Saturday , 28 May 2022

Stocks & Bonds In Bubbles – Here’s Why & What To Do About It

78 million baby boomers are currently passing through the “Risk Zone” that could ruin their retirements. Losses sustained during the 5-10 years before and after retirement will diminish retiree lifestyles even if markets subsequently recover. Imagine 78 million people irreparably and simultaneously harmed.

This is a terrible time to be retired:

  1. Interest rates have never been lower,
  2. stock prices have never been higher,
  3. the world is in the throes of a debt crisis that could destroy paper, fiat, money and, compounding the risk,
  4. the average baby boomer is invested 60/40 stock/bonds, a mix that lost more than 25% in 2008, and could lose much more when stock and bond market bubbles burst.


…Bubbles occur when prices become exceedingly expensive. There are several standards that are currently higher than they have ever been, like price/earnings ratios and Warren Buffett’s ratio of stock market value to GDP. The following picture is an example that uses a family of expensiveness measures, from Advisor Perspectives:

Stocks Are In A Bubble

Stocks are expensive. In the following matrix, we show that a 50% loss would occur if Price/Earnings ratios return to their long-term average of 15, but if stocks remain pricey at their current 30 P/E, returns will remain positive.

Source: Target Date Solutions

Bonds Are In A Bubble

The other bubble is in the bond market. Our government, as well as other governments, are…manipulating interest rates to artificially low levels in order to keep borrowing costs under control on our mounting debt…

Why the Stock Market Is In A Bubble

We can think of 15 reasons for the current stock market bubble, most of which are wishful thinking:

  1. Vaccines: Investors believe that vaccines will cure the pandemic quickly
  2. Earnings: Investors believe earnings will soar in an economic recovery like no other
  3. Quantitative Easing: The Federal Reserve will support stock and bond markets, dumping $trillions
  4. Interest Rates: Interest rates  will remain low, justifying high stock prices
  5. Investor Greed: Investor are experiencing a fear of missing out (FOMO)
  6. Investor Euphoria:Hopiumis the drug that gives hope in a bright future
  7. Foreign Demand for U.S. Securities: Foreigners fear devaluation of their currencies and view the U.S. as “the cleanest dirty shirt in the laundry basket”
  8. Millennial Optimism: 92 million millennials believe markets only go up and are actively trading on RobinHood, robos and the like
  9. The FAANG Stock Phenomenon: Investors believe mega companies will perform well regardless of the economy
  10. Escalating Market Caps: Apple is worth a $trillion and Tesla is worth more than their competitors combined
  11. The Election: The stock market is up so far since Joe Biden took office
  12. Short Squeeze Activity: A belief that amateurs can beat Wall Street with short squeezes on the likes of GameStop and silver
  13. Stock Buybacks: Buybacks capitalize on low borrowing costs
  14. SPACs: Special Purpose Acquisition Companies
  15. IPOs: Initial Public Offerings

Bursting Bubbles

…All bubbles burst when they become overinflated…[and] we think the following scenario is likely:

  1. Interest rates will rise because:
    • a foreign country flinches and raises their interest rates, and / or
    • money printing continues to run amuck and causes rampant inflation, maybe even hyperinflation
  2. Stock prices will fall because earnings will be discounted at a higher rate
  3. The government will be forced to monetize the debt in order to pay interest, creating a debt spiral

How To Position Your Investments

Baby boomers started transitioning through the Risk Zone in 2006 and will continue until 2034. That’s 3 decades to hope that disaster can be avoided, an unrealistic hope. Some boomers will not make it through the Risk Zone unscathed, but they can protect themselves now, before it’s too late.

The number one investment objective of baby boomers at this stage in their lives should be to protect their lifetime savings [as follows:)

  1. …Don’t invest in overpriced and risky stocks and bonds…
  2. Cash would be a safe haven, but there is a risk of rampant inflation and
  3. Inflation argues for protection in:
    • precious metals…
    • cryptocurrencies and
    • commodities.
Editor’s Note:  The original article by Ronald Surz, has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The authors’ views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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One comment

  1. Hopium doesn’t come without fear, and where there is hope and fear there is confusion. In the confusion investors are less able to separate causes from effects, values and price, fact from manipulation, and money
    from currency. Because confusion is built into the process, the end will come devastatingly at the worst possible time, and when least expected. Any system is bound to fail where so much deception is built in.