We Are In a Big, Fat, Ugly Bubble…

by FI Fighter on September 28, 2016

in Stock Investing Thoughts

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The key takeaway I got from the first presidential debate is shared below…

From CNBC.

Donald Trump again warned of a stock market bubble during the first presidential debate, but financial professionals on Tuesday told CNBC they don’t buy it.

 

“Believe me, we are in a bubble right now, and the only thing that looks good is the stock market, but if you raise interest rates even a little bit, that’s going to come crashing down. We are in a big, fat, ugly bubble,” the Republican presidential nominee said Monday night.

 

Love him, or hate him, in this case Mr. Trump is absolutely right on the money about us being in a “big, fat, ugly bubble” right now…

Tune in at 26:33 mark

 

“When they raise interest rates you’re gonna see some very bad things happen…”

 

Yup, which is why we have been stuck at ZERO for a good decade… while the rest of the world is diving deeper and deeper into NEGATIVE territory…

 

Who you gonna believe? Donald Trump (a guy who knows a thing or two hundred about debt and asset bubbles) or a bunch of “financial professionals” who need to keep the suckers in the game for as long as they can to keep earning their big fat bonuses?!?

From TCW.

While every asset price cycle is different, they all end the same way: in tears.

As obvious as this truth is to investors, when the sad end to the credit cycle comes, it always comes as a big surprise to many, including the central bankers who, reliant on their models, confidently tell you that no recession is (ever) in the forecast.

But, successful, long-term investing is predicated on not just knowing where the happening parties are during the reflationary parts of the cycle but, even more importantly, knowing when the time has come to leave the dance floor.

In our view, that time has already come.

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The chart reveals something rather extraordinary: over the course of the past 25 years, the traditional business cycle has been replaced with an asset price cycle

Rather than let recessions run their painful but necessary course, central bankers move forthwith to dispense the monetary morphine.

The Fed’s playbook on this is well worn: first, policy rates are lowered. This triggers a daisy-chain of events: low or zero rates promote a reach for yield; the reach for yield lowers capitalization rates across a variety of asset classes which, in turn, spurs a rise in asset prices.

Rising asset prices – the so-called wealth effect – “rescues” the economy by rebuilding balance sheets and restoring the animal spirits. And voila! Aggregate demand rises, businesses invest, and a virtuous growth process is launched.

Well, maybe not so much. If it were all so simple, then why is it that after ninety something months of zero or near zero rates, growth is sputtering, the corporate sector is in an earnings recession, and productivity growth is negative?

 

Continue reading here

 

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If it looks like a bubble, swims like a bubble, quacks like a bubble, then it probably is a…

 

Bubble…

 

Fight On!

{ 13 comments… read them below or add one }

1 Laurie @thefrugalfarmerNo Gravatar September 28, 2016 at 5:08 am

FINALLY! Someone else who sees it! So many people are riding the “we’re doing great!” train and don’t see the bubble. We’re on the same path as America right before The Great Depression.

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2 FI FighterNo Gravatar September 28, 2016 at 5:17 am

Laurie,

Thanks for stopping by! Absolutely, at market tops most everyone (particularly retail investors) never see the bubble coming because we are too fixated on the fear of missing out (FOMO)… Greed takes over and is in full control… It feels so good when our assets are doing well that we just keep wanting to chase moar, moar, moar!

Confirmation bias is deadly, and investing is by far the most addicting drug out there. Investors don’t like to stop, especially not when they are in the GREEN with their investments.

The second hardest thing to do as an investor? Leaving some near/at the top and feeding the ducks.

The hardest thing to do as an investor? Buying at market bottoms when everyone else is scared and assets are selling for pennies on the dollar (when real fortunes are made by investors).

Human psychology.

Fear and greed.

It will never change… History will only keep on repeating itself.

All the best!

Reply

3 SeanNo Gravatar September 28, 2016 at 6:36 am

Great Article! Do you have some advice for FI Fighters early in their journey during this cycle? Keep higher cash reserves and wait for the bubble to burst? Invest in different asset classes?

Reply

4 FI FighterNo Gravatar September 28, 2016 at 6:43 am

Sean,

Thanks! Keep your head on a swivel and never lose sight of risk vs. reward.

If the upside is immense and the risk manageable, it’s a quality investment opportunity.

If the upside is minimal and the risk excessive, it’s a terrible investment opportunity.

All investments, by definition, involve a degree of risk… Nothing is guaranteed in the world of investing, but we maximize our odds for success when the risk vs. reward curve is skewed heavily towards the reward side.

Also, be an agnostic investor… Stocks make money. Real estate makes money. Commodities make money… Etc.

There are a million and one ways to invest… Passive income/cash flow is nice… Appreciation/capital gains are nice too… Total returns are the best.

Don’t be a binary investor… You can create a portfolio comprised of many things: Buy and Hold Forever cash flowing assets + high growth potential speculations + lots of cash on the sidelines, etc… Doesn’t have to be an all or nothing proposition, ever… Tunnel vision is seldom a good thing unless you are indeed buying into an “opportunity of a lifetime” type of investment, which is when you really want/need to “back up the truck”.

Every asset class goes up and down. Bear market to bull market… Over and over again. To expect anything different is to delude yourself from reality… and that’s how you get into big trouble.

There is always another train arriving at the station… If an investment opportunity runs away, don’t go chasing after it… So be it. Sit back and wait for the next one.

Not all investments work out… You will swing and miss… often. Take it in stride and don’t get too emotional about it. You can’t win em all and don’t need to in order to succeed as an investor.

Education is key… If you don’t understand a sector, study it up like mad and network with those who have been successful investing in that space. Do that before making sweeping generalizations that may be completely false and to your own detriment. My own take? All asset classes have their pros/cons… There is no such thing as the perfect investment.

Leverage is your best friend, but only in a downcycle/bear market… Debt is your absolute worst enemy in a deflation.

And in regards to cash?

It is 10x more difficult to buy at market bottoms for experienced investors and at least 1000x more difficult for new investors. What this means is that the opportunities that present themselves during the Depths of Despair are truly “life changing”. You can make $1 million+ in ONE cycle! If you have to look for “needle in the haystack” type of deals, it’s just not worth doing… Too much work for too little reward. Patience and doing NOTHING is what trips up most investors b/c if you’re too active, at market bottoms even if you want to buy, you have no cash!

Hope that helps!

Cheers!

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5 SeanNo Gravatar September 28, 2016 at 6:59 am

Thanks! Great advice! I especially like your thought on being an agnostic investor.

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6 NickNo Gravatar September 28, 2016 at 9:20 am

I have been debating transition out of the market for this reason. What would you recommend for people with indexed 410k’s and traditional iras? My options are to switch to bond funds or stay put. Can’t really cash out.

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7 FI FighterNo Gravatar September 28, 2016 at 4:36 pm

Nick,

I can only share my own thoughts and what I’m doing with my own portfolio, but I can never recommend any course of action to anyone; I am not a qualified financial advisor.

In regards to my views on the market, it is no secret that I think valuations are sky high and we are due for a correction. Like everyone else, I have no crystal ball and have no idea when/if it will even happen and what the order of magnitude could be…

For your own situation, you would have to assess your own comfort level and determine your own views… With investing in general, I do believe that decisions don’t have to be binary. In other words, it never has to be an “all or nothing” proposition. IN my own case, I still hold 7 rental properties for Buy and Hold cash flow, but I just stopped buying more rentals and general equities… Selling a partial position is an option as well…

It really depends on your own viewpoints.

Hope that helps!

Take care!

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8 AndreNo Gravatar September 28, 2016 at 1:41 pm

Hi Fifighter,
I’m following with great interest cause what your saying makes a ton of sense. I’ve only found this site a month or so ago so I’ve had a lot of catch up to do. I’m wondering… if you buy in to this when they raise rates their will be a big collapse in the stock market and other asset classes and if we look back at the last crash, the tsx.v got absolutely murdered. So my question is will you try and get out of all venture stocks prior to the first rate raise or will you stay in until you actually see the crash happening ?

Looking forward to you thoughts as I am formulating my own plan for this future event

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9 FI FighterNo Gravatar September 28, 2016 at 4:43 pm

Andre,

In regards to interest rates, at this point in the cycle, it’s pretty clear that attempting to raise rates even 25 basis points is something that the Fed has to proceed with doing using great caution… Why is that? There’s simply way too much debt in the system and even such a “minuscule” rate increase could have devastating consequences…

The Central Bank playbook believes that by keeping rates artificially low they can encourage borrowing/spending/consumption and kickstart the economy… After almost a decade of “easy money”, everyone should be able to see that this strategy has clearly not been working. In short, there has been no real growth (inflating asset bubbles does not increase productive capacity)… The rich have gotten richer due to the “Wealth Effect”, but the everyday guy on Main Street is struggling just as much (or more) than before… There’s been a hallowing out of the Middle Class…

So, I think all these threats of raising rates are just “Fed talk”… They’ll probably attempt it one more time in December to save face, but we could very well have a repeat like we did earlier this year when the global markets all decided to sell off…

If we do have a market crash, yes, I would anticipate seeing my portfolio take a nose dive, along with everyone else… I can’t imagine really any assets holding up in value because when it rains it pours… With gold/silver miners, though, I have no idea how much they will get whacked, and if they do, it might just be short-lived due to a liquidity event… I do tend to believe those equities will recover the fastest b/c by nature gold and silver are anti-correlated to the rest of the markets and the “safe haven” or “fear trade”…

That’s why I keep on holding…

But with my real estate, lithium, uranium, etc… yes, they will get hit, and there’s no escaping that… That’s the risk you take with being invested in the markets.

Which is why I’m always hedged; I also have $200k in cash and cash equivalents sitting on the sidelines…

We just try and do the best that we can…

All the best!

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10 Dividend MiracleNo Gravatar September 28, 2016 at 1:53 pm

Nice post and I do wonder what month the Market Bubble will pop?

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11 FI FighterNo Gravatar September 28, 2016 at 4:51 pm

DM,

That’s the million dollar question! If we all knew, we’d all be stinkin’ rich 😉

Your guess is as good as any…

Take care!

Reply

12 joeybeeNo Gravatar September 28, 2016 at 4:03 pm

march 2017. yup, that’s right. i’m purchasing dilithium

Reply

13 FI FighterNo Gravatar September 28, 2016 at 4:51 pm

joeybee,

Hope it works out well for you!

Cheers!

Reply

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