“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.

“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred.” --Seth Klarman

SLASH TRASH, STASH CASH (August 2, 2020): The last seven months have featured wild market swings in both directions. At the start of 2020 investors were willing to take absurdly high risks in nearly all assets, being far more concerned about missing out on additional gains than they were about the danger of losing money. During the third and fourth weeks of March 2020 we experienced the two biggest-ever weekly net outflows from U.S. equity funds in their entire history, smashing the previous marks from early 2009 and previous panics. By early June most people had once again become irrationally euphoric, so in my update from that time I recommended heavily selling most securities except for gold mining and silver mining shares which were still in strong uptrends. After a brief pullback which provided buying opportunities for energy shares during the second week of July, we currently have renewed intense irrational exuberance which has spread to precious metals, so last week I unloaded all of my shares of GDXJ, GDX, SIL, SILJ, and related funds and kept only my coins. At the end of the week in response to absurd bullishness regarding mega-cap U.S. technology shares, I significantly increased my short position in XLK to 8.5% of my total liquid net worth and will add more this week if the excitement continues. I now have more shorts than longs and the most cash since February 2012--roughly 5/6 of my total liquid net worth.

VIX kicks.

VIX has been the most consistently reliable indicator throughout the decades in telling us when to buy and when to sell. During the past several weeks VIX has tried repeatedly to slide into the low 20s and has repeatedly failed to do so, with the most recent attempt on Friday, July 31, 2020 when it dropped to 23.55 at 9:06 am. Eastern Time. Sooner or later VIX is going to surge higher and double or triple, although it will not likely surpass its March 18, 2020 top of 85.47. As this is happening most risk assets worldwide are going to suffer much greater percentage losses than most investors are currently anticipating. Hardly anyone has been hedging or establishing short positions in the false belief that the global economy will prosper once the coronavirus is cured. Paradoxically, the sooner there is a proven vaccine and/or cure for the coronavirus, the more rapidly we will experience a severe bear market because there will be nothing to look forward to except huge worldwide deficits and a persistent slowdown in global economic and profit growth.

Tech dreck.

The total market capitalization for U.S. equities is now roughly twice the total U.S. GDP for the first time in history, surpassing its previous all-time record of 1.87 from March 2000 (source: Randall Forsyth in Barron's from August 3, 2020). U.S. mega-cap technology shares are more overvalued than they had been during the end of 1999 and the beginning of 2000 which had been their previous absurd peaks. It should be remembered that the Nasdaq had plummeted 78.4% from its March 10, 2000 top of 5132.52 to its October 10, 2002 nadir of 1108.49 so we are almost certainly setting up for a repeat performance. Adjusted for earnings and inflation the Nasdaq could drop even more over the next few years than it had done during its historic collapse at the beginning of this century. Just as in early 2000, 1929, and early 1973, the market's most-popular companies are especially overpriced. As they regress toward the mean, they are so heavily owned by index funds and trillions of dollars of managed money that this by itself could push the worldwide economy into a recession in another year or so.

Dollar holler.

On Friday, July 31, 2020 the U.S. dollar index slid to a 2:49 a.m. bottom of 92.546 which marked its most depressed point since May 2018, after which it began to tentatively rebound. The U.S. dollar has entered what appears to be a well-entrenched downtrend, so as it reverses sharply higher along with VIX it is likely to surprise and confuse most investors who are expecting additional greenback weakness. The Russell 2000 is revealing the truth: following its all-time top of August 31, 2018 the Russell 2000 has made lower highs in January, February, June, and July. This means that the real U.S. stock market, not counting the biggest and most-popular names, has been in a downtrend for nearly two years. The longer a U.S. equity bear market continues the more frequently we will experience severe corrections such as the one we had suffered in February-March 2020. Lots of people think that was a one-time event "caused by" the coronavirus but it was merely a continuation of a series of corrections including the drop of more than 20% for the S&P 500 Index over a period of more than three months in September-December 2018. Most likely the next three to five months will be accompanied by a drop of at least 20% for all U.S. equity indices and potentially much greater losses by the time the next intermediate-term bottoming patterns are completed.

Gold cold sold.

Have you noticed recent frequent upside price projections for gold these days? Near the end of 2015 and the start of 2016 nearly all analysts were talking about not if, but when gold would drop to 1000 or 800 or 600 or 300 U.S. dollars per troy ounce, with no one talking about gold recovering to 1200 or 1300 which of course is what it did. Now we see repeated guesses as to when gold will reach two thousand, 2500, 3000, 5000, ten thousand, and so on, with hardly anyone suggesting that it might drop to 1800 or 1700. Any very overcrowded trade is always very dangerous regardless of fundamentals.

More importantly, the most reliable leading indicator for gold is its behavior relative to GDXJ and other funds of gold mining shares. When gold first touched 1970 U.S. dollars per troy ounce just before the end of the after-hours session on Monday, July 27, 2020, GDXJ had its last trade of the day at 64.18. On Friday the last trade just before 8 p.m. Eastern Time for GDXJ was 60.25 and that was with gold bullion just above 1975. When higher gold prices are met by lower highs for GDXJ then this is almost always followed by a substantial pullback for the entire sector. It works the opposite way also: when gold bullion keeps dropping while GDXJ resists repeated pullbacks then a rally is usually closely approaching.

The most bearish behavior would be gold actually reaching or closely approaching 2000 while GDXJ keeps forming lower highs.

Sweep creep deep.

There is no guarantee that Democrats will sweep the U.S. House of Representatives, the Senate, and the Presidency on November 3, 2020 but such an outcome has become increasingly likely. Just as in 2008, a Democratic sweep will cause many investors to become fearful of the future. Such a sweep could lead to the U.S. corporate tax rate climbing to roughly 28% (it was lowered from 35% to 21% at the end of 2017) as well as the SALT limitations being repealed and likely significantly higher marginal tax rates for wealthier U.S. residents. Once investors realize simultaneously that long-term capital gains rates are likely to rise sharply on January 1, 2021, investors will rush to lock in currently unusually-low rates during the final weeks of 2020. Combined with tax-loss selling for some of the biggest 2020 losers and disappointment by Robinhood investors that it's not as easy to make money as it looks, we could experience a multi-month decline which doesn't end until the final weeks of 2020 or perhaps in early 2021 followed by the next bear-market rebound.

House louse.

Real-estate prices have rebounded from their sharp March 2020 selloffs partly since 30-year U.S. fixed mortgage rates had briefly dipped below 3% and partly since the coronavirus has caused unusually low inventory, plus the U.S. stock-market rebound has likely engendered overconfidence in many other assets. As U.S. equities and corporate bonds retreat in value, residential inventory is likely to progressively increase as people sell houses to raise cash. The process of falling real-estate prices is likely to accelerate in 2021-2022 and perhaps beyond, with the primary reason in 2021 being an unexpectedly large rise for mortgage rates as both inflation and interest rates surprise everyone including the Fed with their resurgence. 2022 is likely to bring a worldwide recession and the lowest stock-market valuations in more than a decade, both of which will exert additional downward pressure on housing prices. Many people don't realize that, according to Robert J. Shiller in a New York Times article from earlier today (July 31, 2020), inflation-adjusted U.S. home prices soared 45% from February 2012 through May 2020. This increase is entirely artificial, helped by new U.S. government rules to allow nearly anyone with a good credit rating to buy nearly any house with zero down payment or closing costs which are financed along with the house itself. Real U.S. housing prices slid 36% from December 2005 through February 2012 (source: the same NYT article) so some kind of repeat performance is likely. Houses are no longer as "safe as houses": in the age of the internet they fluctuate sharply in both directions just like stocks, bonds, collectibles, and everything else. It's a small world after all.

The bottom line: get heavily into cash now to minimize your potential losses for the remainder of 2020 and to have plenty of buying power for what will likely become numerous compelling bargains.

Investors tend to be too heavily committed too much of the time, thereby making it impossible to fully take advantage of true bargains such as we had experienced in March 2020. Since the Russell 2000 and most baskets of small- and mid-cap U.S. equities have been in downtrends since August 2018, we are likely to experience several more major corrections over the next few years. You can often make more money in a U.S. equity bear market by making opportunistic purchases near all intermediate-term bottoms than you can by selling short on the way down, although it also makes sense to be short funds like XLK and QQQ or if you have a retirement/cash account to buy something like PSQ which will have inferior returns to selling short directly but which is taxed more lightly in some jurisdictions including Canada. I had recommended holding onto gold mining and silver mining shares two months ago but now those should be sold also.

Disclosure of current holdings:

From my largest to my smallest position I currently am long the TIAA-CREF Traditional Annuity Fund, bank CDs, money-market funds, Discover Bank Savings paying 0.95% (mostly new), I-Bonds, XES, MTDR, PSX, CDEV, WTI (all energy shares purchased in the second week of July 2020), GEO, BCBP, OPBK, SONA, KRNY (continuing to purchase regional banks into weakness). I have 5.0% of my total liquid net worth in the previously-mentioned energy securities, 3.5% in the regional banks I listed, 1.5% in GEO, and am otherwise completely sold out of everything else on the long side.

I have 8.5% of my total liquid net worth short XLK, 4.0% short TSLA, and 1.5% short ZM. I plan to keep adding especially to my XLK short into strength whenever XLK is near 110 or above. My cash and cash equivalents including bank CDs, savings/money-market accounts, I-Bonds, stable-value funds (fixed principal, variable interest) comprise 83.3% of my total liquid net worth, my highest percentage total since February 2012. (It seems to exceed 100% but for short positions only part of the total cash value is required to hold them.)

"Those who cannot remember the past are condemned to repeat it" (George Santayana). "Those who can remember the past but insist that it's different this time deserve to repeat it" (Steven Jon Kaplan).

The two previous longest bull markets in U.S. history occurred as follows: 1) from August 1921 through September 1929 which was followed by a bear market of over 34 months from September 1929 through July 1932; and 2) from October 1990 through March 2000 which was followed by a bear market of 30-31 months in duration (exactly 31 for the Nasdaq). The longest-ever bull market which began for the S&P 500 on March 6, 2009 and which may have ended for that index on February 19, 2020 might therefore last for 30-36 months which implies a major bottom somewhere near the end of 2022. The bear market for the Russell 2000 and many other small- and mid-cap U.S. shares began on or around August 31, 2018 and has therefore been intact for nearly two years with several key lower highs along the way.

Friends don't let friends become overinvested.

“Buy on the sound of cannons; sell on the sound of trumpets.” --Nathan Rothschild, 1810

EUPHORIA TO PANIC TO EUPHORIA (June 9, 2020): Since the internet became popular in the 1990s we have experienced far more frequent and more exaggerated extremes in both directions for nearly all assets. During the past half year we have gone from U.S. equities being dangerously overpriced, to a fabulous buying opportunity for equities worldwide, back to an even more dangerous euphoria which exists today. Even hated energy and Brazilian shares have soared and have recently encouraged insider selling along with new massive fund inflows and all-time record call buying for numerous securities. It is as important to sell now as it had been at the most extreme stock-market peaks in history including August 1929, January 1973, March 2000, and October 2007. Actually 2007 wasn't even especially overvalued but I included it since the other dates may seem like ancient history especially to younger investors. It is urgent to sell soon while almost everyone else is congratulating themselves for being far too heavily invested.

As usual, VIX is sending a valuable signal which almost everyone is ignoring.

In mid-March 2020 VIX soared into the mid-80s and then began to form considerably lower highs. This signaled that the most experienced investors who often sell put options as portfolio insurance were getting less worried about the possibility of significant additional stock-market losses while most amateur investors were getting more worried as prices continued to drop into March 23, 2020. In March 2020 we had the biggest-ever weekly net outflow from equity funds in history, surpassing the previous record from February 2009, and then the record was broken the very next week near the end of March 2020. The most experienced investors were correct as we experienced one of the strongest short-term percentage rebounds in history. Now we have the opposite situation where amateurs are getting more optimistic while VIX is making higher lows instead of lower lows for several trading days, signaling that the most-experienced options traders are increasingly worried about a substantial selloff in upcoming weeks. I have no doubt that the professionals will be proven right yet again.

Investors have been piling into whatever has been rallying the most in percentage terms regardless of merit.

Even bankrupt companies have been enjoying astonishing price increases in recent trading days while sectors which had been abandoned as hopeless including Brazil and energy have enjoyed dramatic upward surges. Just as the strongest rallies are preceded by especially sharp extended losses, the most severe pullbacks are preceded by nearly vertical price increases. Investors have already seen major uptrends followed by sharp downtrends in September 2018 and March 2020, both of which had occurred after the Russell 2000 had completed its all-time top on August 31, 2018. The bear market for the Russell 2000 has existed for nearly two years and will soon intensify regardless of what happens with coronavirus, geopolitics, or any other meaningless triggers or phony cause-and-effect relationships. Whenever assets are dangerously overpriced they are far more vulnerable to above-average percentage losses.

Mega-cap technology shares have never been more overpriced overall even if you compare them to periods like March 2000.

Stocks like AAPL and MSFT have never been more overvalued relative to their likely future profits than they are now. The same applies to a few dozen other overpriced names which are almost all involved directly or indirectly with technology and modern finance. As is often the case during a lengthy bear market, investors are very reluctant to give up on their blockhead Boglehead dreams about making money "in the long run." Those who buy near major tops have always come out far behind even if they are patient enough to hold forever; those who bought or held Nasdaq shares prior to their March 10, 2000 intraday peak of 5132.52 are currently barely ahead after adjusting for inflation after more than two decades and that is with the Nasdaq recently registering a new all-time top. Investors who owned stocks in August 1929 had lost more than half of their money after adjusting for inflation by August 1982 which was 53 years later, and that is counting all reinvested dividends.

Sometimes bulls make money and sometimes bears make money but hogs get slaughtered.

Bulls made plenty of money from Christmas 2018 through January-February 2020. Bears did beautifully during the final weeks of winter. Afterward bulls have done wonderfully. Those who are just sitting around doing nothing and congratulating themselves for being geniuses are about to lose more than half their money for the third time in the 21st century which has only existed for a little over twenty years. In a bull market you can be more patient while buying and holding, but in a bear market such an approach will wipe you out. Sometimes you absolutely must sell and now is absolutely one of those times.

Real estate will likely lose one-third of its value worldwide as it had done in 2006-2011.

One reason the previous recession was so severe was that as people perceived their houses being worth less they cut back on their spending and sold stocks. This is known as the negative wealth effect and it will likely be a major factor in 2020-2023. Only a few analysts are concerned about how lower prices for stocks, houses, bonds, and many other assets will encourage people to become more frugal.

Sometimes you have to adjust your expectations to adjust to reality.

When I was aggressively buying in March 2020, and in some cases through mid-May 2020, I expected to hold most of those shares for perhaps one year and at least into early 2021. However, they have experienced such outsized gains which in many cases exceeded my most optimistic one-year forecasts that it is essential to get out now while it is still possible to achieve high prices. The speculative fever and mood in June 2020 is at least as great as it had been in August 1929, January 1973, and March 2000, and far exceeds that of any time in 2007.

A false belief in the omnipotence of the Fed will be especially crushing when this illusion is shattered.

At every major market top in history there is an overconfidence that nothing bad can happen because of one reason or another. Today there is a widespread false belief that the U.S. Federal Reserve will print unlimited money or purchase unlimited quantities of securities and that this action will enable prices to keep climbing indefinitely. As the bear market continues and intensifies and investors progressively realize that this was a false premise then they will become even more disillusioned than they would have been if there had been no Fed intervention. This loss of faith will be a contributing factor to one of the biggest-ever percentage drops for U.S. equity indices in their entire history.

Summary: even if you live a long life, selling now will likely be one of the key wealth-building events of your lifetime. You must sell high and prepare to buy low again.

Far too many investors believe that they have already experienced the bear market of the decade when it has barely gotten underway. Absurdly overpopular mega-cap technology shares will likely drop by 70% or more over the next few years or less. Sell now when everyone wants to party on.

The bottom line: investors are more dangerously overconfident now than they were in early 2020.

While insiders are doing some of their most intense selling ever recorded for many sectors, we have set new all-time records for call buying relative to put buying along with numerous all-time extremes in short-term percentage gains for thousands of securities along with other rare extremes of positive sentiment. We have gone from euphoria in early 2020 to panic in March 2020 to euphoria in June 2020. The next stop is despondency as the market probably surrenders over half of its post-March 23, 2020 gains for many assets.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ, the TIAA-CREF Traditional Annuity Fund, SIL, bank CDs, money-market funds, GDX, I-Bonds, GOEX, BGEIX, RGLD, WPM, SAND, and SILJ. I am completely sold out of Brazilian shares, energy shares, shipping, other emerging markets, and numerous other equity funds which I had been aggressively accumulating in March through mid-May 2020.

In March I had closed out all of my short positions; now I have closed nearly all of my long positions except for those related to precious metals while selling short especially XLK along with modest short positions in TSLA and ZM. These short positions combined total 8.8% of my total liquid net worth and I plan to keep adding to them into strength. Downside risk for U.S. equity indices is probably greater now than it has been at any time since early 2000. I would also sell short actual houses if there were a way to do so. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise 61.1% of my total liquid net worth, my highest percentage total since January 2018 when I had previously been a heavy seller.

"Those who cannot remember the past are condemned to repeat it" (George Santayana). "Those who can remember the past but insist that it's different this time deserve to repeat it" (Steven Jon Kaplan).

The two previous longest bull markets in U.S. history occurred as follows: 1) from August 1921 through September 1929 which was followed by a bear market of over 34 months from September 1929 through July 1932; and 2) from October 1990 through March 2000 which was followed by a bear market of 30-31 months in duration (exactly 31 for the Nasdaq). The longest-ever bull market which began for the S&P 500 on March 6, 2009 and which may have ended for that index on February 19, 2020 might therefore last for 30-36 months which implies a major bottom somewhere near the end of 2022. The bear market for the Russell 2000 and many other small- and mid-cap U.S. shares began on or around August 31, 2018 and has therefore been intact for nearly two years with several key lower highs along the way.

Investors have amazingly become more aggressive buyers of stocks, junk bonds, and call options in June 2020 than they were in January-February 2020 which had set most of the previous all-time records. The thundering herd is always maximally optimistic near a critical top, just as they had been maximally pessimistic less than three months ago. Look out below.