"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.