From Birch Gold Group
If you’re concerned that the equities markets are going insane and that you might need to adjust your plan, you’re not alone.
Let’s first shed some light on the insanity…
Every Friday after Thanksgiving (except perhaps last year), major retail stores have had a “doorbuster” sale of some type. The mainstream media images of people trampling on each other and brawling to get through the door: Fix these in your mind.
Now, instead of shoppers mobbing an entrance, imagine the panic of investors suddenly waking up to reality and fleeing the stock market. That’s what happens when a popping bubble startles a herd of bulls.
Granted, there are fewer fistfights. Panicking investors aren’t physically at risk. But the stakes are much, much higher than a great deal on a 77-inch class 4 ultra-high-definition TV.
And make no mistake: Even though it’s metaphorical, there’s still blood in the streets…
Every speculative bubble convinces investors that the world has changed in ways that make basic arithmetic irrelevant
We’ll start with a 2021 global survey of individual investors titled The Next Normal, which revealed an enormous gap between investors’ and financial professionals’ expectations for future stock returns.
- Investor expectation: 17.5%
- Financial professionals: 5.3%
Keep in mind that financial professional estimate, 5.3%, pretty much matches today’s inflation rate. Those s
Even worse, the reports’ authors tell us, “the countries where the lowest gaps are found are those where investor expectations were still more than double what advisors say is realistic.” Even the least-deluded investors are expecting more than twice as much return on investment as the professionals think likely.
Is that sane? Are these expectations based in reality? Jesse Felder wasn’t wrong when he called today’s stock market “A triumph of hope over rationality.”
Investors buying stocks now, at these dizzyingly high valuations, are probably ignorant of history. Fortunately, we’re not.
Today’s Shiller PE ratio (also known as Cyclically Adjusted PE Ratio, or CAPE) stands at 39.17. That’s the second-highest in history.
Compare that to this graph of 5-year market returns:
Based on historical data, we’re looking at a 5-year return of -2% (not including inflation) for the stock market.
Maybe financial professionals are irrationally optimistic as well?
Einstein warned: “We cannot solve our problems with the same thinking we used when we created them.”
Or as Dr. John Hussman told us back in 2000:
Historically, when trend uniformity has been positive, stocks have generally ignored overvaluation, no matter how extreme. When the market loses that uniformity, valuations often matter suddenly and with a vengeance. This is a lesson best learned before a crash than after one.
To rephrase: When all stocks are going up, investors buy them regardless of their value. (They don’t want to miss out.) When all stocks stop going up, people start realizing they’ve overpaid. The last report on the S&P 500’s price to book value is 4.8, which means investors are paying $4.80 for every $1 of value they receive in exchange.
When investors sell, that puts pressure on prices. They tend to drop. Any drop in prices weakens investors’ blind faith that stocks will keep going up forever, forces margin calls, creating more selling. Like a tornado, the cycle reinforces itself, spinning faster and faster, becoming more and more destructive.
That’s when you see the mob storming the exit.
The end of the all-in market
Wolf Richter called this year’s margin investing mania a “hyper-speculative and blindly courageous” mega bubble. That’s an accurate depiction of at least some investor behavior.
Dr. Hussman says:
Don’t kid yourself. If you’re fully invested in stocks here, you’re a speculator. If your exposure to stocks doesn’t meaningfully take account of valuations here, you’re a speculator.
The death knell of any market bubble depends on many factors (usually more psychological than economic). We don’t know, can never know when the mania hits its peak. As Nobel Prize-winning economist Eugene Fama said, we can only really find the end of the bubble in hindsight.
Or, as legendary investor Jeremy Grantham told Reuters, “Markets peak when a near-perfect economy is extrapolated into the indefinite future.”
Here’s what we’re seeing:
- Wolf Richter recently reported that margin debt has dropped for the first time in over a year.
- S. expansion has slowed significantly.
- Citigroup’s “Economic Surprise Index” of the world’s ten largest economies just dipped below zero (the last time this indicator dipped below zero was March 2020, as the COVID crisis started).
Now, any or all of these may be the death knell of the “hyper-speculative and blindly courageous” bubble in nearly everything. They may not. Our primary concern is with those who believe, in spite of rationality and history and the real world, that today’s astronomically high valuations are sustainable. Forever. That Santa Powell and the Easter Bunny will give them the gift of infinite profits if they just believe hard enough.
There’s no hope for them.
We’re talking to everyone else. (Especially those old enough to remember this exact same pattern from the 2008 Financial Crisis and the dot-com bubble.)
If you don’t want to get crushed in a mad scramble for the exits when the alarms go off, now is a good time to plan for an orderly exit.
Always know where the exits are
Right now, you have a chance to get your diversification strategy in line with your goals. But time is running out, before the only thing left is to get trapped in the mad dash for the exits along with all the other investors. But there’s one thing to keep in mind.
Remember the last time you were on an airplane?
Please take a moment to find the exits closest to you, keeping in mind that your closest exit may be behind you.
The “closest exit” might not be the obvious one.
The stampeding bulls panic response is usually to sell all their stocks, take all their money out of the bank, hide it under the bed and swear to never invest again.
A more prudent approach may be in order. Instead of panicking, examine your savings with an eye toward rebalancing. Consider diversifying with intrinsically valuable physical precious metals. Gold especially tends to do well during market panics. That’s probably why MoneyWeek called buying gold “insuring your portfolio.”
You may still have time to make a calm and orderly exit, and get the diversification benefits gold and silver on your side while stocks are still high. Or you could always wait for the last possible minute, get stuck in the rush at the door, and join the new crowd clamoring for their own “portfolio insurance.”
While we’ll do our best to help everyone, we think the prudent who act early will be much happier with their results.