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January 29, 2021

Bubble, But for How Long?

Without a doubt, 2020 was a “loss” year. Individually, we lost the ability to live our normal way of life. Globally, currencies lost their purchasing power as central banks added US$9 trillion to the system (leading to price increases in almost everything, including stocks and properties), and over 1.8 million people lost their lives due to COVID-19.

It is fair to say that the current scenario of higher asset prices during a recession is not normal. The natural conclusion is that we are in a bubble, and we do not disagree. However, it is not a typical bubble where the issue is price speculation in a single asset. Rather, this bubble formed due to increased central bank balance sheets (or money supply). From 2011 to 2020, central banks printed approximately US$17 trillion, and half of that is attributed to 2020 alone. Imagine a transaction where someone is selling an asset and getting currency in return. The seller then demands more units of currency in exchange as the currency supply has dramatically increased, even though the asset supply has not changed and demand may have slipped.

Expanding for longer?

The question is, when will this bubble burst? In other words, when will central banks shrink their balance sheets? Expanding is usually an easier decision than shrinking, as decreasing money supply has the opposite effect of lower asset prices, which is typically perceived as negative. Unless we have a very strong economy to offset, then this is usually the last thing on policymakers’ minds. Using history as a guide, central bank balance sheets last peaked at US$16.0 trillion in 2018. With effort, mainly by the U.S. Federal Reserve, that balance fell to US$15.2 trillion in 2019. You may notice the reaction to reduce spending was extremely slow compared to the growth since 2008 (see chart on following page).

With interest rates already at or close to zero, central banks have aggressively used money supply as a tool to combat the market disruption brought on by the pandemic, similar to the Global Financial Crisis of 2008-09. Policymakers seem very comfortable leaving the bubble as is, and most of us are not complaining as higher prices is not a problem for investors. However, this doesn’t mean economies are growing rapidly. Rather, the wealth gap is widening in favour of those who own assets. 

For example, inflation – as tracked by the Consumer Price Index (CPI), which measures changes in consumer prices – has been mild over the last decade. However, we believe the basket of data used to calculate CPI does not accurately capture the inflation of assets such as real estate. According to CPI, prices have grown at an average annual rate below 2% over the last 10 years, but Toronto real estate has gone up by more than 8% per year over the same period. Potential homeowners have effectively been priced out of the market because they do not own inflated assets to sell and they cannot save enough to keep up with the rapid price increases of real estate. As a result, asset owners become wealthier, while those with little net worth fall further behind. That being said, we believe central banks are still likely to focus on boosting prices for the “majority” of the population. This means, the large increase in money supply and renewed currency debasement could continue for years if not decades to come. While unfair, it is not up to us to decide.

What to do in unusual market conditions?

While central banks are aggressively printing money, we believe being defensive and “hiding cash under the mattress” is a losing strategy. Over the last few months, our goal has been to protect our investors’ purchasing power in these very unusual market conditions, and we have actively deployed cash and trimmed government bond holdings for larger equity exposure. As always, we continue to monitor market conditions and may from time to time cut back on our equity exposure to manage downside volatility.

Source: Bloomberg Finance L.P. and CI GAM | Multi-Asset Management as at January 11, 2020.

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About the Author

Marchello Holditch

Marchello Holditch, CFA, CAIA

Vice-President and Portfolio Manager
CI Multi-Asset Management

Marchello Holditch, CFA, CAIA, Vice-President and Portfolio Manager, oversees CI's multi-manager, multi-asset investment programs. He is responsible for managing CI’s institutional and private client multi-asset portfolios and is a member of the CI Multi-Asset Investment Committee. Previously, Mr. Holditch led CI’s portfolio manager research and oversight function, where he was responsible for evaluating the investment managers of all CI funds. Prior to joining CI, Mr. Holditch worked at a major global consulting firm, where he assisted a wide variety of institutional clients with risk budgeting and asset liability modelling, as well as investment manager research and selection. He holds an Honours Bachelor of Mathematics degree in actuarial science from the University of Waterloo and is a CFA charterholder.

About the Author

Alfred Lam

Alfred Lam, CFA

SVP, Head of Multi-Asset
CI Multi-Asset Management

Alfred has more than 18 years of experience specializing in portfolio design, asset allocation, manager and fund selection, and risk management. While at CI Global Asset Management, Alfred has brought unique ideas and processes to the management of the team’s multi-asset strategies, including a mean-reversion currency management strategy, the concept of investing in concentrated and benchmark-agnostic portfolios, and a new approach to risk management. In addition to the Chartered Financial Analyst (CFA) designation, Alfred holds an MBA from the York University Schulich School of Business, and is a member of the CFA Institute and the Toronto CFA Society.


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Published January 22, 2021.