Is Everything One Big Bubble?

Pascal Bedard
Dec 17, 2017 · 15 min read

Bitcoin and crypto bubbles. Stock market bubbles. Bond market bubbles. Canadian housing and credit bubbles. Student debt bubbles. Car loan bubbles. Commercial real estate debt bubbles. The China bubble. It has become hip and trendy to call any price or credit increases a bubble. What’s up with that?

Policy makers and “serious economists” love to call things bubbles, especially crypto currencies. It emanates an aura of knowledge and wisdom. They patiently wait for the bubble to burst to say “I told you so” and seem like the wise and knowledgeable ones who “saw it coming” and warned you.

They tell you to “invest responsibly” but they fail to provide any actual value added insights to that catch-all statement. Jim Rickards has been calling essentially the end of the world for like a decade now. The end of the USD, the end of money, the ‘crash of all crashes” and on and on. Why does anyone still listen to this guy? There are many others in this group.

Here is how you become famous in the financial world: every year, you call a major recession or bubble and you constantly update and adapt your storyline to explain “this year it didn’t happen because…” At one point, obviously you are right. The crash finally happens. You become “the one that called the crash.” Never mind that you were wrong the 10 years (or 30) before that, you “called the crash” and it happened that particular time. Fame and glory to you.

Lets clarify something now: someone who calls a bubble or crash or recession must tell us 1) WHEN precisely it will “burst”, 2) HOW it will happen, and that timeframe 3) must be within 0–12 months from the time they call it. Otherwise they are full of shit. Period. If they do this every year for 5 years or 10 years or 20 years and they are wrong all the time, their “insights” are useless and costly. Period.

It is USELESS and profit-killing to follow advice of people who keep calling bubbles and crashes and recessions if that call is not actionable knowledge in the form of portfolio adjustments, business decision adjustments, risk covering decisions, and macro policy by governments and central banks.

I hereby officially define actionable knowledge as a “macro market call” (bubble crash, recession, etc.) that is highly likely to happen within 0–12 months, backed by realistic assumptions and a coherent story. I have none to make for the coming year. This does NOT mean a crash won’t happen, it only means I can’t say now that I see something big coming, based on the data I can see and on my understanding of economics and finance.

Bubbles, Bubbles, Bubbles

I will talk about the bitcoin and crypto “mania” and “bubble” at length a bit further down, but as an appetizer and to build a framework for logical reasoning, lets start with the “bubble” in my own country, the Canadian housing and credit “bubble.” This “bubble” has been called a “bubble” for at least 5 years now. This is because total private sector debt to GDP in Canada is among the highest in the world. Here is the list of the top 20 countries for private debt to GDP ratios as of December 2017…

Source: and my calculations

Notice there are two elements to look at here: the LEVEL of the ratio and the growth rate of the ratio. For example, Luxemburg has a very high level, but that level flat lined for the past decade. The USA has a relatively low level (relative to others in the top 20) AND has a falling ratio over the past decade (everyone was deleveraging after 2008), which is one reason I am bullish for the USA for 2018 and 2019, by the way.

There likely is no Canadian housing or credit bubble. People increased debt because of a generally good economic context and job outlook, and due to low interest rates, that are likely to remain low (although rising slightly) due to absent inflation for the foreseeable future. Foreign buyers looking to park their savings in safe assets also boost demand for real estate in global city markets, as I explained in a past post.

Students pile on student debt because there is still an income premium on university degrees (although it seems to be fading away for many degrees), which means it is a lucrative debt, because it provides higher future income that is a net positive, EVEN counting the debt load.

Is Luxemburg on the verge of collapse because of that stratospheric private debt to GDP ratio? No. Denmark? Sweden? Australia? Canada? Probably not. The devil is in the details. That’s the third thing to look at closely, details, and it is by far the most important one…


Lets do a thought experiment:

Economy “A” has 10 neuro surgeons each making 1 million dollars per year. The “GDP” of this economy is the sum of all income, hence 10 times 1 million = 10 million. Each one has a total debt of 3 million, when you include their mortgage, credit cards, and so on, so the total debt is 30 million. The neuro surgeons are in very high demand and their risk of unemployment is incredibly low to the point of being essentially zero. The market value of their houses is 4 million. They can handle an increase in mortgage payments by decreasing a bit their high monthly savings that they put in stocks, bonds, and cryptos. This economy has a 300% private debt to GDP ratio.

Economy “B” has 10 blue collar workers who handle cardboard boxes in a manufacturing plant. They are unionized and protected by their union and only completed a high school degree. They are overpaid relative to the economic value of their output and they each make 50 000$ per year. The “GDP” of this economy is 10 times 50k = 500k. They each have 2 children. They are directly exposed to the risk of offshoring to Mexico or China. They each have a total debt load of 150 000$, hence the economy has a total debt of 1.5 million. The market value of their house is 150 000$. They save nothing every month and are living paycheck to paycheck and must often use their multiple credit cards to get by. They are at very high risk of unemployment and would be hard pressed to find a job with that type of income if they lost their job. They CAN’T handle a small increase of interest rates, because their monthly budget is already super tight and their credit cards are maxed out. This economy has a 300% private debt to GDP ratio.

Both of these economies have a “high” private debt to GDP ratio of 300%. Which one is at risk of falling apart in the face of a mild shock? You get my point.

The absolute number for debt to GDP is totally meaningless. The SAME thing could be said of government debt to GDP and many other such metrics. The devil is in the details. It is necessarily case-by-case analysis, and that type of discussion is at the opposite of our “sound bite culture” of 15 second clips, article titles and dramatic calls of crashes and crises.


  1. The debt is supported by lots of savings and a solid capital cushion (i.e. the market value of assets such as houses is significantly higher than the debts that are associated to them).
  2. The economy is doing well and has no systemic imbalances (more on this further down).
  3. There is low probability of unemployment.
  4. There is moderate and manageable risk on interest rates (which is linked to inflation) in terms of debt service ratio (regular debt payments, which include a portion of equity payments and a part of interest payments)…

… Then there is no problem.

China has lots of debt and lots of savings. The equity in houses in China is extremely high, which means the economy can withstand quite a shock before all hell breaks loose. China has stratospheric savings and stratospheric debt, because those savings are deposited in banks, which then lend them in the form of mortgages. China is also pissed at bitcoin, because it allows individuals to send their savings outside the country, in a store of value, thus circumventing government capital controls. Same for Russia. Two great democracies of our time…

Problems arise when the value of assets drop below debts, because then you have negative equity and asset liquidation, which drives down markets and can create self-reinforcing feedback loops that drive the economy into “debt-deflation” dynamics.

You can also have one very indebted individual / city, while the rest of the economy is fine. The disproportionate debt of this person / city can drive up the average debt-to-GDP ratio for the entire economy, but does this mean there is severe credit risk for the entire economy? No. Not necessarily.

You can’t say that whatever number of private debt to GDP is “dangerously high” OR “safely low” when you don’t have very detailed “micro” data on the type of debt, the distribution of the credit, and the risk profile of that credit… and guess what? No country has highly detailed and reliable data on the distribution of savings, credit and debt, etc. So we are essentially talking uselessly about things we can’t properly analyze.

Calling Bubbles

Returning to Canada, what specific number would everyone feel is “OK” for private debt to GDP? 100%? 200%? 300% The one we had in 2007? The world average? The world median? The historical average? It’s all hot air.

Suppose I spend 10 years as a poor student, earning next to nothing and getting by without credit. I have a 10 year historical average of 0% credit-to-income ratio. I then graduate and land a 100k per year job. I buy a house of 300k with a 300k mortgage, which I can pay no problem. My “debt to GDP” (debt to income in this case, but whatever) ratio is 300% and it is WAY higher than my “historical average.” WHO CARES? It’s all fine.

It is true that the GROWTH RATE of credit can sometimes be “too high”, and sometimes this is a legitimate cause for concern… but you can judge that only by looking into the very fine details… NOT with aggregate numbers… Sometimes “low” debt-to-income ratios are at very high risk. It all depends on the details underneath.

Calling credit or debt or price “bubbles” without a detailed analysis and/or some kind of convincing and realistic scenario that can go wrong soon is pointless and it must stop. Does that mean everything is all good? No. Maybe there is a storm brewing in Canada and other markets, but you would have to come to that conclusion with proper analysis, not with numbers you find too high or too low based on arbitrary judgement calls…

One thing is sure, an economy with a high debt load is more exposed to interest rate shocks. Central bankers know this, so they won’t shock the system just for fun, trust me. Interest rates typically increase when inflation increases, and inflation may be increasing a bit now, but it is NOT on the verge of suddenly exploding overnight, so everybody relax: there will be NO major increases of interest rates in any high income country for the coming 2 years, because inflation will remain quite subdued and central banks don’t want to shock the system for no reason. Yes, that is a market call: moderate inflation for the next 2 years, hence moderate and manageable increases of interest rates.

Bitcoin, Cryptos, and Asset Price “Bubbles”

Look at this fictitious chart of a fictitious asset price over a 3 year period:

“SURELY” this asset is in a bubble, right? That “hockey stick” shape… From 10$ to 1000$ within 3 years, COME ON! This can’t be! Yes, by looking at the price chart, I can “declare” that this asset is in a bubble that will soon crash. It’s SO OBVIOUS. Any loser can see it. Right?

That was the price chart for the first 3 years of this imaginary asset. It went from 10$ to 1000$ within 3 years, surely a bubble… THEN it very quickly went from 1000$ to 10 000$… WHAT?! Now here is the price chart for the following 3 years after those dramatic events, with the price starting at 10 000$:

OMG! It went from 10 000$ to 100 000$ within the following 3 years! This CAN’T BE! It was already a bubble at 1000$, because it was not normal that it went from 10$ to 1000$ within 3 years! Now it not only went from 10$ to 1000$ within 3 years, it went from 10k to 100k within another 3 years, and from 10$ to 100 000$ within 6 years!!! NOW I AM REALLY CALLING A BUBBLE…

And here is what happens after that:

AHA! The bubble BURST! I TOLD YOU SO! It reached 100k and crashed to 70k… I called the crash…What about the 1000$ “bubble level” or the 10k “bubble level?” Oh that was because… BLA BLA BLA…

Hind sight is 20/20. It is easy to say it WAS “obvious” that the asset WAS “overpriced” once the price HAS CRASHED. It is also useless.

Hind Sight Is 20/20

Note that in this imaginary example, the price went from 10$ to 100 000$ within 6 years, then crashed to 70k. It could have crashed to 50k or 5k or 10$ or zero, and it could also have risen to 1 million before crashing. It could also have risen dramatically and never crashed, but rather simply flattened out at a high level, in which case it would not have been a bubble after all.

Without some kind of coherent framework to estimate the long run price, any discussion about a “bubble” is hot air and empty words. Spare us your moral lessons please.

Does this mean there are no clueless and not-so-clueless speculators buying this asset and contributing to the upward price pressure? No. It just means that it is hard / impossible BEFOREHAND to determine at which price level it has “gone too far” and at which price level it will level off once the crash starts. For bitcoin, “too far” can be 100$ or 1 million, for all I know…

As I explained in past posts, my best “guess” is that 100k is a reasonable price for bitcoin, while 500k can be possible but on the high side. This is provided some assumptions hold: 1) crypto and blockchain technology do indeed expand to be widely used and cause major disruptions in the way the economy and financial markets (and even governments) work, 2) no banning of cryptos or bitcoin in the major countries, especially the USA, 3) Bitcoin plays the role of central pillar, convertibility facilitator, and store of value of this new rising sector of crypto economics.

Will these assumptions hold? I don’t know… and since I don’t know, the only “logical” long run price I can possibly come up with for btc is at least 100k usd per btc. I am not saying this is correct. It seems ridiculous even to me. Maybe it will all crash to zero. Really, I mean it. This is totally possible… but I can’t tell now… can you? If you can, please send me an email to explain your framework and reasoning, because it means you are way ahead of me, and I’d like to benefit from your insights.

Markets, the Price Signal, and Bubbles

Modern markets are very efficient. Not perfectly efficient, but very efficient. This means that underpriced assets quickly find lots of demand and display explosive price increases, until the high price eliminates the excess profits to be gained from this asset class, given risk and liquidity characteristics.

Prices increase or decrease based on information and expectations. Prices rise tremendously when future value is considerably higher than current value. This happens all the time with stocks, especially when a new industry is rising, as when fibre optics were developed and led to telecoms and Internet, when the combustion engine was developed, and so much more.

When the future of some sector becomes clouded because it is at risk of becoming obsolete, prices drop… it’s called the “price signal” and it tells people, investors, governments, and society as a whole what the overall market thinks about whatever asset class, including its future. It’s how capital is allocated to the various sectors of the economy, and it has produced tremendous prosperity when left to do its job properly within countries providing Rule of Law, political stability, and freedom of enterprise and choice.

Huge price increases or price drops are NOT a problem. They are a normal part of a functioning decentralized economy. When Uber prices multiplied by 10 on Christmas Eve in my city of Montreal a year ago, I found this totally normal, while everyone was freaking out. It happened because demand exceeded available drivers by several orders of magnitude, and when this happens, it means resources must be allocated according to the price signal, willingness, and capacity to pay. Period. My opinion or yours are of no value here.

Once in a while, asset prices start rising due to fundamental new developments that are “game changers”, then speculators and the masses of clueless profit seekers embark on a buying frenzy that drive the price way higher than what it would otherwise have done. When oil was discovered, the real price multiplied by 10 within 2 years. In these times, money and wealth are super easy for the early adopters… there is “magic” and everything becomes insane. That is bubble dynamics supported by mass psychology and self-reinforcing dynamics: you think the price will rise because you think I will keep buying, and I think the price will keep rising, because I think you will keep buying.

As long as no “trigger” breaks the momentum, this can go on for a long time. Short sellers beware, “the market can stay irrational longer than you can stay solvent” as the quote goes. The trigger that causes the party to end is typically inflation-induced monetary tightening and/or state regulation.

Bubbles Bursting and Systemic Risk

When a bubble pops, everyone wants to sell and nobody wants to buy. The first ones to exit are the winners, because as Keynes said, successful investing is anticipating the anticipation of others. In a selloff, “sell buttons” on exchanges and broker websites become disabled, because there are no buyers on the other side and the intermediaries refuse to buy from you. The assets become illiquid: you can’t sell them, and you must watch the price plummet without being capable of doing anything about your falling wealth.

When you hear people saying “invest responsibly”, here’s what it really means:

Don’t take risks you can’t handle and survive!

If all your savings amounts to 10 000$ and you can’t afford to lose it, DON’T PUT IT IN BUBBLY ASSETS like cryptos.

If all you have is 10k, but you CAN survive losing it all AND you are now prepared to lose it and can live with it if things go wrong, then feel free to go ahead and expose it to high potential returns and high risk, it may become 100k and it may crash to zero.

If your total life savings is 500k and you are 65 years old, it is not a good idea to put all your savings in what MAY be a bubble such as cryptos (I don’t know if it is a bubble or not), but if you are fully willing to embrace the risk on 20k or whatever other amount, then go ahead and do it and don’t let moralists tell you what to do.

It’s YOUR MONEY. Not the bank’s money, not the government’s money, not some economist’s or “market expert’s” money, not mine. It’s YOURS. Do what you want with it, and fully embrace the responsibility of that choice. THAT is what it means to “invest responsibly.”

State officials in the government are worried about cryptos, because they fear that a lot of clueless people are NOT “investing responsibly” and so they want to contain the crypto and bitcoin phenomenon. The natural paternalistic penchant of state officials to “protect the clueless” is fair enough and I do think some “rules of the game” are a good thing, to be sure people don’t totally get screwed, but otherwise, state officials should focus on markets that pose systemic risk, which is risk to the entire economy and financial system.

Stocks, bonds, real estate, CDOs and derivatives, and bank credit are systemically important markets. Cryptos are NOT. A LOT less than 1% of total global wealth is parked in cryptos. Cryptos could crash to zero tomorrow and it would barely make a dent in any of the major economies in the world today. A lot of small companies, crypto exchanges, brokers, and individuals would be hurt, and if they were unable to handle the loss, it would mean they didn’t “invest responsibly” as described above, and that is their problem and their personal disaster to live with, but it will NOT cause any macro shock to the economy… so government officials and central banks shouldn’t care. Why are officials and mainstream economists and analysts so bothered by the rise of bitcoin and cryptos? I’m not sure. It sure ain’t systemic risk. Thanks for reading to the end. Clap, like, and “recommend” to share the insights. Regards.

Pascal Bedard

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