If and when we reach a period of pessimism the potential unraveling in terms of perceived wealth is much greater this time than it will have ever been before. I think since I said that we could take out the rivaling 1929 and 2000. I think we’ve gone way past that there are examples of large-scale craziness and meme investing etc. for which there is simply no parallel in 1929 even or 2000. 2000 had a pet.coms and they were kind of glorious but they were scores of millions or a few hundred million.
We have crazy things now that are billions and in some cases tens of billions. We were the most impressive speculation. I think there is nothing like that at scale even adjusted for current dollars in 1929. We are down 80 % which is a fairly fearful decline but along with the US the next tier of speculative stocks. Also came down the SPAC index is down to 20 the market is a self-correcting mechanism. But it’s a little wonky in the time it takes. Sometimes it corrects pretty quickly and sometimes it corrects incredibly slowly and that’s the problem. But if you go back to 2000 which is the previous leader in speculation.
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Let’s say what happened there is the market peach peaked in March of 2000 and between March and September. The pet. coms, basically, went out of business. The internet stocks, basically, went down 80 % but the whole dot com, the whole TMT bubble burst, and the industry which had been 30 % of the market, declined by 50% right. The S P was unchanged and you could have said during that five month six-month period. The window isn’t that healthy, they’re selling the flakiest pet.cons and they’re buying Coca-Cola. What’s not to like about that and that’s exactly what happened.
I like to think of them as the kind of pessimistic termites. They act through the craziest first and then the junior growth stuff and then the intermediate growth stocks and then finally CISCO which was for eight minutes or so the biggest company in the world by market cap. They were all down collectively 50%. The balance of the market was up 17% so that looked incredibly healthy but then the termites reached the broad market and the entire 70 % rolled over and fell 50% in two years. The NASDAQ was down 82 the thing about the underpinnings is. They always look terrific. In 1929 the market didn’t peak when they thought the underpinnings were terrible. They peaked when the market’s enthusiasm for the underpinnings was, approximately, the highest it had ever been in history in 2000 in March. The world uniformly includes the boss of the federal reserve Alan Greenspan. They all thought the system had never been better at the top of the housing bubble in 07 Bernanke.
The boys thought the US housing market had never declined unquote. It merely reflected a strong US economy; the underpinnings were great. They have never gotten it right the federal reserve. In particular, has never had a clue about asset bubbles. It doesn’t even address it; they act as if they don’t exist except on the upside. They occasionally take credit for the wealth effect helping the economy along and it does. There is an income effect and it does help the economy along and Greenspan, Bernanke, and Yellen all took credit explicitly for helping the economy along with what they never did. They never took discredit for the reverse side. The market is a mean reverting mechanism and, eventually, it goes back to a fair price and when it went back in 2001-2002. It had a dreadful negative income effect when the housing market collapsed and it took the equity market with it. It had a double-pronged negative effect on the economy. So, it had a much bigger impact on the economy than had occurred in 2000. This time we’re really playing with fire because this time unlike in 2000. We have an overpriced bond market Jim Graham would argue is the most overpriced in 4000 years. We have, in my opinion, and that of many other bubble students the most overpriced US equity market in history. We have a housing market that three weeks ago reached the same multiple of median family income as it did in 2006 at the peak of the housing bubble. We have commodities that have recently run amok so the Goldman Sachs index of non-energy which is food and metals, which are pretty important.
They have just equaled the peak of 2011 which was said to be one of the super cycle commodity events. So, this is the first time, we’ve ever risked three and a half asset classes bubbling at the same time, if and when we reach a period of pessimism the potential unraveling in terms of perceived wealth – is much greater this time than it will have ever been. Before you quoted Robert Schiller Nobel Prize-winning economist about the fact that you know that he said that even though his indices are showing the market at extreme valuations really when you look compared to the bond market which as you said is very expensive that stocks don’t seem. So, overpriced what is your response to those kinds of arguments. I think the interest rate argument is an explanation of how we get there in behavioral terms. It is not by any stretch of the imagination of justification. You don’t justify anything by taking the most overpriced asset in the history of man. The bond market I’m saying compared to that we are merely very overpriced and therefore relatively cheaper that is very cold comfort Solomon Brothers an important firm at the time of.
In 1989 sent around a hit squad justifying the Japanese stock market which was approaching 65 times earnings. We were told at the time the data was represented as 65 times earnings that had never previously sold over 25. So that was to say the least the real McCoy and this team went around pointing out that the rates in Japan were so low that 100 pe would be fair, of course, the collapse that followed in land and barns, and stars was cosmic and right. In 1989 and it still hasn’t recovered, it still hasn’t reached the 1989 level in either their real estate market or their stock market which reminds the US of the cardinal rule that the bigger the bubble the more ingenious the argument. The bigger the bubble the more extended and painful the decline. This is the broadest asset bubble of all time with three and a half of the four major asset classes clearly in severe bubble territory. Thinking that you have no alternative but to pick between one of the four bubbles is a pretty grim way to view life. I get the argument so pick a bubble. They’ll all go together, probably, and you will suffer a lot of pain and the intellectual content of that argument that they were all bubbles. So, we had to pick the least bad one that will resonate in your head as the market unravels.
This article is a transcription of a video made by Jamie Tree
Original video: https://youtu.be/5E0MyXBUlcU