Portrait Of A Stock Bubble

Just like the Dutch Tulip Bulb bubble, internet stock bubble, and the  mid-2000’s financial asset bubble, the current stock market is no longer  a price-discovery mechanism.   It has deteriorated into a venue in which Central Bank-manufctured liquidity – in the form of printed currency and credit creation – has flooded into the system, enabling investors to chase the few stocks rising in price at the highest velocity (click to enlarge, graph on the left sourced from Jesse’s Cafe Americain).

The drivers of this modern day Dutch Tulip phenomenon are the so-called “Five Horsemen” stocks – AAPL, AMZN, FB, GOOG,MSFT. To that grouping I toss in TSLA.  Among all of those bubble stocks, TSLA has become, by far, the most disconnected from any remote intrinsic, fundamental value.  AAPL alone is responsible for 25% of the YTD gain in the Dow and 13% of the YTD gain in the S&P 500. AAPL’s revenues and operating income have declined over the last three years (2014 to 2016).  More often than not, even on days when the S&P/Dow are red, most if not all of the Five Horsemen + TSLA  seem to close green.

Eventually, the music will stop and this “no-price-discovery-possible” market will become a “can’t find a seat” market.  The abruptness and rate of decline will be breathtaking. Perhaps only matched by the outflow of capital from the cryptos by “investors” who leveraged up their cryptocurrency holdings to throw more “money” at TSLA.

The good news is that a lot of money can be made shorting stocks.  Since April, stocks like IBM, GS, SHLD, BZH and GE presented in the Short Seller’s Journal as shorts have outperformed the SPX/Dow.  SHLD is down 47% in 7 weeks – a home run.  BZH is down 18% in three weeks.  In the next issue, a “funky” financial stock will be featured that has the potential to drop at least 50% over the next 12 months if not sooner.

No one knows what event will trigger the stock bubble collapse.  One possibility is the ongoing financial implosion of the State of Illinois.  In stock bubble periods, all news is imbued with “the glass is half full.”  As an example, Illinois’ credit rating was reduced recently to BB+/Baa3.  That is a junk rating. But the media characterizes it as a “the lowest investment grade” rating – i.e. the “glass is half full.”

Both rating agencies never downgraded Enron to junk until it was weeks from Chapter 7 bankruptcy.  Illinois is on the brink of financial disaster.   See this article as an example:  Illinois Owes Billions.  This problem is absolutely dwarfed by Illinios’ public pension problem, which Illinois underfunded by a couple hundred billion (officially about $130 billion but that’s not on a true mark-to-market basis).

When the music finally stops, the perma-bubble bulls will be looking for that proverbial “seat” in all the wrong places.  But the next stampede of capital will be out of stocks, bonds, cryptos and “investment” homes and into physical gold, silver and mining stocks.

6 thoughts on “Portrait Of A Stock Bubble

  1. As always Dave, you present a complete picture with few words. I especially like the comparison of the current market to the Tulip Bubble, where insanity was considered normal behavior. It staggers the imagination to think that the tail is wagging the dog with only 6 stocks. One would think that the experts would have learned the lessons of history by now. Whatever the catalyst is that finally knocks this silly and unsustainable market off its perch, I will be watching my mining stocks and my physical holdings finally catch up with all the bottled-up inflation. If these behemoths can avoid bankruptcy, an 80% correction will be an excellent chance to pick up these trophy stocks for less than their book value. Thanks always for being a good coach.

    1. In one tiny detail the comparison of the current market to the Tulip Bubble is different. The Tulip Bubble had been the first mistake, which may be considered as a warning to learn a lesson.

      The coming crash violates Einstein’s definition of insanity and madness:
      “Insanity: doing the same thing over and over again and expecting different results.” – Albert Einstein

      And: “In the end stupidity always wins…”

  2. Do you write off the idea of cryptos in the long-run altogether? I think capital controls in the wake of crisis are rather likely, which would drive up cryptos.

  3. It looks to me like a hyperinflation situation. You are right that these companies are not worth much, but the currency is dying. Also, I believe the tulip “bubble” happened when their currency was hyperinflating also. It would be interesting to see a chart of the price of gold in guilders during the same time. So, my question is if the currency is hyper-inflating isn’t it extremely dangerous to be short the stock market regardless?

  4. Steven Bregman On ‘The Greatest Bubble Ever’ (Passive ETF Investing) Jesse Felder June 6, 2017
    Jim Grant calls Steven Bregman, “one of Wall Street’s most interesting thinkers.” I called upon him to share his thoughts on the massive and growing trend to passive investing which he calls, “the greatest bubble ever.” He discusses the differences between the current bubble in the financial markets and prior bubbles, the specific distortions created in the markets and the unique opportunities they present. Perhaps most importantly, Steven reveals the little-discussed structural shift in passive investing which dramatically devalues it as a strategy and how investors have been deceived by historical return figures that are not applicable to the products they own today. We also get into his personal history in the financial industry along with his evolution as an investor and more. Here are a few notes and links related to the episode:


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