Bubbles are evident and only get acknowledged after they pop. Such is because, during the inflation phase of the market bubble, investors rationalize why “this time is different.”
We have seen many examples of this rationalization over the last couple of years. Such as stocks are cheap based on economic growth, low-interest rates justify high valuations or the “moral hazard” of the “Fed put.” Other examples come from the analysis of stock prices, such as this tweet recently.
While the analysis is correct, average stock prices do not solely define a bubble.
Such is where we need to start.
What Is A Bubble?
According to Investopedia:
“A bubble is a market cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. Typically, what creates a bubble is a surge in asset prices driven by exuberant market behavior. During a bubble, assets typically trade at a price that greatly exceeds the asset’s intrinsic value. Rather, the price does not align with the fundamentals of the asset.“
This definition is suitable for our discussion; there are three components of a “bubble.” The first two, price and valuation, as noted above, are get dismissed or rationalized during the inflation phase. That rationalization is due to investor psychology and the “Fear Of Missing Out (F.O.M.O.)
Jeremy Grantham posted the following chart of 40-years of price bubbles in the markets. During the inflation phase, each got rationalized that “this time is different.”
Our friends over at Integrated Wealth Management thought you might enjoy this article. ~Ed.
Ever wonder why you’re going through toilet paper faster (even if your diet hasn’t changed). For those of you alive in the 70’s – did you wonder why all of a sudden gumballs had a hole in the middle? It’s called “shrinkflation” – manufacturers offering less while charging the same price. It’s a “clever” way inflation is killing your purchasing power and probably not reflected in Consumer Price Indices (which we all know are manipulated). Inflation is perhaps the biggest threat to your financial health in the coming years. Make sure to inflation proof your portfolio. This a great article on this phenomenon. ~Sandor Kiss IWM
How will we know if inflation is making a comeback? Most economists are focused on the price of commodities, wages, and other basic goods and services. But history suggests they might want to keep an eye on a related phenomenon that often escapes notice: so-called “shrinkflation.”
This practice became increasingly common in the 1960s and 1970s, when manufacturers confronting runaway inflation tweaked packaging rather than hike prices. At first, the practice attracted relatively little notice: It’s difficult to discern changes in unit prices when they’re camouflaged in different-looking boxes and bags.
In fact, it was the humorist Art Buchwald who was among the first to sound the alarm. In a column entitled “Packaged Inflation” published in 1969, he lampooned the growing tendency to conceal price increases. Tongue in cheek, he praised American industry for “devising new methods to make the product smaller while making the package larger.”
This wasn’t far from the truth. As inflationary pressures rose over the course of the 1970s, manufacturers pursued a number of methods to pass along price increases. The most basic of these was so-called “downsizing” – same package, same price, fewer goods.
In late summer of 1974, for example, Woolworth’s offered a packet of pencils at its back-to-school sale for 99 cents – same price as the previous year. But as a sharp-eyed reporter at The New York Times observed, the packages only contained 24 pencils, six fewer than the previous year. The same strategy affected packets of construction paper (24 sheets, not 30).
The grocery store offered numerous opportunities for downsizers. At the beginning of the decade, that staple of postwar cuisine, Rice-A-Roni, sold boxes containing 8 ounces of the product. Soon, though, it shrank to 6.9 ounces, but the packaging and price remained the same. (Today, the rice-and-vermicelli-filled boxes remain precisely the same weight, which suggests that even shrinkflation has limits.)
This kind of sleight-of-hand became ubiquitous. Everything from cans of tuna fish to jars of spaghetti sauce contained less and less. Advocacy groups like the Consumers’ Union (now Consumer Reports) inveighed against downsizing, but the practice remained widespread…read more.
Politicians never seem to have much trouble telling us they want to raise taxes. It seems to come as naturally to them as breathing does to the rest of us. They do their level best to keep the spotlight on “the rich,” of course, who they say must “pay their fair share.” But what do politicians hardly ever say? They hardly ever say who “the rich” are. And when they do, they usually point to multibillionaires while meaning people with considerably less. What do they also never say? They never say what a “fair share” is. It really just means “more.” Who would’ve thought.
This leaves a problem for the class warfare class, because it is these same rich people who fund their political campaigns. And as if that weren’t bad enough, most Congressmen and Senators are rich themselves. The two who yell the loudest about taxing the rich, Bernie Sanders and Elizabeth Warren, are worth $2.5 million and $12 million respectively. What are the odds that these two, and all their cronies in Congress, would bite the hands that feed them? What are the odds they would bite their own hands?
We do well to remember 1988. George H. W. Bush, in accepting the Republican nomination for the presidency made his point perfectly clear. People would pressure him to raise taxes, but when that happened he would say, he claimed, “Read my lips. No new taxes.” All things considered, that’s a pretty easy promise to make, but a much harder promise to keep. It wasn’t long before Bush broke his promise, but in doing so he only went after “the rich,” signing into law a 10 percent luxury tax on things rich people buy – yachts, private planes, and expensive jewelry.
The tax was supposed to raise more than $30 million in additional revenue, but it didn’t raise much of anything. The rich simply went elsewhere to purchase their luxuries. Entrepreneurs and the working class paid, and they paid dearly as the tax destroyed almost 10,000 jobs in the boating, aircraft, and jewelry industries. Meanwhile, foreign companies in these industries made out like bandits. And that’s the difference between the rhetoric and the reality of taxation.
We can dig deeper still into tax reality through the Congressional Budget Office (CBO), which asks Americans how much they earn and how much they pay in federal taxes. Breaking down those answers by income level provides some valuable insight into who is and isn’t paying their “fair share.”
Our friends over at Integrated Wealth Management thought our readers would enjoy this article. ~Ed “Going forward, active management of portfolios versus passive index investing in ETF’s will be more important than ever because market weighted indexes are too overweight in tech, those tech stocks are at high historical valuations and a rising interest rate environment will impact these stocks. So good stock selection will pay off for investors.” ~Andrew Ruhland, Integrated Wealth Management.
It’s no secret that money has poured into passive equity vehicles as investors seek low fees above all else. To date, that has worked out just fine since equity indexes have compounded their returns at acceptable, if not above average, rates of returns. But, the world is different now than it was 10 years ago, and the low-cost advantage of passive investing may now be outweighed by its risks.
In this quick post we’ll address three risks to passive investing that together suggest the riskiness of this strategy may well be the highest it has ever been. Click here to read more.
Andrew Ruhland shares with Mike his strategy Core and Explore strategy – and how it offers a safe, structured and sophisticated way to take advantage of the Commodity Super Cycle.
With government printing presses running in 5th gear, massive green spending initiatives & monetary policies creating significant risk for fixed income investments… the Commodity Super Cycle presents an exceptional opportunity for investors. Join Andrew Ruhland immediately following the show at 10:05am pacific / 11:05am mountain time as he shares:
- Opportunities created by “Build Back Better,” Money Printing & Infrastructure Spending
- How to carefully invest in emerging opportunities in energy, metals, clean tech, agriculture and nuclear
- How to position income generating assets to benefit from rising interest rates
- How to shift your portfolio to take advantage of inflation
CLICK HERE to register