More Proof The Market Is In A Bubble

This is not investment advice.

Here is an edited transcript from my opening monologue this morning:

When I was in high school, I wanted to buy Apple stock. Relatives and friends sent me a couple thousand dollars in graduation gifts and I just wanted to sink it all into Apple. Had I done so, I would be a multimillionaire assuming I had the willpower to leave it untouched with dividends that would essentially set me up for life.

But my mom was skeptical of the stock market and wouldn't let me sign up for a Merrill Lynch individual brokerage accounts. Instead, I blew a lot of the money in college and years later did put some of the money in the market. Look, I'm not an investment advisor. I'm not giving investment advice. I now rely on other people largely to handle my investing for me because my bandwidth is limited though I enjoy the process.

I've paid attention to the markets over the years and do some individual investments. I recently liquidated my entire portfolio for reasons that I will get into and paid off some debts. While I am not a financial expert or planner, one thing is certain: We’re in a bubble.

I don't think there's a bubble, I know there's a bubble and more people are starting to agree. To borrow a phrase from Alan Greenspan, the market is experiencing “irrational exuberance”. There's unfettered giddiness in the marketplace and I think it's not going to end well.

This is a from Ben White in Politico: Clearly not healthy. Markets are giddy about reopening and that's the problem.”

"Gas prices are climbing. Home prices are surging. Stock markets keep hitting fresh records as chat room driven mania draws in giddy investors. The economy and financial markets appear to be pricing themselves for perfection, betting on rapid vaccinations and a surge of consumer spending later this year that will pull the nation out of its pandemic funk. Serious risks are still lurking just beneath the surface. Vaccinations could take far longer than expected. New COVID strains could evade vaccines and spur new lockdowns. All of this could trigger falls in stock prices and other assets and stomp on job creation. But if the dream scenario does arrive, another risk is lurking. A burst of new spending and economic growth coupled with the massive amount of fiscal stimulus in the system, possibly including nearly $2 trillion more under the White House's latest plan could lead to a sharp spike in inflation that would send stocks tumbling and could force the US Federal Reserve to contemplate raising interest rates to cool the economy. The Goldilocks scenario Wall Street and the White House are hoping for includes a successful vaccination effort and enough federal support to keep millions of suffering Americans afloat until then, followed by an economy that runs neither too hot or too cold, but there is no guarantee Goldilocks will arrive.

"Markets are now telling two very different stories. For stocks it is the best of times, while the Dow Jones industrial average hitting yet another record on Wednesday as corporate profits come in fairly strong. Big stimulus remains likely and hopes remain for a strong economy. But the bond market is growing very worried that all of the stimulus and massive deficit spending could eventually bite the economy in the form of faster inflation. The yield on the 30 year treasury bond climbed above 2% on Monday for the first time since the pandemic began, and the yield on the benchmark 10 year bond hit its highest point since the pandemic began. Interest rates pushed down by the Fed remain historically low, but should they begin to rise more quickly they could eventually cripple consumer's ability to borrow and dent what are now red hot housing markets in many parts of the country."

Now let me add another data point here. Twitter stock closed at a seven-year high as analysts cheered, not profitability, but newfound “swagger”. Here's the sub-headline at MarketWatch. "Analysts seem generally relieved by the company's user growth commentary following its permanent ban of former President Donald Trump."

How did it grow? Well, it didn't actually grow a whole lot. It grew average revenue per user by 7%. Let me put this in perspective: While the market is so giddy about Twitter, Facebook grew 27% and Snapchat grew 62% with the same metric. So what exactly justified a 13% rally in stock price yesterday? I’m not sure.

None of this makes sense. There is so much crazy money flying around right now. The stock market is going up while there's not a lot of wiggle room in the economy. You're practically walking up a mountain cliff with drop-offs on either side. In addition to this, moral hazard is an issue. In 2008 and 2009 with the financial collapse, the government went in and propped up a lot of businesses that probably should have died. I can't tell you the number of friends of mine who work on Wall Street in the financial sector who say this really is the number one issue in markets. Fast forward to last year when the stock market cratered in February and the government stepped in to bail out everybody, they didn't decide who really should have been helped and who should not. They just bailed out everyone.

The government has now created this moral hazard where these businesses that should be left to die in the creative destruction of the free market are perpetually getting bailed out by the federal government. And what do they do? They keep making bad investments and the government throws them a lifeline. Normally, if you feel like God has saved you from something, you take a different direction. Nope, many of these businesses are doubling down on the messes and many of these people deserve to collapse.

Now you've got the cryptocurrency bubble where a joke cryptocurrency called Doge is being skyrocketed by Elon Musk and others on Reddit. Most people don't even understand what cryptocurrency is much less blockchain technology. You get a bunch of little fringy, libertarian-ish people saying, "Oh, the blockchain. I know about the blockchain." Nobody else knows what the hell the blockchain is, but these people speak about it like it's some sort of gospel message you’ve got to throw your money into. What exactly is it? No one knows and hardly anyone can explain it with a straight face. At any moment the government can get involved and send things crashing.

None of this makes any sense anymore. None of it. Twitter skyrocketing because investors like “it's swagger”. There's no monetization in swagger. The market's skyrocketing because they think an 80-year-old geriatric in the White House, surrounded by a bunch of communists, is somehow going to stabilize the markets when he can't even challenge the teacher's unions in favor of scientists and open schools?

We're in a bubble.

Yes, we're in a bubble and I have benefited from it. About a year ago, I decided that people would go crazy for marijuana stocks because legalization is on the horizon. It may come piecemeal, but it's coming. My portfolio skyrocketed hundreds of percent with one stock up over 1000%. Well, I recently decided to cash out. I decided I would rather get myself out of debt, and free up my available monthly income because this rate of growth does not seem to be sustainable.

When you look at this massive spending package from Washington, the consensus of economists is that it's not going to spark inflation, but I think Larry Summers is onto something. It's not really disputable that the government is going to put more money into the economy than is needed to sustain it. Summer's point is if everything goes according to plan over the next seven months, we're going to need less of this stimulus money, but it's going to keep coming and that's going to spark inflation.

I am undoubtedly going to lose out on some money but I also want to sleep well at night. I’m just an average guy with a little bit of common sense and was able to do exceptionally well over the past few months in the market. This isn't me bragging because really, I am not a financial wizard here. The point is I should not have been able to get this amount of growth in a year in the stock market.

Either there's going to be a big cashout soon, or there's going to be something calamitous coming that will put a whole lot of people in a very bad spot. We all know what will happen next: The government will want to bail them out and the moral hazard cycle continues to perpetuate. None of this makes any sense.