"It's very hard to go against the crowd. Even if you've done it most of your life, it still jolts you." --David Dreman

WINTER FOLLOWS AUTUMN (June 30, 2024): Many investors have embraced the mythical "soft landing" scenario. Every multi-year bull market in U.S. history, with steady growth and low inflation, eventually becomes overheated with above-average inflation, just as every moderate spring season is followed eventually by a hot humid summer. This overheating is followed by a choppy, dramatic slowdown during which inflation unevenly declines while GDP growth decelerates and eventually goes negative. It is similar to summer being followed by autumn. Then, just as autumn must lead into winter, negative GDP growth--also known as a recession--is accompanied by an equity bear market. As often as this scenario has repeated itself in the United States since the 1700s, many people today are convinced that we're going to magically transition from colorful falling leaves directly into blossoming flowers and warming temperatures.

The weather doesn't work that way and neither does the economy or the stock market. The Russell 2000 and many other consistently reliable leading indicators have been in bear markets since 2021, with numerous lower highs along the way. After the leaves have reached peak color in November, the next month isn't going to be April or May. Instead we get December, and usually an even colder January, and then a volatile February. Winter is approaching. You can dream of spring eventually returning, but to expect it to happen immediately after autumn is fantasy.

Top corporate insiders have been selling at an all-time record pace, not only in the popular AI shares but in numerous absurdly overpriced U.S. large-cap stocks.

We can spend hours or days debating whether or not Nvidia is overvalued, but let's instead look at a more clear and revealing instance of the current U.S. large-cap bubble. For four decades, Costco (COST) has been growing its profits at 10% or 11% per year, with its price-earnings ratio fluctuating from high single digits to low double digits. Recently Costco has sported a price-earnings ratio of 53.8. There are many possibilities about what the future might bring, but Costco growing its profits at a 50% annualized pace will never happen even if we are invaded from other galaxies and the invaders are eager to buy all of their supplies at Costco. If you didn't flunk kindergarten then you can calculate how much Costco's stock price has to drop to return to its long-term valuation.

Each time that analysts cheer allegedly "great" earnings from any company, the stock price usually immediately surges higher. Within a day or two the top executives usually make massive sales, taking advantage of the irrationally high valuations. Either 1) these insiders are correct by doing their heaviest selling in history by a wide margin, often selling years' worth of accumulated shares; or 2) the least-knowledgeable investors are correct by making all-time record inflows into the U.S. stock market. I know which side I'm betting on.

While top corporate insiders have done their heaviest selling in history during 2024, ordinary investors have done their most aggressive buying in history. Which group is right? History shows us the clear answer.

Ordinary households recently set a new all-time record allocation to the U.S. stock market, about four times their lows from the early 1980s and significantly higher than at the 2000 internet bubble top:

Overconfident investors have also set new records by piling into leveraged long U.S. equity funds, while bailing out of leveraged short funds in their certainty that a significant percentage loss for the U.S. stock market won't happen any time soon:

Other assets including residential real estate have become dangerously overpriced, although they are generally not as wildly overvalued as large-cap U.S. stocks.

Real estate worldwide had been reasonably priced for decades until 1997. Since then, we have experienced housing bubbles worldwide to varying degrees, with the U.S. reaching a bubble peak in 2005-2006 and an even higher bubble zenith in 2022-2024. Here is a chart of U.S. real residential housing prices from January 1976 through June 2024:

While U.S. houses are about twice as high relative to household incomes as compared with their long-term averages, Canadian real estate in early 2022 had reached triple fair value. Whenever any asset is fundamentally very under- or overvalued it must experience a volatile price adjustment in order to return to fair value.

The primary argument for owning any cryptocurrency is that a famous person also owns it and endorses it (and we would be shocked, shocked to hear that such a person is being paid for doing so).

With cryptocurrencies we don't even know what fair value is, because there is no proven history. Bitcoin is the oldest cryptocurrency which was invented in 2009, when the previous severe bear market was ending. Therefore, we have no clue as to how these will perform in another true bear market. It is like buying a rare tropical plant, putting it in your back yard in a place where it goes below freezing numerous times each winter, and assuming that it will thrive. It might be in wonderful shape by August or September, but it may not be in prime condition several months later. Why anyone would want to own such an unproven asset is beyond my limited ability of comprehension.

High-yield corporate bonds have mostly been approaching their lowest-ever spreads relative to U.S. Treasuries.

There are times when U.S. high-yield corporate bonds are at incredibly undervalued levels, such as they had been in years including 1932-1933 and 2008-2009, and there are periods like 2024 when their spreads to U.S. Treasuries have approached or set all-time record lows. Investors love to buy near all-time highs because they perceive elevated prices as proof of any asset's superiority, whereas they end up selling in disappointment near multi-year bottoms since all they hear about is how prices will keep on dropping.

A surprisingly diverse range of assets have quietly become absurdly undervalued, including some major emerging-market equity bourses.

While the price surges for stocks, real estate, cryptocurrencies, and high-yield corporate bonds have resulted in unsustainably overpriced levels being achieved, there are numerous assets which are trading well below fair value. Most emerging-market securities have been trading near their lowest relative valuations in years or decades, with stocks in countries including Brazil, China, Indonesia, and the Philippines being especially worthwhile bargains. Because the early stages of any severe bear market tend to be accompanied by a high degree of correlation, these bargains will probably become even better bargains during the upcoming year which makes it important to be patient before jumping in too soon.

Several less-heralded assets have been or will soon be completing multi-decade bottoms.

Other assets have become cheap enough to be worth purchasing immediately without waiting for lower prices. During the past several months we have had repeated downward spikes for assets as diverse as long-dated U.S. Treasuries (TLT), palladium (PALL), and the Japanese yen (FXY). U.S. Treasuries and their funds including TLT probably completed two-decade bottoms in October 2023 and added key higher lows in April 2024, while PALL may have bottomed in February 2024 at 78.50 and recently slid almost all the way back to higher lows just above 80. The most recent in this group to make new lows has been the Japanese yen, which during the past week touched its lowest level versus the U.S. dollar since 1986.

Funds of precious metals shares including GDX and GDXJ will eventually become compelling buying opportunities, but history and the traders' commitments tell us clearly that we must wait several months or longer before taking action.

QQQ dropped 83.6% from its peak on March 10, 2000 to its bottom on October 10, 2002. Meanwhile, HUI, an index of gold mining shares, completed a key bottom on November 15-16, 2000 and before the end of 2003 was worth more than seven times as much. Therefore, wait several months after QQQ has begun a major bear market and then get ready to aggressively purchase gold mining and silver mining shares. Be patient and don't act too soon.

One way we can be certain that it is too early to buy GDX or GDXJ is that the traders' commitments are especially bearish for gold, silver, and platinum. Commercials (see cftc.gov) such as miners, fabricators, and jewelers who own physical gold are long 86,551 and short 358,039 contracts which is more than 4:1 short to long. Non-commercials (primarily hedge funds) are long 284,885 and short 38,656 which is more than 7:1 long to short. Regardless of how much gold China's central bank does or doesn't buy, these are unsustainable speculative longs which will be dramatically flushed out over the next several months. Gold bullion will drop below two thousand U.S. dollars per troy ounce and could eventually fall below 1800 before powerfully rebounding afterward.

The bottom line: it's not different this time. Don't fall victim to the soft-landing myth. As well-known stocks including Apple (AAPL) and Costco (COST) have been have been trading for roughly five times their long-term average price-earnings ratios, the only realistic possibility will be massive percentage losses for large-cap U.S. stocks during the next few years. Following bubble peaks, stocks don't just retreat from overvalued levels to fair value and stop dropping; they usually end up with undervaluations of 35% to 60% as we had previously experienced frequently including 2008-2009 and 2002-2003. U.S. Treasury yields have been close to their highest levels in more than two decades and will serve as an irresistible magnet once U.S. stocks have fallen enough to make some investors nervous about continuing to be so heavily overinvested in the most popular big U.S. companies.

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Friday, June 28, 2024. 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/BPRXX/Savings/Checking long: 37.24%;

17-Week/52-Week/26-Week/13-Week/2-Year/8-Week/3-Year/5,10-Year TIPS/4-Week/42-Day long/20-Year: 22.91%;

I Bonds long: 11.01%;

TLT long: 10.75%;

PMM long: 0.01%;

XLK short (all shorts are once again unhedged): 34.84%;

QQQ short: 23.78%;

SMH short: 1.61%;

AAPL short: 0.12%;

SARK long: 1.00%;

PSQ long: 0.04%;

PALL long: 1.10%;

Gold/silver/platinum coins: 7.12%;

FXY long: 0.58%.

“With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future.” --Carlos Slim Helu

NASTY MEAN REVERSION (November 24, 2021): There is a fascinating paradox in the financial markets. The most consistent pattern for asset behavior through the centuries is that assets which are dramatically below fair value will have a very high likelihood of rallying toward fair value and beyond to a nearly opposite extreme, while those assets which have become the most overpriced relative to fair value will have a powerful tendency to eventually plummet to fair value and beyond to a similarly-undervalued bottom. However, only a tiny minority of investors will structure their net worth to anticipate this process, since when assets are the most overvalued they appear to be the most superior and the most likely to continue climbing, while assets which are the most out of favor and the best bargains will appear to be hopeless and inferior and will emotionally induce selling rather than buying.

This is one of the primary reasons that we have experienced all-time record inflows into U.S. equity funds in 2021 which have surpassed the combined inflows from 2001 through 2020, while in years with the best opportunities there have been the heaviest net outflows. Investors keep psychologically projecting the past couple of years into the indefinite future.

People tend to be heavily influenced by the moods of their era, often subconsciously.

Andrew Tobias wrote a worthwhile book in 1980 entitled Getting By on 100,000 a Year (and Other Sad Tales). In the early 1980s hardly anyone wanted to invest in real estate, bonds, stocks, and most related assets, because the media were telling them every day why both interest rates and inflation would remain persistently high for decades or permanently. In that environment the most-popular investments were money-market funds which sometimes paid as much as 20% annualized. It was emotionally challenging to realize that if everyone else was shunning many kinds of asset classes then that made them ideal for purchase. Only a few assets in 1980 like precious metals were popular and wildly overpriced.

Today we have nearly the opposite situation in which recent participants are so confident that they are far more concerned about missing out on gains than they are about the risk of losing money. Meanwhile, precious metals which had been so overpriced in early 1980 have become undervalued along with some emerging-market stocks and bonds.

There are many ways to gauge under- and overvaluation including the ratio of total stock market capitalization to GDP for any country.

While emerging markets including Brazil, Turkey, and Chile are experiencing unusually low ratios of both household net worth and total market capitalization to gross domestic product, the U.S. has never been higher even at previous bubble peaks:

The Boglehead argument is most convincing when it should be most ignored and vice versa.

Almost no one wanted to gradually buy and hold in the early 1980s. Here's why: if you had invested in the equivalent of the S&P 500 Index in August 1929 then by August 1982--53 years later--you would have lost 38% of your money after adjusting for inflation as this chart demonstrates:

Ironically that would have made it extremely worthwhile to keep steadily buying stocks into all pullbacks in the early 1980s and at all subsequent higher bottoms. Today, when there is the greatest risk of a similar substantial loss over the next half century or so, being a Boglehead has never been more popular.

If everyone wants to "buy and hold" anything then you must do neither.

It is no coincidence that we simultaneously have very-overpriced assets at the same time as we have supply-chain problems, a shortage of workers, rising inflation, and other rare behavioral extremes.

People involved with real estate in Boise will tell you that Californians are piling in and causing permanently higher prices, while those in California will tell you that people from some other part of the world are causing housing prices to be unaffordable in their towns. Hardly anyone puts two and two together to conclude that nearly all of the peculiar distortions in the global economy are interconnected.

Imagine an inverted world in which we have a multi-decade record inventory of real estate and prices at multi-decade lows in inflation-adjusted terms. Also try to imagine dramatic losses for today's most-popular assets, multi-decade highs in unemployment in most parts of the world, and almost no one wanting to talk about cryptocurrencies because they have collapsed in value. While that might seem like an impossible scenario it is by far the most likely conclusion to the most-overpriced assets reverting to the mean and beyond to some kind of opposite extremes. This is not a far-future science-fiction scenario but something which could occur within three years and perhaps sooner.

While investors keep piling into mega-cap U.S. tech shares they have shunned Chinese internet companies, telecommunications shares, and several other sectors.

In the final weeks of 2020 and the early weeks of 2021 nearly all assets worldwide were moving higher in tandem. Since then we have been experiencing widening disparities between asset classes worldwide. The more that undervalued assets retreat in price, such as UGP, TUR, T, ITUB, and some other assets which I have been gradually accumulating recently, the more that investors are shunning these because most investors conclude that something in a lengthy downtrend will keep dropping. On the opposite overpriced end of the spectrum, analysts are focusing too much on profit growth by itself and too little on the connection between the profits of a company and its stock price.

The next few years will likely experience more frequent and more intense corrections than the average three-year period.

Periods of recent extraordinary overvaluation and extended outperformance tend to be followed by above-average pullbacks. You should therefore keep more in cash than usual in order to be able to take advantage of upcoming bargains. The more severe any overall decline tends to be, the more likely that some assets--often unknown in advance--will become especially oversold and undervalued and will thereafter rebound aggressively.

Be sure to take advantage of the U.S.-guaranteed interest rate of 7.12%.

Did you know that I Bonds, issued by the U.S. government, are currently guaranteed to pay 7.12% for six months with zero state and local income tax due on the interest (and sometimes no federal tax if the money is used for education)? Some people believe that you can only put 10 thousand dollars per calendar year into I Bonds, but that is per account, not per person. A married couple can contribute 65 thousand dollars per calendar year into I Bonds as follows: 1) 10K in your name; 2) 10K in your spouse's name; 3) 10K in the name of your revocable living trust which can be a single paragraph putting your shoelaces into it; 4) 10K into your spouse's revocable living trust; 5) 10K in your business name; 6) 10K in your spouse's business name; 7) 5K by intentionally overpaying your January 15, 2022 federal estimated tax by several thousand dollars and putting five thousand of your federal tax refund into I Bonds.

I may discuss I Bonds in more detail in my next post. Be sure to do your maximum total as soon as possible for 2021 since you have only about one month left. In early 2022 you can do your allocation for next year.

The bottom line: most investors are currently betting on some all-time record extremes becoming even more extreme. While this is always possible and may be more likely in the short run, eventually all assets regress to the mean and beyond to a roughly opposite extreme. It is therefore worth considering going against the herd. The most-overpriced assets today tend to be the most popular including large-cap U.S. tech, crypto, ESG, high-yield corporate bonds, and real estate, while many emerging-market and precious-metals shares are near multi-decade lows in either relative or absolute terms.

This mean regression could become nasty, probably involving much bigger percentage changes and greater volatility in both directions than most investors are anticipating.

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

Here is my asset allocation with average opening prices adjusted for all dividends: 45.3% 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); 19.2% short XLK (112.7737); 17.8% short QQQ (309.7504); 17.2% long TLT (148.259); 8.25% short TSLA (494.9721); 6.3% long GEO (7.65); 4.55% long GDXJ (41.6112); 1.65% long GDX (30.1982); 0.85% short AAPL (125.5481); 0.7% long ASA (19.35); 0.7% long UGP (2.565); 0.55% short IWF (223.0119); 0.45% short SMH (170.7813); 0.2% long ECH (24.23); 0.2% long TUR (19.5525); 0.0375% long ITUB (3.94); 0.025% long BBD (3.44); 0.0125% long TIMB (9.99); 0.0125% long T (23.99). It doesn't add up to 100% since short positions require less cash; there is no margin involved.

I closed out my ZM short position on November 23, 2021 at 199.99 with an average short-sale price of 293.16.

You may wish to check out the following article on MarketWatch.com:

Record Selling by Insiders Is Setting Up Stocks for a Big Fall, Says Contrarian Investor