Many bubbles can exist at once within the stock market. Some will grow slowly over time and pop years later while others grow quickly and pop soon after.
This phenomena is present in various forms within the universe. Stars exhibit the same behavior as an example. Some stars burn relatively cool and last tens of billions of years; others burn extremely hot and use up all their fuel in only a few million years.
We see the same thing today in regards to the overall stock market (a slow bubble), and Bitcoin (a fast bubble). Both will eventually pop, one sooner than the other. Either way we need to be prepared for the inevitable fall.
Let’s get Bitcoin out of the way first because it is a speculative joke at the moment and not worthy of your investment. Bitcoin is exhibiting nearly identical behavior as the tech bubble of the late 90’s.
A few years ago Bitcoin was known as the younger generation’s technology. Now everyone is talking about Bitcoin and its unknown price ceiling…just like the dot-com stocks of the late 90s. And the price has parabolically surged upwards as a result…just like the late 90s.
Bitcoin does have value and a place in society, and years later may even stabilize at a price much higher than today. However as it stands now, the hype is overcoming logic and people are buying in out of fear of missing the boat. Bitcoin has not experienced any fundamental benefit that would justify daily double-digit percentage gains.
In my past postings I mentioned that traumatic experiences have a lasting effect on people’s behavior. The older generation who traded through the dot-com era will always be on the lookout for a repeat of this bubble and is less likely to make the same mistake again.
However the younger, Bitcoin generation has not lived through such a bubble, thus is very prone to making the same mistake that every generation goes through once. They let greed and hype overcome logic and end up chasing the bubble to the top, until the eventual pop and panic crash.
Besides Bitcoin, the overall stock market is a slower bubble in the making. The nearly 300% gain since 2009 has pushed multiple metrics of market valuations to highs last seen during dot-com bubble and years leading up to the Great Depression.
These market valuations are constantly justified by the media because companies are beating guidance and the economy is healthy. That’s all great, but the hard truth is that companies can beat guidance at ANY market valuation, and the economy can be healthy at ANY market valuation as well.
The Federal Reserve is in the process of unwinding the largest stock market welfare program in history and this bull market is the second longest running in history, yet the market continues higher because everyone is feeding into the notion that these valuations are justified.
Once the natural business cycle takes its course and earnings start declining, inflation picks up, and the Fed is forced to raise interest rates back to a normal level – there will likely be an enormous stock market correction.
And if heaven-forbid the economy goes into a recession or stagflation; the Fed can’t cut interest rates much lower than they already thus the stock market may very well have to endure a recession without the Fed’s hand-holding. If you think the dot-com and housing crashes were bad, imagine how much worse things can get if the Fed can’t react to a recession.
As we approach Dow 24k everyone is talking about how high the Dow can go, rather than realizing “normal” market valuations can mean the Dow index dropping less than 16k. That’s not even a low point, just a normal point!
I am fully out of stocks and solely trading both sides of volatility. I generally hold 100% cash until a volatility spike, then short volatility when it stabilizes. However as I’ve mentioned in previous posts, short volatility is its own bubble in the making that many people take for granted because the volatility ETNs did not exist during the last recession.
As always, keep logic in your investments and stay an outsider from the media hype. Invest wisely.