“Humans are prone to herd because it is always warmer and safer in the middle of the herd. Indeed, our brains are wired to make us social animals. We feel the pain of social exclusion in the same parts of the brain where we feel real physical pain. So being a contrarian is a little bit like having your arm broken on a regular basis.” --James Montier

FEAR: STOP FEEDING, START FADING (March 8, 2020):

There are two ways investors can respond to the coronavirus panic. The first one is the overly obvious wrong one: pile into long-dated U.S. Treasuries; buy shares of companies like Clorox and drug-related corporations which will allegedly benefit from a vaccine or some kind of cure; massively sell energy and travel shares and anything else which would be negatively affected by virus fears. Taking these actions has been widely popular as you can immediately see as yields on the 10-, 20-, 30-, and related U.S. government securities have plummeted to their lowest levels ever recorded since U.S. debt was first available in 1791. Many of these yields are not only all-time records but are roughly half the previous lows while representing the greatest-ever negative real yields (i.e., after adjusting for inflation) in U.S. history. Meanwhile, already-undervalued shares in sectors like energy and travel have become even more illogically depressed.

Second-level thinking is essential to profit in the financial markets. If they act early enough, first-level investors may sometimes be ahead in the short run but almost always lose in the intermediate and long run.

If taking panic action like piling into U.S. Treasuries is obvious even to the average pre-K investor who has barely learned to recognize the letters in the symbol names then probably it is not going to be a successful approach. More importantly, successful investing is almost always not about recognizing the obvious but gauging the most extreme overreactions by others who have recognized the obvious as a thundering herd. If media headlines about a virus lead to less travel then perhaps travel shares should drop by a tiny amount but not by fifty, sixty, or seventy percent. Even in an unusually volatile year like 2008 actual energy supply and demand fluctuated by only a half percent as prices quadrupled and then plunged below their pre-quadrupling levels. After the 9/11 terrorist attacks analysts were confident that flying and other forms of travel would remain depressed indefinitely. It is the absurd extent of the most exaggerated overreactions which provides most worthwhile buying and selling opportunities. Just as we adjusted after 9/11 to the knowledge and responsibility regarding occasional terrorist attacks, one way or another society will adjust more rationally to the existence of coronavirus. People will want to travel as much as they had done before and otherwise live fully again while knowing what do do in case they exhibit certain symptoms characteristic of coronavirus. Doomsday scenarios of "never doing so-and-so again" have always proven to be false in past decades and centuries.

Full credit must be given to Howard Stanley Marks for popularizing the concept of second-level investing. Like myself he has also become a recent heavy buyer of the least-popular shares worldwide.

The incredible level of worldwide stimulus in response to coronavirus is the main financial story and one which has been woefully underemphasized.

The financial media are rife with speculation about how this or that asset will allegedly react to coronavirus. The fact is that the market has already reacted, overreacted, overreacted some more, and then ridiculously way overreacted again. What almost no one is emphasizing is how governments around the world have been cutting overnight lending rates, pouring record billions into their economies--at least one or two trillion overall eventually--and how this is occurring not during a severe recession but near the end of an eleven-year global economic expansion. The real dilemma is that the worldwide economy is likely to generate rising inflationary expectations rather than deflation or contraction. The end of any lengthy economic expansion will eventually be a worldwide recession, but coronavirus has invited massive stimulus which other than an initial brief negative GDP impact has likely postponed the arrival of such a recession by more than a year.

The media know they will get more viewership by hyping the coronavirus and making it seem personally imminent, rather than responsibly reporting on current advanced efforts to develop cures and how people should avoid irrational overreactions.

Energy shares are trading near two-decade lows with some of them near three- and four-decade bottoms.

The sector with by far the most insider buying for an extended period of time has been traditional oil and gas shares and companies which service and are connected with those producers. Profits are generally much higher now than they had been in past decades so their price-earnings ratios and other fundamentals have become amazing bargains even when compared with past recession nadirs. In 2008 we had irrationally undervalued energy followed by the highest overpricing in history followed by a second irrational undervaluation, all within a single calendar year. Investors who are currently overreacting to the downside will be wildly speculating and pushing prices of energy shares to multi-year highs perhaps two years from now. Exactly why the shares of energy companies are so volatile and tend to fluctuate roughly in two-year swings is unclear but what has been the case in the past will almost certainly continue into the future.

Worthwhile funds in this sector include FCG, OIH, XES, and PSCE. PSCE is especially unpopular since it consists of small-cap energy names, and small-caps worldwide are out of favor at the same time that energy companies are unpopular--thus providing you with an attractive double play.

As I am writing this Sunday night, March 8, 2020, West Texas intermediate crude oil just dipped briefly to 27.90 U.S. dollars per barrel which it had not touched since the early weeks of 2016. Regardless of what it does in the short run, this price will roughly triple within about two years.

Travel shares have become as irrationally oversold as they had been after the 9/11 terrorist attacks.

Other than energy the heaviest insider buying during the past several trading days has been for companies which are connected directly or indirectly with travel. The assumption is that because of coronavirus--that excuse again--people will permanently travel less for business and pleasure than they have done in the past. Those who remember 9/11 remember similar forecasts; just two years later we had new all-time records for flights and vacations. This time it may not even take two years to rebound strongly because a partial cure might be found any day or warming weather could greatly reduce the virus' spread or a vaccine could be developed--or all of the above. Insiders don't have special knowledge but they recognize that when valuations have become their cheapest in decades it is usually worth gradually buying especially when so many investors are selling first and asking questions later if at all.

Cruise-line shares CCL, RCL, and NCLH have been especially out of favor in recent trading days and will likely all rebound significantly over the next several months.

Hardly anyone is considering the political impact of coronavirus as Democrats have a far greater chance of retaking the U.S. Presidency and the Senate while retaining control of the House of Representatives.

What does Donald J. Trump point to most often as the justification for having another four years in office? It is the way he has allegedly pushed the stock market higher. The problem with consistently taking credit for new all-time market highs is that you have to take equal blame for what may end up being one of the biggest-ever percentage declines from those highs in an election year. It's certainly not necessarily Trump's fault and if coronavirus is still around on Election Day then it may provide a convenient excuse for the decline. However, it is more likely that by November 3, 2020 coronavirus will have become a nagging background issue rather than continued headlines and that there will be several other reasons cited for weakness in U.S. equity markets. That will be especially true if we enjoy a multi-week rebound which I will expect will begin very soon time-wise.

Gold mining and silver mining shares have probably already completed key higher lows to point the way higher for commodity-related and emerging-market securities.

During the last bear-market bottoming cycle gold mining and silver mining shares mostly completed their respective nadirs at or near the opening bell on October 24, 2008. Most other commodity producers and leading sectors including semiconductors did so around November 20, 2008 while many other assets bottomed during the first quarter of 2009. It is likely that gold mining and silver mining shares were again among the earliest sectors to complete their coronavirus-inspired lows with GDXJ slumping to 35.25 on February 28, 2020 and making several higher lows thereafter. This has been followed by other commodity-related and emerging-market funds beginning to form additional higher lows with energy as usual being one of the last sectors in this category to rally strongly. Insiders continue to point the way by persistently buying into the lowest valuations with energy shares enjoying especially intense insider accumulation.

VIX keeps surging toward and occasionally above 50 but will not likely be able to remain above such levels for an extended period of time.

Fear is a powerful human emotion but it is not easily sustained. Whenever VIX is spiking as it has been doing lately it is warning that any stock-market downturn is likely to soon lead to an impressive intermediate-term rebound. I expect most global risk assets to enjoy uptrends which will be highly choppy but will generally last for at least several weeks until VIX is once again around 17, 16, 15, or perhaps even lower than that. If investors would learn to sell whenever VIX is forming key higher lows as it had done in February 2020, rather than when VIX is topping out as it is doing now, then they would enjoy far greater long-term success.

Buying on Monday morning has often been a successful strategy as weekend warriors upset by recent losses and above-average volatility finally surrender and place massive market sell orders which will be triggered at Monday's opening bell--an ideal time to add to your long positions.

The U.S. dollar index has quietly begun a two-year downtrend from a three-year top.

The U.S. dollar index rallied to 99.910 on February 20, 2020, its highest point in three years and not far below its zenith from the beginning of 2017, and has since formed numerous lower highs. The greenback will continue to choppily decline for perhaps two years and will eventually complete multi-year bottoms versus many global currencies. This process will encourage rising U.S. inflationary expectations which when combined with already-committed stimulus and foolishly-conceived interest-rate cuts will prove to be a potent reflating cocktail.

Summary: the biggest profits are made by taking the opposite side of the most extreme overreactions. We now have more such simultaneous extremes than probably at any time since the first several weeks of 2016.

When I wrote my last update in early February 2020 investors saw no urgency in selling and were eager to keep piling into the most popular technology shares when it was essential to aggressively reduce risk. Now when we have multi-decade lows for many sectors people are eager to sell rather than to capitalize upon numerous compelling buying opportunities. Most investors will keep buying high and selling low because they are subconsciously responding to media hype coaxing them not to miss out when prices are topping and to bail out from fear of further losses when prices are bottoming. In the long run the U.S. equity bear market which began with the Russell 2000's zenith on August 31, 2018 will continue for perhaps a few more years, but since so many are gloomy today we are going to enjoy a multi-week rebound. You will know when to start selling again whenever VIX has slid down into the mid-teens again and the media are telling you why you should get back into the market.

The bottom line: buy whatever the top corporate insiders are buying.

Most investors currently detest energy and travel shares while insiders have been eagerly buying them into weakness. You can guess which of those groups will again be on the right side of the market.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ (some new from late February), 4-week U.S. Treasuries yielding 0.939%, the TIAA-CREF Traditional Annuity Fund, SIL, XES (some new), ELD (some new), FCG (some new), OIH (some new), PSCE (some new), bank CDs, money-market funds, GDX, I-Bonds, SCIF, MTDR (some new), URA (some new), PAK, EPOL, ECH, COPX (some new), REMX (some new), LIT (most sold), EZA (most sold), GXG (most sold), ASHS (most sold), ASHR (most sold), SEA (most sold), VNM (most sold), TUR (most sold), FXF, EGPT, GOEX, BGEIX, NGE, FXB, AA (some new), EWM, RGLD, WPM, SAND, SILJ, CCL (all new), SLX (most sold), FM (most sold), ARGT (most sold), EWW (most sold), RSXJ (most sold), GREK (most sold), and CHK. I am completely sold out of HDGE, EWU, EWG, EWI, EWD, EWQ, EWK, EWN, WOOD, EPHE, JOF, AFK, and IDX.

I have again reduced my short positions to a very small short position in XLI, a small short position in SMH, and a very small short position in CLOU. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise 25.5% of my total liquid net worth.

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

The two previous longest bull markets in U.S. history occurred as follows: 1) from August 1921 through September 1929 which was followed by a bear market of over 34 months from September 1929 through July 1932; and 2) from October 1990 through March 2000 which was followed by a bear market of 30-31 months in duration (exactly 31 for the Nasdaq). The current lengthy bull market which began for the S&P 500 on March 6, 2009 and which may have ended for that index on February 19, 2020 might therefore last for 30-36 months, implying a bottom around the second half of 2022.

Because there is so much gloom and doom today expect a multi-week rebound for stocks and corporate bonds worldwide over the next several weeks. Buy now and don't sell again until VIX is back down to the mid-teens.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” --Charles Mackay (1841)

MARKET MURDER MYSTERY (February 2, 2020): One feature of the global financial markets since the internet became popular in the mid-1990s has been an unusual concentration of irrational extremes in both directions. Partly this is because, with ordinary investors being able to buy or sell literally within seconds of hearing information or analysis, there is no longer any time for thought between an investor getting an idea to buy or sell and executing that idea. This encourages wild overcrowding into overly popular investments and equally illogical mass selling of out-of-favor assets. It is no coincidence that since 1996 the S&P 500 has traced a megaphone formation of higher highs and lower lows. Recently technology shares and several other sectors became their most overpriced in history with a few exceptions from late 1999 and early 2000, while energy and some other commodity-related assets have been trading near multi-year lows. Investors adore stocks like Tesla (TSLA) with price-earnings ratios near 300 while disdaining commodity-related companies with single-digit price-earnings ratios including Matador Resources (MTDR) and Alcoa (AA) which have enjoyed heavy insider buying.

How can one explain such strange divergences? Ordinary mortals have no clues, but fortunately some of our favorite detectives agreed to return from their hidden places (mostly in remote corners of town libraries) to help us in locating the suspects who created this incoherent mess. Let's see what they have to say.

Join our unexpected detective reunion.

Sherlock Holmes: How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth? I must conclude that the invention of this fascinating internet has indeed eliminated the essential mental pause between thought and action, thereby causing humans to behave precisely as apes. Put that in your book, Watson: you have always been a man of immediate direct action. When one billion men and women of action all buy or sell before thinking it over then you get the mispriced chaos we have now.

Dr. Watson: Are you referring, Holmes, to Apple (AAPL) and Microsoft (MSFT) making ridiculous gains in recent months which has nothing to do with their fundamentals?

Sherlock Holmes: Precisely, my dear Watson. It is the triumph of instinct over intellect. I have seen it many times in my day, but this is the first time I can recall an instance of society as a whole acting so singularly. Charles Mackay was right in his "Extraordinary Popular Delusions" about people going mad in herds.

Dr. Watson: Did he not say specifically that men--not people--think in herds?

Sherlock Holmes: Excellent recall, Watson, but nowadays the fairer sex have the right and perhaps the mandate to make equally inferior trading decisions as their male counterparts. That's true women's liberation.

Miss Marple: Indeed, Mr. Holmes, I believe you are being a bit unfair to us. However, your main observation is accurate. The situation reminds me of a naughty boy I knew once in my village. Before his fifth birthday he was already taking the wings off of bugs and destroying birds' nests. Before he reached the age of majority he had already committed a few murders. And he had such a sweet angelic face too, making everyone think he was just an ordinary nice chap.

Joe Friday: Just the facts, ma'am.

Sherlock Holmes: That is most edifying, Miss Marple, but how does that relate to the global financial markets in February 2020?

Miss Marple: My inference should be clear, especially to you, Mr. Holmes. The market pretends that everything is normal and permanent when it is the opposite. Popular overpriced favorites are just beginning what will become a historic collapse, while the most-hated securities will double and triple within a couple of years.

Hercule Poirot: It is essential to use the little grey cells, n'est-ce pas? Investors should be doing what the insiders are doing and the opposite of what the unwashed masses are doing. Instead they have it backwards. C'est dommage.

Captain Hastings: Now look here, Poirot, I just bought some of those newfangled technology shares for my own account. Are you telling me I shouldn't have done?

Hercule Poirot: It is not for me to play the fortuneteller, mon ami, but alas I see some losses in your future. You must recall how your last dozen or so ventures panned out in the end.

Captain Hastings: Just bad luck each time, Poirot. Surely it's different this time: the Fed, Brexit, the Chinese virus, Trump, . . . .

Hercule Poirot: There's nothing new under the sun, Hastings.

Dr. Watson: I personally experienced violent conflicts in the days of the British Empire but I couldn't have imagined this strange Brexit phenomenon. What's next? Is Scotland going to break away from the United Kingdom?

Sherlock Holmes: Actually that is a distinct possibility, my dear Watson, as regrettable as that would be. More relevantly, we must stop thinking about the future as an extension of the recent past. If the stock market on the other side of the Atlantic regresses to its average bear-market bottom then this will imply a loss of more than 70% from top to bottom for the S&P 500 Index.

Dr. Watson: I don't know that index, Holmes. I always heard about the Dow Jones Industrial Average.

Sherlock Holmes: Indeed the antiquated Dow Jones index, idiosyncratically modified, remains with us, Holmes, for better or for worse. That one will probably also drop 70% from its recent top, as unlikely as that would seem to most investors who have not studied history. There is a lesser-known index called the Russell 2000 consisting of U.S. companies 1001 through 3000 by market capitalization; in spite of large-cap indices frequently setting new highs since August 31, 2018, the Russell 2000 and the S&P 5mallCap 600 have never surpassed their zeniths from that day.

Dr. Watson: Is there a reason that would be meaningful, Holmes?

Sherlock Holmes: The worst American bear markets have always begun that way.

Hercule Poirot: Plus ça change, plus c'est la même chose, eh, Holmes? Our thoughts are very much alike on this subject.

Inspector Clouseau: I am searching for the clues in the room. Where is the scene of the crime?

Sam Spade: So sorry, sweetheart. I think you missed your train a long time ago. It's a tough world out there and there's no room for sugarcoating the truth. The assets everyone loves are going down, hard. My pals and I are buying up what no one seems to want, because they have no idea what they should be looking for.

Dr. Watson: I don't believe we've been formally introduced. Call me Watson. What is it that your "pals" are buying?

Sam Spade: I keep it simple. Energy. Mining. Base-metals production. Emerging-market government bonds. With a martini chaser and a broad.

Captain Hastings: I still don't see what you all have against technology. What's wrong with investing in something I can't possibly understand?

Hercule Poirot: It's not technology that's the problem, per se, but the fact that investors are willing to pay far too much for each dollar of technology earnings. I can't bring myself to say "euro" without blanching. Energy's share of the S&P 500 is below 4%--it was above 16% in the summer of 2008. Except for gold mining and silver mining shares which have been strong for over four years, and a few environmentally-trendy companies, most commodity-related assets have been given up as hopeless. Sensationnel.

Lieutenant Columbo: Mrs. Columbo was telling me just the other day that so many people we know seem to have their money in U.S. index funds these days. We're boring--we have everything in bank CDs and money-market funds.

Sam Spade: Boring is underrated.

Lieutenant Columbo: Maybe when everyone else asks me about how much interest we're getting, it will be time to buy some of those stock index funds.

Captain Hastings: You can hang up your raincoat near the door, sir. Usually everyone agrees with me--I'm not used to so much contrarianism.

Hercule Poirot: Indeed we live in a world of many Hastings and few Poirots. Tel est le monde. I am enjoying the challenge. Épatant.

Lieutenant Columbo: [whistling "This Old Man"] Come here, dog, and meet all these nice detectives.

Captain Hastings: Keep your raincoat, then. Don't you think technology shares have unlimited potential?

Lieutenant Columbo: Does that include the potential to drop in value? No one seems to be thinking about that these days. All I hear is about fear of missing out. Seems to me that was a familiar tune from 2000 and 2007.

Hercule Poirot: With all due respect, I am probably the greatest detective in the world. But I, Poirot, have been so stupid. If I purchase some of these gas and oil shares then I won't have to spend so much time chasing these perplexing clues. Tres bien, that is what I will do.

Inspector Clouseau: I have found the clues. They are here. No, they are there. They are somewhere.

Lieutenant Columbo: Just one more thing. Where were all of you at the opening bell on Friday, January 24, 2020? That is when the latest stock-market murder occurred.

How will the bear market end? Tune in next week to find out--same contrarian time, same contrarian channel.

If we're in a true bear market for U.S. equities then we'll continue to enjoy numerous sharp short-term rallies. Don't be fooled: within a few years the S&P 500 will eventually trade 70% or more below its recent zenith which means below one thousand. Along the way commodity-related assets currently mostly sporting single-digit price-earnings ratios will likely be among the few outperformers while technology favorites with triple-digit price-earnings multiples will be among the biggest losers. Bear markets usually consist of numerous corrections interrupted by powerful rebound attempts, so intermediate-term buying opportunities may occur at various points in 2020-2021 for unknown sectors.

Investing Tip #2: when you are opening any position, gradually accumulate risk using ladders of good-until-canceled orders, not with lump-sum lucky strikes.

There is no way to know in advance how extreme any given asset will get when it is completing a topping or a bottoming process, nor is it possible to determine when the ultimate zenith or nadir will occur. Therefore you must avoid dangerously accumulating risk with lump-sum opening positions. Occasionally you will get lucky, but if you buy too much at once and underpriced assets become even more absurdly undervalued--as they usually do--then you won't have enough cash to keep steadily buying. In addition, once any security completes a major bottom it usually forms several higher lows before it rallies strongly. These higher lows should be used as opportunities to keep adding to your position. Think of investing as adding one grain of sand at a time to each pile, not a whole bag at once, and to keep gradually adding until prices become too expensive.

Perhaps the simplest way to accomplish this objective is to place a ladder of small orders, with each rung in the ladder consisting of roughly 1/1000 (one-thousandth) of your total liquid net worth. Each order can be placed roughly 1% apart from each other order. If an asset worth buying keeps dropping in price, you will buy more of it each time it falls another 1%. If the security rebounds, then you can replace orders which were already filled with identical orders at the same prices and quantities, so that if there is another pullback then you will gradually buy more of it into weakness. This is how many top corporate insiders and market makers accumulate their positions.

The basic idea is that a topping or bottoming pattern is usually a process, not an event. Instead of trying to use magic market timing or mystically guessing when a top or bottom is occurring, gradually scale into any position in which you are increasing your risk.

Summary: a surprising number of assets are either far below or far above fair value.

Today we have numerous energy and related commodity securities trading at less than half fair value while many other assets including U.S. equity indices and coastal real estate remain at roughly double fair value. Mean regressions are often unexpected and especially disruptive events because too many investors are anticipating that the trends of recent years will continue even though they have already been reversing.

The bottom line: keep buying commodity-related securities into extended weakness and keep selling overpriced assets into strength.

The next two or three years will likely be accompanied by a massive shift away from the biggest winners of recent years into the most notable losers. This process is barely underway so there is plenty of time to double or triple your money by capitalizing upon it.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ, 4-week U.S. Treasuries yielding 1.573%, the TIAA-CREF Traditional Annuity Fund, SIL, XES (some new), ELD, FCG (some new), OIH (some new), PSCE (some new), bank CDs, money-market funds, GDX, I-Bonds, SCIF, MTDR (some new), URA (some new), PAK, EPOL, ECH, COPX, REMX, HDGE, LIT (most sold), EZA (most sold), GXG (most sold), ASHS (most sold), ASHR (most sold), SEA (most sold), VNM (most sold), TUR (most sold), FXF, EGPT, GOEX, BGEIX, NGE, FXB, EWM, RGLD, WPM, SAND, SILJ, AA (brand new), SLX (most sold), FM (most sold), ARGT (most sold), EWW (most sold), RSXJ (most sold), GREK (most sold), and CHK. I am completely sold out of EWU, EWG, EWI, EWD, EWQ, EWK, EWN, WOOD, EPHE, JOF, AFK, and IDX.

I have a significant short position in XLI, a slightly larger short position in SMH, and a moderate short position in CLOU. As always, my short positions are notably smaller than my more meaningful long positions. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise 33.5% of my total liquid net worth, continuing to retreat from a two-year high as I have been persistently purchasing energy shares especially into early morning weakness.

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

I expect the S&P 500 to eventually lose more than 70% of its value from its all-time top, whether that level has or hasn't already been reached, with its next bottoming pattern occurring with frequent sharp downward spikes perhaps during the second half of 2022. During the 2007-2009 bear market, most investors by Labor Day of 2008 still didn't realize that we were in a crushing collapse, and I expect that by early 2022 many Boglehead investors will stubbornly persist in believing that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and most other small- and mid-cap U.S. equity funds have persistently underperformed their large-cap counterparts except before sharp rebounds and have never surpassed their zeniths from that day; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, 2000-2002, and 2007-2009. The Nasdaq has completed a historic double top with its March 10, 2000 zenith in inflation-adjusted terms. A 70% loss from its recent zenith would put the S&P 500 near one thousand and I expect it to go even lower than that by some unknowable percentage. Eventual widespread fear over how much further prices will drop is likely to be accompanied by all-time record investor outflows from most U.S. equity index funds and U.S. high-yield corporate bond funds before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all major U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than U.S. equity bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next historic bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.

Here is the rationale between my timing guess of the next bear-market bottom for U.S. equity indices: the two previous longest bull markets in U.S. history occurred in 1921-1929 which was followed by a bear market of over 34 months from September 1929 through July 1932. The other long bull market was from October 1990 through March 2000 which was followed by a bear market of 30-31 months in duration (exactly 31 for the Nasdaq). The current lengthy bull market which began for the S&P 500 on March 6, 2009 and which may have ended for that index on January 22, 2020 might therefore last for 30-36 months, implying a bottom around the second half of 2022.

“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate rewards.” --John Templeton

INFLATION'S GYRATIONS (December 4, 2019): When I wrote my last update on August 7, 2019--I will try not to wait so long before the next one--the media were obsessed with the inverted U.S. Treasury curve, the insistence that we were headed for an imminent recession, and the "certainty" of continued all-time record low long-term U.S. Treasury yields. Practically all that anyone debated in August was when a U.S. recession would arrive and how much lower long-dated U.S. Treasury yields would drop as a result. After falling to all-time lows on August 28, 2019, yields on the 10-, 20-, and 30-year U.S. Treasuries have been rebounding. All of a sudden almost no one is worried about a U.S. recession any more. The 4-week U.S. Treasury no longer has anywhere near the highest yield in the entire Treasury curve as had been the case in the late summer.

Investors have shifted within four months from an obsession with recession to an even more absurd overconfidence in ever-rising U.S. asset valuations.

During recent weeks we have experienced some of the most intense net exchange-traded fund inflows in history along with rare extremes of optimism in surveys which date back several decades. Daily Sentiment Index on Wednesday, November 27, 2019, the date of the exact top for the S&P 500 and the Nasdaq and even the Dow Jones Industrial Average, showed 89% of futures traders who were bullish toward the S&P 500 and 91% who were bullish on the Nasdaq Composite Index--and only 26% bulls toward gold. On the exact day when I had written my last update on this site on August 7, 2019, the American Association of Individual Investors (AAII) reported only 21.7% of investors who were bullish toward U.S. equities while 48.2% had been bearish. 2019 year-to-date net inflows for U.S. exchange-traded funds set a new all-time annual record with several weeks to go, surpassing last year's peak which had been the previous high-water mark by a wide margin. Investors who shunned U.S. equities by making substantial net outflows when the S&P 500 had been below one thousand in 2008-2009 have since been making massive net inflows with the S&P 500 near and above three thousand. Selling low and buying high, as usual, is unfortunately what usually occurs in real life. After an extended pullback assets look the most dangerous whereas they are actually the safest and most rewarding. Buying an asset after it has already gained 373% (from 666.79 on March 6, 2009 to 3154.26 on November 27, 2019) will tend to be considerably less profitable than buying it before it has done so. Psychologically an asset which has been climbing for more than a decade appears to exude superiority and safety when it is maximally dangerous to be long. Conversely, an asset which has suffered an extended decline as energy shares have done during the past two years makes it seem to be intrinsically inferior and dangerous when it is maximally safe and rewarding.

Small- and mid-cap U.S. companies are continuing to resist all attempts to regain their 2018 zeniths.

Throughout 1929 small- and mid-cap shares mostly never reached their highs from 1928 even while large-cap shares mostly did so; U.S. stocks thereafter suffered their worst percentage losses in history. Throughout 1972 and into January 1973 U.S. small- and mid-cap shares couldn't recover their 1971 highs while the largest-cap "Nifty Fifty" names kept climbing; this was followed by the biggest stock-market plunge since the Great Depression. Very few investors know or care that the New York Composite Index which has existed for decades has still not regained its January 26, 2018 top, while the Russell 2000 has not set a new all-time high since August 31, 2018. The most severe bear markets in U.S. history all have in common an extended period of underperformance by smaller and medium-sized companies relative to their large-cap counterparts. The markets are telling you loudly and clearly what is going to happen next; all you have to do is respect history and listen.

The U.S. dollar index climbed to its highest point since May 2017 and has begun a major multi-month decline.

The U.S. dollar index completed a top of 99.667 on the first trading day of September 2019 which was nearly regained on the first trading day of October. Until it had recently been surpassed by speculative bets on higher U.S. asset valuations the most overcrowded trade worldwide was betting on a stronger U.S. dollar versus nearly all global currencies. The theory was that the U.S. economy, while far from perfect, was the cleanest dirty shirt in the laundry. This is a badly soiled theory which relies heavily on the spin cycle, since the only thing truly dynamic about the 2%-growth U.S. economy has been its outperforming U.S. assets. Whenever any sector outperforms investors tend to invent nonexistent reasons for its having done so along with projections of unending future gains; recent extended losses will lead to nonsensical explanations about "why" any asset has retreated and why it will keep dropping in price. No one wants to admit that something has become far above or far below fair value just because herds of stupid investors have been irrationally crowding into or out of any given asset.

Energy shares remain compelling bargains with most of them having dropped by more than half since their respective January 2018 highs.

Energy shares not only went strongly out of favor but have had among the greatest losses of all sectors since their respective January 2018 peaks and are even farther below their elevated highs of June 2014. Most energy shares have lost more than half their value within less than two years. Exchange-traded funds in this sector which I have been gradually buying at first into lower lows and during the past two months into higher lows include all of the following: XES (oil/gas equipment/services), FCG (natural gas producers), OIH (oil services), and PSCE (small-cap energy). PSCE has slid from its June 2014 top by (53.37 - 5.95) / 53.37 or more than 88.8% which makes it among the worst-performing non-leveraged funds in any category over the same time period. This is because both energy and small-cap shares are simultaneously out of favor, making this a rare double play on these unpopular concepts. Other funds in this sector include RYE (equal-weight energy) and IEZ (oil equipment and services). All of the above funds have been forming higher lows for various periods of time. Before assets rally sharply higher they almost always discourage investors by creating a bottoming pattern consisting of a deep nadir followed by a sequence of progressively higher lows. Instead of being encouraged by the higher lows, investors perceive these as a sequence of failed rallies, and therefore often end up doing net selling when they should be gradually buying into all higher lows.

One worthwhile individual energy name is MTDR (Matador Resources). This little-known company is geographically surrounded by two large giants which might eventually initiate a takeover. Even if that takes years to occur, insiders including CEO/founder Joe Foran have been persistently buying near and below 14 dollars per share including the past several trading days.

I have sold most of my developed-market equity funds and a modest percentage of some emerging-market equity funds if they have a strong positive correlation with U.S. equity indices.

We are likely in a period where U.S. assets including U.S. equity indices will mostly experience corrections exceeding 20% over the next several months. During the same time interval the U.S. dollar will usually be retreating. I have been selling a large percentage of the Western European, Japanese, and related securities which I had mostly purchased at depressed prices when they progressively slid toward their Christmas 2018 bottoms. Often I have been selling these on the exact days when they have achieved favorable long-term capital gains or shortly thereafter. The stronger their positive correlation with U.S. assets, the more essential it has been to keep selling these into strength--especially into all sharp short-term rallies.

I had also bought many emerging-market securities which had mostly bottomed in October 2018 and made higher lows in December 2018. I have retained assets such as PAK, GXG, ECH, ARGT, along with my funds of commodity producers and related assets such as GDXJ, COPX, and REMX--and anything where a falling U.S. dollar will have a much more positive impact than the negative drag of sliding U.S. assets.

Investing Tip #1: respect insider activity.

In each update starting today I will include a fundamental concept of my investing strategy which is a combination of value and behavioral methods. I try to combine the best ideas of value giants including Benjamin Graham, John Templeton, Seth Klarman, and Ray Dalio, along with behavioral concepts from Howard Marks, Daniel Kahneman, Amos Tversky, and Gerd Gigerenzer. I gladly steal others' ideas since they are so often better than my own.

Top executives, especially those in certain companies, tend to have a proven track record of far outperforming median investors. One key reason is that they know exactly what is going on with their companies so if they are buying their own company's stock with their own money it must be meaningful. Another reason is that insiders are classic value investors. They don't fret about the concerns of amateur investors such as what will happen next week, what the media are saying, whether they are buying "at the bottom," or their average purchase price. They don't do lump-sum trading: they keep gradually buying when valuations are the most in percentage terms below fair value while gradually selling when prices are the most above fair value. Insiders couldn't care less whether they are raising or lowering their average purchase price. They don't do swing trading, don't use stops, and could care less about breakouts or moving averages. Investors would be wise to follow their example.

Insider activity is the most meaningful when numerous executives of different companies within a single sector are simultaneously buying or selling in unusually intense total U.S. dollar volume. During the past half year energy executives have smashed all-time records of insider buying including their aggressive gradual accumulation during the past several trading days.

Summary: the two most irrational extremes today are 1) underpriced energy shares and 2) overpriced U.S. assets.

When I wrote my last update investors were illogically obsessed with an imminent recession and had zero fear of inflation. Today recessionary concerns have almost disappeared but investors still don't realize that inflationary expectations are set to sharply surge higher. Investors have become dangerously complacent about the downside risks for U.S. assets, being far more afraid about missing out on future gains for U.S. equity indices than they are about the possibility of losing money. As always, capitalize upon investors' herding behavior by acting before they realize what is really going on.

The bottom line: keep buying energy shares into additional higher lows while selling U.S. assets into lower highs.

Tax-loss selling has been especially rough on energy shares and could potentially continue through the end of December 2019. Meanwhile, investors encouraged by their 2019 gains will periodically create upward surges for U.S. assets including equity index funds, high-yield corporate bonds, and related assets. Keep buying energy shares into higher lows and selling U.S. assets into rallies.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ, 4-week U.S. Treasuries yielding 1.649%, the TIAA-CREF Traditional Annuity Fund, SIL, XES (some new), ELD (some new), FCG (some new), SEA, SCIF, OIH (some new), PSCE (some new), ASHS, GDX, VNM (some sold), ASHR (most sold), bank CDs, money-market funds, GXG, I-Bonds, URA, SLX, PAK, EPOL, EZA (some sold), ECH, LIT, HDGE, TUR (some sold), FM (some sold), EPHE (some sold), MTDR (some new), EGPT, REMX, FXF, COPX, WOOD, ARGT, GOEX, BGEIX, NGE, EWW (some sold), AFK, RSXJ, FXB, EWM, GREK (some sold), EWG (most sold), EWU (most sold), EWI (most sold), JOF (most sold), EWD (most sold), EWQ (most sold), EWK (most sold), EWN (most sold), RGLD, WPM, SAND, SILJ, IDX (some sold), CHK.

I have a significant short position in XLI, a moderate short position in SMH, and a modest short position in CLOU. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise just about exactly 30.0% of my total liquid net worth.

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

I expect the S&P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bottoming pattern occurring with frequent sharp downward spikes perhaps during the final months of 2020 and into the first several months of 2021. During the 2007-2009 bear market, most investors by Labor Day of 2008 still didn't realize that we were in a crushing collapse, and I expect that at least until around the middle of 2020 most investors will similarly persist in believing that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and most other small- and mid-cap U.S. equity funds have persistently underperformed their large-cap counterparts except before sharp rebounds; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, 2000-2002, and 2007-2009. The Nasdaq in 2018-2019 never quite achieved its March 10, 2000 intraday zenith in inflation-adjusted terms and has thereby completed a historic long-term double top. A two-thirds loss from its recent zenith would put the S&P 500 near 1050 and I believe that its valuation will become even more depressed at some unknowable level below one thousand; eventual widespread fear over how much further prices will drop is likely to be accompanied by all-time record investor outflows from most U.S. equity index funds and U.S. high-yield corporate bond funds before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all major U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than U.S. equity bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next historic bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.

“The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view.” --Michael Steinhardt

INFLATION BEFORE RECESSION: BUY ENERGY SHARES (August 7, 2019): The media have become obsessed with the belief that the U.S. economy is heading for an imminent recession. A primary flaw in this reasoning is that U.S. equity bear markets for more than two centuries have followed a reliable pattern in which events occur in a certain sequence. This order of operations has a resurgence of inflation occurring well before the U.S. economy experiences negative GDP growth which defines a recession. There are other elements in this sequence which are also consistent and which are repeatedly misinterpreted by investors each time we are in a new U.S. equity bear market, including rallies for commodity producers beginning with precious metals and usually ending with energy. Investors foolishly conclude that "it's different this time" and then the same patterns repeat yet again.

The first, second, and now the third primary stages of a U.S. equity bear market are proceeding precisely on schedule.

On August 31, 2018 the Russell 2000 completed its all-time intraday zenith at 1742.0889. When this index of two thousand out of 3600 U.S. companies began to persistently form lower highs in September 2018 while the S&P 500 continued to set higher highs, it was beginning a pattern which has characterized all major U.S. equity bear markets throughout history. While the Russell 2000 did not exist in 1929, most small- and mid-cap U.S. stocks persistently underperformed their large-cap counterparts from roughly Labor Day 1928 through Labor Day 1929. This was followed by the worst bear market in U.S. history with losses averaging seven out of eight dollars by the ultimate nadir in July 1932. The same pattern repeated several decades later when large U.S. companies including the S&P 500 Index continued to climb into January 1973 while most baskets of small- and mid-cap companies had peaked in 1971-1972. This was followed by the worst bear market since the Great Depression. A dozen years ago the Russell 2000 completed a double top on June 1 and July 9, 2007, while the S&P 500 didn't top out until October 9, 2007 and the Nasdaq reached its cycle high on October 31, 2007. Overall the Russell 2000 during 2007-2009 dropped 60.0% while the S&P 500 slid 57.7% from top to bottom.

Small- and mid-cap U.S. companies have been far underperforming their large-cap counterparts for nearly one year.

The situation during the past year has been eerily similar to the severe past bear markets listed above. From their summer 2018 highs to their Christmas 2018 lows, the Russell 2000 dropped by (1742.0889-1266.9249)/1742.0889 or 27.3%, while the S&P 500 only lost (2940.91-2346.58)/2940.91 = 20.2%. The first pullback in a bear market is almost always followed by a strong rebound, and both of these indices recovered--but by very different margins. The S&P 500 repeatedly set new highs in 2019 until it achieved a new all-time top of 3027.98 on July 26, 2019. The Russell 2000 never got anywhere near its prior-year high, only reaching 1618.37 and doing so on May 6, 2019 to continue its pattern of peaking ahead of the S&P 500 and at significantly lower highs. My essays regarding this topic on SeekingAlpha.com drew derision from some who were either ignorant of history or who refused to believe that this kind of underperformance was a reliable signal of a severe bear market. The recent sudden slide has finally gotten some people to realize that, alas, we could be in some kind of downtrend after all. The media have created the illusion that the latest U.S. stock-market pullback was caused by Trump, tariffs, earnings, employment data, and other allegedly unpredictable events. However, the Russell 2000 has been screaming loudly and clearly that a major loss would have to happen relatively soon. Because valuations were so much higher in 2018-2019 than they had been in 2007, the overall percentage losses will be proportionately greater, probably exceeding two thirds from top to bottom for nearly all U.S. equity indices. However, most of these losses will occur during the final months of the bear market, and not before several other key developments occur which I will list below.

The U.S. dollar just began to retreat from its highest level since May 2017. As the greenback grinds lower, this will be inflationary rather than recessionary. A U.S. recession won't occur until the U.S. dollar begins to sharply rebound from multi-year lows versus most global currencies.

The U.S. dollar has generally acted strongly, reaching 98.932 on Tuesday, August 1, 2019 which marked its most elevated point in over 26 months. The strong U.S. dollar has encouraged investment into all U.S. assets including stocks, corporate bonds, Treasuries, and real estate, while discouraging investment into commodity-related assets and non-U.S. stocks and bonds which tend to correlate inversely with the greenback. Just as bear markets reliably feature small- and mid-cap U.S. stocks underperforming large-cap shares, they also tend to experience substantial losses for the U.S. currency versus most other global currencies during the middle of the bear market. During the 2007-2009 bear market which began with the Russell 2000's first peak on June 1, 2007, the U.S. dollar index slumped to its all-time bottom of 70.698 in March 2008, and after briefly rebounding, retreated again to complete a double bottom at a slightly higher low in July 2008. Thus, the greenback moved dramatically lower for roughly one year. During this time all of the following occurred: commodity producers were among the world's strongest equity sectors; many emerging markets rose while U.S. stocks mostly moved lower; and inflation--which was widely considered in the middle of 2007 to be subdued and irrelevant--became unexpectedly widespread.

The major inflationary bout of 2008 has already been forgotten by most investors, and almost no one recalls similar surges in years including 1973, 1948, and 1937. The same phenomenon is about to occur again as precious metals are warning us.

By the final months of 2007 gold, silver, and related assets had been climbing strongly since June 2006 but their message was generally ignored. In early 2008 agricultural prices rose so suddenly, and by hundreds of percent apiece. My local bakery posted futures charts for the only time in their history on their front window to show customers that they weren't profiting from their sharply higher prices. In India they actually banned the export of rice until they discovered that tons of rice were rotting in warehouses. By July 2008 almost everything else had been soaring in price including a new all-time peak for gasoline and most energy products. In the current cycle, after having fallen to a 2-1/2-year bottom on September 11, 2018, precious metals and their shares have been among the top-performing sectors. This has significant inflationary implications which so far have been muted largely because of the strong U.S. dollar. As the greenback retreats, inflationary pressures will become increasingly evident and will eventually crowd out the current obsession with an imminent recession. Before we have anything resembling negative U.S. GDP growth we will have consumers complaining about high prices for gasoline, food, and many other essential goods and wondering if the inflationary spiral will get much worse.

During the current phase of the U.S. equity bear market the biggest percentage gains often occur in whichever commodity-related and emerging-market assets have become the most depressed and oversold.

Energy shares have become among the least popular areas for current investment. Exchange-traded and closed-end funds in this sector including XES (oil/gas equipment/services), FCG (natural gas producers), OIH (oil services), and PSCE (small-cap energy) are enormously below their respective January 2018 highs with many of them losing over half their value. Several of these are commission-free with some brokers including RYE (equal-weight energy) having zero commissions with E*TRADE and Schwab while IEZ (oil equipment/services) and FENY (energy index) are commission-free energy funds at Fidelity. Only alternative energy funds including TAN (solar) and FAN (wind) have been relatively strong, almost certainly due to the increased popularity of "green" investing strategies. As the prices of energy shares have experienced extended pullbacks, many investors have been selling primarily because they see others selling and as their persistently sliding valuations make them emotionally seem to be inherently inferior. This has encouraged huge net outflows from most energy funds. At the same time, top corporate energy executives recognize the irrationally low prices and have been making the most intense insider buying in this sector since their previous deep bottoms of late 2015-early 2016 and late 2008-early 2009. No matter how many times in the past energy shares have doubled or more during their periodic bull markets, investors inevitably conclude that "it's different this time" and only participate after most of the gains have already been achieved.

The traders' commitments for natural gas show an unusually rare commercial net long position--observe the dramatic shift indicated by the maroon bars in the following chart:

Traders' Commitments, Natural Gas

Commercials are those who actually use an asset in their line of business, versus speculators and other investors who only use it for trading.

Numerous other non-precious commodity producers have also been trading not far above multi-year lows.

Other exchange-traded funds of commodity producers including COPX (copper), REMX (rare earth), LIT (lithium/battery), and WOOD (timber/forestry) have become simultaneously depressed, and I have been gradually accumulating these for the first time since around Christmas 2018. Insiders have been buying at these producers including executives with proven long-term track records of making money on these trades including FCX insiders. The traders' commitments for copper highlights a sharp shift toward the commercial net long side in recent months:

Traders' Commitments, Copper

Numerous other sectors also tend to rally at this point during a U.S. equity bear market, usually for somewhat less than one year overall.

Other exchange-traded funds which tend to rally strongly when the U.S. dollar is retreating and when the Russell 2000 is mired in a lengthy bear market include SEA (sea shipping) and SLX (steel manufacturing) along with many emerging-market stock and bond funds. Country funds including NORW (Norway) and GXG (Colombia) correlate positively with energy prices due partly to their above-average concentration in the energy industry.

No worthwhile investment lasts forever, but rising inflationary pressures are likely to continue into somewhere around the middle of 2020.

When top corporate insiders aggressively buy into any sector, as energy executives have been doing, they do not expect a rapid recovery and a quick profit. They must hold their shares for more than six months in order to qualify for favorable treatment. Timing is always unknowable, but it is likely that energy shares and other inflation-loving assets will rally--with several sharp pullbacks whenever momentum players have recently chased after any of these--until the late winter, the spring, or possibly the early summer of 2020. Watch the U.S. dollar's behavior, insider activity, and net fund flows as valuable clues as to when to sell. Eventually the U.S. dollar will begin to rebound unexpectedly from multi-year lows versus most currencies, while top executives become heavy sellers of their shares and several funds enjoy huge net inflows. This will signal that the most knowledgeable participants are getting out just as the public--as always--eagerly piles in during a major topping pattern. Just as you will be buying energy shares now when everyone you know is bailing out of them, you will be closing out your positions when your friends are asking you which ones you own because they don't want to miss out.

U.S. stocks, bonds including corporates and Treasuries, and real estate will all mostly move lower during the upcoming year and then except for U.S. Treasuries will plummet dramatically lower during the following year.

During most of the upcoming year, nearly all U.S. assets including stocks, corporate bonds, Treasuries, and real estate will choppily decline significantly more than most investors are currently anticipating. This won't have anything to do with recession, but due to these assets having become irrationally popular and very overvalued relative to historic norms. The only time in history that U.S. real estate was more overpriced in some regions was in 2005-2006 and prices have already been falling--in some cases for more than a year--in an increasing number of U.S. neighborhoods. U.S. stocks overall were only higher in relative terms at the very end of 1999 and the beginning of 2000, while U.S. high-yield corporate bonds have never been more overpriced than they had been in July 2019. One defining feature of the upcoming year is how U.S. assets of all kinds will be moving lower except during swift rebounds from intermediate-term bottoms, while they are gaining in most other parts of the world and in commodity-related sectors.

Long-dated U.S. Treasuries will likely decline sharply for roughly one year as the current recessionary obsession is replaced by fears of continued inflationary increases.

The yields on the 10-, 20-, and 30-year U.S. Treasuries have plunged to absurdly low levels due to misplaced concerns about an imminent U.S. recession. As investors progressively realize that inflation is a more serious presence and that the anticipation of recession had been premature, the Treasury curve will steepen while long-dated U.S. Treasury yields will likely climb to multi-year highs at some point during 2020. This means that we will have substantially higher U.S. 30-year fixed mortgage rates which will put additional downward pressure on current overvalued and mostly unaffordable U.S. real estate.

Starting sometime in 2020 we will experience the worst part of the current bear market, probably continuing into some part of 2021.

Beginning sometime around the middle of 2020 and continuing probably into the first several months of 2021, assets worldwide will mostly plummet except for a tiny number of safe havens including the U.S. dollar and U.S. Treasuries.

Summary: eventually we will suffer a severe recession, but first inflation has to run its course.

Between now and roughly the spring of 2020, global equities and commodity producers will mostly climb--some quite sharply--while U.S. stocks fluctuate in both directions while mostly losing value. The current correction for U.S. equity indices will likely result in overall losses which are greater in percentage terms than their declines during the final months of 2018. These will probably be followed by strong rebounds into some part of 2020, not that different from what we experienced after Christmas 2018 but following a somewhat different timetable. Just as had been the case earlier in 2019, investors at some point during the first several months of 2020 will mostly conclude that we just had another correction but that U.S. stocks remain in a strong bull market. Once again the persistent pattern of lower highs and underperformance of the Russell 2000 and other baskets of small- and mid-cap U.S. shares won't be taken seriously. The U.S. dollar will keep dropping until around the middle of 2020. At that point we will suddenly experience a sharp rebound for the U.S. dollar, renewed losses for U.S. stocks and corporate bonds, and accelerated declines for U.S. real estate. Only at that point will we finally enter a deep recession.

The bottom line: inflation will precede recession. Especially now that everyone is obsessed with an allegedly slowing economy, it will likely become overheated sometime during 2020.

U.S. recessions are almost always preceded by powerful inflationary surges. This was just as true in 1937, 1948, 1973, 1980, 1990, 2001, and 2008 as it is today. With the Russell 2000 having dropped over 13% in nearly one year from its August 31, 2018 intraday peak (as of its August 6, 2019 close) and the S&P 500 outperforming, this is a typical severe bear market. As the vast majority of investors are expecting a higher U.S. dollar, lower interest rates, lower commodity prices, and lower inflation, we are likely to get the exact opposite just as we have experienced during past U.S. equity bear markets. It always seems different this time but it never is.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ, 4-week U.S. Treasuries, the TIAA-CREF Traditional Annuity Fund, SIL, XES (many new), ELD, ASHR, FCG (some new), SEA (many new), SCIF (some new), OIH, ASHS, VNM, GDX, bank CDs, money-market funds, GXG, I-Bonds, URA, PAK (some new), SLX (many new), EPOL, EZA, EPHE, LIT, TUR, ARGT, FM, HDGE, ECH, EGPT, MTDR, EWG, EWU, EWI, REMX, EWW, FXF, COPX (many new), JOF, AFK, RSXJ, EWD, EWQ, EWK, GREK, FXB, EWM, CHK, EWN, GOEX, BGEIX, NGE, WOOD (all new), IDX, RGLD, WPM, SAND, and SILJ. I am short a moderate quantity of XLI.

Those who respect the past won't be afraid to repeat it.

I expect the S&P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bottoming pattern occurring with frequent sharp downward spikes perhaps during the final months of 2020 and into the first several months of 2021. During the 2007-2009 bear market, most investors by Labor Day of 2008 still didn't realize that we were in a crushing collapse, and I expect that during the first several months of 2020 most investors will similarly persist in believing that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and most other small- and mid-cap U.S. equity funds have persistently underperformed their large-cap counterparts except before sharp rebounds; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, and 2007-2009. The Nasdaq in 2018-2019 never quite achieved its March 10, 2000 intraday zenith in inflation-adjusted terms and has thus completed a historic long-term double top. A two-thirds loss from its recent zenith would put the S&P 500 near one thousand and I believe that its valuation will become even more depressed; eventual widespread fear over how much further prices will drop is likely to be accompanied by all-time record investor outflows from most U.S. equity index funds and U.S. high-yield corporate bond funds before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all major U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than U.S. equity bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next historic bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.