Typically, bubbles can take years to wash out, and whatever the recipe for the 'perfect' bubble may be, the conditions of 2021 can’t have been far off. Zero interest rates and stimulus cheques made money seem free, and government-imposed lockdowns made normal spending impossible - all but guaranteeing that all that 'free money' would be used for speculation instead.

The speculative frenzy led to booms in cash-burning tech firms, metaverse stocks, electric vehicle outfits and any company with the whiff of disruptive innovation.
Financial promoters became celebrities, and celebrities became financial promoters.

Many of those stories started with a kernel of truth, but as influential investor Seth Klarman puts it, 'At the root of all financial bubbles is a good idea carried to excess'

Exciting projects were lavished with cash, while boring businesses were starved of it. We got a junk surplus and a food shortage. Shortages in things people actually need led to the sharpest inflation the West has seen in decades and, in 2022, central banks finally responded by taking the free money away.

Now that money has a cost again, the craziest assets have started to crash. Dogecoin has lost 89% of its value, and Bitcoin is down around 75% from its peak. In financial markets, cash has dried up with the most speculative shares the hardest hit. Money-losing tech companies have lost 80% of their value on average. In the US, the Nasdaq is down by a third from its peak, and the world index by nearly a fifth.

It usually takes a long time and a lot of pain for bubbles to burst and valuations to return to sanity. It would be strange if a single year completely unwound the biggest bubble in living memory.

Profit margins and earnings expectations are still very high, as is the dollar. Stock valuations have come down but not compared to bonds. Most importantly, and encouragingly for us, the valuation gap remains exceptionally wide. Said differently, the difference in expected return for stocks in the cheaper part versus the expensive part of the market remains large.

Today, the Orbis Global Equity Fund has its strongest-ever tilt towards value. Broadly, we have found more of this value outside the US and in businesses that haven’t had their valuations inflated by supernormal earnings or very high price multiples.