A massive stock market bubble is forming, may have already been completely inflated

 

In my opinion the extremely long in the tooth, 12+/- year long bull market since 2009 has finally matured into a fully-fledged massive bubble due to massive intervention and manipulation and almost endless liquidity. Featuring extreme overvaluation, explosive price increases (many times in zombie firms) frenzied issuance (especially the issuance / of stock at nose-bleed price levels, and nutty IPO’s) and hysterically speculative investor behavior, I believe this period / cycle will be recorded as one of the great bubbles in financial history, right along with the South Sea bubble, the bubble prior to the Great Depression of 1929, and the Dot-com bubble of 2000.  Massive Hindenburg type bubbles are when fortunes are made (playing the proverbial “dark-side” sell/short-side) and lost (due to stubbornness of not taking profits) where old savvy investors truly prove their determination, courage, and knowledge [ "buy when you feel like the world is coming to an end...and sell when you believe there is no stopping the bull-train and extreme euphoria has gripped thew markets]! We need to position our positioning a portfolio to avoid the worst of pain that becomes inflicted by a massive bubble bursting is the hard part.

This massive liquidity fueled speculative bubble (FED and fiscal, and massive debt-laden) will burst in due time, no matter how hard the FED and others try to support it, and it will have significantly damaging effects on the economy and on many-many portfolios. For the majority of the FOMO crowd and the incessant dip-buying Pavlovian response that has been so conditioned these past several years. Speaking from close to 30+ years of experience the one reality that you can never change is that a significantly pumped up higher-priced asset will produce a lower return than a lower-priced asset. Most of the time, major asset classes like stocks, bonds, commodities etc. are reasonably priced relative to one another.

The correct response is to make modest bets on those assets that measure as being cheaper and hope that the measurements are correct. With reasonable skill at evaluating assets the valuation-based allocator can expect to survive these phases intact with some small outperformance. “Small” because the opportunities themselves are small. If you wanted to be unfriendly you could say that asset allocation in this phase is unlikely to be especially important. It would certainly help in these periods if the manager could also add value in the implementation, from the effective selection of countries, sectors, industries, and individual securities as well as major asset classes.

This long, slow-churning (due to massive intervention and manipulation) bull market (12+ years) like other long-term giddy bull markets can spend many & many months years above serious fair value and even 2 sometimes 3-years longer than logic can dictate and rally way above fair valuations into nosebleed valuations. These events have often outlasted the patience of most traders/investors. And when price rises are very rapidly as we have seen this past year which typically happens toward the end of a bull market, impatience is followed by nervousness. As I like to say, there is nothing more irritating than watching dumb-ass folks get rich chasing mostly-crap higher and higher many zombie firms that have exhausted 8 of their 9 lives. As we saw in late 1997, when the SPX-500 surpassed its previous 1929 peak of 21x earnings, I stared to get nervous then into late 1999 I stated shouting loud and clear (SELL-SELL-SELL) and for 4-5 more months I watch the market soared up to 36.75x earnings, after being bloodied several times trying to sell/short the giddy market.

During the fall of 2019 (prior to the onset of my massive wave of health issues) I said it was likely that we were in the last innings of this 12+ year long bull-market and the subsequent bubble could implode in December into January, then came the drop into March but it was due to the Covid-19 pandemic and then we saw wave after wave of massive liquidity from the government and FED; and away we went as the dips were bought on a ballistic parabolic ride. One of the most dependable elements of the late stages of the massive mega bubbles created in history has been really crazy investor behavior, especially on the part of individuals. For the first decade of this bull market, which is the longest in history, we had seen for the most part structured buying and the rally lacked waves of wild speculation in 2019 to now we have it in record amounts.

Ø  The infamous Buffett indicator, total stock market capitalization to GDP, broke through its all-time-high 2000 record high a measure of the total value of all publicly-traded stocks in a country, divided by that country's Gross Domestic Product (we are also extremely over-extended significantly of debt).

Ø  Amazingly we saw this past Covid-19 year that there were 480 IPOs (including an incredible 248 SPACs) more new listings than the 406 IPOs we saw come to market in 2000 into the dot.com bubble.

Ø  There are about 175 firms (with market capitalization of over $250 million) that have more than tripled this past year, which is over 3 times as many in any year in the previous 11 to 12 years.

Ø  The volume of small retail purchases, of less than 10 contracts, in call options on U.S. equities has increased 9-fold compared to 2019, and 2019 was already approaching 30% above the long-run average.

I am not at all surprised with close to $5.75 trillion in liquidity (FED and Government) that the market has advanced at a parabolic fast rate and with increasing speculative massive excesses. It is precisely what I have come to expect from a late-stage bubble: an accelerating, nearly vertical stage of unknowable size but these bursts of euphoric buying are typically short lived. I have “the hard way” found that cycle at the top of a bubble is shockingly painful and full of risks for newbie / reckless grizzly bears (who should not short due to inexperience and lack of discipline).

v  Currently, I am short 65% of my portfolio and now I am doubling down, because as prices move further away from their standard deviations and real trends, at accelerating speed and with growing speculative fervor.

The strangest feature of this bull market is how unlike every previous mega bubble is that past bubbles have combined accommodative monetary conditions with decent economic conditions. Today’s extremely wounded economy is totally different: as we have only seen a small-partly recovery so far and in my opinion, we are likely facing a double-dip, the numbers are already foretelling of a slowdown, and if nothing else we are facing an exceedingly high degree of uncertainty (should be very unsettling for the markets). Yet the market has continued to crawl higher than it was last fall when the economy looked to be doing OK and unemployment was at a historic low. Today the P/E ratio of the market is extremely high and within a few percent of the historic top while the economy is in the cesspool. This is completely without precedent and may even be a better measure of speculative intensity than the massive rise of SPACs.

This time, more than in any previous mega FED intervened bubble, investors are relying on massive and I mean massive accommodative monetary conditions and zero real rates extrapolated indefinitely. This is a kin to assuming great/peak economic performance forever: these conditions are being utilized to justify much lower yields on all assets and therefore correspondingly higher equity prices. But neither perfect economic conditions nor perfect financial conditions can last forever, despite the CNBC hype.

From my research, (I have read over 500-articles, books and expert opinions) all mega bubbles end with the near-universal recognition that the current one will not end yet; and the omnipotent FED has their back; because Y-2-K Greenspam’s FED in 2000 was predicting a lasting improvement in productivity and was pledging their unwavering loyalty (what I saw as massive “moral hazard”) to the stock market; Then Bernanke believed unwaveringly that in 2006 that “U.S. house prices merely reflect a strong U.S. economy” as he perpetuated the FE’s wave of moral hazard: Yellen, and now Powell, maintained this Ponzi-scheme premise; as we have seen that all three of Powell’s predecessors claimed that the equity asset prices they helped inflate into Hindenburg proportions aided the economy through the wealth effect (I almost puke when I reflect on this “BS”). But all three of these charlatans have avoided claiming credit for the ensuing market implosions that I repeatedly wrote about would inevitably develop...the dot-com bubble bursting of 2000 and the housing implosion of 2008, each complete with the accompanying anti-wealth effect that came when the economy least needed it, exaggerating the real weakness in the economy.

Now once again the massively over-inflated equity prices this time will hold and gains will continue as CNBC and other so-called gurus want us to believe without question that the FED (due to their symbiotic relationship with the TBTF-bankers, and corporations, and especially the government “as they are far from independent”) keep interest rates near “0%” forever, an ultimate statement of “moral hazard” the asymmetrical market risk we have come to know and depend on. The mantra of recent has been that the FED can engineer low rates with out any ramifications for ever to prevent a decline in equity asset prices. But of course, this FED is your ultimate savior was a fallacy in 1999-2000 and in 2007-2008 as it is a fallacy now. In the end, moral hazard did not stop the technology bubble implosion, with the Nasdog imploding over 80%...nor did in 2008, did it stop U.S. housing market to melt-down a shocking loss of over $8.4 trillion dollars of value in then over-valued homes; and an ensuing cycle of mega weakness in the economy; and a broad decline in global asset prices. All the promises that the masses believed in were in the end worth nothing, except for one; the FED did what it could to pick up the pieces and help the markets get into stride for the next trend into another massive- wave of over-inflated asset prices and then a subsequent ensuing decline. And here we are again, waiting for the music to stop and to see how many chairs have been removed from this game of musical chairs.

I have acknowledged that this giddy market can rise further for a few more weeks or even months like it did on me in 11/1999 into 3/2000 and 9/2007 into 2008. My best guess as to the top of this bubble is the nest 50-100 days coinciding with the Biden Administration broad rollout of the Covid-19 vaccines. At that moment, the most urgent issue facing the global economics could be abated or significantly mitigated. Market participants will likely breathe a sigh of relief, look around, and immediately realize that the real economy is still in the proverbial cesspool just as the FED and fiscal stimulus will be significantly reduced or eliminated with the end of the Cocid-19 crisis in sight, while acknowledging that market valuations are absurd a classic set up of “Buy the rumor, sell the news.”

This market is now displaying all characteristics of a mega bubble. The most impressive features right now are the intensity and enthusiasm of the giddy bulls that have been feasting on mega doses of locoweed! Another feature of a late stage long in the tooth bull markets has been a parabolic rise of the final leg, which in recent cases has been over 60% in the past 18 months a rate well over 2x the normal rate of assent within a bull market. Currently the U.S. indices have risen over 70% for the SPX-500, over 100% for the Russell 2000 in just 9 months.

So, please my friends (and yet to be friends) do not wait for the so-called market gurus (GS, JPM, BAC, MS and Black Rock) to become openly bearish: it never really happens. Their “BS” market premise is simple: always be extremely bullish as it is good for business one main reason why they have always had massive bullish advice especially in mega bubbles.