June 22, 2017

The Everything Bubble

It wasn’t always this way. We never used to get a giant, speculative bubble every 7-8 years. We really didn’t.

In 2000, we had the dot-com bubble.

In 2007, we had the housing bubble.

In 2017, we have the everything bubble.

I did not coin the term “the everything bubble.” I do not know who did. Apologies (and much respect) to the person I stole it from.

Why do we call it the everything bubble? Well, there is a bubble in a bunch of asset classes simultaneously, like:

For the last few, I am just screwing around… though they are also bubbles.

I don’t like going around and calling things bubbles. It’s a good way to lose credibility (especially if you started in 2013).

I haven’t been exactly bullish over the last year. But I have refrained from calling it stupid, because it could always get stupider.

But now, I’m not sure how much more stupid things will get.

Initial Coin Offerings

I think what pushed me over the edge was bitcoin.

First, let’s define what a bubble is. A bubble is not simply a matter of overvaluation. It has to be accompanied by an obsession or preoccupation with an asset class.

When you see people making haystacks of cash all out of proportion to their intelligence or work ethic?

Bubble!

That is kind of what is happening right now in cryptocurrencies.

Am I some kind of Luddite? No.

Do I see the potential of blockchain? Yes.

But when I see people behaving this way—literally throwing money at each other—you’re probably closer to the end than the beginning.

People are comparing bitcoin to tulip bulbs. I think those comparisons are apt. But at least with tulips, you had something tangible—a plant.

Someone asked me last week how I thought bitcoin and the others would perform in a bear market. Would they go up, like gold?

I think the opposite would happen. Regardless of bitcoin’s supposedly safe-haven status, right now it’s acting like a risk asset—a risk asset with a lot more beta.

If we get a bear market in stocks, we get a bear market in bitcoin (or vice versa).

And if we get a bear market in stocks or bitcoin, we are probably getting a bear market in credit.

And if we get a bear market in credit, we are probably getting a bear market in real estate.

It is all connected.

Basically, in the age of peak indexing, the only thing left is systematic risk.

Wax On, Wax Off

A market that is just systematic (non-diversifiable) risk is impossible to trade. You can be risk-on (long stocks), or risk-off (short stocks), but there are virtually no benefits to diversification.

Look at S&P 500 index funds. In the old days, you would say you were diversified if you owned one—you owned 500 stocks!

Does anybody really think that they are diversified by owning an index fund today?

No. You own the same 500 stocks that everyone else owns. Again, there is nothing left but systematic risk.

And this is borne out by experience—professional stock-pickers are getting schooled. You are either long FANG, or you aren’t. This has compelled a lot of people to say that active managers are stupid.

But do you think it’s more likely that:

a) a bunch of smart people became stupid, or

b) that the environment suddenly changed?

If you’re one of those smart people, do you completely abandon your process and just buy FANG?

Or do you stick with what has worked your entire career in the likelihood that it will one day work again?

This time is (probably) not different.

Bear Markets

A lot of bears get sweaty palms about the possibility of a bear market. Hey, you can’t have capitalism without downturns. You have to purge the speculative excesses. The longer you go without a purge, the bigger it is going to be.

As much as I think a bear market would be fun to trade, I do not wish it on anyone. Most people are no good at trading a bear market.

A wise man once told me that bear markets don’t just destroy the bulls’ capital… they don’t just destroy the bears’ capital… they destroy everyone’s capital.

I have been through this a couple of times. Even when I think I am perfectly positioned for it, I still seem to find a way to lose money.

Also, nowadays, we have no idea what kind of malignant political forces will be unleashed if we have a real, hard-landing recession…

Does it all get pinned on Trump? Probably.

Does it push the left further left? Probably.

Does it increase the chance of real instability in 2020? Yup.

And people underestimate the ferocity of bear markets, because they can’t see second and third-order effects. The stock market doesn’t go down 20% in a vacuum. We have no idea what is going to happen when stocks go down 20%. Nothing good, I imagine.

So you should not be wishing for a bear market. You should be wishing that this goes on forever.

I have been making bearish noises for a while, but I haven’t been willing to stake my reputation on it.

I am now willing to stake my reputation on it.

I think we’re very close to a downturn. I will be surprised if this doesn’t come to pass within 6-12 months. If it doesn’t, I suppose you can call me out, if you like doing that sort of thing.

One more comment: it will probably be the fastest downturn in history, owing to the degree of leverage and speculation. Proper preparation prevents poor performance.

Jared Dillian
Editor, The 10th Man

Jared's premium investment service, Street Freak, is available now. Click here for our introductory offer. Jared Dillian, former head of ETF Trading at one of the biggest Wall Street firms and author of the highly acclaimed books, Street Freak: Money and Madness at Lehman Brothers , and All the Evil of This World , shows you how to pick and trad e trends, and master your inner instincts. Learn how to use “Angry Analytics” as a leading indicator of budding trends you can profit from… and how to view any market situation through the lens of a trader. Jared’s keen insight into market psychology combined with an edgy, provocative voice make Street Freak an investment advisory like no other. Follow Jared on Twitter at @dailydirtnap.

Share Your Thoughts on This Article

http://www.mauldineconomics.com/members

Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact service@mauldineconomics.com.

Disclaimers

The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One Trade, Transformational Technology Alert, Rational Bear, The 10th Man, Connecting the Dots, This Week in Geopolitics, Stray Reflections, and Conversations are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financi al advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

© Copyright 2017 Mauldin Economics