Welcome to the 10-24-2017 update from your Pocono Summit Certified Financial Planner and retirement planner, Mike Savage. Today, Mike discusses the potential bubble in many traditional assets.
If I needed any more proof that we are in a bubble in most traditional (stocks, bonds and real estate) assets I got plenty last week.
It started with a text from my daughter shortly after the DOW went over 23,000. She asked me “Do I have money in the stock market?” I immediately thought— good, she is getting concerned that the stock markets are way overvalued and she wants out. Good thinking. When I answered “not much” she let me know that she wanted to earn more money and she wanted to try trading.
This is typical action when you are getting near a significant turning point. Everyone is fearful of missing out on the anticipated ever-higher moves.
She appears to not be alone. Charles Schwab has reported that new accounts are being opened at levels not seen since the Nasdaq bubble. Actually new account openings are up 34% in the first half of 2017 over 2016. In addition, many people must be borrowing money to increase their exposure to stocks because margin debt remains at all-time highs and cash reserves are historically low.
Mutual funds are also holding less cash than would be normal and ETF’s- unlike mutual funds that hold cash for redemptions- don’t hold cash so as people hit the sell button shares have to be sold to fund the redemptions in real time. This could add additional stress to the system when the likely correction starts.
There is a reported $3 trillion that have piled into passive ETFs. There would be plenty of ammunition here to accelerate any moves to the downside.
Of course, the financial game shows don’t mention any of the many risks that are littering the landscape. They just focus on the stock markets making all-time highs day after day and home prices rising in 20 cities even though people’s incomes are not rising enough to afford the higher prices.
Bonds, of course, are being totally manipulated by central bank purchases. How in the world could European junk bonds have lower yields than US treasury notes in some cases? How could over $8 trillion in sovereign debt have a negative yield? (You pay them to loan them money!) My guess is that only someone or some entity that can “print” money up out of nowhere would buy assets such as these.
Many financial pundits have dubbed this the “everything bubble”. Not quite. It is a bubble in assets that those who are “printing” the euros, yen, dollars, etc. want propped up. Many assets, like precious metals, have been artificially suppressed in the paper markets where little to no actual gold changes hands.
To me, this sets up a phenomenal opportunity to position ourselves for what Jeremy Grantham of GMO fame would call a “reversion to the mean”. Stock, bond and real estate prices would be expected to retreat to a long term trend line and likely overshoot to the downside while the metals markets would have a lot of performance to make up for and may overshoot to the upside.
To get an idea of the type of moves that could happen I will use some information from Michael Belkin, author of the Belkin Report.
He spoke at the Toronto Mines and Money Conference in early October. His main points were that the Nasdaq is in a similar over-extended position as it was in March of 2000 and could see a 55% downside move in the next 1-2 years. That would compare with the 78% loss in the Nasdaq from 2000-2002 and the 56% loss from 2007-2009. A main point is that if this happens many investors will be looking for alternative places to invest. He also points out that the precious metals and oil have already had their major bear markets from around 2011-2015. Since then, these assets have been rising in tandem with stocks but you would never know it watching the financial game shows. I believe the gains we have seen in the past 20 months or so is just a warmup for the real action that may lie ahead.
Keep in mind that silver lost 72% from April 2011 to December 2015, oil lost 76% from June of 2014- February 2016 (Belkin). Gold lost around 44% from 2011-2015. The losses that may happen to the stock averages, which are off the charts overvalued, has already happened in these assets and they may be poised to move meaningfully higher. This would be particularly true if faith is lost in either central banks, currencies, debt sustainability, etc.
Of course, why would anyone lose faith in the central banks? We have had one long run of prosperity with no interruptions. As long as you don’t remember 2008, 2000, 1998, 1987.
I saw a headline on CNBC yesterday that mentioned that the Nikkei had reached a new all-time high. YAY! Too bad there are people like me out there who remember that the Nikkei was nearly 40,000 in 1989. It sits at just over 21,000 with the Japanese Central Bank buying it up hand over fist. This is just another GLARING example of propaganda. Is it an all-time high for the past 10 years? Certainly it is NOT an all-time high since it is a little over 50% of its value from 28 years ago!
Anyone who sees this and doesn’t know history would immediately assume that Japan is rocking. Of course with their aging population they are rocking ok- in rocking chairs.
The whole idea is to buy assets low and sell them high. I have never seen anything so simple yet so hard to actually accomplish because it seems that humans have a natural tendency to chase bubbles higher and shy away from assets because they have fallen and are now on sale.
Timing it seems is always the issue. I will go out on a limb and guess that we are far closer to a top in traditional assets (stocks, bonds and real estate) and that some of the, in my opinion, undervalued assets like gold, silver and many commodities may be set up for some stellar gains.
Time will tell. Be Prepared!
Mike Savage, Financial Advisor
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