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jeremy if you're right and we're on the cusp of the bursting of an epic bubble is now the time to as they say sell everything i suspect selling everything would work out just you believe that the bull market that started in march of 2009 the longest bull market in history has matured into a speculative fever of rare proportions in your words a fully fledged epic bubble tell me more it would be surprising if you could have one that long that didn't end up with the animal spirits are beginning to freak out a bit and this one has normally it takes a nearly perfect economy and friendly uh ready fed behavior but this one has managed to do it with a somewhat wounded economy on a global basis and to compensate for that we've had even more spectacular fed friendliness and government friendliness that we've had for once the joining of fiscal spending with uh with the beds behavior and the usual moral hazard that has been going on for since greenspan arrived in in the 90s and the result of this is the confidence has risen and risen until finally people are reaching for the greatest demonstration of confidence they have had in their investment career they're borrowing more money to throw it into the market their belief in the market is profound the common wisdom is that with the fed on your side how can you lose when they first said that back in greenspan there were a few doubters and they said it with bernanke there were less doubters but some and now finally there appear to be almost no doubters at all the belief is more or less complete that all it takes is the fed on your side and stops will rise forever what are some of the signs we'll all look at with the clarity of hindsight and say of course it was a bubble if you want crazy ones and you need crazy by the way that's the best timing for a bubble top it's crazy behavior you look at the over-the-counter the trading i was big over-the-counter trader in a speculative bubble of 1969 i had almost forgotten there was a over-the-counter but they last february it traded about 80 million shares for the month and it worked its way steadily through the year until november uh was about 380.
so it had gone up four times and and then in december it went to 1.15 trillion shares for the month having tripled it then tripled again in the single month of december i can't tell you what is going to be in january but these are spectacular performances my my own stock in quantum scape it it came into the market at 10 and shot up to 130 at 130 it was bigger than general motors or panasonic and this is a a brilliant company but it has no trouble admitting that it won't be producing any batteries for four years so no sales no profits and bigger than gm there is nothing like that in 1929 nothing of that scale nothing like that in 2000 the ciscos of the world were pretty serious companies but they didn't they didn't get to this level 1929 of course ran into the great depression and global trade problems so you really just want to look at the first leg down which was big enough the analogy is much better with two thousand and two thousand it went down fifty percent and the reason it only went down fifty and and bounced back uh relatively quickly was uh was because the fed came charging in uh to the rescue and you can have a lot of rescues when you start at a 16 long government bond in 1982.
you can have a bull market as you go down from 16 to 12 and another bull market from 12 to 8 another bull market from eight to four but now you're down at two and a half or whatever you have to realize that most of the easy pickings uh of of saving the game by ramping rates down is behind us at the lowest rates in history you don't have a lot in the bank to throw on the table do you no at least it doesn't matter going by conventional monetary theory no that's right and and the idea that you know fundamentals the real world doesn't count all you need is money uh to generate real wealth i think most people can can feel is an illusion you can imagine a situation where you had a much more serious virus the economy really was on its knees and and the fed was obviously would be doing everything it could would that be enough uh to uh to save the system in the end the system is about the number of people working the amount of capital spending the the quality of education of your workforce that's the real world we're talking about the paper world and there's just so much blood you can get out of that would a bubble have formed absent the kovalev 19 pandemic it's the covet brought in spectacular excesses on the part of the fed and the government writing checks and i say excesses perhaps it was necessary but in any case it was unprecedented and the combination was very powerful without covert we cannot know the market had resisted opportunities to bubble earlier in this 11-year cycle it looked like it was getting pretty close about three years ago and then it just kind of fizzled away the confidence dissipated the market had a decline and those bull markets can go on forever and you don't know how long and you don't know how high they can go the back of every bear's mind must surely be japan japan in 1989 managed to get to 65 times earnings it had never previously gone over 25 until that cycle so that is the thing that makes the bears wake up in the middle of the night sweating so you just don't know how long and how high a market can can go if you avoid the burst of euphoria it's the burst of euphoria that typically brings these things to an end and we are seeing it all around us today as you've noted just because stocks are overpriced it doesn't mean that that a bubble if we're in one is necessarily about to pop what is to stop valuations from climbing even higher for years possibly put it this way when you have reached this level of obvious super enthusiasm the bubble has always without exception broken in the next few months not a few years it's always you can't maintain this level of near ecstasy it can't be done because you've put in your last dollar you are all in what are you supposed to do beyond that point you can't borrow any more money you can't take any more risk in fact you know in your heart of hearts you have never taken this level of risk and you never thought you would it's just that this opportunity is so exceptional this is going to be your once in a lifetime and and how do you keep that level of enthusiasm going indefinitely what if it's not your money what if it's the fed's money what if it's the treasury's money yeah no that that of course is a very good point and you can never call a bubble to a few weeks or even a few months and if the government is going to write unprecedentedly large checks to some of the players in the market but then indeed their all-in position can can expand one last desperate notch and the sad truth of a lot of the quote stimulus is that it didn't increase uh capital spending um it didn't increase much in the way of of real production but it flowed a lot of it eventually into the market one way or the other and i have no doubt that some of this new round of stimulus will and if it's as big as they talk about this would be a very good making of a top for the market just of the kind that the history books would enjoy and we will have a few weeks of extra money and a few weeks of putting your last desperate chips into the game and then an even more spectacular bus the market is going to end up as we know where it is going to end up and all the paper in the world will not change the level that is justified by the flow of dividends and earnings that is after all the only thing you can end up eating is the flow of dividend and sooner or later the stock market will once again boring boring sell on the future flow of dividends and that is not going to be changed materially by the size of the check we get in the next few weeks jeremy if you're right and we're on the cusp of the bursting of an epic bubble is now the time to as they say sell everything i suspect selling everything would work out just fine however having said that there are major discrepancies as there were in 2000 between the u.s tech which is overpriced the same as it was in 2000 and everything else so the value stocks the low growth stocks if you prefer it are about as cheap relative to the high growth stocks as they ever get so they will not have the same pain but they're still at risk to some degree i suspect the good news is that overseas they have not had this same huge bull market and the same over pricing that we have had and that and that of course is a heaven sent opportunity because you can go out into the emerging markets and they are absolutely not that expensive despite the ridiculous argument of comparisons with a overpriced bond market they're simply not that bad anyway and compared to the s p they're as cheap as they have ever been about they've been this cheap two or three times and each time it's worked out very well so you can buy emerging markets and you can look at the intersection of those two ideas which is the low growth stocks or the value stocks within the merging and they are handsomely priced you should be able to make a really decent 10 20 year return there you will not make a handsome 10 or 20 year return from u.s growth stocks there is in the air a simple arithmetic the higher you big bid up the price of an asset the lower the long-term return you will get there is nothing you can do to change that equation every day the market goes higher you know only one thing with certainty that the long term return will be less than it was the day before you
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