The stock market continues to make new all-time highs almost daily. However, almost every respected economist in the world will clearly tell investors, “the stock market is in a bubble”. While no one can tell when it will burst, the dislocation from fundamental analysis is insane. Stocks keep rising, some but 10-50% a day for weeks at a time. Most of these stocks that have no path to profitability or even survival and are trading at multi-billion-Dollar valuations. Below are the 5 reasons every investor should understand the stock market is a bubble.
- The Federal Reserve has flooded the market with zero interest rate money. They have done this by pushing rates to near 0% and pushing money into the system by buying bonds. This is left investors with no choice but to invest in stocks. It is the only place to get any sort of return that is above inflation. After 11 years of 0 interest rates, investors need to expect an unwind. With the 10 year yield approaching 1.2% and the 30 year approaching 2%, it is wise to think the party is near an end.
- The retail investor is back big. Since 2009, analysts and traders have commented how the small investor has never dared come back into the stock market after being burned during the financial crisis. Having the retail investor in the market is key for institutions. They need someone to dump their large positions to. It is safe to say that for any bubble to burst, you need the small investors buying stocks hand over fist. This allows the institutions to unload big positions. Historically, anytime the small investors have gotten into the market heavily, the stock market has been near a major bubble top point.
- Margin levels are insane. The amount of money being borrowed to buy stocks is at record highs. This ties into both the retail investor as well as the Federal Reserve. Money is cheap so investors are willing to borrow money to buy stocks. Money is cheap because the Federal Reserve drove interest rates to near 0%. Every past bubble collapse has seen margin rates at historic highs just prior to the collapse. Margin is so important because even a small 10% correction in the stock market can trigger margin calls. To cover a margin call, investors have to sell more stock. This then triggers more selling pressure in the market.
- The insanity in stocks like Gamestop (GME), AMC Entertainment (AMC), Tilray (TLRY) are a direct replica of what happened in the late 1990’s during the dot.com frenzy. When small investors pump and dump stocks. Runs of over 1,000% like on Gamestop are exactly like what happened in the dot.com era. Even stocks like Tesla Inc (TSLA) mirror Cisco Systems (CSCO) in 1999 when it ballooned to a $750B market cap company with a PE over 1,000, much like Tesla today.
- The SPAC mania is another warning sign. In 2007 and 1999, companies were racing to come public because money was everywhere. Today, it is arguably even more insane with how many SPAC’s are going public. 90% of them make almost no money and have no logical path to profitability. This is exactly like 1999 when Dot.com stocks were coming public non-stop. Companies run by kids out of their parents basement were commanding $100m valuations. The main different today? Instead of $100 million valuations, the valuations are $10-100 Billion.
There are countless other signals of a bubble. However, the big question remains….when will it burst. When it does, look for an over 50% drop in the stock market. Considering the bubble has been created by the Federal Reserve, it makes sense that a pop in inflation which causes interest rates to jump would be the culprit. The TIPS market is signaling possible 3% inflation by year end. So, while this bubble could last longer, it is on its final stretch in my humble opinion.
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