BAML's conclusion is questionable, so are its methods. Take a look at the various asset bubbles they're comparing. Two of them – biotech and real estate – represent entire sectors of the U.S. economy. Two more are the stock market capitalizations of entire countries.
And we're comparing these asset classes to ... bitcoin and volatility futures?
These represent differences not just in kind, but in orders of magnitude. Each of the historical bubbles cited by BAML were markets that amounted to multiple trillions of dollars. Bitcoin's market cap currently stands at $73 billion. Total assets in short-vol (i.e., XIV): $1.3 billion. Here's what they look like side-to-side (numbers very rough):
So what's the point here, exactly? For every massive, economy-wide bubble of the past, we could probably find dozens of minor asset classes that have seen speculative fevers on the scale of bitcoin and XIV. What makes these less remarkable than, say, the housing bubble that crashed the whole dang economy, is that they are very small in the grand scheme of things. And as we all know, the smaller an asset, the more sharply it can move.
Of course, BAML knows this banal truth. But the problem with the banal truth is that you can't use it to whack the Fed.