Is ‘hysterical’ market speculation pushing us towards another crash?

Insurrections are not usually seen by investors as buy signals. Yet even as rioters stormed the seat of US legislative government last week, stock market indices hit new highs in New York, adding another chapter to 12 months of apparent defiance of economic gravity.

Wall Street, measured by the benchmark S&P 500, was not alone in starting 2021 with a bang. London’s FTSE 100 jumped by more than 6% in the first week of the year as investors took in a heady cocktail of a President Joe Biden ready and able to spend money, cheap borrowing costs, and the hopes that vaccines will end the coronavirus lockdowns. Yet amid the exuberance a serious concern looms: are we on the cusp of another colossal crash?

Some veteran investors believe so. Jeremy Grantham, the British co-founder of the US investment firm GMO, gave some of his fellow investors pause last week when he described “a fully fledged epic bubble” that has grown out of the recovery from the financial crisis of 2008-09.

“Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history,” he wrote in a letter to investors. Analysts at Bank of America joined him last Friday, warning of “frothy prices, greedy positioning” and telling their clients to sell equities.

There is a growing divide in the investment world: on the one side are believers that the recovery from the pandemic will add extra impetus to stock markets; on the other are those who think that bubbles are inflating to bursting point.

There are relatively few investors who do not admit to the existence of speculative bubbles in some parts of the financial markets. The mania for bitcoin, the cryptocurrency, appeared to have dissipated in December 2017, when prices fell from just short of $20,000 to dip below $4,000 in 2019. But enthusiasm for bitcoin is back: after passing the $20,000 mark in December, its price has doubled and hit highs near $42,000 last Friday.

Other contenders for bubble status are Tesla and fellow electric car pioneer rivals such as Nikola and China’s Nio, whose shares have surged in value as investors scramble to stake claims in the green-transition gold rush. The spectacular tenfold increase in Tesla’s market value since the start of 2020 made chief executive Elon Musk the world’s richest person last week. The carmaker is worth more than the next seven most valuable legacy carmakers combined, despite making a fraction of their profits.

Yet bitcoin and Tesla have by no means been the only beneficiaries. While 2020 for most of us will be remembered as the year we were confined to our homes, for financial markets it was a year in which prices escaped their constraints. Paul Tudor Jones, a billionaire hedge fund manager, last month pointed out that more companies were priced at more than 100 times their earnings than at any other point in…