By now only the most oblivious of market observers could deny that financial markets are in a bubble.
From stocks to bonds, the trillions of dollars of easy money that have flooded markets over the last few years, and especially this year, have incentivized a feeding frenzy on Wall Street, and both stock and bond valuations are wildly out of line with historical valuations as well as with reality.
The reality is that with an economy still suffering from COVID-related lockdowns, with unemployment still high, and with hiring slowing, stock markets shouldn’t be near record highs. But easy money papers over a myriad of ills, at least temporarily, and it has even the biggest bears wondering if they shouldn’t jump back in to stock markets to benefit from at least a little bit of the recent gains.
Make no mistake, though, markets are in a bubble that could rival or even exceed the dotcom bubble in size and scope. And when the bubble crashes, the negative effects could dwarf the dotcom bubble and the housing bubble combined.
How Big Is the Bubble?
One of the surest ways to see that stock markets are in a bubble is to look at what exactly is driving stock markets. Right now, the largest tech stocks are what is driving markets. Facebook, Amazon, Apple, Microsoft, and Google are the top 5 stocks in the S&P 500. Their total gains through late August were 35% for the year, whereas the other 495 stocks in the index came in at a combined -5% for the year. So, when you hear about how strong the US economy is, it’s really just five companies that are driving all this growth.
It’s no wonder that many investors have skipped index investing altogether, preferring to hold individual shares in these big stocks. After all, these are companies whose products we use every day. The concept that they could lose value is inconceivable. Yet it’s happened before, and investors who invest heavily in these stocks could see huge losses.
Younger Americans may not remember the days when Amazon was merely an online bookstore, but the company’s stock lost over 90% after the dotcom bubble burst. Could it lose 90% again? Stranger things have happened.
Disruptive technology is the current darling of Wall Street, with firms shaking up the normal way of doing things reaping the benefits of consumer and investor interest. But much of this is the result of hope and well-wishing about the future, not about the results of sales and the promise of future growth.
Look at Tesla, which currently has a market capitalization of over $330 billion, making it the largest car company in the world by market capitalization. That’s larger than the next two companies’ combined, second-place Toyota at a market cap of $215 billion, and third-place Volkswagen at a market cap of $80 billion. Yet Tesla sold a total of 367,500 cars in 2019, versus nearly 9 million for Toyota and nearly 11 million for Volkswagen. On what grounds are investors valuing Tesla at such a high price versus two companies that combined produce 50 times more cars? Will Tesla ever reach Toyota- or VW-like production and sales figures? It’s highly unlikely.
But this investor euphoria about the future is being driven by a continual stream of easy money that is being pushed into the financial system by the Federal Reserve. With trillions of dollars of easy money out there, Wall Street isn’t hurting for cash. And the more the Fed pumps, the higher stock prices climb.
Bonds Aren’t Immune Either
Bond markets aren’t in much better shape either, as bonds are, according to some analysts, nearing the tail end of a 40-year bull market. Here too, the actions of the Fed in pushing down interest rates over the past several decades have artificially suppressed bond yields and therefore artificially raised bond prices. There will be an eventual correction, and when it occurs, expect interest rates to rise very quickly back to more natural market levels.
The past decade of near-zero interest rates has also incentivized numerous corporations to issue more debt to take advantage of rates that are lower than anyone has ever seen. With the Fed having kept interest rates at close to zero for most of the past 12 years, the ability to borrow, refinance, and continue rolling over debt at low interest rates is incredibly enticing.
That’s why corporate debt has skyrocketed, growing by nearly 60% from its previous high before the 2008 financial crisis. American businesses are more indebted than ever, and the quality of their debt is lower than ever, with more and more bonds being downgraded into junk or near-junk status. With a slowing economy and falling consumer spending, many hundreds or thousands of corporations will find out the hard way that financing their growth through debt issuance wasn’t the best idea.
Even worse are the companies that issued debt in order to fund stock buybacks. The executives of those companies thought that by buying back stock and boosting their own share prices, they would also pad their own bottom lines by getting performance-based bonuses and stock options. But now that the bill is coming due for all that debt, they, and more importantly their shareholders, are realizing that the billions they spent on buybacks was money down the drain.
Protect Yourself With Gold and Silver
As with the previous two market bubbles, there has been a chorus of voices in recent months stating that “this time is different.” Somehow, we’ve turned a corner, and with the Fed set on permanent easing, we’re supposed to believe that stocks can’t fall in value. The truth is quite the opposite.
This time isn’t any different than before. Those who pile into stocks at the end of the bubble will lose out massively when the crash comes, and those who invest in bonds thinking they’ll be safer will find out the hard way they’re wrong, once companies start declaring bankruptcy and rating agencies begin their next series of downgrades. And just like the last two stock market crashes, those who are invested in gold and silver will stand the best chance of being protected against market falls.
During the 2008 financial crisis and its aftermath, gold nearly tripled in price while silver nearly quadrupled. And both precious metals are reacting to current events by rising once again. Gold recently broke its all-time high price, and silver could very well break its all-time high price in the coming months.
If you haven’t protected your investments against the likelihood of a market crash, what are you waiting for? Bubbles don’t grow infinitely large and, if your assets aren’t protected before the bubble bursts, you could lose thousands of dollars before you’re able to protect yourself.
Don’t risk losing money that you don’t have to. Call Goldco today to find out from our experienced representatives how investing in gold can protect your retirement savings against the dangers of the current market bubble.
Trevor Gerszt is America's Gold IRA Expert, CEO of Goldco Precious Metals, and holds a position on the Los Angeles board of the Better Business Bureau.
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