April 1, 2021
It’s a bubble market in… everything.
Stocks have been flirting at or near all-time highs for months. By most any measure, they’re expensive on a valuation basis.
But what’s more worrisome is the prices at which things that are literally worthless – in terms of underlying value – are exchanging hands.
Dogecoin is a meme-inspired digital currency (though it really isn’t) that was called a “joke” by the guy who made it. It serves no real-world purpose but hit a market capitalization of upwards of $10 billion. It was up by as much as 15-fold this year.
And things that are next-door neighbors to worthless – by any normal person, normal market kind of standards – are also selling for waaaay too much money.
In September, a yellow Rolling Stones’ tongue logo toilet seat cover sold for $1,152 at an auction of belongings of the band’s bassist, Bill Wyman.
As Spin magazine explained, “The purchase… made a splash in the history books, with the cover becoming the most expensive ever sold at an auction.”
(If you’re ever having a lousy day, cheer yourself up with this: At least you’re not the guy who tracks the prices fetched for toilet seat covers at auctions.)
The same auction also set a record for the highest-priced bass guitar ever sold at an auction. A 1969 Fender Mustang Bass with a Competition Orange finish (which presumably means something to guitar geeks) that was designed by company namesake Leo Fender is not worthless. But the $384,000 price it sold for feels almost as over the top as that toilet seat cover.
And last month, a house in Palm Beach, Florida – built on a piece of land once owned by former President Donald Trump – sold for $132 million, making it the second-most-expensive single-family home in the U.S. (Photo of the above interior, posted by Forbes magazine, make it clear that money doesn’t buy taste… but it can get you plenty of tacky.)
It all feels like a bubble… And that feels familiar.
The sharpest, most successful Americans find themselves abandoning the U.S. dollar, allocating their money into cryptocurrencies instead. And the politicians in DC are desperate to stop it. But investors worldwide finally realize our currency is no longer safe.
Last summer, we urged you to get into Bitcoin before a historic rally from $9,000 to over $60,000. Welcome to your next life-changing opportunity. Access our most massive money-making prediction of the year.
The Original Market Bubble
It’s a story almost as old and familiar as Romeo and Juliet. And tales of bubbles and star-crossed lovers have at least one thing in common: They don’t end well.
In the early 17th century, the Dutch fell head over heels for flame-colored tulips. Demand spiked, and the value of tulip bulbs shot up. Word of profitable speculation spread, and more people piled in. Prices went up and up and up.
From December 1636 to February 1637, the price of premium tulips surged by 200%. (That kind of appreciation is just another day at the office by today’s standards… Back then, it was real money.) At the height of the mania in 1637, a single prized bulb could purchase one of the grandest homes on the most fashionable canal in Amsterdam – which at the time were among the most expensive in the world.
Needless to say, the prices didn’t accurately reflect the true value of a tulip bulb. And in February 1637, buying tipped over into selling, triggering a devastating domino effect. Prices plummeted. With the spell broken, speculators realized they had spent vast sums on glorified onions, and quickly liquidated their tulip-bulb holdings. Wealth evaporated and pandemonium engulfed Holland. A deep economic depression followed.
And since then, history has repeated itself… again and again and again.
The Anatomy of a Bubble
More than 400 years of market bubbles reflect a recurring pattern. In 2008, a Canadian scholar named Jean-Paul Rodrigue published a model that defines the stages of a bubble…
Stealth Phase: In the stealth phase of a bubble, early so-called smart-money investors sense a new market opportunity or paradigm. They start to buy discreetly, careful not to show their hand.
Awareness Phase: As market prices rise, more investors are drawn to the new investment story. The media begins to cover it – perhaps egged on by “Oops, I didn’t say that out loud, did I?” leaks from the smart money who participated in the stealth phase… adding to the momentum. Regular investors – the early-adopter types, the stock market equivalent of people who camp out overnight to get the latest iPhone – sense that something is rustling in the jungle.
Mania Phase: Now everyone notices the rising prices. The media is touting “the investment of a lifetime.” Prices detach from underlying economic reality. Euphoric and increasingly irrational investors extrapolate recent price gains into the future. Enthusiasm spreads like a virus, and a feedback loop ensues – rising prices amplify stories that seem to justify high valuations, which attract an ever-increasing number of buyers.
Even cynical traders join the buying, expecting to sell to “greater fools.” Price gains become nearly parabolic. Paper fortunes are made and greed rules. Meanwhile, the smart money is selling to the dumb money.
Blow-off Phase: At some point, buying abates and a paradigm shift slowly – or sometimes quickly – unfolds. Market participants experience the stock equivalent of a brain-breaking hangover. Sellers who were in the catbird seat now can’t find a buyer for love or money. Leveraged speculators face margin calls and are forced to sell. The decline becomes a crash. In this stage, prices fall faster than they rose when the bubble was inflating. Often, prices fall below pre-bubble levels. The asset in question becomes universally hated.
And eventually, the smart money starts buying again, recognizing the panic has created an opportunity to buy assets at cheap prices. And the process starts all over again…
Where are we now with many asset classes? If you’re not sure… listen to your guy.
The Next Bubble to Look Out For: Garlic
Some bubbles… well, they just smell bad.
In late 2015, the price of physical garlic started to rally. Heavy rains and then snow in China’s Shandong province – the garlic hotbed of the country that makes more than three-quarters of the world’s garlic – hit crop production. By the end of 2016, garlic prices had nearly doubled.
Unlike many other commodities, there are no garlic futures in China. So to bet on a rise in the price of garlic, an investor has to buy actual garlic – that is, the real thing that people use in pesto and to ward off vampires or would-be kissers.
Big, chilled storage facilities – some larger than a football field – can keep garlic bulbs fresh for up to two years, allowing for an extended selling window. The savviest traders buy warehouses full of garlic and slowly sell them into periods of low harvest and high prices.
But since the last garlic bubble five years ago, times have been rough. In May of last year, the price of garlic in China fell by 50% in just 10 days – to levels around one-tenth of where prices were back in the bubble of 2016. A few months later, the volume of fresh, stored garlic reached an all-time high, of 4.46 million tons (up 30% from the previous year). A quick calculation suggests that’s just under 84 billion (that’s with a “b”) heads of garlic… that’s like 10 heads (there are around 12 cloves per head) for every man, woman, and child on Earth.
When will garlic come back? We all need to pitch in to consume that surplus… but even so, I’m sure it won’t be long – everything else is already in bubble territory. Now it’s garlic’s turn.
(And in the meantime, another reason to feel happy today: You’re not the guy on the garlic beat at the local paper in Jinxiang, China’s “garlic capital” in southwestern Shandong province.)
Past garlic bull markets yielded a bull market in another asset of questionable quality: newspaper headlines too feeble to make it even to dad-joke territory. “Chinese garlic market reeks of speculation,” said the Wall Street Journal. “Chinese investors smell profit in garlic,” observed Nikkei Asia. “Garlic bubble leaves bad taste in Chinese mouths,” wrote the Guardian.
And in case you were wondering (you know you were), there in fact is a crypto called Garlicoin. It has a market cap of $1.1 million. And like almost any other asset on Earth, Garlicoin also went into bubble territory, as its price rose nearly 16-fold in February, on daily volumes that cracked the mid-four digits.
(Would you rather be known as the guy who bought a yacht with the profits from Dogecoin, or from Garlicoin? Or does it really matter… if you’re on your yacht?)
And while you’re waiting for garlic to recover, there’s the chance to invest in baseball idol A-Rod’s SPAC… if you really want to.
Too Much Money to Go Around… The Shaq SPAC
I recently wrote about “kamikaze capital” as a twisted way to invest to try to make a point – rather than to make money. We see that in GameStop Robinhood speculators who want to make a point to hedge-fund managers, even if it costs them their life savings… and we also see it in investing that has social justice or the environment – rather than generating a return – as its main objective.
And then there are the celebrity SPACs. (A “SPAC” stands for a special purpose acquisition company, which is essentially a shell company set up by investors with the sole purpose of raising money through an IPO to eventually acquire another company. SPACs are becoming increasingly popular.) This is an actual headline from February 9 from an otherwise mostly credible investment news website: “5 ‘Celebrity SPACs’ To Consider: Shaq, Serena, Steph, A-Rod And Ciara.”
It lists a number of SPACs where sports stars – well-known enough to be identified by one name – and a musician (also goes by just one name, Ciara) were involved in raising funds for these shell acquisition companies. While athletes are certainly capable of having other skills (basketball legend Shaq has built a solid record as an investor off the court), touting them as headliners for shell companies suggests that some investors have way too much capital burning holes in their pockets.
The most worrisome part of this? All but one of the SPACs listed in the article – from a bit more than a month ago – have already gone public, raising hundreds of millions of dollars.
There’s just one more sign of the bubble market that hasn’t happened yet…
The Ultimate Sell Signal: Meet the Jeddah Tower
Indicators that have nothing to do with markets can sometimes offer insight on bubbles. One of the best is the “skyscraper index” (for those with a fondness for adolescent humor, this is also known as the “erection index”), which points to a correlation between the construction of the tallest building in the world and financial crises.
When a country declares it’s going to build the tallest building in the world – a surefire sign of excessive optimism – it angers the gods of finance, who hurl a thunderbolt of crisis around the time the building is completed… ensuring years of depressed prices and empty floors.
For example… the Empire State Building took the mantle of the world’s tallest building when it was completed in 1931, one year into the Great Depression. In 1974, Chicago’s Sears Tower claimed the title – just as the U.S. entered a macroeconomic hell of stagflation.
When Malaysia took the curse of the world’s tallest building, with the Petronas Towers in 1998, they brought with them the poisoned chalice of the Asian financial crisis, which nearly swallowed the country’s economy whole. And the current tallest building in the world, the Burj Khalifa in Dubai, was completed in 2010 – just months after a default (or rather, a debt “standstill”) by the emirate’s investment vehicle.
Next up? The one-kilometer-high – that’s 0.62 miles, 3,280 feet, or nine football fields – Jeddah Tower, in the eponymous city in Saudi Arabia. Once (or rather, “if,” since construction was suspended last year and hasn’t resumed yet) completed, it will be more than 170 meters taller than the current world-record holder. The Jeddah Tower will have 59 elevators, but “the lifts will not reach the speeds of normal elevators, as the change in air pressure at those altitudes would cause nausea,” architecture website Architizer helpfully explains.
But let’s hope it’s never finished. The last thing a bubble market needs is a one-kilometer-high building – the ultimate sign of a bubble.
Before then… there are some simple things you can do to protect your portfolio from a burst bubble.
How to Protect Your Portfolio From a Bubble Market
If it really is a bubble market – and it sure looks as if it is – you need to watch that your portfolio doesn’t pop with it. A few simple ways to protect yourself…
1. Regularly rebalance your portfolio. Did your 4,000% gains in, say, Garlicoin make your portfolio top-heavy with all those crypto gains? If so… be sure you rebalance your portfolio by selling the big gainers and redistributing to the assets where you have a smaller allocation – to get back to your target portfolio profile.
2. Watch those stop-loss levels. No one likes to admit defeat. But in investing, it’s important to have a disciplined approach to selling your bad positions – when that bubble pops – and losing the battle. Otherwise, you risk losing the war when a few bad stocks wipe you out altogether.
The important – and most difficult – thing is to follow through. If an asset falls to your stop-loss level, sell… no questions asked. And make sure you don’t put a standing market order in at your trailing stop level. You don’t want to tell your broker when you’re going to sell. Make sure that you make it a mental note (or a bright orange sticky note on your monitor) – not one that you tell your broker.
3. Raise some cash. If you think a bubble is forming… sell something and hold onto the world’s best hedge. It’s the least exciting asset known to mankind (how many cocktail party conversations have started with some variation of “Let me tell you about this great cash I have”?). But it’s also one of the safest and one of the easiest to use. And if all other assets collapse in price, cash will be worth the same tomorrow.
4. Don’t bet the ranch to begin with. If you employ basic position sizing from the outset (that is, allocate according to risk… more low-risk, less high-risk), then regardless of what happens to a particular potentially bubbly asset class, a severe correction isn’t going to cause you any kind of catastrophic drawdown in your portfolio.
If, for example, you allocate 2% of your investable asset base into cryptos, then even if the entire crypto market is worth zero tomorrow, your maximum loss is 2%. It’s not rocket science, it’s just prudent position sizing.
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