Bubble Notes
Adjusted for inflation, housing prices are now 5% higher than they were back in 2006, when the previous housing bubble peaked. After that housing bubble popped, housing prices fell for six years, by 28% (after adjusting for inflation).
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Adjusted for earnings, stock prices are now 30% higher than they were in 1929, and approximately at the same level as in 1999, less than a year before the Dot-Com Bubble peaked. Stock prices would need to fall by 60% to reach their median historic valuation.
But corporate profits are also higher than normal. Stock prices would need to fall an additional 40% if corporate profits regressed to the median historic proportion. That's a total decline in stock prices of 75%, just to return to normal. And half the time stock valuations, and corporate profits, are lower than the median.
So ... a rational expectation would be for stock prices to fall 75% from where they are now, although they could fall more, or less.
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The bond market is in a bubble also. In the past when inflation was around 7%, the median rate on a 10-year Treasury bond was about 8%. Currently the 10-year Treasury pays less than 2%. Bond prices would have to fall 40% to account for such a big increase in interest rates.
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With stocks, bonds, and real estate in bubble territory, where should you store your savings/investments?
How about gold?
Well ... gold is in a bubble also, adjusted for inflation it is close to its all-time high. Gold prices are more than twice the historic median inflation-adjusted value.
Crypto? I could write an entire post about how crypto is probably the worst Ponzi scheme in the history of the world. Plus, it is horribly energy intensive as the planet burns.
With everything in bubble territory, there's not really a good option for savings. You should spend your savings on stuff you'll remember enjoying.
But if you have to save, I'd say a basket of some of the world's hardest currencies would be best right now -- the Euro, the Dollar, the Pound, the Yen -- all invested in short-term bonds or money-market funds. Then after the bubbles pop, you can move back into other kinds of assets.
But, the biggest problem with bubbles is how long they can last. You never really know when they will pop, so if you avoid bubbly assets you can feel stupid for a long time. That's why I don't put all my assets in any one basket, instead I distribute my assets across several domains, while putting more in the less bubbly and less in the more bubbly.
So, my retirement funds are in money market, bonds, and stocks, but mostly in money market for now. In my play money account I've sold bonds short, to profit from their decline. Your mileage may vary.
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Adjusted for earnings, stock prices are now 30% higher than they were in 1929, and approximately at the same level as in 1999, less than a year before the Dot-Com Bubble peaked. Stock prices would need to fall by 60% to reach their median historic valuation.
But corporate profits are also higher than normal. Stock prices would need to fall an additional 40% if corporate profits regressed to the median historic proportion. That's a total decline in stock prices of 75%, just to return to normal. And half the time stock valuations, and corporate profits, are lower than the median.
So ... a rational expectation would be for stock prices to fall 75% from where they are now, although they could fall more, or less.
-----
The bond market is in a bubble also. In the past when inflation was around 7%, the median rate on a 10-year Treasury bond was about 8%. Currently the 10-year Treasury pays less than 2%. Bond prices would have to fall 40% to account for such a big increase in interest rates.
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With stocks, bonds, and real estate in bubble territory, where should you store your savings/investments?
How about gold?
Well ... gold is in a bubble also, adjusted for inflation it is close to its all-time high. Gold prices are more than twice the historic median inflation-adjusted value.
Crypto? I could write an entire post about how crypto is probably the worst Ponzi scheme in the history of the world. Plus, it is horribly energy intensive as the planet burns.
With everything in bubble territory, there's not really a good option for savings. You should spend your savings on stuff you'll remember enjoying.
But if you have to save, I'd say a basket of some of the world's hardest currencies would be best right now -- the Euro, the Dollar, the Pound, the Yen -- all invested in short-term bonds or money-market funds. Then after the bubbles pop, you can move back into other kinds of assets.
But, the biggest problem with bubbles is how long they can last. You never really know when they will pop, so if you avoid bubbly assets you can feel stupid for a long time. That's why I don't put all my assets in any one basket, instead I distribute my assets across several domains, while putting more in the less bubbly and less in the more bubbly.
So, my retirement funds are in money market, bonds, and stocks, but mostly in money market for now. In my play money account I've sold bonds short, to profit from their decline. Your mileage may vary.