The Ecstasy and The Agony of Market Bubbles
Miles Franklin sponsored this article by Gary Christenson. The opinions are his and are not investment advice.
At a glance:
- Tesla stock, Bitcoin, and others have blasted higher into a bubble.
- Bubbles implode. Watch out below following the top, whenever that occurs.
- The crazy silver bubble of 1979—1980 was LESS OUTRAGEOUS than the Tesla stock price bubble of today. Oops!
- Gold fell $59 to $1,835 for the week ending January 8, 2021.
- Silver fell $1.69 to $24.64 for the week.
- The DOW exceeded 31,100. QE created $trillions, and The Fed injected fake money into the stock market.
- Bitcoin almost reached $42,000. Bubble?
- Tesla stock reached $884. Definitely a Bubble!
MARKET BUBBLES ARE AMAZING.
- They inspire feelings of ecstasy on the way up and agony on the way down, like PCP, meth, cocaine, and QE4ever.
- Bubbles have occurred before and will happen again.
- Every bubble feels new, special, and exciting. After the peak, the hangover, the consequences, the agony, the “regression to the mean,” the balancing, the “chickens coming home to roost” … torment us.
- The crash after the bubble peak can be devastating. The wealth that seemed real… disappears, like morning mist.
- Bubbles appear believable, inevitable, and justified… like desert mirages, until they implode.
- But this time is not different, bubbles will pop, implosions occur, the agony becomes real, tears flow, and life goes on.
Before we discuss current bubbles, look at historical examples.
SILVER – 1979 – 1980:
The silver bubble was amazing. In January 1979, silver sold for under $6.00. In January 1980, silver prices exceeded $50 for a few moments. The media blamed the Hunt brothers, but gold bubbled higher at the same time and the Hunts were not invested in gold. Silver retraced 100% of the bubble rally, and sold for $11 in May 1980, under $5 in June 1982, and $3.51 in 1991.
CISCO SYSTEMS IN 1999 – 2000:
Cisco rose during the Internet bubble, reached amazing prices, and crashed. Cisco stock sold for $15 in April 1997, $30 in 1998, and exceeded $230 in March 2000.
By October 2001 it had crashed back to $9.00, retracing 100% of its rise from 1995.
THE NASDAQ 100 BUBBLE OF 1996 – 2000:
The Dow peaked in January 2000, but the NASDAQ 100 rose until March 2000. The index was priced at 400 in January 1995, under 1,100 in October 1998, and peaked over 4,800 in March 2000.
The index fell to 1,100 in September 2001, and 810 in October 2002, a fall of over 80% from top to bottom. The index retraced to levels last seen in 1996.
CRUDE OIL BUBBLE OF 2008:
Crude oil sold under $11 in December 1998, and $51 in January 2007. It bubbled higher in 2008 and reached $147 in July 2008. The bubble imploded and prices fell to $36 five months later in December 2008. The implosion retraced to prices last seen in 2004.
MODERN BUBBLES – BITCOIN AND TESLA STOCK:
Bitcoin bubbled higher in 2017 and 2018, selling for $750 in January 2017, and peaking near $20,000 in December 2017.
By December 2018, the bubble had burst, and Bitcoin fell to under $3,300.
In 2020 and 2021 Bitcoin did it again—another bubble. From $4,000 in March 2020, Bitcoin exceeded $41,900 in early January 2021. It may rise further.
Will Bitcoin reach $100,000 or fall under $5,000? Your call… My concerns are:
a) What is the intrinsic value of a Bitcoin?
b) What happens to Bitcoin prices if western countries and China make Bitcoin transactions illegal to promote central bank digital currencies?
If Bitcoin peaks at (say) $50,000 before it implodes, and then falls 83% as it did after the 2017 peak, it might trade again under $10,000. However, with fake money, central bank QE, bubbles everywhere, and an excess of political and economic craziness in the wind, it is difficult to predict highs or lows.
TESLA STOCK BUBBLE:
Tesla stock sold for under $75 in March 2020, and over $880 on January 8, 2021. Amazing rally…
Will Tesla reach $1,000? What about $2,000? It looked too high at $500. Such is the nature of bubbles… they can expand higher than anyone dreams and turn quickly into nightmares.
Comparison between bubbles. Remember:
- Use weekly graphs with weekly closing prices. Examine the relative price change during the final year before the bubble peak.
- A larger ratio shows more “bubblicious” behavior.
- Few people predict tops.
- The bigger than are, the harder they fall.
- Bubbles always implode and retrace most of their rise.
The silver bubble of 1979—1980 was an enormous bubble that expanded rapidly in its final year. Compare it to the Bitcoin bubble during 2020—2021.
The 1999—2000 tech stock bubble, shown by the NASDAQ 100 Index, devastated retirement and brokerage accounts. Compare the NASDAQ 100 bubble to the current Tesla bubble.
THE SHOCKING FACTS ARE:
- Tesla stock has risen by over a factor of 8 in the past year, and it may not be finished. According to yahoo finance, Tesla market cap is approaching $1 trillion. Its PRICE TO EARNINGS RATIO is over 1,680, and PRICE TO SALES exceeds 29. Crazy!
- Knowing that Tesla stock prices are in a bubble, and that bubbles always implode, do you want to be long this stock? After seeing its rapid rise, do you want to be short this stock? Danger Zone!
- Gold will be valuable long after Tesla stock crashes to earth.
- Note: The Tesla stock relative rise in the past year is LARGER than the crazy silver bubble blow-off in 1979 – 1980. Does that suggest a collapse is inevitable?
The stock market is overvalued. “Printing” dollars by the trillions levitated the market, but that rise is “living on borrowed time.”
From Alasdair Macleod “Don’t dismiss gold and silver.”
“Even without an overt banking crisis, the Fed and the US Treasury will have to work together in their attempts to rescue the US economy from an inevitable slump. They cannot succeed, but they must try, sacrificing the dollar as a deliberate act of economic policy.”
WHAT HAPPENS NEXT?
1) Bubbles always pop. We don’t know when.
2) Congress and the new administration will spend trillions in payoffs to cronies, bailouts to cities and states, support for Big Pharma and the war machine, and they will distribute a few bucks to citizens. All those trillions will be newly created debt.
3) Debt will rise. Make that debt will BLAST MUCH HIGHER!
4) Read “The Bailout Binge Begins.”
5) M1 and M2 will streak higher. Gold, silver, commodities, and food prices will follow.
6) If tens of $trillions in stock market paper wealth evaporate, people will be scared and angry. They will seek something real that preserves value—like gold and silver.
- A Tesla stock price crash could happen anytime.
- A stock market correction and/or crash are coming.
- The bond market will fall if interest rates rise (they are) because the Fed’s “fire hose” (plus commercial banking) is squirting fake money by the $trillions into stocks and bonds.
- Gold, silver, and food prices are going higher.
Miles Franklin will convert stock market profits into real money—gold and silver. Protect your savings and retirement!