"The near absence of bargains works as a reverse indicator for us. When we find there is little worth buying, we find there is probably much worth selling." --Seth A. Klarman

BUDDING BURSTING BUBBLES (November 12, 2023): Investors are easily impressed by large percentage moves, while barely noticing important asset behavior. Therefore, since the total losses so far for major U.S. large-cap equity indices including the S&P 500, Nasdaq, and QQQ have been modest so far, most people aren't concerned about whether or not we are in a primary bear market. The total declines overall are generally less than 10% from their peaks in November 2021 or early January 2022. U.S. real estate overall also has mostly single-digit percentage declines. Therefore, the fact that most of the above and other indices have experienced numerous lower highs over the past two years isn't appreciated even with the bearish implications of this activity in prior decades. Small- and mid-cap U.S. equity indices and funds have almost all suffered larger percentage losses, but hardly anyone pays attention to the Russell 2000 and similar benchmarks.

Therefore, even though the U.S. equity bear market is roughly half over timewise, and is probably entering its most dangerous downside phases, most investors are blissfully complacent. This is evident from VIX closing at 14.17 on Friday, November 10, 2023, an astonishingly low level two years into a bear market. Hardly anyone thinks they need protection or hedging against potential upcoming losses. Boglehead myths are widely prevalent with many such investors convinced that they have a divine right to come out ahead in the long run no matter how overvalued the assets are which they own.

Investors can get 5.5% guaranteed by the U.S. government with zero state and local income taxes, making the U.S. stock market much more overpriced than it had been two years ago.

One plausible reason for U.S. equities reaching all-time record overvaluations in November 2021 was that the 26-week U.S. Treasury bill had been yielding less than 0.1%. Currently it is yielding just about exactly 5.5%. This means that investors can obtain this kind of annualized gain with zero risk. Especially with the spread between the 13-week and the 10-year U.S. Treasuries reaching an all-time record going back to 1789, this makes U.S. stocks even more dangerously overpriced relative to U.S. Treasury bills and with far greater downside risk. Investors are so concerned about "missing out" on potential upside that they're unaware of the likelihood of losing more than half of their money. No one can say how far any asset will decline during a bear market, but if QQQ declines as much in 2023-2025 as it had done from its March 10, 2000 zenith to its October 10, 2002 nadir then those who currently hold QQQ and similar assets will lose more than 80% of their current valuation. This includes reinvested dividends and is even without adjusting for inflation.

There are two major consequences of the longest-ever U.S. equity bull market.

The U.S. equity bull market which began in March 2009 lasted longer than any other bull market in U.S. history. Whenever anything persists for such a lengthy period of time, investors psychologically don't believe that anything which had happened in prior decades has any significance. It has been so long since we had suffered the previous severe bear market that hardly anyone can imagine a significant percentage decline. This is similar to how hardly anyone two years ago thought that inflation could reoccur, since it had been such a long time since we had experienced surging inflation. Paradoxically, if some investors think about selling and then prices climb even higher, they congratulate themselves for not selling "too soon" and become even less likely to sell the higher that prices are rising. Insiders are an important exception, demonstrating their highest-ever overall ratios of insider selling to insider buying since early 2021 and only behaving otherwise during the final four months of 2022.

Besides investors being emotionally far too distant from the previous two true bear markets of 2000-2002 and 2007-2009 to believe that a third such decline could be underway, the duration of any bear market tends to be proportional to the bull market which precedes it. In general, a bear market will last roughly one-third as long as its prior bull market. Since the U.S. equity bull market which started in March 6-9, 2009 lasted for almost thirteen years, the current U.S. equity bear market will probably last for roughly four years which means that it won't likely be completed until around the end of 2025. This relatively leisurely pace has fooled many investors into believing either that the bear market "is over" or that we might experience one more moderate correction, rather than the far greater likelihood of two upcoming crushing down years which overall become progressively more dramatic.

The biggest losses will generally be suffered by the best-known shares.

U.S. equity overvaluations are far more pronounced and out of line with corporate profit growth for the best-known and largest U.S. companies, especially those which had generated a high level of excitement from the AI bubble and excitement over other modern technology. Nearly all of the 2023 gains for major U.S. large-cap equity indices were achieved by a surprisingly small number of trendy stocks. A company with an annualized profit growth averaging about 10% cannot maintain a price-earnings ratio near 40 regardless of what is happening with the economy, how inverted the U.S. Treasury curve happens to be, or what is occurring with the U.S. dollar. Momentum can sometimes seem to prevail for awhile, but eventually a regression toward the mean and beyond to a nearly opposite extreme of undervaluation must happen sooner or later.

The strongest proof of the unsustainability of the current situation is the irrationality of investors' attitudes toward any given company.

Perhaps you are thinking to yourself: maybe it makes sense for a company like Microsoft to have a price-earnings ratio which is four times its profit growth, since AI will allegedly cause its profits to quadruple. You can believe in such foolish fantasies, but consider that the corporate bonds of the most popular large-cap companies have been among the biggest losers over the past few years while the stocks of the same companies have been among the biggest winners. If a particular company is really going to outperform with its fundamentals then its bonds should also be outperforming along with its stocks. What is really happening is that investors have been crowding more and more aggressively into the biggest percentage winners while piling out of the biggest percentage losers, regardless of their merit. This has caused closed-end bond funds including "boring" municipal bonds to experience some of their highest-ever historic discounts, while anything related to AI has enjoyed some of the biggest gains regardless of whether new technology will ever get around to increasing these companies' profitability.

The U.S. economy is behaving like a trip on the planet Mercury.

Unlike Earth, the planet Mercury doesn't rotate. It maintains the same side toward the sun at all times. This side is incredibly hot, while the dark side which faces away from the sun is incredibly cold. If you are on the planet and you decide to pass from the scorching to the frigid side, you will briefly pass through a region where the temperature is just about right for human habitation. This is similar to what is happening with the U.S. economy: it is going from an overheated state with very low unemployment and bloated inflation, just like 1929-1930, 1972-1973, 1999-2000, and 2007-2008, to a period of serious recession, high unemployment, sharply diminished inflation, and depressed asset prices. 2025 is going to be very similar to 1932, 1974, 2002, and 2008, with stocks bottoming during or shortly after each of those years and real estate following roughly one year later.

Real U.S. equity bear markets always end with sizable undervaluations, heavy net investor outflows, intense insider buying by top executives, and pervasive media gloom. We are nowhere near any of the above.

At the end of any bear market, whether for stocks or real estate, we usually have an average of a 20% discount to fair value for real estate and a 40% discount to fair value for the U.S. stock market. We will have a multi-decade high for insider buying, exaggerated ratios of insider buying relative to insider selling, all-time record net outflows by investors who are finally panicking after losing more than half of their money, and day after day of negative media commentary about the economy and the markets. Until all of the above actually happen we can be certain that much greater downside for the U.S. stock market lies ahead.

The excuses change through the ages but the results are identical.

During the 1800s investors said that because of progress, canals, or railroads, the old valuation rules were no longer relevant. In the 1900s industrialization, computers, and at the turn of the century the invention of the internet convinced many that price-earnings and price-to-book measures were no longer relevant in the "modern age." Today you hear a lot about how AI has "permanently" changed the situation or how the Fed will ensure that valuations remain far above average indefinitely.

It's not different this time.

I have been gradually adjusting my mix of assets as I always do in order to respond to changing circumstances and multi-decade extremes, and I have general plans for the next several months.

As TLT and the actual 20-year U.S. Treasury both fell to their lowest valuations since 2004, I had been gradually purchasing them into weakness through October 2023. Related assets including closed-end bond funds like PMM slid to even deeper average bargains which hadn't been experienced generally since 2000, so I had gradually bought them also. More recently I have been adding to my short position in QQQ and related shares as they complete additional lower highs and haven't dropped much overall from their respective peaks from November 2021. I had been selling short large-cap energy shares and their funds including XLE at each of their peaks since November 2022 including September 2023. The Japanese yen slid to its lowest point since July-August 1990 making FXY a worthwhile bargain.

During the next several months I expect to be covering some or all of my short positions whenever QQQ experiences dramatic weakness such as a loss of about half from its current price. The next major purchase I think will be likely will be buying gold mining and silver mining shares through funds including GDXJ, although the traders' commitments demonstrate clearly that it is still too early to be doing so. Most likely gold bullion will drop below 1800 U.S. dollars per troy ounce sooner or later to provide the next buying opportunity in this sector.

The following charts highlight recent multi-decade extremes:

The bottom line: We have numerous nearly simultaneous multi-decade extremes in the global financial markets which sooner or later will all regress toward the mean and beyond to nearly opposite extremes within two or three years. This is likely to lead to an additional loss of 80% for QQQ and AI bubble stocks, roughly double the current valuations for TLT and the 20-year U.S. Treasury bond, much higher valuations for most closed-end government bond funds and the Japanese yen, and losses of about half on average for real estate around the world. The alternative is a simple one: put your money into U.S. Treasuries which mature within a couple of years and are paying up to 5.5% with both interest and principal guaranteed along with being exempt from state and local income taxes.

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Friday, November 10, 2023. Each position is listed as its percentage of my total liquid net worth.

I computed the exact totals for each position and grouped these according to sector.

The order is as follows: 1) U.S. government bonds; 2) shorts; 3) bear funds; 4) gold/silver mining; 5) coins; 6) miscellaneous securities.

VMFXX/TIAA(Traditional)bank CDs/FZDXX/FZFXX/SPRXX/SPAXX/Savings/Checking long: 35.67%;

26-Week/17-Week/52-Week/13-Week/2-Year/8-Week/3-Year/5,10-Year TIPS/4-Week/42-Day long: 19.28%;

TLT long: 10.35%;

I Bonds long: 9.88%;

PMM long: 0.01%;

XLK short (all shorts once again unhedged): 26.54%;

QQQ short: 14.17%;

XLE short: 5.06%;

XLI short: 2.51%;

XLV short: 1.58%;

SMH short: 0.92%;

AAPL short: 0.02%;

SARK long: 1.22%;

PSQ long: 0.02%;

GDXJ long: 0.53% (fully hedged with out-of-the-money covered calls);

GDX long: 0.24%;

PALL long: 0.15%;

ASA long: 0.09%;

Gold/silver/platinum coins: 5.92%;

FXY long: 0.15%;

PAK long: 0.03%.

"At some price, an asset is a buy, at another it's a hold, and at another it's a sell." --Seth A. Klarman

2023 ALL-TIME DANGER (May 3, 2023): In 2021 we achieved especially dangerous all-time record unprecedented investor behavior. In the U.S. we had greater net inflows into U.S. equity funds in 2021 than in 2001 through 2020 combined. We also experienced all of the following all-time record extremes from early 2021 through early 2022: 1) the ratio of the total dollar volume of insider selling divided by the total dollar volume of insider buying; 2) the ratio of the top 50 U.S. companies by market capitalization relative to the entire U.S. stock market; 3) the ratio of the total market capitalization of the top 50 U.S. companies relative to the total U.S. GDP; 4) the overall valuation of the top 50 U.S. companies relative to the total market capitalization of the the rest of the world; 5) the total volume of call buying; 6) the average daily net inflow into U.S. passive large-cap equity funds; 7) the divergence in behavior between the most-experienced investors who had never been heavier net sellers especially of the biggest U.S. company shares, versus the least-experienced participants who had never been more aggressive net buyers of U.S. equities.

This article on Bloomberg from November 25, 2021, which doesn't even include the huge net inflows from the past several weeks of that year, highlights how investors became far too heavily committed to U.S. stocks at the worst possible time in history:

Stock Funds Took in More Cash in 2021 Than Two Decades Combined

2023 has smashed all previous U.S. large-cap stock-market extremes including those of 2021 and 2022.

It was truly amazing to have all of the previous extremes surpassed for all previous U.S. large-cap equity bubbles including 1837, 1873, 1929, 1973, and 2000. I was convinced that we might never see such overenthusiasm, overinvesting, and overcommitment to the biggest U.S. stocks for another century or more. However, it didn't take a century to revisit these all-time distortions, as every single one of the above all-time records from 2021-2022 was surpassed in 2023.

Practically every week we get a new all-time record or two: 1) the lowest VIX (15.53) during a bear market; 2) the longest rebound from an intermediate-term bottom during a bear market (nearly 7 months); 3) frequent record ratios of the biggest U.S. megacap shares relative to the rest of the S&P 500 or relative to other indices of small- and mid-cap U.S. shares. The last statistic is especially ominous, since the degree of overcrowding into the biggest U.S. companies has consistently been proportional to the subsequent total percentage losses for the best-known U.S. equity indices and funds. The following three charts highlight the astonishing enthusiasm for the biggest U.S. companies in recent weeks:

If U.S. Treasuries are paying over 5% guaranteed with the interest exempt from state and local income taxes, how can other investments compete?

The simple answer is that on a rational or analytical basis there is no reason to purchase U.S. stocks, real estate, art, collectibles, or anything else if you can get 5% or more on U.S. Treasury bills. Only emotional reasons would justify purchasing fluctuating assets, especially since so many of those are trading near all-time record overvaluations and as described earlier in this update have rarely been more popular.

The 17-week U.S. Treasury bill usually sports among the highest yields of all U.S. Treasuries since it has only existed since October 2022 and many institutions aren't aware of it. This is a far more intelligent choice than putting money into absurdly-overpriced U.S. large-cap equity funds including QQQ, XLK, and SPY.

The U.S. Federal Reserve is trying to slow the U.S. economy. Do you really think they'll fail in that pursuit?

The U.S. Federal Reserve has just raised both of its key overnight lending rates by a total of five percent over a relatively short time period in order to slow the U.S. economy. Regardless of whether there is a soft landing or not, current valuations especially for the largest U.S. stocks aren't compatible with contracting economic growth. We don't need to have a recession in order to have a stock-market crash, since merely returning to fair value will produce massive percentage losses. Moreover, bear markets almost always bottom at a 30% to 50% discount to fair value.

Gold mining and silver mining shares are often among the earliest assets to complete both tops and bottoms in any cycle. History always repeats itself with minor variations.

Even though the price of spot gold almost exactly revisited its all-time high from August 2020, the prices of gold mining and silver mining shares remained dramatically below their peaks from that month. This served as an important negative divergence to warn us that, even though this sector is traditionally one of the strongest bear-market performers, for some period of weeks or months we are going to experience a meaningful correction in this sector which has been underway since April 13, 2023.

Funds including GDXJ and GDX are likely to complete their bottoms ahead of nearly all other risk assets over the next several months. Gold has repeatedly failed to remain above 2050 U.S. dollars per troy ounce, including a failed attempt on Wednesday, May 3, 2023, and will likely drop below 1800 before resuming its long-term uptrend which has been in effect since the beginning of this century. After gold mining and silver mining shares complete their pullbacks and begin to rebound, the clock will be ticking for most other stocks which will fall to multi-year lows over the subsequent several weeks or months.

The biggest losses for U.S. stocks will be in 2024-2025, not in 2023. However, we are going to drop a lot more in 2023 than even many bearish analysts are anticipating.

In 2024-2025 U.S. stocks are likely to return to their levels of 2013 and perhaps even 2012. In 2023 we generally won't approach or drop below most of the March 2020 bottoms, because it's not yet timely for such an event to occur. Bear markets are like avalanches: they start out slowly and build up momentum on the way down. All pullbacks are followed by powerful recoveries, each of which convinces most investors that the bear market is over and we're in a new bull market. If you don't believe this then check how many times during the past 1-1/2 years Jim Cramer has insisted that the bear market has ended. Each time he and many other analysts became convinced that "the bear market is over", a renewed, ferocious downturn ensued.

A reasonable 2023 downside target for QQQ would be 200 or 190, and I think we will go lower than that before the end of this calendar year. This should be followed by a rebound of perhaps 40% over a period of several months, after which we will begin a much more severe downtrend.

U.S. equity indices keep making upward spikes as is characteristic of an intermediate-term topping pattern in a bear market.

QQQ briefly surged to intraday highs of 323.63 on May 1, 2023 and 322.47 on May 3, 2023. Topping patterns within bear markets feature repeated attempts to stage upside breakouts, just as bottoming patterns within bear markets are accompanied by repeated sharp downward moves. Investors tend to be easily fooled into believing that repeated upward intraday surges are bullish when they are profoundly bearish.

VIX fell to 15.53 at 11:02 and 11:03 a.m. on Monday, May 1, 2023 for the first time since November 5, 2021.

In past bear markets, multi-month low extremes for VIX were an important sell signal. Similarly, when VIX climbs to a multi-year high and then begins to form lower highs, as I think will be the case much later in 2023, this is a useful buy signal for U.S. equities and their funds.

Investors are repeating the same recency-bias mistake as the Fed had done in 2020.

Why did the Fed wait so long before starting to increase overnight lending rates? Didn't they notice that the U.S. stock market was approaching record bubble levels near the end of 2020? Of course they did, but the deciding factor in not raising rates at that time or in early 2021 was because we hadn't experienced a true inflationary binge since the early 1980s which was forty years earlier. If something hasn't happened for a long time, you start to believe that it's highly unlikely to reoccur even if it is by far the most probable outcome.

Investors are making the same serious mistake today. They're not putting most of their money into U.S. Treasury bills, in most cases not because they aren't aware how overpriced megacap U.S. shares are today (although some are simply ignorant), but because we haven't experienced a crushing bear market since early March 2009 which was more than 14 years ago. Anything which is that far in the past seems psychologically as though it can't happen again, even though it is by far the most likely outcome.

The U.S. dollar index has been making higher lows since early 2021. The correction from the last week of September 2022 essentially ended at the beginning of February 2023 and we have been experiencing higher lows in preparation for a dramatic move higher for the greenback over the next several months.

I keep reading about how I should invest in anticipation of a falling U.S. dollar. As with most media coverage this is badly misguided. One of the major risks to the global economy is that the U.S. dollar, which reached its highest point in September 2022 in more than twenty years, is likely to achieve a 40-year zenith within two or three years. Bet on a rising U.S. dollar, not a falling one.

Investors are overly concerned about commercial real estate and are not nearly concerned enough about residential real estate.

Work-at-home popularity in recent years, encouraging companies to lease significantly less office space, has become widely broadcast and Charlie Munger was recently featured as highlighting this point. This phenomenon is probably more than built into current valuations for commercial real estate and associated REITs. Investors are ignoring the far more dangerous all-time record ratios of residential real estate in most neighborhoods to the average household incomes in those neighborhoods. Eventually residential real estate, like all other assets, must regress to fair value as measured by the average long-term ratios of housing prices to household incomes. This implies a 50% average decline for houses in most U.S. cities over the next few years if you don't adjust for inflation. If U.S. stocks end up mostly completing historic nadirs in 2025 then real estate might complete its bottoming process in 2025-2027 as residential housing prices tend to retreat to important lows a year or two later than the equity market.

The bottom line: 2023 has experienced even more dangerous extremes than 2021 or 2022, and those had been among the most-overvalued episodes in U.S. history for large-cap U.S. equities.

We can debate how much lower QQQ, XLK, and similar assets are likely to drop over the next 1-1/2 to 2-1/2 years. I feel pretty confident that QQQ will eventually trade below 80 which would not even be as large a total percentage decline as its 83.6% collapse from its March 10, 2000 top to its October 10, 2002 bottom. This would represent a slide of 75% for QQQ from its current level. Other funds which are laden with heavy weightings in the largest U.S. companies will suffer proportional declines.

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Monday, May 1, 2023.

The order is as follows: 1) U.S. government bonds; 2) shorts; 3) gold/silver mining; 4) coins; 5) individual securities.

TIAA(Traditional)/VMFXX/FZDXX/Savings/Checking long: 26.44%;

26-Week/17-Week/52-Week/2-Year/8-Week/3-Year/5,10-Year TIPS long: 13.02%;

I Bonds long: 9.35%;

TLT long: 9.04%;

XLK short (all shorts are currently unhedged): 21.45%;

QQQ short: 8.74%;

XLE short: 4.59%;

XLI short: 2.37%;

XLV short: 1.62%;

SMH short: 0.69%;

GDXJ long: 11.45%;

ASA long: 7.33%;

GDX long: 3.25%;

BGEIX long: 1.59%;

Gold/silver/platinum coins: 6.10%;

HBI long: 0.31%;

EWZ long: 0.20%;

EWZS long: 0.08%;

PAK long: 0.02%;

EGPT long: 0.01%.

The numbers add up to more than 100% because short positions only require 25% to 30% collateral in stocks/funds and less than that in U.S. Treasuries (by SEC regulations; some brokers require more) to hold them with no margin required.

"Patience and discipline can make you look foolishly out of touch until they make you look prudent and even prescient." --Seth A. Klarman

TRAPPED BOGLEHEADS (March 22, 2023): If it doesn't rain outside for several weeks in a row then you may stop taking an umbrella with you even when it's cloudy. As a result you'll get rained on sooner or later. Worse, if the lack of rain continues for years then you may start building houses without roofs. Then you'll have a catastrophe. Investors have been building portfolios in the same manner, ensuring that they'll be flooded and thoroughly ruined sooner or later. The water is already coming in and they're not even putting on plastic blue roofs.

We had such a lengthy bull market that, even with the overall mediocre 23-year performance for U.S. large-cap equity index funds since March 2000, investors who made foolish decisions were generally rewarded instead of punished. Those who used margin, or who kept piling blindly into U.S. equity growth funds in classic Boglehead style, or who simply purchased shares of the best-known big U.S. companies, generally outperformed those who used more scientific methods. Buying whatever was out of fashion or which was most undervalued often did more poorly than picking the popular names, especially in years like 2021. When inferior performance is rewarded and careful analysis is not, investors will naturally pile into whatever is "doing well" regardless of merit. Even assets with essentially zero value like cryptocurrencies became highly desired because they were going up.

Most investors have been piling into U.S. large-cap equity growth funds in 2023 at an even more intense pace than during 2021, which at that time had set a record for greater total net calendar year inflows than 2001 through 2020 combined.

2021 experienced by far the highest total net inflows into U.S. equity funds in history even if you adjust generously for inflation. 2022 would have been an all-time record except for 2021. Not learning anything from their mistakes, 2023 has shown greater average daily net inflows into U.S. stock funds than either 2021 or 2022. The following article highlights this astonishing phenomenon of supreme overconfidence at the worst possible time:

Retail Investors Are Pouring a Record 1.5 Billion [U.S.] Dollars Per Day Into the Stock Market

Many baby boomers know they didn't save nearly enough to enjoy a comfortable retirement. Now that these folks are mostly in their 60s and 70s, they have been hoping that the stock market's gains will magically compensate for their savings shortage.

Millions of baby boomers didn't save anywhere close to the amount they knew they would need to retire comfortably. They have adopted the Boglehead philosophy that they have a divine right to come out ahead, and have therefore ignored compelling alternatives. More importantly, far too many investors of all ages haven't been reducing risk by moving into guaranteed U.S. Treasury bills and similar insured time deposits. Most people have no idea why it matters that large-cap U.S. stocks are still mostly trading at more than double fair value based upon their future profitability.

Now that U.S. Treasuries have been paying close to 5% with zero risk and zero state and local income taxes, a small minority of investors have been intelligently accumulating these since last summer. Tragically, far more investors are actually more confident about the U.S. stock market after experiencing a losing year like 2022, because they figure that was the one bad year of the decade and they'll get even bigger gains from now on. The media have been encouraging this sort of behavior, reporting that something like 90% of all down years for U.S. stocks are followed by up years. The problem is that 100% of all the first years of bubble collapses are followed by down years, and since we had experienced all-time record overvaluations, net inflows, and insider selling in 2021, the current scenario cannot be anything other than a bubble collapse.

The longest bull markets are followed by the lengthiest bear markets in a simple case of Newton's Third Law applied to investing.

The longest bear market in U.S. history was from September 1929 through July 1932, or 34 months. This was preceded by a bull market from August 1921 through September 1929 which was over 8 years. The second-longest bear market in U.S. history of 31 months occurred from March 2000 through October 2002 when QQQ had plummeted 83.6%. This had been preceded by a bull market from October 1990 through March 2000 which lasted for more than nine years.

The most recent bull market extended from March 6, 2009, when the S&P 500 had slid to 666.79, followed by the final peak on January 4, 2022 when the S&P 500 topped out at 4818.62. This was nearly 13 years altogether. Therefore, the current bear market is going to be a lengthy and severe one, perhaps lasting into 2025, and with the S&P 500 Index likely losing more than 70% of its peak valuation.

History always repeats itself with minor variations.

In any true bear market the S&P 500 moves below its previous bull-market top. Prior to early 2022 the most recent bull-market top for the S&P 500 had been 1576.09 on October 11, 2007. Therefore this index will have to drop below such a level sooner or later, although there is no way in advance to know when or by how much.

You have to adjust intelligently to everything in life, not just investing.

Imagine that you are a frequent sailboat racer. You adopt the following approach in every single race: within seconds of the official start, you hoist the spinnaker to go full speed ahead in a straight line toward your target. You don't care how the winds are blowing, or what the other boats are doing, or anything about the capabilities and personalities of their crews. It's always a direct all-or-nothing rush toward the finish. You have concluded that tacking (playing defense in unfavorable or shifting wind conditions), observing what other sailors are doing, or anything other than a straight-ahead approach is an irrelevant distraction.

No serious sailor would do this except on rare occasions. Unless the wind is firmly at your back and everything should be full speed ahead, you have to keep adjusting your strategy depending upon the conditions, what the competitors are planning, what you know they're likely to do based upon their past history, and dozens of other considerations. You don't wear the same clothing on a sweltering day in July as you do during a blizzard in January. Therefore, why would you want to invest with blinders on and zero consideration for the prevailing conditions?

While the stock market's long-term upward direction is a meaningful force, mean regression from a rare extreme is a far more powerful force. Whenever any asset is dangerously overpriced it will inevitably collapse before it resumes its next rally.

A married couple I have known for many years love to tell me how they remain nearly fully invested in U.S. large-cap passive equity funds at all times, no matter what the market is doing, as though I'll reward them with bones for being such faithful dogs.

Whenever I meet a certain lovely couple whom I've known for many years, the first thing they tell me is how they're staying the course no matter what and refusing to alter their asset allocation. These are folks who know they're on the Titanic and they've hit an iceberg, and the ship is probably sinking, but they're going to refuse the lifeboats and keep singing bravely on into the unknown. They're already starting to take on water, but their foolish consistency and pride will always trump their common sense.

It's better to be confused than to be wrongly overconfident.

Those who are baffled when the market has been more volatile or disappointing than usual might sell some of their stocks and reduce their risk because they don't understand what's happening. Those who are supremely confident that they have to come out ahead in the long run will keep buying, and buying, and buying, and will eventually lose a lot more than their counterparts. Being unsure is far superior to a false certainty.

Top U.S. corporate insiders have been persistently selling into rallies for more than two years. Since February 2021, insiders set a new all-time record for insider selling relative to insider buying.

Just as average investors have never been more aggressively buying large-cap U.S. equity index funds, top corporate insiders have never demonstrated a higher ratio of selling to buying in U.S. dollar terms than they have done for more than two years. These are the same executives who made all-time record purchases near major market bottoms including 2002-2003 and 2008-2009, and who no doubt will eventually become even more aggressive in accumulating shares of their companies.

However, insiders haven't been making purchases in any notable way since their massive buying spree of March 2020, even near the lowest points of 2021-2023. Therefore, the U.S. stock market has a very long way to go to the downside. Once insiders become heavy buyers it will be time to buy also, but it would be absurd to want to front-run those who know the most about the financial markets.

U.S. Treasury bills provide nearly 5% risk-free interest which is free of state and local income taxes.

A month ago, most U.S. Treasury bills were yielding over 5%. Now that we had the U.S. bank crisis, some investors have taken their money out of banks to put into U.S. Treasuries which has pushed their yields below 5% across the board. These are still well worth buying and I participate in all auctions of 8, 17, 26, and 52 weeks as well as those of 2 and 3 years.

Here's a little secret with U.S. Treasuries: hardly anyone knows about the 17-week U.S. Treasury which was only introduced in October 2022 when the U.S. government needed to increase its net borrowing. Some brokers including TD Ameritrade don't even offer this maturity to its customers, while older computer systems haven't added it to its inventory. You will therefore often get a higher yield on the 17-week U.S. Treasury than on other maturities including 13-week and 26-week; the March 22, 2023 17-week U.S. Treasury auction yielded an investment rate of 4.964%.

TLT sounds like a boring fund of U.S. Treasuries, but I expect it to gain more than 50% including all monthly dividends over the next two years.

Longer-term U.S. Treasury bonds and their funds including TLT suffered substantial losses in 2022, followed by a moderate recovery since then. TLT became so undervalued that, even if you don't count its rebound from its 11-year bottom in October 2022 until today, it will likely gain another 50% or more (including all monthly dividends) over the next two years. Usually investors don't think of U.S. Treasuries as being so volatile, but they were by far the biggest winners of all sectors in 2008.

Precious metals will likely correct for several weeks or more, but will thereafter become among the top performers of the 2020s.

Gold bullion recently briefly surpassed two thousand U.S. dollars per troy ounce. Historically moves above each exact multiple of one thousand have generated lots of excitement among the wrong investors, meaning those with the least experience who are most susceptible to chasing after trends which have already nearly fully matured. Therefore, I expect pullbacks for most assets related to precious metals until we reach some kind of important higher lows this spring or summer.

Over a longer-term basis, bubbles for large-cap U.S. equity growth shares are consistently followed by gains of hundreds of percent for gold mining and silver mining shares during subsequent years. There is a key parallel with the previous bubble peak for the S&P 500: in both cases, gold mining shares began to rally eight months after the top in the S&P 500. The March 2000 zenith was followed by a rally for gold/silver mining shares which started in November 2000; the January 2022 peak for the S&P 500 Index was similarly followed by September 2022 start for the long-term uptrends for GDXJ, GDX, ASA, and similar securities which had all lost more than half their value from their August 2020 peaks (a critical time to sell them) while retreating to 2-1/2-year lows.

VIX has continued to provide the most reliable signal telling us when to sell short during the current U.S. equity bear market.

Some market signals have an inconsistent record or send false messages, but fortunately VIX is spot on. Since 2021 VIX has told us precisely when to sell short QQQ and related large-cap passive U.S. equity growth funds. Whenever VIX is near 20 and especially whenever it is below 19, you get the green light for selling short large-cap passive U.S. equity funds including QQQ and XLK. The reason this works repeatedly is that a depressed level for VIX in a bear market tells us loudly and clearly that there exists a dangerous environment of complacency and a widespread misguided belief that, usually due to a recent extended stock-market rebound, the bear market is probably over. During the 2000-2003 and 2007-2009 U.S. equity bear markets we heard similar repeated pronouncements about the bear market being over, with some analysts making such a statement a dozen times or more within a few years and being wrong each time.

As has always been the case in past bear markets, whenever the downtrends for QQQ, the S&P 500, and similar funds and indices really are over, you won't be hearing about it in the media. Instead, almost everyone will be asking how much lower the market still has to go to the downside.

In recent months I had added to short positions in XLV, XLE, and XLI. More recently I have been adding to my short positions in QQQ and SMH whenever VIX is near 20 or lower.

Investors tend to be mesmerized by the "recency bias": whenever a given asset has been enjoying an extended uptrend most people take for granted that additional gains will follow, whereas protracted downturns cause people to conclude that additional losses will soon occur. This is where tracking VIX, insider activity, fund flows, and traders' commitments has a huge advantage. You will get reliable forecasts while most investors are overly reliant upon the recent past continuing into the indefinite future.

If you're not sure about whether or not we're in a U.S. equity bear market, check to see if women's clothing length has been extended to the feet--amazingly this signal has been accurate for over a century:

Maxi Skirts Are Everywhere

Here are some useful charts which illustrate the above points.

The following chart shows that for more than a century an unusually low spread between corporate bond yields and U.S. Treasury yields signals a major decline for the U.S. stock market, while an especially high spread precedes the biggest rallies in percentage terms:

We have also experienced unprecedented buying of call options in 2023 even when compared with previous all-time record speculative call buying in 2021 and parts of 2022:

The traders' commitments for all U.S. Treasuries, including the 30-year and 5-year maturities shown below, have demonstrated commercial accumulation (equivalent to insider buying for futures by those who are trading any given security as part of their career) which is near their highest percentiles ever recorded:

The bottom line: we have two crushing down years still ahead for U.S. assets including especially large-cap growth stocks, high-yield corporate bonds, real estate, art, and other collectibles.

Why did the Fed wait at least a year too long before raising the overnight lending rates? It was primarily due to the foolish conclusion that, since we hadn't experienced above-average inflation for decades, it couldn't reoccur. Don't make the mistake of thinking that, since we haven't suffered a severe U.S. equity bear market since March 2009, it is somehow less likely to happen. Exactly the opposite is true as this extended period without a real decline has psychologically caused most people to believe that it won't occur again at least in their lifetimes, thereby causing valuations for U.S. stocks and real estate to be near or above double fair value and higher than that for many large-cap U.S. growth shares.

Don't live in a house without a roof. Protecting against adversity is far more important than stretching for dangerous additional gains.

Disclosure of current holdings:

Here is my current asset allocation as of the close on Wednesday, March 22, 2023:

TIAA(Traditional)/VMFXX/FZDXX/FZFXX/SPRXX/Savings/Checking long: 33.63%;

XLK short (all shorts currently unhedged): 20.36%;

QQQ short: 7.70%;

XLE short: 4.29%;

XLI short: 2.28%;

XLV short: 1.51%;

SMH short: 0.67%;

GDXJ long: 10.74%;

ASA long: 6.64%;

GDX long: 2.95%;

BGEIX long: 1.45%;

2-Year/3-Year/52-Week/26-Week/13-Week/5,10-Year TIPS long: 12.56%;

TLT long: 9.33%;

I Bonds long: 9.31%;

Gold/silver/platinum coins: 5.86%;

HBI long: 0.27%;

EWZ long: 0.07%;

EWZS long: 0.04%;

PAK long: 0.01%;

EGPT long: 0.01%.

The numbers add up to more than 100% because short positions only require 30% collateral in stocks/funds and less than that in U.S. Treasuries (by SEC regulations; some brokers require more) to hold them with no margin required.

"Successful investing is about recognizing the widest gaps between fair value and present value." --Steven Jon Kaplan

BABY DONE, MAMA NEXT (November 27, 2022): All we really need to know we learned in kindergarten, including the story of Goldilocks and the Three Bears. 2021 was Goldilocks and 2022 was Baby Bear, so 2023 will be Mama Bear and 2024 will be Papa Bear. If you can remember this then you will invest far better than most grownups.

2022 was a classic first year of a bear market with familiar themes from similar past bear markets.

Bear markets are much more similar to each other than bull markets. We experienced a large-cap growth stock bubble one year ago which was very similar to the bubbles of September 1929, January 1973, and March 2020. Just as in those three previous periods from the past century, the large-cap growth shares which caused the bubble in the first place mostly dropped in 2022 about twice as much as the average U.S. stock during the past year just as they had done in 2000. We also had three sharp bounces along the way, including the current one which began around the beginning of the fourth quarter of 2022. It is therefore logical to assume that 2023 will be similar to a year like 2001, with generally steeper losses during each downtrend along with stronger bounces in between downtrends and probably with a moderately larger total loss for 2023 compared with 2022.

Throughout 2022 the U.S. dollar, emerging-market securities, and highly-speculative assets (think cryptocurrencies) also behaved as they generally do during the first year of major bear markets.

VIX and TLT varied from the usual script throughout 2022.

Two interesting differences from analogous past bear markets included 1) the failure of VIX to reach 40 throughout 2022; and 2) the dramatic weakness for U.S. Treasuries and their funds including TLT which dropped about twice as much as they usually would during the first downward phase of a bear market. Since we had more net inflows into the U.S. stock market in 2021 than during 2001 through 2020 combined (not a misprint), presumably these tardy buyers included many less-experienced investors who are not familiar with bear markets.

I expect U.S. Treasuries and VIX to surge sharply higher during the first half of 2023, partly to compensate for their overdone 2022 weaknesses.

In a bear market you can make money selling short on the way down while purchasing U.S. Treasuries and gold/silver mining shares along with other deeply-oversold securities near each intermediate-term bottom.

Selling short the most-overpriced U.S. large-cap equity funds will likely continue to be a winning approach which you can enhance by periodically selling covered puts against these whenever VIX is beginning another retreat. This can be enhanced by adding to the most undervalued long positions whenever there is the least insider selling and the greatest outflows by the least-experienced investors. U.S. Treasuries and gold/silver mining shares in particular tend to enjoy net gains even with sharp corrections during these kinds of bear markets; look at a chart of VUSTX (long-term Treasuries) or $HUI (gold/silver mining shares) from 2000 through 2003. I have therefore been adding to both of these sectors during their most depressed periods of 2022.

Closed-end funds often provide outsized bargains during intermediate- and long-term bear market bottoming patterns.

Some investors aren't as familiar with closed-end funds as they are with open-end or exchange-traded funds. Especially during bear markets, closed-end funds are often sold by those who are disappointed or discouraged or who are otherwise emotionally unhappy about holding anything which has dropped for two years or longer. This causes many closed-end funds to sell at higher discounts to net asset value than they experience during bull markets.

In February 2009, near the end of the severe 2007-2009 bear market, I went to Cefa.com and ranked all closed-end funds from highest discount to lowest. By the middle of the ninth page the discount finally dropped below 20%. When I did the same test in January 2010, less than a year later but when fear of losing more money had been replaced by fear of missing out on additional gains, the discount dropped below 20% halfway down the very first page. This means that the number of closed-end funds with high discounts was 17 times as high in February 2009 as it was in January 2010.

It is especially likely that the next market bottom following a "Mama Bear" retreat, perhaps around the middle of 2023, could be accompanied by very high discounts for some worthwhile closed-end funds. Select those where the fund manager(s) have their own money in the fund, where they have been managing the fund for several years or longer, which have relatively low expense ratios, and which rely on value investing principles rather than using leverage or other financial tricks to enhance their performance.

Value investing is once again taking over from growth as these major groups take turns outperforming through the decades.

The following chart highlights the see-saw behavior of value vs. growth investing since 1975:

I expect value shares to lose much less than growth shares on the way down for a couple of years, just as value had lost much less overall in 2022, and to gain substantially more on the way up for five or six years during the next major bull market (2025 through 2030, approximately).

Differentiation is clearly underway.

In my last update I forecast that investors would begin to differentiate among sectors, so that not all shares would go up or down by similar percentages. This has been increasingly prevalent in recent months as gold mining and silver mining shares and some emerging markets have been far outgaining large-cap U.S. growth favorites from 2020-2021. Part of the critical shift from growth to value will be the increasing outperformance of small caps versus large caps, emerging markets versus U.S. securities, mining shares versus technology, and in general the big winners of 2000-2008 trouncing the big winners from 2009-2021.

It is okay to be a Boglehead with assets which may have completed their cycle bottoms including government bonds and gold/silver mining shares. It's not okay to be a Boglehead with SPY, QQQ, or any collection of previous large-cap U.S. growth favorites.

Why did U.S. large-cap growth stocks perform so well in 2021? It wasn't because their profits increased faster than the profits of other sectors. The primary reason by far is that we had the biggest-ever inflow of inexperienced investors in 2021 who in many cases had never invested in anything before. Being unfamiliar with the financial markets, they invested in names they knew from their everyday lives regardless of how overpriced they had become, and therefore created unsustainable bubbles. Just as a hangover must result from having far too much alcohol, 2022-2024 is the inevitable morning-after resolution of 2021. All of those big-name U.S. technology shares have to go back to fair value and probably well below, since bear markets usually end with an average 30% to 50% discount to fair value for these shares.

Dollar-cost averaging is not a worthwhile approach for any overpriced asset class. You might lose less on the way down but it will still represent a huge overall loss.

I am gradually adding to my short positions and reducing my long positions during the upcoming month to restore their balance from the middle of August 2022.

At the end of September and the beginning of October 2022 I sold covered puts and added significantly to all of my long positions in order to create a much heavier weighting of longs versus shorts compared with their mid-August interrelationship. Now that VIX has retreated almost all the way to 20, I plan to use the next few weeks, especially shortly after the opening bell into all upward spikes, to progressively reduce my long positions except for U.S. Treasuries and gold/silver mining shares and to add to my short positions in XLI, XLE, SMH, QQQ, and XLK. You can't make as big a percentage gain by selling short as you can by being long, but in a bear market the most consistent gains will almost always be on the short side.

XLI and XLE are new short positions, with SMH possibly joining them soon.

I began to sell short XLE when it had first reached 93 a couple of weeks ago, and I have been more recently selling short XLI at 101 and above. Both of these sectors are among those which have more than doubled from their respective March 2020 bottoms, have experienced intense selling of their components by top corporate executives, have enjoyed massive net inflows in recent weeks, and frequently climb shortly after the opening bell most days which is when the least-experienced investors do a large percentage of their total trading. SMH has experienced a sharp bounce in recent weeks so I may begin selling it short soon. If QQQ approaches 300 and especially if it surpasses that level, it is also worth adding to my already-existing position.

I'll take the over on the duration of this bear market.

Many investors believe that either the current U.S. equity bear market has ended or that it will terminate within a year or so. In my opinion that's not likely and I'll happily take the "over" on that bet. The earliest the current bear market could end, based upon the experience with all past lengthy bull markets (the bull market ending in January 2022 had begun in March 2009), would be in the summer of 2024 and that is probably too early by some unknown number of months.

I'm sure that by the time the current bear market has ended, I'll be losing plenty of money on the long side from having gotten invested far too soon and too high.

Old-fashioned savers can get their best deals from U.S. government bonds, especially U.S. Treasuries of 26 weeks, 52 weeks, 2 years, and 3 years until maturity.

Most investors are unaware that U.S. Treasuries have been sporting their highest yields since the summer of 2007. You can get over 4.7% on some securities and over 4% even on the shortest 4-week Treasuries. A good place to do this is TreasuryDirect.gov which charges no fees and allows you to participate in the same auctions as multi-billion-dollar institutions.

The bottom line: 2023 will resemble 2022 but with larger percentage pullbacks, bigger rebounds, and outperformance by U.S. Treasuries and gold/silver mining shares.

As we transition from the first to the second year of a three-year U.S. equity bear market we are likely to have a similar transition as we had experienced in 2000 to 2001. Mama Bear will rip apart large-cap U.S. growth shares, but will be considerably gentler to safe-haven assets including U.S. Treasuries along with gold mining and silver mining shares; Baby Bear in his inexperience treated almost all assets the same (i.e., not with care). In addition to selling short, put lots of money into 26-week, 52-week, 2-year, and 3-year U.S. Treasuries which have enjoyed their highest yields since the summer of 2007.

Disclosure of current holdings:

Here is my current asset allocation as of the close on Wednesday, November 23, 2022:

TIAA(Traditional)/VMFXX/FZDXX/Savings/Checking long: 30.97%;

XLK short (all shorts currently unhedged): 18.84%;

QQQ short: 6.71%;

XLE short: 4.90%;

XLI short: 0.64% (November 25 close);

TSLA short: 0.35%;

GDXJ long: 10.40%;

ASA long: 5.93%;

GDX long: 2.74%;

BGEIX long: 1.34%;

I Bonds long: 8.95%;

TLT long: 8.78%;

2-Year/3-Year/52-Week/26-Week/13-Week/5-Year TIPS long: 7.76%;

Gold/silver/platinum coins: 5.54%;

INTC long: 2.34%;

TKC long: 2.33%;

GEO long: 1.87%;

TEI long: 1.42%;

KWEB long: 1.32%;

FXY long: 0.85%;

FXB long: 0.18%;

FXF long: 0.17%;

VZ long: 0.65%;

EPOL long: 0.34%;

T long: 0.22%;

WBD long: 0.20%;

HBI long: 0.11%;

LEMB long: 0.06%;

PCY long: 0.05%;

NGL.PR.B long: 0.02%;

CEE long: 0.02%.

The numbers add up to more than 100% because short positions only require about 30% to hold them with no margin required.

"Here's how to know if you have the makeup to be an investor. How would you handle the following situation? Let's say you own a Procter & Gamble in your portfolio and the stock price goes down by half. Do you like it better? If it falls in half, do you reinvest dividends? Do you take cash out of savings to buy more? If you have the confidence to do that, then you're an investor. If you don't, you're not an investor, you're a speculator, and you shouldn't be in the stock market in the first place." --Seth A. Klarman

MAMA BEAR (August 9, 2022): Throughout 2021 some analysts compared the U.S. stock market with Goldilocks and her porridge: not too hot, not too cold, but just right. Unfortunately many of them played hooky in kindergarten so they never learned that Goldilocks is always followed by the three bears. This truancy has come home to haunt analysts and investors in 2022 which featured the appearance of Baby Bear throughout the first half of this year.

Far too many analysts have recently rushed to declare that "the bear market is over" but, alas, we haven't seen either Mama or Papa so far. Mama Bear is about to surprise many with her dramatic entrance. Unlike Baby Bear, Mama needs a lot to keep her well fed, so she's going to be around for a year or two. Once she's had her fill, Papa Bear will bring the proceedings to a thunderous grand finale.

The U.S. equity bear market has a long way to go, with QQQ facing additional losses of 75% or 80%.

On November 22, 2021 at 10:16:19 a.m., just after Jerome Powell was reappointed as Fed chair, QQQ completed its all-time record zenith at 408.71. After making lower highs through January 4, 2022, it didn't take long for QQQ to lose one-third of its value by June 15, 2022. Since then it has been generally rebounding for several weeks which has encouraged a surprising number of people, especially those who haven't studied market history, to conclude loudly that "the bear market is over." Often they'll mention something about inflation receding or a recession not being imminent or something equally irrelevant as justification for their outlook.

Quite a few of these folks declared in both late March and more recently that "the bear market is over," probably on the way to doing so several more times.

The bear market of 2021-2025 has almost nothing to do with inflation, recession, Ukraine, or energy. It has everything to do with all-time record overvaluations, insider selling, net inflows, and public participation in 2021.

The media have been completely clueless about why we're in a bear market and why it must continue for at least two more years. We had the highest overpricings in history last year combined with by far the most intense insider selling and greater total net inflows for 2021 than we had for 2001 through 2020 combined. The market has to reward insiders for bailing out and punish the average investor in a way which will be unforgettable, at least until the next bear market comes along and no one respects it either.

The two previous longest bull markets in history were followed by bear markets of 34 and 31 months respectively.

Some analysts would have you believe that the bull market from March 2009 through January 2022, almost 13 years altogether and by far the longest in U.S. history, ended with a 5-1/2-month mild bear market. If we look at the second- and third-longest bull markets then this is what we find: the powerful uptrend from August 1921 through September 1929 was followed by the most severe bear market ever recorded which terminated in July 1932, 34 months later. The bull market from October 1990 through March 2000 was followed by a bear market which ended in the U.S. in October 2002 after 31 months and in most of Europe in March 2003 which was three years (36 months) altogether.

If this pattern repeats itself then the current bear market won't end until either the second half of 2024 or sometime in 2025.

Bear markets aren't "healthy corrections." They destroy an average of one decade's worth of investors' total accumulation.

In any bear market a major index like the S&P 500 will return to its top from the bull market prior to the previous one. In this case that means going back to its October 11, 2007 top of 1576.09 which had been the previous all-time intraday record prior to the 2007-2009 collapse. Since the S&P 500 on January 4, 2022 had reached 4,818.62 this means a loss of more than two-thirds from top to bottom and it could be significantly higher than that.

From its top of March 10, 2000 through its bottom of October 10, 2002, QQQ dropped 83.6%. Not many investors have prepared their portfolios for a repeat performance.

U.S. government bonds are irrationally underappreciated.

As I have discussed in previous essays, the best deal you can get is to put up to 65K each calendar year into I Bonds per couple or 35K if you are single. These are currently paying 9.62% free of state and local income taxes, and possibly free of federal income taxes if the money is eventually used for someone's college education. Once you have maxed out your I Bonds you can still get the highest guaranteed yields since October 2007 by purchasing U.S. Treasuries at each auction at TreasuryDirect.gov. The 52-week, 1-year, 2-year, and 3-year Treasuries are auctioned once per month, while the 26-week Treasuries are issued each week. I have recently been buying all of the above including the auctions on August 8 and August 9, 2022. Recent yields include 3.325% on today's 52-week auction and 3.202% for the 3-year U.S. Treasuries. Yesterday's 26-week auction yielded 3.130% which is much higher than you will get from any bank, plus the interest is free of state and local income taxes.

Bogleheads would do much better getting 3.2% guaranteed by the U.S. government than continuing to pile into U.S. equity index funds which are near double or triple fair value and which could still be behind after adjusting for inflation a half century from now.

Here is the official U.S. government link for the results of recent U.S. Treasury auctions:

U.S. Treasury Auction Results

Sell short in any bear market whenever VIX drops below 20.

Huge insider selling combined with massive net fund inflows are two clear signals that U.S. equities are headed much lower regardless of what they do in the short run. If you're uncertain about when to sell short, a useful guideline in a bear market is to track VIX. Whenever this measure of the average implied volatility of a basket of options on the S&P 500 Index goes below 20 it is safe to add to your short positions. The lower VIX goes below 20, the more aggressively you can add to your shorts, although always continue to do so gradually into extended equity strength.

Partially balance your short positions with long positions.

While funds including QQQ and XLK remain near triple fair value, other sectors tend to perform strongly during bear markets which follow growth-stock bubble tops. Gold mining shares consistently rally strongly following Nasdaq-style bubble peaks after an eight-month delay as we saw after September 1929, January 1973, and March 2000. For example, QQQ completed a key zenith on March 10, 2000; $HUI which is a long-running index of gold mining shares began a huge uptrend starting on November 15, 2000. In the current cycle QQQ peaked on November 22, 2021, so it is possible that the recent lows for gold mining shares eight months later may be following a similar pattern.

GDXJ is an ideal fund to hold during the current U.S. equity bear market. Other funds will likely become compelling over the next several months if they retreat irrationally during the next major downward phase for QQQ and SPY.

Not counting TLT and other funds of U.S. Treasuries, my equity short-to-long ratio is currently about 9:8. In other words, my combined short equity positions are modestly greater than my combined long equity positions, constantly adjusting both sides by buying into extended weakness and selling into extended strength.

Probably we will soon retest the upside a few more times for QQQ and SPY before we suffer their severe plunges.

It's somewhat unlikely that August will be the month where the U.S. equity bear market accelerates. Looking back at similar bear-market years including 1929, 1937, 1973, 2000, and 2008, it is probable that equity indices will periodically try to rally on "good news," especially near the opening bell, before we experience a more sustained decline after Labor Day to what will likely be the lowest points this autumn since April-May 2020.

A likely downside target for QQQ in the next phase of the bear market will be 215. We could bottom slightly higher and potentially much lower. Right now I expect this to occur before the end of 2022 although there exists a smaller chance of a slower descent into early 2023. If VIX suddenly spikes above 60 then expect this intermediate-term bottom to occur sooner rather than later.

Here are three useful charts.

Top corporate executives set new all-time records of insider selling to insider buying in 2021 and have recently been selling at their most intense pace since the beginning of 2022:

It's not just stocks which are overpriced; new homes under construction set a new all-time record as housing inventory is being transformed from a record shortage to a record surplus:

Among the few undervalued assets are precious metals, with silver's traders' commitments demonstrating the 99th percentile of its historic range. When commercials aren't hedging it's because they expect a substantial price increase in coming years:

The bottom line: the bear market is far from over as Mama Bear is about to make her appearance. An ideal way to ride out the current bear market is to keep a substantial percentage of your money in U.S. Treasury bills averaging 3.2% guaranteed which is free of state and local income taxes.

Disclosure of current holdings:

Here is my asset allocation in order from largest to smallest position: U.S. I Bonds along with 26-week, 52-week, 1-year, 2-year, and 3-year Treasuries, VMFXX, and similar cash reserves; short XLK; short QQQ; long TLT; long GDXJ (some bought in July); long GDX (some bought in July); short TSLA; long ASA (many bought in July); long GEO; long KWEB; long EWZ; long XBI; long TEI (many bought in July); long INTC (many bought recently including today); long TKC (many bought in July); long EPOL (some bought in July); long LEMB (many bought in July); long PCY (many bought in July); long TUR; short AAPL; long T; long ECH; short XLU; short XLE; long VZ (many bought in July); long FXF (some bought in July); long FXY (many bought in July); long FXB (many bought in July); short IWF; short SMH; long WBD; long VMBS; long EGPT (many bought in July); long PAK (many bought in July); long UGP; long ITUB; long BBD; long TIMB.

“The success of contrarian strategies requires you at times to go against gut reactions, the prevailing beliefs in the marketplace, and the experts you respect.” --David Dreman

DÉJÀ VU ALL OVER AGAIN (January 17, 2022): Most investors are either treating 2022 as though it will be an approximate repeat of 2021 or else they believe that the investing world is totally different than it has ever been in the past. Both of these expectations are seriously flawed. The financial markets will consistently behave similarly to whatever they have done in the past under nearly-matching conditions. Early 2022 has numerous parallels to early 2000, early 1973, and the late summer of 1929. In addition, the past year which was 2021 was surprisingly analogous to 1999-2000, 1972, and 1928-1929. Therefore, what will occur over the next few years can best be determined by examining the market's behavior during 2000-2003, 1972-1975, and 1929-1932. This is especially true since so few investors are doing likewise, thereby making it probable that you will come out far ahead by studying and applying these valuable parallels.

We have experienced an exaggerated large-cap U.S. growth bubble which will behave like all previous large-cap U.S. growth bubbles, only more so since we had achieved all-time record extremes and divergences.

Imagine that you go to see the classic movie Casablanca with a friend. You observe how your buddy responds emotionally to the scenes which you have seen over and over again and which you conclude he must be watching for the first time. After the movie is over you plan to discuss this with him, and then one of the ushers you have seen there for years says to your pal, "You must be a huge fan of this film. You've already viewed it several times during the past couple of weeks." Surprised, you turn to your friend and ask him, "Is that true? The way you reacted to the most powerful parts of the film convinced me that you had never watched it before." "Oh, sure, I've seen it over and over," he responds, "but I keep hoping that it will turn out differently."

Expecting the financial markets to turn out differently than they had done in 2000, 1972, and 1929 is a serious mistake, because we have such a close repeat of those years. Several weeks ago we had 1099 new 52-week lows for the Nasdaq in a familiar pattern where investors crowd into fewer and fewer of the biggest names near the end of a large-cap growth bubble. Boglehead investing is incredibly popular just as it had been in each of those years. Huge numbers of people who had never invested before are participating for the first time: bucket shops appearing worldwide on ordinary city and town blocks in 1928-1929; discount brokers emerging for the first time in the early 1970s; online brokerages having their debut around 1999-2000; and Robinhood/Reddit and other trendy zero-commission mobile-phone apps appealing to middle- and working-class investors in 2020-2022. There are numerous other parallels including the kinds of options trading, the times of the day/week/month/year when investors are most eagerly participating, huge net inflows into passive index funds, and all-time record overvaluations for the most popular shares. Here is one chart highlighting one of these exaggerated extremes:

The next few years will likely be similar to 1929-1932, 1972-1975, and 2000-2003.

People frequently ask me why I consistently accumulate the most-underpriced shares into extended weakness when I expect the biggest large-cap U.S. growth shares to drop over 80%. The reason is because, following growth-stock tops, value shares often end up with absolute gains especially when they are notably undervalued. Below is a chart highlighting how value shares had performed while QQQ was busy collapsing 83.6% from its March 10, 2000 intraday zenith to its October 10, 2002 intraday nadir:

The above chart highlights the useful point that a bubble for large-cap growth shares, especially the internet bubble of 1999-2000 and the Nifty Fifty bubble of 1972-1973, were followed by extended periods of outperformance by low-price-earnings assets especially in certain sectors such as gold mining. As great as the Great Depression had been, many gold mining shares gained hundreds of percent starting near the end of 1929.

There are numerous sectors today which will likely gain while large-cap growth shares keep making lower highs for two or three years.

Chinese internet shares have never been more undervalued relative to U.S. internet shares than they have in recent weeks by a large factor. Gold mining shares tend to perform especially well whenever large-cap growth shares begin powerful downtrends. Other currently-undervalued sectors include biotech, South American emerging markets, telecommunications, and recently Russian shares. Gradually purchasing these and other unpopular shares into extended weakness over the next few years is likely to be especially rewarding.

TLT and long-dated U.S. Treasuries have gone wildly out of favor in recent weeks.

Two essays were very recently posted by other analysts on Seeking Alpha which recommended selling TLT--after it has already been trading near a multi-month low. Commercials have been accumulating long positions in the 30- and especially the 10-year U.S. Treasury as you can see from maroon bars on the following charts:

10-Year U.S. Treasury

30-Year U.S. Treasury

We also had the greatest-ever two-week net outflow from TLT in its entire history. In a nearly exact inverse position from the spring of 2020, investors are minimally concerned about a recession and maximally worried about inflation. TLT will likely perform well until almost everyone is again far more concerned about a U.S. recession and continued losses for the Nasdaq 100, at which point it could become timely to sell TLT at a two-year high.

Think of your role as a jumbo-jet pilot, not an air-show sensationalist.

A jumbo-jet pilot's top responsibility is to ensure that the passengers remain calm throughout the flight, even if it means taking longer to reach the destination or even putting up with more turbulence than another approach. On a recent flight to San Francisco the pilot decided to break this rule and to make a sudden sharp dive to get us into calm air much more quickly. While he succeeded admirably in his objective and the remainder of the trip was surprisingly calm, quite a few people cried out or were otherwise upset by suddenly dropping thousands of feet. No doubt this would have been the correct maneuver as a military pilot with a squadron on board instead of ordinary passengers, but acting gradually has to take higher priority.

Even if I were to become absolutely convinced near a major bottoming pattern over the next few years that a particular drastic increase in portfolio risk is justified because VIX is at a multi-year peak, we have all-time record insider buying relative to selling, and we had the biggest weekly net outflow in decades, the next week could be even more extreme as we had experienced in March 2020. I have to discipline myself not to "pick up all those great bargains" too quickly.

Unfortunately I can't write a hundred-page essay for each posting, but you can subscribe to my twice-weekly email updates.

Several readers on Seeking Alpha usually say that I'm not giving enough detail to support my arguments. I would love to write a 100-page essay for each posting but unfortunately that's not practical. However, if you want to get additional precise details about what I am planning to buy and sell, at what prices, and in which quantities, you can subscribe to my newsletter at TrueContrarian.com. The subscription also includes two weekly Zoom meetings of 75 minutes apiece.

The bottom line: we have stealthily entered a meaningful rotation out of large-cap deflation-loving U.S. growth shares into small- and mid-cap inflation-loving global value shares. The ideal approach is to gradually purchase assets where their rate of profit growth exceed their price-earnings ratios by the widest ratios and where there is a history of outperformance by those shares under similar past circumstances. Too few investors are intelligently using 1929-1930, 1973, and 2000-2001 as a guide to 2022.

Disclosure of current holdings (most recent purchases in red):

Here is my asset allocation with average opening prices adjusted for dividends/splits and newly-opened positions in boldface: 44.1% cash including I Bonds paying 7.12% guaranteed, TIAA Traditional Annuity paying 3% to 5% (only available for legacy retirement accounts), and Discover Bank high-yield savings paying 0.40% (available for all U.S. residents with retirement and ordinary savings accounts); 18.7% short XLK (112.7737); 16.75% long TLT (148.259); 16.7% short QQQ (309.7504); 7.0% short TSLA (494.9721); 5.9% long GDXJ (39.96); 5.6% long GEO (7.65); 2.53% long GDX (28.97); 1.33% long TUR (17.17); 1.27% long KWEB (35.51); 1.22% long EWZ (27.33); 1.1% long ASA (19.43); 0.9% short AAPL (125.5481); 0.625% long ECH (22.98); 0.55% short IWF (223.0119); 0.45% short SMH (170.7813); 0.175% long T (23.17); 0.1% long UGP (2.565); 0.09% long ITUB (3.83); 0.044% long BBD (3.39); 0.013% long TIMB (9.99). It doesn't add up to 100% since short positions require less cash; there is no margin involved.

“Don't panic. The time to sell is before the crash, not after.” --John Templeton

CRACK CRUMBLE CRASH (May 17, 2021): There are all kinds of theories about why U.S. stocks reached all-time record overvaluations in 2021: the Fed, coronavirus, zero commissions, near-zero bank interest rates, and widespread popularity of trading. While these all have kernels of truth the real reason U.S. stocks are so overpriced is that investors poured more money into U.S. stocks during November 2020 through March 2021--just five months--than during the entire remainder of the bull market which had begun in March 2009:

Investors Have Put More Money into Stocks in the Last 5 Months Than the Previous 12 Years Combined

In addition to cleaning out their bank accounts and selling "boring" bonds so as to "not miss out" in the U.S. stock market, investors have borrowed all-time record amounts of money via margin loans as you can see from this chart of margin debt vs. GDP since 1959:

Downtrends have already begun for key leading sectors.

In any major bear market certain sectors tend to begin declines ahead of most other sectors. These tend to include small-caps (IWC), semiconductors (SMH), emerging market (EEM), and biotech (BBH). All of the above sectors had peaked weeks ago and have formed several lower highs since then. We also experienced the highest-ever ratios of insider selling to insider buying in U.S. dollar terms, a complete reversal from March 2020 when we had enjoyed the highest ratio of insider buying to insider selling since March 2009.

Notice the stark inversion from March 2020 to May 2021:

March 26, 2020: Executives Are Buying Stock in Droves, Giving a ‘Strong’ Signal That the Comeback Is for Real

May 14, 2021: Billionaires Are Selling Mega-Sized Stock Blocks After Surge

The following chart highlights how insider selling relative to insider buying has soared in recent months:

The media and analysts have shifted from expectations of essentially no inflation at the beginning of November 2020 to permanently-surging inflation by May 2021.

A half year ago the media, if they bothered to mention inflation at all, was about how it wouldn't be a problem for several years--if ever. In recent weeks inflation has been cited as one of the key factors in the global financial markets. It is almost certain that the media, along with most analysts and advisors, are just as wrong now as they were a half year ago but in the opposite direction. There is a long-term rising trend for inflation and interest rates worldwide which began in March 2020 but now that almost everyone is preparing themselves for higher inflation we are almost certain to move the opposite way for at least several months. Here is a refreshing contrarian viewpoint on this critical topic:

Greasing the Slide Toward Deflation

The insiders and commercials are clearly pointing the way forward while almost no one is paying attention to them.

Insiders of companies which would benefit from rising inflation, such as non-precious-metals commodity producers, industrials, and the shares of major global exporters, have experienced their highest insider selling in decades. At the same time we have all-time record traders' commitments in inflation-loving currencies such as the Canadian dollar in which commercials--who are the insiders for futures trading--have never been more aggressively net short:

Current Traders' Commitments, Canadian Dollar at Record 5-11-2021

It's a long way to Tipperary, not to mention the bottom for nearly all asset classes.

From its dividend-adjusted zenith of 104.99 on March 10, 2000 to its 17.22 bottom on October 10, 2002, QQQ plummeted 83.6%. With even greater net inflows by average investors and all-time record selling in 2021 by top corporate insiders it is likely that the current bear market for QQQ will end up experiencing similar or greater total percentage losses within three years or less. Hardly anyone is protecting themselves against such a possibility, which might even be the most probable scenario, by hedging, selling short, or even moving to a greater cash allocation. For the first time in history more puts were sold to open--that is, to make money betting on the stock market not declining much in percentage terms--than bought to open as a form of portfolio insurance. We have also experienced all-time record levels of small speculative call buying in 2021.

The total volume of short selling relative to market capitalization reached an all-time record low below 1.5% at the beginning of spring 2021:

The total percentage losses for unproven asset classes like cryptocurrencies and NFTs can't even be estimated, but the top-to-bottom declines for most of these will probably exceed 99%. Investors are far too easily swayed by well-known personages like Elon Musk rather than carefully considering the intrinsic merits of such speculations.

The bottom line: increasing negative divergences are pointing the way lower for U.S. equity indices in both the intermediate (3 to 6 months) and longer term (2 to 3 years) with periodic sharp upward spikes that are typical in all severe bear markets.

As the media have been maximally bullish and investors have smashed all previous net inflow records in their anticipation of higher asset valuations for U.S. stocks, corporate bonds, cryptocurrencies, real estate, collectibles, NFTs, and just about everything else, insiders and commercials and those with the most knowledge have never been more aggressive sellers. Do you think the world's wealthiest and most-experienced investors will be those who triumph over the next few years or the masses who have no idea what they are doing? There's a reason that the rich get richer and the poor remain poor. Otherwise we'd have mostly wealthy neighborhoods and a few scattered pockets of poverty rather than the other way around. It's not different this time.

Resist the temptation to become a rhinoceros, I mean a Boglehead, and remain heavily in cash.

It's time to hit an inside-the-park home run.

While you're patiently waiting for global assets to collapse you might enjoy watching a comedy I wrote in these euphoric times:

Inside-The-Park Home Run

Disclosure of current holdings:

Each time QQQ has been near or above 340 I have gradually increased my short position in that fund which had plummeted 83.6% from its January 10, 2000 top to its October 10, 2002 bottom including all reinvested dividends and will likely experience a similar top-to-bottom loss by 2024 or sooner.

Here is my asset allocation with average opening prices adjusted for all dividends: 57.0% cash including TIAA Traditional Annuity paying 3% to 5% (only available for legacy retirement accounts) and Discover Bank high-yield savings paying 0.40% (available for all U.S. residents with retirement and ordinary savings accounts); 18.4% short XLK (112.7737); 16.8% long TLT (148.59); 12.3% short QQQ (296.3402); 7.4% short TSLA (494.9721); 4.5% long GEO (7.898); 1.9% short ZM (293.16); 1.4% long GDXJ (44.6462); 0.9% short AAPL (125.5481); 0.6% short IWF (223.0119); 0.5% short SMH (170.7813). It doesn't add up to 100% since short positions require less cash; there is no margin involved.