There’s an old saying when it comes to investing that markets can stay irrational longer than you can stay solvent. We’ve seen the development of an “everything bubble” over the past several years that has now blown up even larger than ever. Just how big will it get before it bursts?
Many of us have been waiting expectantly for the bubble to finally burst, but it just keeps getting larger and larger. Corporate debt levels are climbing, price-to-equity ratios of stocks traded on exchanges are skyrocketing, and all the statistics point to an asset bubble on par with the dotcom bubble, the housing bubble, or possibly even worse. When will this all end?
Of course, there are many investors, analysts, and pundits who think that the good times won’t end. This happens every time there’s a bubble, that every time the bubble is created many people inevitably believe that the good times are here to stay. But inevitably those poor deluded souls are eventually introduced to the harsh reality that what goes up must come down.
Some of those people end up learning from their mistakes and adjust their strategies accordingly. Others remain defiant, convinced that each subsequent bubble is going to be different. And while it can be very difficult to figure out when exactly a bubble is going to burst, there are three key phrases that you might hear that indicate you’re right in the middle of one.
1. This Time Is Different
When you hear “this time is different,” you can almost guarantee that you’re in the middle of a bubble. We heard this during the dotcom bubble, as the new technological advancements brought about by the internet were thought to render previous methods of stock valuation obsolete. We were supposed to have been on the verge of entering a brave new world… until the bottom fell out of markets and millions of dotcom investors lost their shirts.
We heard the same thing when the housing bubble was on the verge of collapse, as the first signs of weakness were judged to be totally not a bubble. We were assured by the “experts” at the Fed and Treasury that any weakness was isolated. And then we watched in dismay as the financial system came to the verge of complete collapse, with stock markets losing over half their value. Each time we heard that “this time is different,” yet each time the bursting of the bubble was the same old story.
Now we’re hearing the same thing today, that “this time is different.” With the Federal Reserve pumping trillions of dollars into the financial system and the government spending big on stimulus, trillion of dollars have flowed into stock markets, boosting prices. According to some, this massive amount of stimulus won’t stop, and will push stock markets to ever greater highs. Yet both of those beliefs are likely sadly mistaken, and those who make decisions based on those beliefs could find themselves badly hurt when this bubble bursts.
Some are trying to assure us that we’ve learned the lessons of 2008 and that businesses and households are better protected than they were back then. They try to tell us that the Fed is on top of its game and won’t let another 2008-style crisis occur. You can just imagine their disappointment when the bubble finally collapses and all their assurances are shown to be worthless.
2. We’ve Reached a Permanent New High
Another sign of investor overconfidence is thinking that markets have reached a permanent all-time high. The eminent economist Irving Fisher is perhaps the best-known example of this, as he remarked in 1929 that “stock prices have reached what looks like a permanently high plateau.” It was only a few weeks later that the Dow Jones Industrial Average suffered its infamous Black Monday and Black Tuesday crashes, ending 40% down from its all-time high.
Fisher thought the crashes would be temporary, but they weren’t. In fact, it wasn’t until 1954 that the Dow reached that 1929 high again.
How many investors today think like Fisher? With the Dow over 34,000 points, the S&P 500 having broken the 4,000-point barrier, and the Fed adding at least $1.5 trillion to the financial system each year, many investors think the party will keep on going forever. They may be sadly mistaken when the party ends.
The dotcom bubble was famous for the optimism shown by investors who thought that stocks were entering a new era of permanent highs. It even featured a book, “Dow 36,000,” since we were supposedly on the cusp of a new era of stock market growth. Yet it actually took over 20 years for the Dow to get anywhere close to 36,000, and it has yet to actually reach that level.
So the next time you hear someone talking about how stock markets are going to keep climbing, or how they’re going to hit 50,000 in the next year or two, you’ll know to take that with a huge grain of salt.
3. Making Money Is Easy
One of the characteristics of a bubble economy is the fact that it seems like every idiot out there can make a boatload of money. During the dotcom era day trading and options were the big thing. During the housing bubble it was house flipping. And today it’s a little bit of both of those, with cryptocurrencies mixed in as well.
Day trading and options trading have returned with a bang, as the case of Gamestop demonstrated earlier this year. House flipping has made a resurgence as low interest rates and government stimulus checks have boosted house prices across the country. And the increasing popularity of cryptocurrencies has made the joke crypto Dogecoin the best performing asset of 2021 as of the beginning of May.
It seems like everybody is making money on stocks, real estate, or cryptocurrencies. And it can be disheartening for those of us trying to be value investors looking at these huge gains for doing nearly nothing and wondering why we weren’t doing the same thing too.
Rest assured, however, many of these new investors who think that making money is easy will end up getting burned. Real estate prices will eventually collapse as indebted Americans can no longer afford to buy, Dogecoin and other small-time cryptocurrencies will eventually lose value as people tire of them, and many day traders on Robinhood and similar apps will get burned when stock markets finally enter correction territory.
You may be able to make a little money in the short term on fad investments, but no one ever got rich doing that over the long term. But once again, markets can stay irrational longer than investors can stay solvent, so even shorting these obvious bubbles isn’t necessarily going to net you any gains.
What Can You Do?
It can be frustrating to see what’s going on in markets right now and know that hot assets will eventually return to earth. If you’re invested in value-driven investments, or lowering your risk profile ahead of retirement, it can be infuriating looking at people who know absolutely nothing about investing making huge gains while you struggle to eke out 4-5%. But that’s the way of the world. Eventually those know-nothings will learn a tough lesson, while you hopefully will have your assets protected.
One of the traditional methods of protecting assets is through investing in precious metals such as gold and silver. Their stability makes them a popular asset for those looking for hedges against inflation and economic turmoil, while their ability to maintain wealth through tough economic times makes them a popular asset during times of crisis. During the aftermath of the 2008 crisis, for instance, the gold price nearly tripled while the silver price more than quintupled, while stock markets struggled to regain their footing.
With modern methods of investing such as a gold IRA, you can even invest in precious metals while still enjoying the same tax benefits of conventional tax-advantaged retirement accounts. And funding your gold IRA can be done by rolling over existing retirement funds from a 401(k), IRA, TSP, or similar account.
If you’re looking at what markets are doing right now and worried that a sudden downturn could cost you your retirement savings, maybe it’s time to start thinking about investing in precious metals. Call the experts at Goldco today to learn more about how gold and silver can benefit you.