I have heard people refer to the current state of the economy as the “everything bubble”. In other words, they are saying that virtually everything is in a bubble.  This could include real estate, stocks, bonds, crypto currencies, and commodities.  I would also say that government is a massive bubble, and that is what needs to be popped the most.

Of course, not everything can be in a bubble, unless we are facing the complete collapse of society and the division of labor.  There is always something that goes up, or at least doesn’t go down.  That is why I advocate a permanent portfolio. It is rare that all four asset classes go down in tandem.  And when it does happen, it is short lived.

I don’t necessarily think the U.S. dollar is in a bubble as compared to the other major currencies (the yuan, yen, and euro).  That is only because the Federal Reserve has been less bad in terms of monetary policy, especially over the last 4 years.

As long as these major currencies exist, at least one of them has to go up as compared to the others.  And even in terms of purchasing power, if price inflation gets out of control, then gold and silver will likely go up.

My point is that there are always going to be exceptions, even in an “everything bubble”. There will always be certain asset classes or investments that perform well.

Still, I think the idea of an “everything bubble” has some merit.  Maybe we can call it the “most everything bubble”.  One area where I tend to disagree with the idea of a bubble is in the realm of government bonds.  I continue to say that U.S. government bonds will do well in a recession (yields will fall), as long as price inflation stays relatively low.  There probably is a bubble in U.S. government debt, but it is going to take a lot longer to pop.

Gold is a little less predictable, but we know that gold will tend to do well when significant inflation becomes a concern.

I do believe that the “most everything bubble” is beginning to pop.  It has already started, and I am not referring to the recent decline in stocks, although that could also be the beginning of something.

So what is the first asset class to pop?

The Bitcoin Bubble

The price of one bitcoin recently dropped below $4,000.  It peaked in December 2017 at about $18,000.  Other crypto currencies have also fallen dramatically, but I point to Bitcoin because it started the trend and is still the most popular of the crypto currencies.

I have no idea if Bitcoin will have another run up from here or just continue to go down.  I am not making day-to-day predictions. But I do know that it could easily keep going down to $1,000 or $500 or $10.  It probably won’t hit zero any time soon because you can almost always find someone to pay something.  This is especially true with Bitcoin, since there are libertarian-leaning tech nerds who spend every waking hour of their lives researching and thinking about Bitcoin.

Bitcoin is nothing to me.  As with everything, it has subjective value.  But it is completely useless for anything other than the fact that others are willing to accept bitcoins or buy them.  Bitcoin is not much different from a government currency.  But with a government currency, you are essentially compelled to use it, and you have to pay taxes in it.

I see parallels between the Bitcoin/ crypto currency bubble and the tech bubble of the late 1990s. Bitcoins will fall like many dot com companies did.  It may do the equivalent of going bankrupt.  But just as the crash in tech stocks did not spell the end for the Internet, neither will the crash in cryptos spell the end for the blockchain. The technology behind Bitcoin will be used in many ways in the future for other things.

A few years ago, I wouldn’t have cared much if Bitcoin and other cryptos crashed.  I would have said it was mostly irrelevant to the overall economy.  Today, I see things a little different, only because Bitcoin has become so popular and talked about.  There is at least one show on CNBC that seems to devote a lot of their time talking about Bitcoin.  If you go around and ask people, there is now a large percentage of the population who are at least familiar with Bitcoin.

It does not surprise me that this was the first major bubble to pop.  Real estate takes time for prices to adjust.  Stocks can obviously crash quickly, but there is more support there, at least for the time being.  With Bitcoin, it is still a somewhat thin market, and it is easy for the price to fall quickly.  It is also pure speculation as far as I’m concerned.

I really do believe that the bursting of the Bitcoin bubble is the beginning of the bursting of the “most everything bubble”.  I just don’t know how long everything else is going to take to follow suit.

I’m still looking for the inverted yield curve.  Bitcoin didn’t need an inverted yield curve to collapse. But I don’t think we will see an official recession until the yield curve goes flat or inverted.  We are getting close, but we’re not quite there yet.