Kovar Capital: Stock Market Superbubble

By Taylor Kovar

Hi Taylor – I saw the term “superbubble” the other day in reference to the stock market and it seemed to have a pretty bad connotation. Can you explain?

Hey Ginessa – Glad to smash the horrors that are a “superbubble”. To my knowledge, the term was coined by a great hedge fund manager and used to describe a confluence of financial events that will lead us to a worse than normal crash. Because there are bubbles, and then there are super bubbles.

Bubbles. You’ve probably heard the housing crash of 2008 described as a bubble. The bubble analogy makes sense when we think of a floating ball of soap that suddenly explodes and disappears, but the funding behind it is a bit more involved. The root of these so-called bubbles is when an asset or market sector experiences massive gains beyond expectations. In the housing meltdown, it was the overheating of the subprime mortgage market. Money overtook assets, and suddenly people were left with notes that had no real value. Bubble = burst.

Superbubble. When you have multiple bubbles at the same time, that’s when you start to hear that term super bubble. The bubbles in question are A) real estate, where house prices have been rising steadily for years; B) “Meme stocks” – things like NFTs, electric truck manufacturers and Gamestop and AMC exchanges, where a lot of money comes in before the real value of the asset is settled; and C) declining wealth within blue chip and speculative stocks, indicating that many investors are hiding their capital in safer places. If we see a selloff as interest rates rise, it could be the start of the aforementioned super bubble.

Will it happen? I try to stay away from lofty predictions. I want to be ahead of the curve, but I’m not going to declare something as heartbreaking as a super bubble rocking the US economy. I believe that what goes up must come down, and I expect that with the heat of the markets for three years, we should not be surprised by a significant decline. At this point, we are repricing and buying a lot of stocks and assets at a reduced rate before the market starts to rally. Until you have all of your wealth tied up in unproven commodities, now is not the time to panic.

Superbubble or not, the market always fluctuates. We’ve had strong growth over the past decade and had low interest rates for a number of years, and these are good things to keep in mind when investing and following the markets. Thanks for the question, Ginessa!

Sallie R. Loera