"You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing." --Warren Buffett

TREASURING TREASURIES (May 15, 2025): Investors have become disenchanted with investing in U.S. Treasuries, thereby causing their yields to climb in recent years to their highest levels since the beginning of the century. The most informed insiders, known as commercials, have an aggregate net long position which is near the 98th percentile of their historic range. Some of the most-experienced investors today, including Warren Buffett, have been aggressively accumulating U.S. Treasuries since their yields had reached multi-decade highs during the final months of 2022. The media in 2025 have featured far more bearish than bullish articles regarding U.S. Treasuries. In recent weeks there has also been a sharp surge of stories about how the U.S. dollar will lose its role as the world's reserve currency, which is one of the most important reasons especially for non-U.S. investors to own U.S. Treasuries.

The primary reason for investing in U.S. Treasuries is that, relative to U.S. stocks, they have rarely been more undervalued in their entire history going back to when George Washington was the U.S. President.

The U.S. government began to issue U.S. Treasuries in 1789, which was one year prior to the founding of the Philadelphia Stock Exchange and three years before the New York Stock Exchange officially opened for business. As a general principle, investors can either purchase U.S. Treasuries which pay interest or they can buy stocks which pay dividends. The idea is that since U.S. Treasuries are explicitly guaranteed by the U.S. government, whereas stocks can fluctuate unpredictably, the dividend yield on the S&P 500 Index and for most equity investments will have to be higher than the yield on short-term U.S. Treasuries to induce investors to take the much higher risk of stock ownership. However, because large-cap U.S. stocks have outperformed nearly all other investments in recent years, most people are willing to accept a lower return from equity dividends and to give up 4.3% guaranteed on U.S. Treasury bills, because they are so confident of making 20% or more per year by investing in the biggest and most popular U.S. stocks. This is obvious by the all-time record inflows into funds of U.S. stocks in retirement accounts and for retail investors in general, even as the fundamental valuations of the most popular U.S. equities are near the 99th percentile of their historic range. The yield on the 10-year U.S. Treasury bond, currently 4.431%, is almost 3.5 times the S&P 500 yield of 1.27%.

If someone is certain that he will make at least 20% per year in the stock market then he's not interested in getting a guaranteed 4.3%, or even more than 6% as some U.S. Treasury bills had yielded briefly when there was a Congressional standoff in May 2023. (I should probably say he or she, but hardly any woman would be so foolishly overconfident.) This is the real reason that U.S. Treasury yields are far above their long-term historic averages. The only way the U.S. government can induce sufficient investment in U.S. Treasuries is for their yields to be unusually high, because investors are currently interested in taking the greatest risks possible. This is one of the clearest signs that U.S. stocks are in a dangerous and unsustainable bubble which will be followed by a dramatic collapse.

A popular myth is that U.S. Treasury yields will keep rising because the U.S. government is running an especially large budget deficit which could rise even more due to federal tax proposals for 2026 and beyond.

Here is a simple quiz: in which year did the U.S. government experience not only its lowest deficit in many decades, but also an actual budget surplus? The answer is 2000, the final year of Bill Clinton's term in office. This was also the year when U.S. Treasuries sported their highest yields of the past several decades. This doesn't necessarily mean that a smaller U.S. budget deficit will be accompanied by rising Treasury yields, but it is pretty strong proof that there is no positive correlation between the size of the U.S. budget deficit and U.S. Treasury yields. If you study a long-term chart then you will see that the long-term correlation is close to zero.

The huge U.S. budget deficit and the surging total U.S. government debt are real drawbacks with the U.S. economy. The consequences will be numerous and potentially severe, but rising U.S. Treasury yields is not one of them.

A more recent and especially popular myth, especially in the mainstream media, is that the U.S. dollar will no longer serve as the world's reserve currency, a status it has enjoyed since it had supplanted the British pound in that role over a century ago.

The financial media, including many otherwise respectable publications, have observed the recent three-year bottom for the U.S. dollar index and, as they usually do whenever any asset falls to a 3-year low, are considering the possibility that the euro, the Chinese renminbi (yuan), or even a currency which doesn't yet exist will supplant the U.S. dollar as the world's reserve currency. This has raised widespread speculation that U.S. assets and especially U.S. Treasuries are dangerous to own in case the greenback suffers a serious pullback versus other global currencies. Here is a sampling of some recent articles on this topic:

The New York Times featured an article on the first page of their business section on April 28, 2025 about how the euro could become the world's premier currency. OMFIF made a serious case for a currency that doesn't even exist yet, and which will be shared among several countries which have few formal economic or political ties, to potentially take over the global reign from the U.S. dollar. Serious independent analysts including deVere have speculated that the Chinese renminbi could become the king of worldwide currencies.

Meanwhile, the frequency of bearish commentary about the U.S. dollar and U.S. Treasuries rose sharply in recent weeks, including this CNBC forecast of another 15% to 20% pullback for the U.S. dollar broadcast on April 29, 2025.

Magazine covers often highlight trends which are just about to dramatically reverse.

There are several magazines which tend to feature trends on their front covers just before they violently change direction. A classic example is during the exact week of the U.S. dollar index's recent three-year bottom, where The Economist cover story was entitled "How a Dollar Crisis Would Unfold," complete with a caricature of Edvard Munch's painting "The Scream." To give you an idea about how accurate this publication has been, also on the exact week of the recent multi-year bottom in November 2022 for many cryptocurrencies was this Economist cover story entitled "Crypto's Downfall."

Why is there a recent consensus about the U.S. dollar losing its role as the world's reserve currency, combined with a sharp rise in bearish forecasts for the greenback? The primary reason is that, just as with any asset that has recently achieved a three-year extreme in either direction, the vast majority of investors become convinced that such a multi-year trend will continue indefinitely. It doesn't matter whether it is an all-time high for large-cap U.S stocks, a new historic zenith for gold, or a five-year bottom for Brazilian and Chinese stocks. Analysts are most likely to be bullish toward any asset whenever the biggest percentage losses are about to occur for that asset, and to be maximally bearish whenever the strongest rallies are set to occur.

An interesting question is which U.S. government bonds to purchase, given the wide range from 4-week U.S. Treasuries to TIPS and I Bonds. I have been participating in all U.S. Treasury auctions since the summer of 2022 and have been accumulating a wide range of these, especially those which are consistently undervalued like the 6-week, 17-week, and 20-year Treasuries, along with TIPS from 10 through 30 years.

The 6-week and 17-week U.S. Treasury auctions have been around for a much shorter period of time than the better-established 4-, 8-, 13-, 26-, and 52-week Treasury auctions. Therefore, there are fewer participants out of unfamiliarity and a reluctance to change established habits, thus plumping up the 6-week and 17-week yields. The 20-year Treasury has had a longer existence but it is overshadowed by the 10- and 30-year Treasuries, thereby usually resulting in its yield being higher than it should be in relative terms.

TIPS, which pay a combination of a fixed rate determined at auction which is added to the U.S. inflation rate, tend to confuse many investors which stay away from them primarily for that reason. These have been sporting some of their highest real yields in their entire history, and therefore I have been consistently buying them both at auction and in the secondary market. The next 10-year TIPS auction will be held in the morning of Thursday, May 22, 2025.

There are little-appreciated side benefits to having U.S. Treasuries, especially if they are in a brokerage account.

U.S. Treasury interest is exempt from both state and local income taxes by federal law. This means that if you live in a place where these taxes are high, your after-tax return will be greater than with many competing investments. If you own U.S. Treasuries in a brokerage account, then only 1% of their value for short-term Treasuries and 2% for 52-week Treasuries is required to hold them on margin. This means that 100 dollars invested in U.S. Treasuries is as good as 98 or 99 dollars of actual cash for margin collateral purposes, plus it will currently be yielding close to 4.3%.

U.S. Treasuries are fully liquid, so that if you purchase a 3- or 20-year U.S. Treasury and you decide after several months or a year that you would like to sell it, all brokerages have a very active secondary market where you will get close to fair value for these Treasuries. You can also purchase "used" Treasuries in these secondary markets at generally favorable prices to supplement the Treasuries you buy at auction. The ability to sell a Treasury bond prior to maturity, and not to pay state and local income tax, makes these far superior to bank CDs which are almost completely illiquid and are subject to income taxes in all jurisdictions. In addition, U.S. Treasuries purchased at all auctions are free of brokerage fees. You can also purchase U.S. Treasuries at TreasuryDirect.gov which is maintained by the U.S. government and where no fees are charged, plus you get a detailed 1099 form each year for your income taxes.

The following are recent useful charts:

There was a nearly unanimous bullish consensus to buy gold a month ago when it had been the most calmly and positively behaving asset of 2025, as extreme tranquility consistently precedes the most tumultuous storms:

Retail investors have been especially excited about purchasing large-cap U.S. stocks which are modestly below their all-time highs:

Especially in their retirement accounts, U.S. investors have never been more heavily committed to the largest and most popular U.S. stocks than they are now:

CNN's Fear and Greed Index soared all the way from 3 in early April to 70 during the past week:

The bottom line: with U.S. Treasuries trading near their highest yields and their most depressed valuations since the beginning of the century, investors are shunning them in order to own large-cap U.S. stocks which have only been slightly more overpriced briefly in February 2025. The vast majority of investors have responded to last month's three-year low for the U.S. dollar index by becoming very bearish toward the greenback. Gold mining and silver mining shares have already begun to form lower highs following 12-year peaks on April 21, 2025. Widely popular large-cap U.S. stocks will likely resume and intensify their bear markets which may have begun on February 18-19, 2025 or which will begin in the near future, and which may not touch their ultimate nadirs until they reach their lowest levels since 2013, perhaps during 2028.

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Tuesday, May 15, 2025. 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) precious metals; 5) emerging markets; 6) individual Brazilian ADRs; 7) energy; 8) other individual shares.

VMFXX/TIAA Traditional, TIAA money market/bank CDs/FZDXX/FZFXX/SPRXX/SPAXX/BPRXX/Savings/Checking long: 36.76%;

17-Week/52-Week/26-Week/13-Week/2-Year/8-Week/3-Year/5,10,30-Year TIPS/4-Week/6-Week/20-Year: 24.12%;

TLT long: 10.66%;

I Bonds long: 3.80%;

PMM long: 0.01%;

XLK short: 32.09%;

QQQ short: 23.46%;

SMH short: 1.36%;

GDXJ short: 0.79%;

AAPL short: 0.15%;

GDX short: 0.08%;

SARK long: 0.51%;

PSQ long: 0.26%;

Gold/silver/platinum coins: 9.57%;

PALL long: 2.15%;

EWZ long: 0.33%;

FLBR long: 0.31%;

EWY long: 0.05%;

FLKR long: 0.03%;

TUR long: 0.02%;

UGP long: 0.32%;

VALE long: 0.21%;

BBD long: 0.11%;

GGB long: 0.11%;

EWZS long: 0.01%;

RIG long: 0.28%;

PTEN long: 0.03%;

WTI long: 0.02%;

OGN long: 0.22%;

CLF long: 0.01%.

"The inability to hold cash and the pressure to be fully invested at all times meant that when the plug was pulled out of the tub, all boats dropped as the water rushed down the drain." --Seth A. Klarman

NINE ALIGN; BENIGN? NEIN! (April 2, 2024): We have recently experienced several simultaneous extremes which investors are ignoring due largely to two key factors: 1) investors will almost always believe that whatever has occurred in recent months will continue over the next several months, regardless of the merits of such a momentum argument; and 2) the Goldilocks myth of a "soft landing" has become so widely prevalent that the vast majority of individual investors in their retirement plans and hedge funds have become dangerously overcrowded into the most popular U.S. stocks. Nearly 100% of equity valuations are at or near all-time record overpricings, while many reliable signals of upcoming market behavior have approached or surpassed all-time record extremes.

Many investors apparently weren't paying attention in kindergarten. They should have learned that Goldilocks is always followed by the three bears. Mama Bear is backstage now, already cued up and ready to make her dramatic entrance. Speaking of cue, the most overvalued assets including QQQ are likely to lose one-third or more of their recent peak valuations, which would imply QQQ dropping below 300 at least briefly during the next twelve months. In the final months of 2022, all forecasters of the U.S. economy insisted that there would be a U.S. recession. Now almost none of them expect a recession. They're going to be as wrong in 2024 as they had been in 2023.

Several reliable signals have been flashing bright red.

All of the following warnings are close to their most extreme levels ever recorded: 1) we have the lowest-ever put valuations and the lowest overall "skew" of put valuations relative to call valuations since options began trading on the CBOE at the start of 1973; 2) we have the longest-ever inverted U.S. Treasury yield curve and we had recently experienced the most-inverted Treasury curve in its entire history going all the way back to 1789; 3) the U.S. dollar amount of insider selling divided by the U.S. dollar amount of insider buying set a new all-time record during the first quarter of 2024; 4) investor inflows set several historic records including the largest-ever weekly inflow into U.S. exchange-traded equity funds during March 2024; 5) most measures of valuation which had been favored by classic value analysts including Benjamin Graham and Seth Klarman either approached or surpassed all-time records going back to 1790 when the Philadelphia Stock Exchange had its debut; 6) we have experienced the greatest-ever divergences between the most popular large-cap U.S. shares and just about everything else worldwide; 7) investor sentiment is close to multi-decade peaks; 8) perhaps most importantly, far more investors are concerned about missing out on future gains than they are about losing money in the financial markets.

No trigger has even been needed to begin either a massive collapse or a major rally. Follow the insiders whenever their trading is near a rare extreme in either direction.

Whenever someone asks me which event will trigger a massive percentage loss for QQQ and related assets, the answer is best encapsulated in the following question: what triggered the 83.6% drop for QQQ starting on March 10, 2000? What "caused" the even larger percentage losses beginning in September 1929? How about January 1973 or the 19th-century bubbles which had begun collapses in 1837 and 1873? In other words, the financial markets have never been and will never become cause-and-effect processes. Whenever valuations for any asset are either unusually high or low relative to fair value, anything can spontaneously initiate a regression toward the mean and beyond. I had to laugh when I saw the news articles on Tuesday about why U.S. stock futures were lower. All of them related to events which had occurred over the weekend or on Monday during market hours. Can't the market respond immediately? Investors tend to forget that during the subprime mortgage housing price bubble collapse of 2007, which had begun in January of that year, most equity sectors kept climbing at first. The S&P 500 didn't peak until October 11, 2007, long after the subprime news was already widely known. Other analysts pegged the collapse of Lehman Brothers as the trigger, even though that occurred in September 2008. Probably that helped to accelerate a much later phase of the downtrend but it had already been in place for a long time.

Top corporate executives are well aware of this principle. They don't waste time debating what could "trigger" any future event in the financial markets. The reason that top executives overall and especially in the most-overpriced sectors have been selling at their most intense pace in history is because they are close to being pure value investors. They know better than anyone what fair value is for the company which they are helping to run, and when current valuations have deviated the most from this level. That is why insiders consistently buy aggressively near bottoms and persistently sell near tops. They are often "wrong" in the short run but they are rarely off the mark in the long run.

The unusually lengthy interval since the last true bear market encourages investors to believe that the next bear market is emotionally far away, even as it is much more likely to happen.

Many people including myself remain puzzled why the U.S. Federal Reserve didn't immediately begin to raise the overnight lending rates shortly after the U.S. Presidential election near the end of 2020. The real reason is probably that, not having experienced significant U.S. inflation since the early 1980s, most people on the Fed really couldn't imagine inflation surging the way it ultimately did. Similarly, with the last true U.S. equity downtrend ending in early March 2009, it seems psychologically to most investors that bear markets were something which happened a long time ago and are no longer a serious possibility.

The level of surprise is therefore going to be quite high whenever we undergo the largest percentage losses in over fifteen years for most U.S. stocks. Just about everyone has concluded that huge exchange-traded equity fund inflows will continue for many more years, that VIX will keep dropping below 13 for many more years, and similar "obvious" conclusions. George Santayana stated that those who don't remember the past are condemned to repeat it. My corollary is that those who do remember the past, but believe that "it's different this time," deserve to repeat it.

We have already been in bear markets for years, but hardly anyone pays attention to them because they don't involve the most popular shares.

The stock market in China began its downtrend during the second week of February 2021. Most small- and mid-cap U.S. shares also completed their tops in 2021, and even recently the Russell 2000 (IWM), after a strong rebound since October 2023, wasn't able to approach its high of February 2021, much less its brief spike higher in November 2021 when most U.S. stocks by count touched their highest points of their bull markets which had begun from the depths of March 2020. Since most investors don't track these or other emerging-market indices, or baskets of thousands of U.S. stocks, but only pay attention to the most well-known names, they are convinced that there is a solid uptrend for the entire U.S. stock market.

The most impressive percentage increases above fair value are inherently unsustainable, and are therefore consistently followed by the most impressive percentage declines.

You could argue that the rally for AI shares and related large-cap popular names since October 2023 has been impressive, and it has in the same way that the large-cap popular rally diverged from everything else and was impressive in September 1929, January 1973, and March 2000. However, all extremes come to an end sooner or later because the basic Boglehead premise is fatally flawed. There is a long-term uptrend to any asset, just as there may be a long-term uptrend in the temperature due to global warming, but that doesn't mean you throw away your snow shovels and winter tires in July and expect the weather to keep getting hotter. Mean regression has been proven by Benjamin Graham and Seth Klarman and many other value investors throughout history to be a much stronger force than the long-term uptrend, especially whenever the current distance from the mean in either direction is unusually extreme. That is why we had such powerful multi-year rallies which began in late 2002 and early 2003, and again in late 2008 and early 2009. It is the primary reason why we must experience an approximate repeat of the internet bubble over the next few years.

I am surprised how few analysts have pointed out the obvious parallels between the internet bubble of 1999-2003 and the current AI bubble 24 years later.

Usually nothing repeats exactly in the financial markets, although bubble collapses are so similar to each other that if I were to remove the X and Y axes on charts of the railroad bubble of the 1870s and the internet bubble from the early part of this century, and ask you to tell me which was which, I would challenge you to get it correct. In this case, however, we have almost an exact parallel in several ways, including the dramatic outperformance of the most popular large-cap shares in late 1999 and early 2000 which is almost exactly analogous to late 2023 and early 2024, almost to the exact day.

March 2000 is remarkably similar to March 2024. Nonetheless, most investors use the period from October 2023 through March 2024 as their guide to the next several months, rather than looking at what had occurred after March 2000 or January 1973 or September 1929.

In some cases the parallel is to the exact day, or as exact as it can be. The internet bubble for the Nasdaq and QQQ had topped out on March 10, 2000. This would have been impossible to occur on March 10, 2024, as it was a Sunday. However, on March 8, 2024, both XLK (a fund of popular tech shares) and SMH (a fund of semiconductors) may have completed their peaks for the cycle. QQQ could have done so later on March 21, 2024. In 2020, the S&P 500 Index (SPX) continued to receive inflows mainly from individuals in their retirement plans even after tech shares had topped out, causing SPX to reach its highest point so far on March 28, 2024. In 2000, the S&P 500 similarly experienced a delayed zenith on March 24, 2000. That's about as close as you're going to get in real life. This doesn't guarantee that QQQ will drop 83.6% as it had done from its top on March 10, 2000 until its bottom 31 months later on October 10, 2002, but it has to be a realistic possibility especially since by many measures this index was more overpriced in March 2024 than it had been in March 2000.

We have ended or are near the top of the sixth U.S. stock-market bubble in its history. It will collapse the same as the previous five.

In the 1830s investors insisted that since we never had canals before, we wouldn't experience a severe U.S. equity bear market regardless of how overpriced many of the canal shares had become by 1837. The same fairy tale was popular in the 1870s regarding railroad stocks, in the 1920s about industrialization, in the early 1970s regarding the popularization of computers, in the late 1990s with the internet, and now in modern times with AI. All of these involved huge societal changes, but they had zero net impact on the financial markets because the financial markets have always followed and will always follow the same basic principles. If a company has a certain level of profit, and that profit is increasing by a certain percentage, then regardless of whether you're living in 1824 or 1924 or 2024 you can compute how much that stock should be trading for. If investors are depressed or excited about investing, thereby distorting this number in either direction, it creates an opportunity for alert investors who recognize that all such distortions are temporary and will eventually fluctuate toward nearly equal and opposite extremes. During the late 1920s Benjamin Graham repeatedly insisted upon this key point even with loud Bogleheads like Irving Fisher insisting upon the Boglehead point of view even before it had that name. The worst bear market in world history proved that mean reversion will always triumph at any extreme, no matter how "permanent" famous analysts claim that it is.

We don't just have an AI or large-cap bubble, although that exists and is especially dangerous. We have simultaneous perilous overvaluations for cryptocurrencies, gold, residential real estate, and many other assets. The percentage loss of total worldwide net worth is probably going to experience one of its biggest-ever declines in history.

During previous historic bubbles including Tulipmania nearly four centuries ago in Amsterdam, it wasn't just tulips which collapsed in price. There had been simultaneous bubbles for residential real estate, the stock market, and numerous related assets which are not generally remembered by most people but which can be reviewed in detail for free online at "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay. Residential real estate is overpriced for the same fundamental reason as U.S. large-cap stocks: the ratio of housing prices to average household income in many countries including the United States is close to double its long-term average level. People's incomes in real terms are not going to suddenly double, which means that housing prices will have to fall by half in real terms. Gold has probably been in a long-term uptrend since August 1999, but the traders' commitments for both gold and silver, showing commercials net short about 2.7 to 1 for each, are a warning sign that the most-experienced investors who own actual gold and silver as miners, fabricators, jewelers, and so on, are betting on the price dropping. Gold will probably fall by a minimum of 400 dollars an ounce from wherever it is topping out in this cycle, and perhaps by more than 500 dollars, while silver will likely drop below 20 U.S. dollars per ounce at least briefly later in 2024. Once silver commercials go net long, as they almost did in March 2023 and had actually done in September 2022, it will be time to buy into this sector in the anticipation of a powerful rally.

As for cryptocurrencies, no one has any idea what they are worth. At least a stock with a price-earnings ratio of 50 will become a bargain when its P/E drops below 8, but any given cryptocurrency is only worth whatever someone else believes that it's worth. Peter Pan is one of my favorite children's stories by J.M. Barrie, but you can't use Peter Pan logic to justify any investment.

The following charts highlight rare multi-decade extremes from reliable media sources, some of which became their most exaggerated in a century.

The bottom line: the most popular shares as a group, as are epitomized by funds including QQQ and XLK, have been making many upward spikes since February 12, 2024 but haven't been able to remain above those key intraday highs. Hedge funds, which by far had been their most net long any asset in history when they had dangerously overcrowded into AI shares and related large-cap U.S. favorites, will likely curtail their buying or actually do some net selling, although as usual with more than 90% of hedge funds they won't become serious sellers until these and related funds have already dropped 15% or 20% from their respective March 2024 tops. We will continue to experience frequent sharp upward bounces for U.S. stocks for about three years, with some of those rebounds for QQQ approaching or exceeding 50%, but during that time all of the major indices will join the Russell 2000 in primary downtrends which almost certainly means a loss of more than 70% from its peak for the S&P 500 Index and more than 80% for funds of the most popular shares including QQQ. During the next twelve months, when hardly anyone is anticipating a significant drop for the U.S. stock market, QQQ will likely at least briefly spike sharply below 300 before recovering. Over the longer run, QQQ is likely to fall below 100 and perhaps much lower by 2027 or sooner. This will surprise most investors, but compared with its October 2002 or November 2008 bottoms it would be a very similar "Papa" bear-market bottom adjusting for inflation and earnings.

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Tuesday, April 2, 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/Savings/Checking long: 37.13%;

26-Week/17-Week/52-Week/13-Week/2-Year/8-Week/3-Year/5,10-Year TIPS/4-Week/42-Day long: 21.66%;

I Bonds long: 10.88%;

TLT long: 10.86%;

PMM long: 0.01%;

XLK short (all shorts once again unhedged): 30.58%;

QQQ short: 20.17%;

XLE short: 5.48%;

XLI short: 3.05%;

XLV short: 1.82%;

SMH short: 1.33%;

AAPL short: 0.03%;

SARK long: 0.88%;

PSQ long: 0.04%;

PALL long: 0.17%;

GDXJ long: 0.14% (fully hedged with covered calls at a strike price of 45);

Gold/silver/platinum coins: 7.01%;

FXY long: 0.24%.

"In a world in which most investors appear interested in figuring out how to make money every second and chase the idea du jour, there's also something validating about the message that it's okay to do nothing and wait for opportunities to present themselves or to pay off. That's lonely and contrary a lot of the time, but reminding yourself that that's what it takes is quite helpful." --Seth A. Klarman

CALDRON BUBBLE (January 17, 2023): We are in the second year of the collapse of the "everything bubble." Unless you are in your 90s or over 100 years old and you were trading during the Great Depression, or you're in kindergarten and you could be trading into the 22nd century, this will end up being the biggest bubble collapse of your lifetime.

U.S. stocks, high-yield corporate bonds, real estate, art, used autos, baseball cards, and of course cryptocurrencies are all declining almost the same way that they did following a similar bubble in Japan which had peaked at the end of 1989. As for the U.S. stock market, there are many parallels in 2022-2025 with 2000-2003 which we will discuss in more detail later in this essay.

The most important characteristics of bubbles is that regardless of how or why they form, they all collapse nearly identically. This was first chronicled in detail by Charles Mackay in his 1841 classic publication, "Extraordinary Popular Delusions and the Madness of Crowds."

2023 will likely have a very different shape from 2022 although it will also primarily be a bear-market year.

Bear markets for all assets usually feature the most sharp rebounds within the context of dramatic long-term declines.

The lion's share of the market's losses in 2022 occurring in the most overvalued shares. High-P/E large-cap technology shares in 2022, just as in 1973 and 2000, were among the biggest percentage losers. From its March 10, 2000 intraday top to its October 10, 2002 intraday bottom, QQQ, a fund of the top 100 Nasdaq companies, lost 83.6% of its value which is more than 5 dollars out of 6. It is likely that a similar percentage decline is in progress following QQQ's all-time zenith in November 2021, with the losses for QQQ ending up twice or thrice as much as many other U.S. equity index funds.

We could get a much higher VIX and a much deeper pullback for U.S. equities in 2023 as compared with 2022.

I expect the S&P 500 Index to probably drop below three thousand at some point during 2023. If this occurs around mid-year rather than near the end of the calendar year, and if it is accompanied by the highest level for VIX since March 2000, massive investor outflows, and heavy insider buying, then this could provide our first opportunity to actually close out short positions and go heavily net long many deeply-undervalued securities. This would not be because the bear market will be over, as 2024 will almost surely feature the greatest percentage losses of the entire bear market. However, it could be possible to make numerous diversified purchases of washed-out securities around the middle of 2023 which could be huge winners within several months at which time most of them should be sold.

Even in the most severe bear markets, you can often make more money by going long prior to the bounces following deeply-oversold bottoms than from going short into the declines themselves.

Remember your favorite kindergarten story: Goldilocks and the Three Bears.

If March 2020 through January 2022 was Goldilocks, then 2022-2025 will feature the inevitable starring roles for the Three Bears. Baby Bear is an apt description of 2022, with numerous equity pullbacks each followed by a sharp rebound. Mama Bear should be an apt description of 2023 with a much more severe parental punishment, followed by a motherly strong rebound. This still leaves Papa Bear's powerfully destructive grip for 2024, of which we will talk more in future updates.

Investors on the equivalent of the Titanic prefer to upgrade their cabins rather than to head for the lifeboats.

In early 2001 investors had been migrating away from slumping large-cap tech shares and moving into energy, industrials, healthcare, and whatever else had been outperforming in 2000. Similar behavior has been occurring recently, with funds including XLI (industrials), XLV (healthcare), and XLF (financials) only modestly below their all-time tops. Last week XLI had the biggest net inflow of all exchange-traded funds. Just as in 2001, investors in early 2023 are unwilling to accept that we could be in a bear market and that they should therefore purchase something safe like 26-week U.S. Treasuries yielding between 4.8% and 4.9%. Instead, they think they are immune to losing money if they are in the "right" sectors.

As in all bear markets, most analysts are emphasizing "looking for quality" instead of diversifying into safer assets. The problem is that they're looking for quality in all the wrong places.

Bogleheads will be Bogleheads.

Near the end of 1999 I was working for a company in Manhattan which offered 401(k) options to its employees. Two of these choices were entirely invested in Nasdaq shares, one with large-caps and one which was more diversified but still highly speculative. The custodian of these assets sent a representative to "educate" (i.e., brainwash) employees on their options, failing to mention that these Nasdaq funds featured fees which were triple those of more conservative bond funds in the plan. They also did typical Boglehead tricks like showing charts of how these funds had performed--but going back to 1982 rather than some other year. I was upset enough to write a written complaint to the head of human resources and copy the CEO, and also to point out that they were subjecting themselves to potential legal action in a future year. They dismissed my complaints as being absurd.

In response, I organized a meeting of my co-workers in which I arranged to give a lecture about how the financial markets work. I was already teaching a class in the financial markets to new employees, so people were familiar with my experience. I gave one of my most eloquent explanations of how the Nasdaq and its funds were very dangerously overpriced. Many people commented that they had no plans to change their allocations since "the market always goes up in the long run" and this kind of commonly-heard nonsense, but over the next few years quite a few people came up to me privately and told me that they paid attention to my advice and reduced their risk.

The most reliable bear-market signals are ringing loudly of further losses.

VIX, an important signal of investor fear, hasn't even approached 40 so far in the current bear market. VIX slid to an intraday low of 18.01 on January 13, 2023, a one-year bottom. VVIX, also known as the VIX of VIX, has recently been rebounding from a multi-year nadir. We haven't had anywhere near the typical heavy net outflows that have characterized every bear-market bottom in history, nor the intense levels of buying by top corporate executives which had featured so prominently at major bottoms including March 2009 and March 2020 and were far more prevalent at minor bottoms such as December 2018. The failure by average investors to be worried about additional losses, and the indifference by insiders in accumulating shares near recent lows, are both clear signs that additional substantial losses still lie ahead.

In 2021 we had greater net exchange-traded fund inflows than during the entire twenty-year period from 2001 through 2020 combined. In 2022, even with notable declines for equity valuations, we had the second-highest total after 2021.

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

Inflows for Globally Listed ETFs Reach Second-Largest Tally Ever in 2022

Fundamental valuations for most assets remain enormously above long-term historic averages.

QQQ and the S&P 500 have dropped from all-time record overvaluations a year ago but are still both trading at more than double their average ratios relative to the profits of their components. Real estate has fallen modestly from its all-time highs in recent months, but is about 75% overpriced on average in U.S. cities and more than that in many parts of the world. Assets in true bear markets don't just retreat somewhat and then resume their uptrends. They usually bottom well below fair value as we had seen for stocks in late 2002 and early 2003 as well as late 2008 and early 2009. For real estate we had many deeply undervalued neighborhoods at various points from 2010 through 2012.

After experiencing an extended correction since its September 28, 2022 two-decade high, the U.S. dollar index could be ready for its next multi-month uptrend.

Some undervalued assets including U.S. Treasuries have probably begun multi-year bull markets.

U.S. Treasuries, including their funds like TLT, fell to multi-decade lows in the autumn of 2022 and have begun forming several higher lows. Each week I have been buying 26-week U.S. Treasury bills along with other short-term Treasury securities as they have been enjoying their highest yields in 15-1/2 years. One consistent winner in bear markets going back to the late 1700s has been U.S. Treasuries of nearly all maturities.

Gold mining and silver mining shares likely resumed their bull markets in September 2022, right on schedule.

In March 2000 the S&P 500 completed its top and initiated a huge bear market which didn't end until October 2002. Gold mining and silver mining shares, as measured by $HUI and other reliable indices and funds, bottomed in mid-November 2000 which was eight months later. Fast forward to 2022. The S&P 500 completed its top on January 4, 2022 while GDXJ and related funds slid to multi-year lows (although remaining well above their March 2020 bottoms) in September 2022, once again eight months following the S&P 500 top. Looking back at 2000, gold/silver mining shares were among the top-performing sectors over the next three years and over the next decade. This is likely to be the case over the next several years also.

Gold mining and silver mining shares will dramatically outperform in the upcoming decade with periodic pullbacks of 15% to 25%. Only buy them after such pullbacks.

I have been maintaining my long positions in gold mining and silver mining funds including GDXJ, ASA, GDX, and BGEIX in that order. These consistently outperform following the collapse of U.S. growth bubbles, although they will periodically suffer moderate pullbacks of 15% to 25% just as they had done during November 2000 through December 2003.

I have been steadily adding to my short positions and reducing my long positions in preparation for the next downward trend for U.S. equities.

While I have been maintaining my short positions in XLK and QQQ, in recent months I have been adding to short positions in XLI, XLV, and SMH whenever VIX is below 20 and in XLE whenever insiders are heavily selling energy shares.

We had an all-time record level of insider selling of the largest global energy companies in recent months, so I began selling short XLE near 93 and 94 and have been continuing to add to this short position into its recent lower highs near 90 and 91. XLE has been one of the biggest outperformers since its March 2020 bottom and is therefore likely to be one of the biggest losers until insiders are once again heavy buyers. During several periods in 2020, including the spring and early autumn, we had the heaviest-ever insider buying of energy shares. Energy insiders seem to be especially astute in buying low and selling high.

Here are some useful charts which illustrate the above points.

The following chart highlights that the 2022 U.S. housing bubble surpassed the previous dangerous bubble peak of 2005-2006:

The Nasdaq in recent years has very closely tracked the Nikkei in the late 1980s as all true bubbles collapse identically:

The S&P 500 Index is its most overvalued in its entire history relative to risk-free U.S. government bonds:

Measured using price-to-sales, the S&P 500 has been far more overpriced recently than at any time in recent decades including 1999-2000:

Commercials, the equivalent of insiders for futures trading, have approached multi-year highs in accumulating the 30-year U.S. Treasury bond:

Lengthy bull markets from August 1921 through September 1929 and October 1990 through March 2000 were both followed by bear markets which lasted over 2-1/2 years apiece, therefore likely setting the stage for a repeat:

The bottom line: expect two more bear-market years through late 2024 or perhaps 2025.

Numerous analysts have declared that "the bear market is over" and use as "evidence" the hilarious proclamation that down years are followed by up years a large percentage of the time. This is like concluding that you don't need to take an umbrella when you go outside, since it will usually not be raining--except when it is. Checking the weather forecast or actually going outdoors to see for yourself is much more reliable than going by irrelevant long-term statistics, and there can be no doubt that stormy weather in the financial markets will be with us for roughly another two years. If you're very conservative then put all of your money in U.S. Treasury bills up to 52 weeks while emphasizing the weekly 26-week auctions. If you're willing to assume greater risk than gradually sell short the most-overvalued large-cap U.S. equity funds including XLI, XLE, XLV, and SMH.

Disclosure of current holdings:

Here is my current asset allocation as of the close on Tuesday, January 17, 2023:

TIAA(Traditional)/VMFXX/FZDXX/SPRXX/Savings/Checking long: 34.54%;

XLK short (all shorts currently unhedged): 17.52%;

QQQ short: 6.23%;

XLE short: 4.61%;

XLI short: 2.24%;

XLV short: 1.53%;

SMH short: 0.06%;

GDXJ long: 10.84%;

ASA long: 6.77%;

GDX long: 2.88%;

BGEIX long: 1.48%;

2-Year/3-Year/52-Week/26-Week/13-Week/5-Year TIPS long: 10.04%;

I Bonds long: 9.19%;

TLT long: 8.65%;

Gold/silver/platinum coins: 5.55%;

HBI long: 0.30%;

WBD long: 0.25%;

EWZ long: 0.08%;

EWZS long: 0.04%;

The numbers add up to more than 100% because short positions only require 30% collateral (by SEC regulations; some brokers require more) to hold them with no margin required.

“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.

“Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” --Paul Anthony Samuelson

INVESTING WHILE INTOXICATED (January 17, 2021): We have experienced all-time record levels of speculative call buying, penny-stock chasing, massive percentage increases for marginally-profitable companies, IPO eagerness, and numerous other multi-decade and even multi-century records which in many cases have surpassed rare bubble extremes from periods like 1928-1929, 1972-1973, and 1999-2000. Far too many investors have embraced the perceived certainty of ever-rising asset valuations, resurging inflation, a slumping U.S. dollar, endless summer for cryptocurrencies, record-low spreads for high-yield corporate bonds over U.S. Treasuries, the second real-estate bubble of the 21st century, and other myths as though they were certainties. The most remarkable feature today is how few people recognize it as being both phenomenally extreme and completely unsustainable. All similar bubbles in past centuries have ended with nearly identical collapses and this is not going to be the first-ever exception to that rule.

The large-cap Nasdaq collapses of 1973-1974 and 2000-2002 are likely to be repeated along with severe losses for many other fluctuating assets.

From its March 10, 2000 peak of 105.12 to its October 10, 2002 bottom of 17.24, adjusted properly to include all reinvested dividends as StockCharts.com does, QQQ plummeted 83.6%. I expect a similar percentage decline, plus or minus several percent, within three years or less. This will likely be accompanied by notable percentage losses for high-yield corporate bonds, real estate, cryptocurrencies, art, and nearly all fluctuating assets. It won't be a smooth path down and there will be many rebounds along the way. Robinhood investors and Bogleheads will both suffer severe losses for somewhat different reasons.

Bogleheads are overreliant upon the glory of past decades.

John Bogle himself decried the existence of those who took his excellent idea about index investing and badly distorted it. John Bogle sold all of his aggressive-growth shares in 2000 and also unloaded most of his stocks shortly before his passing in 2018 because he astutely recognized that there is sometimes far too much risk in the financial markets. It's too bad that most of today's Boglehead investors haven't considered that if you had been invested in the U.S. stock market near the end of August 1929 then by August 1982--which was 53 years later--your portfolio would have lost an average of about 60% after adjusting for inflation depending upon exactly what you owned. The only true periods of dramatic outperformance for the U.S. stock market, not counting the bubble behavior since March 2020, were the incredible eight-year rally from August 1921 through August 1929 and the more recent huge bull market from August 1982 through March 2000 with a few minor bear markets along the way. Even with its huge gain in recent years, if you are long a basket of Nasdaq stocks which you have owned continuously since the peak on March 10, 2000 then you are only marginally ahead after adjusting for inflation.

People are repeatedly underinvested whenever bull-market gains are about to be greatest and dangerously overinvested near the beginning of all major downtrends.

Nearly all long-term analyses of the financial markets underrate the rarity of the atypical outsized gains of the above two periods of 8 and 17-1/2 years. They usually have an agenda, open or hidden, of creating an illusion that "stocks always go up in the long run." Actual records by brokerages and mutual-fund companies illustrate clearly that most people prior to these two major outperforming periods had historically very low allocations to risk assets; in August 1982, for example, only 13.2% of total household wealth was invested in stocks versus roughly five times that amount by early 2000. So the vast majority of investors got little benefit from the two huge bull markets of the past century while there was massive participation on the downside in 1929-1932 and 1999-2003. With everyone nearly fully invested today we are set perfectly for a massive aggregate loss of wealth over the next few years.

Safe-haven assets have quietly completed important bottoming patterns.

VIX, a measure of implied volatility, has been steadily making dozens of higher lows since the final months of 2019. The U.S. dollar index, a little-followed signal which has accurately forecast nearly all major market turns of the past half century, probably completed its lowest point since the second week of April 2018 at 90.209 at 6:30 a.m. on January 6, 2021, having made numerous higher lows during the past 1-1/2 weeks. The U.S. dollar index topped out on March 4, 2009, exactly two days before the S&P 500 began a historic surge higher, and the U.S. dollar index also completed a key peak on March 20, 2020 just before the March 23, 2020 bottom for many U.S. equity indices. In July 2008 the U.S. dollar index completed a key double bottom just before the S&P 500 suffered one of its worst-ever percentage collapses. It is probably no coincidence that the January 6, 2021 bottom for the U.S. dollar index preceded by a half week the 319.99 after-hours top for QQQ registered at 5 p.m. on January 8, 2021.

The most-experienced investors are among the few who have embraced the U.S. dollar and U.S. Treasuries.

The third of the "Three Musketeers" safe-haven trio, TLT and other long-dated U.S. Treasuries, likely completed important bottoms around noon on January 12, 2021. Top U.S. corporate executives have set new all-time records for the ratio of the total dollar amount of insider selling relative to insider buying in the U.S. stock market. These very-experienced investors have been increasingly accumulating the safest havens while they are still significantly undervalued. In every bull market the most-capable participants buy first, followed gradually down the food chain until the least-knowledgeable novices are piling in near the top. In a bear market the savviest investors get out earliest, followed all the way down the line until the least-experienced traders end up setting all-time records for net outflows near the bottom of the cycle.

Real estate worldwide is completing its second major bubble of the 21st century.

The 2005-2006 real-estate bubble featured subprime mortgages and liar loans. The 2020-2021 real-estate bubble is notable for record-low mortgage rates and the easy availability of credit and zero down payments. The most important similarity between 2005-2006 and 2020-2021 is that the ratio of U.S. housing prices to average household income in both cases surpassed twice their long-term level in many neighborhoods. Much of this data including the detailed Herengracht study which began in 1628 and Case-Shiller backdating to 1890 spans centuries (and even millennia, since real-estate prices have been recorded throughout written history). In 2005-2006 one heard frequently about how "foreign buyers" would enable real-estate prices to be perpetually elevated; by 2010-2012 many of these buyers had become sellers. Today you hear repeatedly about how people "from away" are eagerly buying but no one mentions how those with no long-term connection to a place are much less likely to hold on during periods of falling valuations. No asset which is more than double its fair value can sustain such a high price regardless of whether it's real estate, stocks, commodities, or anything else.

Intraday behavior highlights eager opening-bell buying which characterizes nearly all tops.

If you look at intraday charts of most risk assets in March 2020 then you will quickly discover that the least-experienced investors who were panicking out of the market nearly all did so near the opening bell, especially on Mondays when investors had been worrying all weekend about how much lower the market might retreat and had placed massive market orders to sell. Near bubble peaks in March 2000 and again in recent weeks we have repeatedly experienced the highest prices of the cycle near the opening bell when the least-experienced recent investors are most excited about how much money they're going to make. During the final months of 1999 and the early months of 2000 I heard many people openly predicting--in person and on the internet--how much money they would make in the stock market, with an infamous survey in February 2000 registering the average investors' expectations of 30% annualized gains in the stock market for the following decade. Recently similar absurd extrapolations have become commonplace.

Many of today's investors were in high school or younger during the 2007-2009 and earlier bear markets.

The huge surge of new investors in less than one year, just as in 1972-1973 and 1999-2000, have mostly never experienced a bear market. Many of them were in school when the last bear market occurred so it seems emotionally distant. Now they'll have a front-row seat to the carnage which will affect so many of them directly.

It's not just the newby investors who are convinced of invincibility but many long-time baby boomers who should know better.

If you look at the comments below and on my other essays on Seeking Alpha then you will quickly discover that those who are most optimistic about future risk-asset valuations are not just those who have never personally experienced bear markets. Many investors who lived through the huge collapses of 1999-2003 and 2007-2009, and who may have lost significant percentages of their net worth during those bear markets, have convinced themselves that "because of the Fed" or "since you have to put your money somewhere" or "with all of that cash still out there" or "since assets have to climb in the long run" that they're going to come out ahead even if they enter or hold their positions near their most-overvalued levels in history. All major market tops and bottoms must be accompanied by widespread delusions that a current unsustainable over- or undervalued extreme can persist indefinitely. The biggest percentage losses have always occurred whenever there was the highest level of overconfidence in future gains while the most dramatic percentage gains have happened in an atmosphere of maximum pessimism.

All post-bubble collapses have nearly identical chart patterns as Charles Mackay pointed out in "Extraordinary Popular Delusions and the Madness of Crowds" which he first published in 1841.

QQQ's pullback from its March 10, 2000 zenith of 105.12 to its May 24, 2000 intermediate-term intraday low of 63.03--with both numbers properly adjusted for dividends by StockCharts.com--was just about exactly 40%. QQQ reached 319.99 at 17:00:01 Eastern Time on January 8, 2021 which if we round off to 320 implies an upcoming bottom, perhaps in the second quarter of 2021, near or below 192. This is nowhere near what its ultimate bear-market nadir will be in 2022 or 2023 but is merely a projection for its first significant decline. Usually bear markets have their second-largest percentage losses near the beginning and their largest percentage declines near the end with lots of bounces and other unknowable fluctuations in between. Hardly anyone would likely agree with this price target with the vast majority of forecasters expecting continued QQQ gains in 2021 and beyond.

Participation in recent weeks has been concentrated in the least-reliable and most-dubious sectors of the financial markets.

The most-speculative sectors in the financial markets today have enjoyed by far the greatest increases in both participation and percentage gains, thereby encouraging many others to climb aboard these highly-uncertain assets. Penny stocks, cryptocurrencies, and out-of-the-money call options have become the darlings of recent months to an extent not even approached during past bubble peaks. Here is a chart of participation in penny stocks during the past decade:

The disappearing Trump mystique provides an emotional excuse for "huge" asset losses.

Most of the irrational increases for risk assets occurred since Donald J. Trump was declared the winner of the 2016 U.S. Presidential contest. Whether this is fundamentally meaningful or not, Trump is associated in many people's minds worldwide with wildly-overpriced assets. Now that Trump is out of favor, and soon to be out of office, this mystique has reversed. Many will subconsciously tell themselves that since Trump has gone there is nothing to prevent asset valuations from declining dramatically.

The most noteworthy aspect of the current asset bubble is how--as with every bubble peak in history--so many perceive it as being normal and sustainable when it is neither.

A few people in the media and on chat sites including Seeking Alpha have mentioned the rarities of the current situation and sometimes use the word "bubble" but most investors are convinced that nothing extraordinary is going on. A century from now, and perhaps two or three centuries from now, the current mania will be analyzed as to how it could have been created in the first place and why so many more people piled in near the top rather than prudently reducing risk. The 1929-1932 bear market might still remain as the premier historic collapse but 2021-2023 will provide some serious competition and will likely be much more closely scrutinized partly since data and analyses from the current century are far more numerous and pervasive than a bear market from a previous century of mostly mass print media. Most people have been investing while inebriated with the liquor of potentially unlimited gains, not realizing the severe hangover which is approaching.

When in doubt use the Martian test.

Suppose that you had just arrived on planet Earth from a trip to Mars where your internet connection had been broken. What looks absurd and what looks normal? If you are living through a period where the value of cryptocurrencies gradually climbs for months then you begin to accept it as being typical regardless of how high it gets. If you were thinking about selling on the way up but you didn't sell and the price climbs higher, you keep getting positive psychological feedback telling you how smart you were for waiting longer. Eventually you won't be able to sell at any price, no matter how high, since you've gotten so many pats on the back attesting to your brilliance in doing nothing. Many of the recently-minted rich from being fortunate enough to hold bubble assets have proudly declared that they're not selling a single share, thereby ensuring that they will end up poorer than when they began. I personally know several people who had suffered this fate in 1999-2003.

The bottom line: today's investors are like small animals blissfully eating by a pond, not recognizing that they are surrounded by hungry alligators.

One of the most important principles of investing is that if you are long anything and a massive concentration of inexperienced investors are joining your trade while insiders and commercials are heavily selling then you must get out regardless of what might happen in the long run. That is why I bailed out of GDXJ with an average price of 62.50 - 63.00 in the morning of July 27, 2020. Similarly, if you are short or in cash and investors are making all-time record net outflows while insiders are buying at their most intense pace in eleven years, as had occurred in March 2020, then you must buy aggressively even if you don't see any light at the end of the tunnel.

Disclosure of current holdings:

I have gradually increased my short positions in XLK, TSLA, and especially in QQQ while increasing my long position in GEO and more than quadrupling my now-substantial long position in TLT. I closed out all of my long positions in value shares; while I like many value sectors long-term I expect substantially lower prices sometime during the next half year.

Here is my asset allocation with average opening prices adjusted for all dividends: 65.7% cash including TIAA Traditional Annuity paying 3% to 5% (only available for legacy retirement accounts) and Discover Bank high-yield savings paying 0.50% (available for all U.S. residents); 18.5% short XLK (112.5968); 11.5% long TLT (154.68); 10.2% short QQQ (292.8835); 9.6% short TSLA (491.9117); 3.0% long GEO (8.76); 2.4% short ZM (293.16); 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.