– originally posted January 2020, when the Dow approached 30K
I woke up this morning and realized – it’s time to unload my stock portfolio!
As my mind cleared, I recalled that I didn’t actually have a portfolio, or any stocks at all.
I don’t even have a 401K. My retirement plan is the 401EZ – it should cover me, as long as I don’t stop working after I retire.
Just the same – it’s time to sell stocks. A Dow of 30,000?
It was 20,000 a year ago, and that was padded.
Take a look around – do you see 50% economic growth since last Spring? I see low interest rates, a huge tax cut for the rich, a housing bubble in major markets…. but not much economic growth.
But What About Uber?
Sorry, Uber is not “economic growth” – at best it’s a lateral movement that provides a slight improvement in taxi services. Whoop tee do.
What else is booming? Tourism? Destroying the environment in search of more fossil fuels? New advances in robotic senior care?
OK, I grant you those – but a 50% boost to the entire economy? I’m skeptical.
It’s a bubble. And while I can’t name the date it will burst, it is not going to inflate much further.
Let’s look back at the last bubble – which peaked much lower than this one.
The 2008 Crash Revisited
In the mid-2000s, the booming stock market – then passing peaks of 12, 13, and even 14,000 – was widely called “irrational exuberance,” even by the former Fed chairman.
No one believed the economy had grown that much, nor that housing prices should have doubled in a decade. The word bubble was widely bandied about.
Sure enough, the markets crashed.
In 2008, the Dow crashed to about 8000, and took until 2013 to get back to 14,000.
What brought the markets (housing and stocks in particular) back was not actual economic growth, but microscopic interest rates (.25 at one point in the US, which had a past average of around 4-5% in non-inflationary periods). Nearly-free money was hurled around, and lacking productive investments (more on this in another post) the money basically re-inflated stock and housing bubbles.
As I write, the Dow is over 29,000 – double the peak of just a few years ago.
Ie – double the peak that crashed hard in 2008.
Amazing What Cheap Money Can Do
Why? Cheap money. Low interest rates, big bonuses paid to the stock-buying classes, and most recently an absurdly unnecessary tax cut that poured billions more into the pockets of stock-buyers.
To no one’s surprise, the market bubble has inflated to new “irrational” heights.
But now, interest rates are as low as they can go (negative rates would destroy savings and retirement funds – a political non-starter unless we’re in a severe depression).
The tax cut will continue to pour money into the pockets of the rich – but the effect on the market will be to sustain current prices, not increase them.
The current peak will be almost impossible to surpass.
Sensing the peak, speculators will look for more lucrative “investments.” They’ll be selling – so whatever new cheap money comes into stocks, the speculators will balance by selling. The peak has been reached.
Sooner or later, stagnant or rising interest rates and declining effects of the tax cut will result in an overall slowdown. Recessions do happen, you know.
At that point, the downward spiral begins – people sell stocks because they need money to cover their debts. With increased stocks for sale, market prices go lower, so people have to sell more stocks to get the same money. And so on.
That moment is fast approaching. It’s been 12 years since the 2008 crash. That’s one of the longer stretches between crashes since 1900.
I’d say – prepare for hard times.
– in process – email Luke Hauser with ideas