Something doesn't feel quite right

     "Markets can stay irrational longer than you can stay solvent."
     John Maynard Keynes

Markets seem "off" to me. Irrational and wrong.

No need to pay any attention to me. I'm just one more guy with an opinion. And I am old. And my experience comes from observing the past, not the future.

It is perfectly reasonable advice to tell Americans just to buy, hold, and accumulate wealth as best you can, and ride the jagged up-escalator of prosperity. Don't worry about crashes or depressions. America is strong. The American economy is strong. People and businesses will adjust to thrive in whatever the future brings. The long-term trend is up. 

There is another school of thought. It comes most powerfully to mind when I see a college student wearing earphones and a peripheral-vision-obscuring hoodie stepping blithely onto a crosswalk, eyes on his phone, somehow certain that traffic will stop for him. I want to shout, "Have some situational awareness, dummy! It's dangerous!"

I am in that latter school. Several times in my adult life I have seen economic events that seemed too crazy to endure, and they didn't. They were obscure in the present, obvious with hindsight. The Beanie Baby collection/investment fad was a tiny example of the late 1990s. That seemed irrational and doomed, and it turned out to be. The internet stock bubble was far bigger and lasted longer because the internet has real long-term value. Pricing got far ahead of earnings. Technology stocks lost about 83 percent of their value. The market was "wrong" for a decade.

Americans have lost their faith in our institutions of media, government, and experts in every field to give them the straight, reliable truth. Perhaps markets -- that great aggregator of widely distributed information -- are the only thing left. If Bitcoin is priced at $115,000, it must have value of $115,000. 

I am skeptical. 

I think markets are dominated by crazy speculative thinking and loose money looking for a home. Goldman Sachs said as much -- not that anyone cares about that institution's opinion -- but they based it on market data, a "Speculative Trading Indicator," which was at levels associated with market tops. They measured elevated call option purchases and high trading volumes "in unprofitable stocks, penny stocks, and stocks with elevated EV/sales multiples.”  

Maybe John Hussman at Hussman Investments is completely wrong in his opinion (and he has been bearish while the stock market has continued to go up and up) but his data indicates that on a ratio of company capitalization to earnings, we are at the most extreme data point in history.  But maybe the market is exactly right and things are just fine. 

Experience has been a harsh teacher for me, but a good one. Home prices go down sometimes. Stock markets, too. Stuff happens.

Erich Almasy wrote me this weekend to share his observations. I am publishing his comments because they generally align with my own thinking. Erich is familiar to readers of this blog as the business executive who retired to the expat haven of San Miguel de Allende in Mexico. It gives him some perspective on the U.S. dollar that my U.S. based readers don't have. (It has fallen since Trump's inauguration.  As Americans who keep track of things solely in dollars, everything is OK. But as citizens of the world, Americans are 15% poorer.) Erich is a college classmate who went on to Harvard Business School, and then had a career in business management and consulting.

Consult your own financial advisor and find your own comfort level. Erich and I might be wrong.

Guest Post by Erich Almasy

Bubbles, Part One

I’m forever bursting bubbles, pretty little bubbles in the air. Since the Dutch tulip bulbs in the seventeenth century, there have been many examples of what Alan Greenspan liked to call “irrational exuberance.” Today, we are floating inside of at least six “bubbles” whose impending destruction will shape the world for at least the next five years.

The first is a multi-bubble and covers many aspects of the financial markets. Foremost is cryptocurrency, which has become an oxymoron for something that does not exist except in the minds of speculators and foolish investors. The speculators believe that a “greater fool” will make them rich before it all collapses. I think this bubble will implode relatively soon, since its crafty formulators have reaped their above-average returns. Even Trump and his crypto-cronies may be caught in the fallout since they don’t strike me as particularly bright. The damage from this bubble burst will see small investors ruined and financial markets roiled. The overall financial system will also likely experience a crash from an overvalued stock market, which may be just a much-needed cyclical correction. Much worse will be the collapse of the “private lending” bubble. Never heard of this one? Not satisfied with private equity and always seeking higher returns, the financial giants (even the smart ones like Goldman Sachs) are bypassing banks and making “loans” to corporations already leveraged with too much traditional debt and bank loans. These loans carry higher interest rates but less collateral and greater risk, just like the days of leveraged buyouts. And how well did that turn out? When the Trump administration allows small investors to add cryptocurrency, private equity, and private lending to their 401(k)s, the stampede will “obliterate” the markets. Recession will likely become stagflation, which, as we learned in the 70s, is hard to reverse.

The second bubble involves artificial intelligence, AI. Like the dotcom bubble of the late 90s and early 00s, a techno aftermath will remain, and AI will be a part of our lives from now on. However, the huge expectations and much of the investment are unlikely to survive. A good friend named Andy Tobias wrote “The Only Investment Guide You’ll Ever Need” in 1978, and there have been multiple editions since, most recently in 2022. One of his most telling initial observations was to question how Avon door-to-door cosmetics could be worth more than the combined stock values of Ford, John Deere, and Caterpillar. It couldn’t, and his point, reiterated through many subsequent examples of overvaluation, is that when something doesn’t look right, it probably isn’t. Are current AI companies worth trillions of dollars? Should half of the current GDP be tied to this investment? When will investors ever hope to see a return? Will these techno-firms pass the way of Go-Go stocks, conglomerates, and leveraged buyouts? My guess is yes, and also relatively soon. When the economy turns, as it always does eventually, AI will collapse under its weight to take its place among other new basics of life, cellphones, the internet, and social media. And as to the latter, as AI becomes increasingly malevolent and full of fake news, I think social media will turn into a collective of small, private groups where membership is by invitation only so that some degree of verification and legitimacy is possible.

The DOGE bubble has, in large part, already burst, but the most disastrous effects are in the future. That is when people will die because USDA inspectors miss food disease outbreaks, weather forecasters ignore flash floods (oh wait, that already happened), CDC staffers don’t monitor H5N1 outbreaks, overworked air traffic controllers cause mid-air collisions (that already happened too), and EPA scientists fail to restrict forever chemicals and pollutants. Medicare recipients will have no one with whom to register or complain. FEMA workers will abdicate all disaster relief to overburdened state personnel. Free advice: move away from the coast. The machinery of government, which was always much more efficient than recognized, will grind slower and slower with basic services falling by the wayside. On the plus side, private contractors will make fortunes (start your own weather balloon service) as they are hired to stopgap the damage. Perhaps they might even rehire some former qualified government employees. The DOGE wind has swept away the accumulated expertise of decades.

 

Erich perceives three more bubbles, including the biggest, and I will continue his comments tomorrow.

[Note: To get daily delivery of this blog to your email go to: https://petersage.substack.com. Subscribe. Don't pay. The blog is free and always will be.]