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m_d_hThe all-time greatest stock market bubble in US history, as measured by the Shiller PE ratio, peaked around January 2000. Also known as the Dot-Com Bubble, the US stock market had never been so expensive.
Previously, you had to go all the way back to 1929, the Roaring Twenties, to find the greatest stock market bubble in US history.
But right now, in 2020, in the midst of this Pandemic Recession, we're living through another of the three greatest stock market bubbles in US history. Stock prices are currently more expensive than they were at their 1929 peak. Stock prices were only more expensive than they are now during the 1998-2001 Dot-Com Bubble.
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But there's another bubble happening right now, one that fewer people pay attention to, because it isn't reported daily or hourly or second-by-second like stock prices.
We're living through the greatest bond market bubble in US history, and as far as I can tell, in world history. In all of world history. In human history. Long-term US government bonds are sold at interest rates below 1% -- this has never happened before. Corporate bonds are selling at their all-time lowest interest rates. And it's not news anymore to anybody who reads the financial press, but trillions of dollars worth of foreign government bonds are selling at negative interest rates -- which means a guaranteed loss if you hold them to maturity. Negative interest rates, especially on this tremendous scale, have never happened before in human history.
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If your retirement account consists of mainly stocks and bonds, which would describe the vast majority of retirement accounts, then you're invested in the second greatest stock market bubble in US history, and the greatest bond market bubble in the history of the known universe. Your retirement account balance may look great now, but account balances always look great during bubbles.
What's especially strange about the current dual stock/bond market bubbles, is that they are persisting during a time when nearly a million people are losing their jobs EVERY WEEK in the US.
It's as though some sort of magical force field has separated the stock and bond markets from the rest of the economy.
-----
I've watched my favorite restaurant close. My favorite concert venue close. My favorite sex club close. My gym close.
65 million people have filed for unemployment in the US since mid-March! (Some of these may be the same person being laid off more than once, but, still, completely unprecedented.)
Yet stocks are more expensive than in 1929 (relative to underlying earnings), and bonds are more expensive than ever (relative to interest paid). It makes no sense!
-----
Earlier this year I'd set aside some "play money" to speculate on the financial markets. Overall I made a profit -- and every bet I placed did well except for one horrible miscalculation that cost me most of my profit. This horrible miscalculation was that I expected the stock market to decline this year, I sold stocks short. Not just any stocks, I sold short the high-flying most-bubbly technology stocks. But instead of going down, they went up even more.
With the election approaching, and a Third Wave of COVID-19 growing in the US, I've liquidated all of my play bets. I took my profits, and cut my losses. I'm waiting until my crystal ball clears up. I have no idea what's coming next in the short term.
But with my retirement account, I'm mainly invested in the "G" fund, which is the equivalent of a cash money-market fund. Not stocks, not bonds. Oh, I've got about 20% in stocks and 5% in bonds, for a bit of diversification, but mainly I'm hiding out in cash.
Hiding out in cash during a bubble can look stupid while the bubble persists. Everybody who has invested in stocks and bonds has made a killing. But when the bubble inevitably pops, I'll still hold most of the value of my retirement account. And with my retirement approaching in 2027, I'd rather hold most of my value in seven years than take a bet on having more.
-----
I think the inevitable result of these bubbles is going to be global financial and economic disruption, accompanied by a lot of inflation. So I think gold and real estate are the best long-term bets right now. But gold and real estate prices can be volatile also -- and they are generally not options for retirement accounts.
Perhaps after the election dust settles I'll put my play money into gold and real estate bets. But for now I'm sitting on cash, in both my retirement account, and my play money account.
If your retirement is still decades away, and you've invested in an age-appropriate "lifecycle" fund, you shouldn't worry about the markets or the bubbles. But if you're planning to retire this decade, beware. Now might be a good time to increase your cash level. But, these bubbles could persist a couple years longer, who knows. There's no expiration date on irrational behavior.
Previously, you had to go all the way back to 1929, the Roaring Twenties, to find the greatest stock market bubble in US history.
But right now, in 2020, in the midst of this Pandemic Recession, we're living through another of the three greatest stock market bubbles in US history. Stock prices are currently more expensive than they were at their 1929 peak. Stock prices were only more expensive than they are now during the 1998-2001 Dot-Com Bubble.
-----
But there's another bubble happening right now, one that fewer people pay attention to, because it isn't reported daily or hourly or second-by-second like stock prices.
We're living through the greatest bond market bubble in US history, and as far as I can tell, in world history. In all of world history. In human history. Long-term US government bonds are sold at interest rates below 1% -- this has never happened before. Corporate bonds are selling at their all-time lowest interest rates. And it's not news anymore to anybody who reads the financial press, but trillions of dollars worth of foreign government bonds are selling at negative interest rates -- which means a guaranteed loss if you hold them to maturity. Negative interest rates, especially on this tremendous scale, have never happened before in human history.
-----
If your retirement account consists of mainly stocks and bonds, which would describe the vast majority of retirement accounts, then you're invested in the second greatest stock market bubble in US history, and the greatest bond market bubble in the history of the known universe. Your retirement account balance may look great now, but account balances always look great during bubbles.
What's especially strange about the current dual stock/bond market bubbles, is that they are persisting during a time when nearly a million people are losing their jobs EVERY WEEK in the US.
It's as though some sort of magical force field has separated the stock and bond markets from the rest of the economy.
-----
I've watched my favorite restaurant close. My favorite concert venue close. My favorite sex club close. My gym close.
65 million people have filed for unemployment in the US since mid-March! (Some of these may be the same person being laid off more than once, but, still, completely unprecedented.)
Yet stocks are more expensive than in 1929 (relative to underlying earnings), and bonds are more expensive than ever (relative to interest paid). It makes no sense!
-----
Earlier this year I'd set aside some "play money" to speculate on the financial markets. Overall I made a profit -- and every bet I placed did well except for one horrible miscalculation that cost me most of my profit. This horrible miscalculation was that I expected the stock market to decline this year, I sold stocks short. Not just any stocks, I sold short the high-flying most-bubbly technology stocks. But instead of going down, they went up even more.
With the election approaching, and a Third Wave of COVID-19 growing in the US, I've liquidated all of my play bets. I took my profits, and cut my losses. I'm waiting until my crystal ball clears up. I have no idea what's coming next in the short term.
But with my retirement account, I'm mainly invested in the "G" fund, which is the equivalent of a cash money-market fund. Not stocks, not bonds. Oh, I've got about 20% in stocks and 5% in bonds, for a bit of diversification, but mainly I'm hiding out in cash.
Hiding out in cash during a bubble can look stupid while the bubble persists. Everybody who has invested in stocks and bonds has made a killing. But when the bubble inevitably pops, I'll still hold most of the value of my retirement account. And with my retirement approaching in 2027, I'd rather hold most of my value in seven years than take a bet on having more.
-----
I think the inevitable result of these bubbles is going to be global financial and economic disruption, accompanied by a lot of inflation. So I think gold and real estate are the best long-term bets right now. But gold and real estate prices can be volatile also -- and they are generally not options for retirement accounts.
Perhaps after the election dust settles I'll put my play money into gold and real estate bets. But for now I'm sitting on cash, in both my retirement account, and my play money account.
If your retirement is still decades away, and you've invested in an age-appropriate "lifecycle" fund, you shouldn't worry about the markets or the bubbles. But if you're planning to retire this decade, beware. Now might be a good time to increase your cash level. But, these bubbles could persist a couple years longer, who knows. There's no expiration date on irrational behavior.