"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.

“The real secret to investing is that there is no secret to investing.” --Seth A. Klarman

UP YOUR ASSET ALLOCATION (February 6, 2022): Surprisingly few people recognize how dramatically the financial landscape has changed during the past year. Exactly one year ago the vast majority of global assets were in bull markets. Today, more than 40% of all Nasdaq shares have dropped over 50% from their 52-week highs while most global stocks, high-yield corporate bonds, cryptocurrencies, NFTs, and perhaps even real estate have been in downtrends. Some oversized percentage pullbacks have created worthwhile bargains at various points in recent months.

I have shifted my equity short:long ratio dramatically toward the long side while remaining 2:1 short to long.

My current total as of the close on Friday, February 4, 2022 was long 20.636% and short 42.13%, or almost exactly 1:2, not counting TLT. If the bear market continues for large-cap U.S. growth shares as I expect then I will likely be more long than short before the end of 2022. I list the exact percentages at the bottom of this essay.

TLT has become very unpopular as investors don't trust a forty-year bull market.

One of my very first investments was purchasing long-dated U.S. Treasuries in 1981. At that time there was a nearly unanimous consensus that U.S. Treasury yields would keep climbing indefinitely due to permanently high inflation and soaring budget deficits. Each year, often more than twice per year even in the early 1980s, there was a proclamation that the bull market for the 30-year U.S. Treasury had ended, and we have continued to experience this gloom and doom each year since then including right now. On Friday, February 4, 2022, TLT dropped to 138.78 at 10:52:28 a.m. Eastern Time. I made my most frequent purchases of TLT on Friday since it had been even more depressed during the late winter and early spring of 2021. The longest-tenured writer at Barron's, Randall W. Forsyth, penned a bullish column about long-dated U.S. Treasuries which is the lead article in this week's print edition and can be found below:

Contrarians Indeed: Two Seers See Lower Rates, Bond Boom

The online version has the same essay but a different title: "Forget About Inflation. Contrarians Expect a Recession and a Drop in Bond Yields." It is probably not a coincidence that The Economist has the following cover story:

How High Will Interest Rates Go?

Many investors confuse the Fed's overnight lending rate with long-term yields.

If we are heading toward increasing recessionary expectations, as the flattening U.S. Treasury yield curve has been telling us, then this would mean higher short-term yields and probably lower long-term Treasury yields to create additional flattening. I plan to keep buying TLT into weakness because it could be one of the top performers as it has been in the past whenever investors have gone from almost zero expectation of a U.S. recession, like now, to a majority of investors expecting such an economic slowdown.

U.S. housing prices may have begun to drop following a more extreme bubble in 2021 than we had in 2005-2006.

The price of the median U.S. house dropped about 34% following the housing bubble we had sixteen years ago. Average valuations were even higher in 2021 by Case-Shiller and many other reliable measures, so the overall pullback is likely to be greater. The U.S. Fed's data for new home prices experienced its first pullback in a long time:

Numerous sectors had become especially compelling in recent weeks including GDXJ, KWEB, and XBI.

In addition to my very recent buying of TLT, I have been accumulating GDXJ, KWEB, and XBI into weakness. GDXJ is a fund of mid-cap gold mining shares; this sector had been one of the largest percentage winners following the collapse of previous U.S. growth-stock bubbles in 1929, 1972, and 2000. KWEB is a fund of Chinese internet companies which has one of the highest ratios of profit growth to price-earnings ratio for any U.S.-listed exchange traded fund. XBI is a fund of biotech shares which recently had more than a 1.5 to 1 ratio of profit growth to price-earnings, according to the sponsor's web site, and which had also featured significant insider buying of several of its components. XBI and GDXJ traded near two-year lows while KWEB had fallen to a five-year nadir. T (AT&T) is sharply out of favor partly over confusion about its upcoming spinoff and related uncertainties. I plan to continue to purchase all of the above into either lower lows or higher lows, especially whenever we are experiencing dramatic net outflows from these and related funds along with continued above-average insider buying relative to insider selling.

Too many investors are waiting for nonexistent triggers.

Extreme deviations from fair value in either direction are sufficient reason for dramatic price changes to occur. People often ask "what is going to trigger a huge drop for QQQ" or "what will cause Chinese internet shares to rebound?" I often answer these kinds of questions with this question: what caused U.S. internet companies to collapse after 1999-2000? What caused the crash of 1929? What caused stocks worldwide to surge in the late winter and early spring of 2009? The answer in all three cases is that, even with years or decades of hindsight, there were no obvious triggers to either of these major trends. Any irrationally huge deviation from fair value will always resolve itself sooner or later.

The bottom line: we have dangerous overvaluations for large-cap U.S. growth shares combined with compelling bargains for several other sectors. Now is a good time to combine long positions in unpopular assets and short positions in the trendiest shares.

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

Here is my asset allocation with average opening prices adjusted for dividends/splits and newly-opened positions in boldface: 43.6% cash including I Bonds paying 7.12% guaranteed (available to anyone with a U.S. social security number), TIAA Traditional Annuity paying 2.758% to 3.519% (for legacy retirement accounts), and Discover Bank high-yield savings paying 0.50% (available for all U.S. residents with retirement and ordinary savings accounts); 18.0% short XLK (112.7737); 17.3% long TLT (147.86); 15.9% short QQQ (309.7504); 6.4% short TSLA (494.9721); 5.9% long GDXJ (39.68); 5.0% long GEO (7.52); 2.54% long GDX (28.98); 1.68% long KWEB (35.19); 1.32% long EWZ (27.33); 1.23% long TUR (17.17); 1.05% long ASA (19.49); 0.90% short AAPL (125.5481); 0.74% long XBI (86.14); 0.62% long ECH (22.98); 0.53% short IWF (223.0119); 0.40% short SMH (170.7813); 0.27% long T (23.33); 0.12% long UGP (2.565); 0.10% long ITUB (3.83); 0.052% long BBD (3.39); 0.014% long TIMB (9.99). It doesn't add up to 100% since short positions require less cash; there is no margin involved.

“The success of contrarian strategies requires you at times to go against gut reactions, the prevailing beliefs in the marketplace, and the experts you respect.” --David Dreman

DÉJÀ VU ALL OVER AGAIN (January 17, 2022): Most investors are either treating 2022 as though it will be an approximate repeat of 2021 or else they believe that the investing world is totally different than it has ever been in the past. Both of these expectations are seriously flawed. The financial markets will consistently behave similarly to whatever they have done in the past under nearly-matching conditions. Early 2022 has numerous parallels to early 2000, early 1973, and the late summer of 1929. In addition, the past year which was 2021 was surprisingly analogous to 1999-2000, 1972, and 1928-1929. Therefore, what will occur over the next few years can best be determined by examining the market's behavior during 2000-2003, 1972-1975, and 1929-1932. This is especially true since so few investors are doing likewise, thereby making it probable that you will come out far ahead by studying and applying these valuable parallels.

We have experienced an exaggerated large-cap U.S. growth bubble which will behave like all previous large-cap U.S. growth bubbles, only more so since we had achieved all-time record extremes and divergences.

Imagine that you go to see the classic movie Casablanca with a friend. You observe how your buddy responds emotionally to the scenes which you have seen over and over again and which you conclude he must be watching for the first time. After the movie is over you plan to discuss this with him, and then one of the ushers you have seen there for years says to your pal, "You must be a huge fan of this film. You've already viewed it several times during the past couple of weeks." Surprised, you turn to your friend and ask him, "Is that true? The way you reacted to the most powerful parts of the film convinced me that you had never watched it before." "Oh, sure, I've seen it over and over," he responds, "but I keep hoping that it will turn out differently."

Expecting the financial markets to turn out differently than they had done in 2000, 1972, and 1929 is a serious mistake, because we have such a close repeat of those years. Several weeks ago we had 1099 new 52-week lows for the Nasdaq in a familiar pattern where investors crowd into fewer and fewer of the biggest names near the end of a large-cap growth bubble. Boglehead investing is incredibly popular just as it had been in each of those years. Huge numbers of people who had never invested before are participating for the first time: bucket shops appearing worldwide on ordinary city and town blocks in 1928-1929; discount brokers emerging for the first time in the early 1970s; online brokerages having their debut around 1999-2000; and Robinhood/Reddit and other trendy zero-commission mobile-phone apps appealing to middle- and working-class investors in 2020-2022. There are numerous other parallels including the kinds of options trading, the times of the day/week/month/year when investors are most eagerly participating, huge net inflows into passive index funds, and all-time record overvaluations for the most popular shares. Here is one chart highlighting one of these exaggerated extremes:

The next few years will likely be similar to 1929-1932, 1972-1975, and 2000-2003.

People frequently ask me why I consistently accumulate the most-underpriced shares into extended weakness when I expect the biggest large-cap U.S. growth shares to drop over 80%. The reason is because, following growth-stock tops, value shares often end up with absolute gains especially when they are notably undervalued. Below is a chart highlighting how value shares had performed while QQQ was busy collapsing 83.6% from its March 10, 2000 intraday zenith to its October 10, 2002 intraday nadir:

The above chart highlights the useful point that a bubble for large-cap growth shares, especially the internet bubble of 1999-2000 and the Nifty Fifty bubble of 1972-1973, were followed by extended periods of outperformance by low-price-earnings assets especially in certain sectors such as gold mining. As great as the Great Depression had been, many gold mining shares gained hundreds of percent starting near the end of 1929.

There are numerous sectors today which will likely gain while large-cap growth shares keep making lower highs for two or three years.

Chinese internet shares have never been more undervalued relative to U.S. internet shares than they have in recent weeks by a large factor. Gold mining shares tend to perform especially well whenever large-cap growth shares begin powerful downtrends. Other currently-undervalued sectors include biotech, South American emerging markets, telecommunications, and recently Russian shares. Gradually purchasing these and other unpopular shares into extended weakness over the next few years is likely to be especially rewarding.

TLT and long-dated U.S. Treasuries have gone wildly out of favor in recent weeks.

Two essays were very recently posted by other analysts on Seeking Alpha which recommended selling TLT--after it has already been trading near a multi-month low. Commercials have been accumulating long positions in the 30- and especially the 10-year U.S. Treasury as you can see from maroon bars on the following charts:

10-Year U.S. Treasury

30-Year U.S. Treasury

We also had the greatest-ever two-week net outflow from TLT in its entire history. In a nearly exact inverse position from the spring of 2020, investors are minimally concerned about a recession and maximally worried about inflation. TLT will likely perform well until almost everyone is again far more concerned about a U.S. recession and continued losses for the Nasdaq 100, at which point it could become timely to sell TLT at a two-year high.

Think of your role as a jumbo-jet pilot, not an air-show sensationalist.

A jumbo-jet pilot's top responsibility is to ensure that the passengers remain calm throughout the flight, even if it means taking longer to reach the destination or even putting up with more turbulence than another approach. On a recent flight to San Francisco the pilot decided to break this rule and to make a sudden sharp dive to get us into calm air much more quickly. While he succeeded admirably in his objective and the remainder of the trip was surprisingly calm, quite a few people cried out or were otherwise upset by suddenly dropping thousands of feet. No doubt this would have been the correct maneuver as a military pilot with a squadron on board instead of ordinary passengers, but acting gradually has to take higher priority.

Even if I were to become absolutely convinced near a major bottoming pattern over the next few years that a particular drastic increase in portfolio risk is justified because VIX is at a multi-year peak, we have all-time record insider buying relative to selling, and we had the biggest weekly net outflow in decades, the next week could be even more extreme as we had experienced in March 2020. I have to discipline myself not to "pick up all those great bargains" too quickly.

Unfortunately I can't write a hundred-page essay for each posting, but you can subscribe to my twice-weekly email updates.

Several readers on Seeking Alpha usually say that I'm not giving enough detail to support my arguments. I would love to write a 100-page essay for each posting but unfortunately that's not practical. However, if you want to get additional precise details about what I am planning to buy and sell, at what prices, and in which quantities, you can subscribe to my newsletter at TrueContrarian.com. The subscription also includes two weekly Zoom meetings of 75 minutes apiece.

The bottom line: we have stealthily entered a meaningful rotation out of large-cap deflation-loving U.S. growth shares into small- and mid-cap inflation-loving global value shares. The ideal approach is to gradually purchase assets where their rate of profit growth exceed their price-earnings ratios by the widest ratios and where there is a history of outperformance by those shares under similar past circumstances. Too few investors are intelligently using 1929-1930, 1973, and 2000-2001 as a guide to 2022.

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

Here is my asset allocation with average opening prices adjusted for dividends/splits and newly-opened positions in boldface: 44.1% cash including I Bonds paying 7.12% guaranteed, TIAA Traditional Annuity paying 3% to 5% (only available for legacy retirement accounts), and Discover Bank high-yield savings paying 0.40% (available for all U.S. residents with retirement and ordinary savings accounts); 18.7% short XLK (112.7737); 16.75% long TLT (148.259); 16.7% short QQQ (309.7504); 7.0% short TSLA (494.9721); 5.9% long GDXJ (39.96); 5.6% long GEO (7.65); 2.53% long GDX (28.97); 1.33% long TUR (17.17); 1.27% long KWEB (35.51); 1.22% long EWZ (27.33); 1.1% long ASA (19.43); 0.9% short AAPL (125.5481); 0.625% long ECH (22.98); 0.55% short IWF (223.0119); 0.45% short SMH (170.7813); 0.175% long T (23.17); 0.1% long UGP (2.565); 0.09% long ITUB (3.83); 0.044% long BBD (3.39); 0.013% long TIMB (9.99). It doesn't add up to 100% since short positions require less cash; there is no margin involved.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here is my asset allocation with average opening prices adjusted for all dividends: 45.3% cash including I Bonds paying 7.12% guaranteed, TIAA Traditional Annuity paying 3% to 5% (only available for legacy retirement accounts), and Discover Bank high-yield savings paying 0.40% (available for all U.S. residents with retirement and ordinary savings accounts); 19.2% short XLK (112.7737); 17.8% short QQQ (309.7504); 17.2% long TLT (148.259); 8.25% short TSLA (494.9721); 6.3% long GEO (7.65); 4.55% long GDXJ (41.6112); 1.65% long GDX (30.1982); 0.85% short AAPL (125.5481); 0.7% long ASA (19.35); 0.7% long UGP (2.565); 0.55% short IWF (223.0119); 0.45% short SMH (170.7813); 0.2% long ECH (24.23); 0.2% long TUR (19.5525); 0.0375% long ITUB (3.94); 0.025% long BBD (3.44); 0.0125% long TIMB (9.99); 0.0125% long T (23.99). It doesn't add up to 100% since short positions require less cash; there is no margin involved.

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

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

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

“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.

“To succeed as a contrarian you must recognize what the crowd believes, have concrete justification for why the majority is wrong, and have the patience and conviction to stick with what is, by definition, an unpopular bet.” --Whitney Tilson

GOLDILOCKS AND THE THREE BEARS (May 28, 2019): Beginning around the end of 2006 it was common to hear that the U.S. stock market would keep climbing because the U.S. economy was neither too hot nor too cold; it was just right. This was often called the Goldilocks economy on cable TV in honor of the young girl who wanders into a strange home and discovers porridge which is neither too hot nor too cold but just right for her to eat. What the commentators failed to mention was that Goldilocks is followed by three bears: baby bear, mama bear, and papa bear, in that order. That is exactly what we got in 2007-2009, and what also began on August 31, 2018 when the Russell 2000 again led other U.S. equity indices in completing a historic top.

Here is a past update in which I mentioned Goldilocks and the three bears at a very different juncture for global assets:

True Contrarian update from March 8, 2009

We experienced baby bear during the final months of 2018. Mama bear probably started around the end of April and the beginning of May 2019.

Investors made all-time record inflows into many U.S. equity index funds near their highest levels of 2018 which were also close to all-time record overvaluations. Although semiconductor shares, the Russell 2000, VIX, and several other reliable indicators warned of trouble ahead, very few investors were prepared for the pullback during the fourth quarter of 2018. Investors then reduced risk very close to the Christmas bottom just in time to miss a powerful intermediate-term rebound. In April 2019 investors once again piled into U.S. equity index funds along with new record inflows into many U.S. high-yield corporate bond funds. In addition to semiconductor shares, the Russell 2000, and VIX once again warning of a likely sharp correction, U.S. housing prices have been dropping in far more neighborhoods than had been the case last summer. It is likely that the total percentage pullbacks during the next several months will exceed the total losses of 20%-30% for U.S. equity indices from their late-summer 2018 highs to their Christmas 2018 lows.

Many global assets are out of synchronization with U.S. equity indices.

Sometimes global assets tend to rise and fall in tandem while other times they behave quite differently. At the end of 2017 and the beginning of 2018 nearly all risk assets rallied together around the world, and then they began to diverge sharply in January 2018 as U.S. equity indices and U.S. high-yield corporate bonds continued to mostly climb while nearly all other worldwide assets experienced sharp losses. This divergence continued as many emerging-market government bonds and gold/silver mining shares bottomed in September 2018 while many other emerging markets completed their 2018 nadirs during October. U.S. assets completed historic topping patterns from late August through early October 2018 and then plummeted choppily through Christmas, with energy shares experiencing especially sharp December losses.

Starting in early January 2019 there was a nearly synchronous global uptrend, and then divergences began again as non-U.S. assets mostly began notable corrections around the beginning of the second quarter. U.S. equities and high-yield corporate bonds either made lower highs in late April through early May 2019 versus their late-summer tops for small- and mid-cap shares, or else they achieved nominally higher highs for large-cap holdings compared with 2018. Most of the 2019 new large-cap highs for U.S. equity indices and funds including the S&P 500 and the Nasdaq exceeded their 2018 peaks by about a half percent which makes them actually lower highs after adjusting for inflation. Currently we have a situation which is somewhat analogous to roughly the middle of October 2018 where U.S. assets have begun downtrends which are still in their early stages, while many emerging-market stocks, bonds, and commodity-related assets have either recently completed important 2019 lows or will soon do so. Several sectors including India, Brazil, rare-earth extraction, and several non-greenback currencies including the Swiss franc have probably already begun significant uptrends.

Long-dated U.S. Treasuries are an example of how many categories of assets aren't behaving according to traditional bull-market scripts.

Long-dated U.S. Treasuries and their funds including TLT often behave quite differently from U.S. equity indices and U.S. high-yield corporate bonds, but TLT has been approaching its 2017 highs with notable heavy net inflows, deteriorating traders' commitments, and 83% bulls at Friday's close for the Daily Sentiment Index. Funds like TLT and ZROZ will likely end up declining along with U.S. equity indices, U.S. high-yield corporate bonds, and U.S. real estate. The U.S. dollar is probably also completing a topping pattern in preparation for a substantial decline during the upcoming nine to fifteen months.

Uptrends for emerging markets will likely prevent papa bear's emerging [pun probably intended] from hibernation, but mama bear is no sweet gal.

The collapsing phase of any U.S. equity bear market is usually postponed until nearly all worldwide risk assets are set to plunge together. A classic example is 2007-2009 when the Russell 2000 completed a double top on June 1 and July 9, 2007, followed by the S&P 500 on October 9, 2007 and the Nasdaq on October 31. Many commodity producers and emerging markets didn't complete their highs for the cycle until May-June 2008 or the summer of 2008 for many energy shares. As long as many emerging-market securities and commodity producers are mostly forming higher lows, U.S. assets can experience periodic sharp losses which will usually be followed by powerful recoveries such as the post-baby-bear rebound from December 26, 2018 through May 1, 2019. Eventually papa bear will arrive and nearly all worldwide assets will experience dramatic percentage losses, but I don't expect this to occur prior to the spring of 2020.

Each of the three bears along with other bear-market pullbacks will be followed by a powerful rebound, especially after the ultimate bear-market nadir, although volatility will remain elevated with especially sharp moves in both directions.

Any U.S. equity bear market is actually a series of corrections, each one of which is followed usually but not always by a sharp rebound, with the most intense pullbacks generally experiencing the most energetic recoveries. Volatility in both directions will remain especially high for an extended period of time particularly when the bear market has either ended or has a few more scary downward spikes remaining before it is finished, since that is when valuations are most compelling and bargains will eventually lead to triple-digit percentage gains. To discourage as many investors as possible into selling instead of buying, all recovery attempts during a bottoming process will be accompanied by frightening corrections, huge down days, and anything else which will cause most people to want to reduce risk instead of increasing it. I remember a friend who had considered buying risk assets many times in late 2008 and early 2009 but couldn't bring herself to do so because there was no calm entry point which appeared to be emotionally safe. When she was finally ready to more seriously invest near the end of March 2009, April 1 ended up being a sudden and severe down day which once again discouraged her from participating.

Outflows for U.S. equity index funds and U.S. high-yield corporate bond funds will probably approach or set new all-time records for net outflows during the bottoming process when papa bear is roaring at full blast. This will likely occur in 2020 and perhaps also in 2021 as U.S. pre- and post-election uncertainty encourages intense emotional buying and selling.

A weakening U.S. dollar is one characteristic feature of the mama-bear portion of a bear market.

Looking back at 2007-2009, the U.S. dollar slid to an all-time low versus many currencies in March 2008 and then completed a vital double bottom mostly at higher lows in July 2008. As long as the greenback remained well above its bottom there was no reason to sell most global assets. Once the U.S. dollar began to surge higher in July 2008 it served as a warning that the clock was ticking for all risk assets. Papa bear began shortly after a brief post-opening-bell ascent on September 2, 2008. The U.S. dollar index reached its high for that cycle on March 4, 2009, two days ahead of the ultimate 666.79 nadir for the S&P 500 Index. It is likely that in the current mama-bear environment we will mostly experience lower highs for the U.S. dollar versus nearly all worldwide currencies until we are experiencing a sharp U.S. equity intermediate-term bounce, at which point the greenback will probably rebound convincingly from multi-year and multi-decade lows as a useful advance warning of the upcoming papa bear. The U.S. dollar tends to be especially robust as a safe haven during papa bear, usually more than completely reversing its mama-bear losses versus most currencies.

VIX has been forming higher lows for 1-1/2 years since late 2017, just as it had previously done starting in late 2006.

In December 2006 VIX dropped below 10 and thereafter formed higher lows. VIX was still relatively depressed in August 2008, trading periodically below 20, but it thereafter soared to a multi-decade top just below 90 in October 2008 before forming numerous lower highs thereafter. VIX is doing the same in recent years, trading on an intraday basis below 9 several times near the end of 2017 and the first two trading days of 2018, then forming progressively higher lows including numerous dips below 15 during the past several trading days. Eventually VIX will peak at its highest point since 2008 or earlier and will thereafter form numerous lower highs prior to U.S. equity indices probably completing their respective bottoms several weeks or months afterward. The relentless sequence of higher VIX lows for 1-1/2 years while still remaining subdued means that mama bear is almost certainly here but so far remains incognito.

Most investors believe that we are still in a Goldilocks economy and won't recognize the three bears until the bitter end.

One reliable characteristic of U.S. equity bear markets is that investors don't believe they really exist until it is far too late to sell at favorable prices. During the 2000-2002 bear market, investors in January 2002 remained confident that the uptrend was still intact, and the same was true during the 2007-2009 bear market as late as Labor Day 2008. Most people can't perceive the existence of baby bear or mama bear and only notice papa bear after a crushing collapse when the overall bear market has already experienced most of its losses and when some leading sectors have already completed their bottoms just as investors are making all-time record net outflows while insiders are aggressively accumulating their own shares. There are many Boglehead devotees which is ironic since John Bogle himself sold heavily near bull-market peaks including 2000 and in 2018 shortly before his passing. These folks are convinced that they should keep buying U.S. equity index funds and U.S. high-yield corporate bond funds no matter how overvalued they are, because they are overconfident that they will have to come out ahead in the long run. This attitude will discourage Bogleheads from selling anywhere near the top but just as with equally committed Nifty Fifty and similar investors from past decades they will eventually unload massively out of disillusionment when we get close to the lowest bottoming prices near the end of papa bear.

U.S. housing prices have been falling in an increasingly widening range of neighborhoods.

Near the end of 2018 there were not many neighborhoods where U.S. housing prices had been dropping on a year-over-year basis, whereas in recent months the total has been climbing sharply with month-over-month losses becoming more common. U.S. housing prices overall are moderately less overvalued than they had been at their all-time 2005-2006 peaks averaging more than twice fair value. However, housing prices reached all-time highs during the past year or two even after adjusting for inflation in many central urban neighborhoods. Down payments remain essentially zero so that a moderate decline will leave many homeowners underwater and reluctant to pay their mortgages which will lead to another round of widespread defaults. A repeat of the 2006-2011 bear market, in which the average U.S. house lost 34% of its value (not adjusting for inflation), is likely to occur during the next four years or so with greater percentage pullbacks generally prevailing in the most overvalued regions. As compared with a historic average of 3:1 for housing prices relative to average household incomes, and bargain ratios of 1.5:1 in many parts of Arizona, Florida, and Nevada during 2010-2012, there are numerous neighborhoods in San Francisco, Los Angeles, Seattle, Portland, Vancouver, and elsewhere which sport ratios of 9:1 or even 10:1 and are thus roughly triple fair value.

Cryptocurrencies' 2019 surge confirms that investors remain eager to chase as is characteristic of a post-baby-bear rebound.

Investors become dangerous complacent following a lengthy bull market, and the bull market for U.S. equity indices which began in early March 2009 certainly fits all criteria of having been absurdly overextended. Just as with Beanie Babies in the 1990s, cryptocurrencies were late to the bull-market party but caught up with ultra-trendy action until December 2017. They thereafter acted as all bubbles inevitably do: they plummeted over 80% and then rallied strongly after Christmas 2018. Cryptocurrencies have once again become trendy and were even featured in a recent episode of "60 Minutes" highlighting a fellow who went from rags (almost nothing) to amazing riches to rags (washing dishes) to riches--and will surely go to rags yet another time. His lavishly leveraged lifestyle is typical of people who are about to suffer serious losses. The South Sea Trading Company followed a nearly identical chart pattern three centuries ago--spoiler alert: it collapsed horribly in its final months.

Semiconductor shares and their funds continue to give a valuable foreshadowing of both uptrends and downtrends.

SMH, a fund of semiconductor shares, had peaked on July 17, 2007 at 41.41--almost three months before the S&P 500 did likewise on October 9, 2007. SMH similarly gave advance notice of the subsequent bull market by completing its bottom for the cycle on November 21, 2008 at 14.45; the S&P 500 didn't complete its historic nadir of 666.79 until March 6, 2009 which was 3-1/2 months later. This pattern has continued in modern times with SMH topping out in March 2018 with lower highs in June 2018 and afterward while the S&P 500 didn't reach its highest point until September 21, 2018. This year, SMH rose to an all-time zenith shortly after the opening bell on April 24, 2019, several trading days ahead of the S&P 500's May 1, 2019 top. Whenever we are in the papa-bear phase of the current bear market it is probable that SMH will bottom by an indefinite period of time prior to most U.S. equity indices. As of the close on Friday, May 24, 2019, SMH had fallen over 17% while SOXX was down 18% relative to their April 24, 2019 intraday zeniths.

Small- and mid-cap U.S. equity baskets never got anywhere near their 2018 all-time highs during 2019.

One classic divergence from history is whenever smaller U.S. companies are underperforming their large-cap counterparts. In 1929 this became an increasingly notable development which led to the worst bear market in U.S. history, and in 1972 a similar growing divergence between smaller and larger U.S. socks presaged the worst post-Great Depression bear market of the 20th century. In 2007, most baskets of smaller companies peaked relatively early in the year, such as the June 1/July 9 double top for the Russell 2000, versus the S&P 500, the Nasdaq, and other large-cap indices which mostly didn't peak until the fourth quarter of 2007 and in some cases around the opening bell on Christmas Eve. It is probably not a coincidence that most baskets of small- and mid-cap U.S. companies including the Russell 2000, the S&P SmallCap 600, and related baskets had peaked on or near August 31, 2018 and didn't get anywhere close to those levels thereafter, even at the highest points of 2019. By diverging negatively from the S&P 500 and the Nasdaq, this common pattern from past U.S. equity bear markets has been repeated.

The relatively few investors who have noted this behavior have mostly concluded that for one reason or another "it's different this time" or have recommended shifting from smaller to larger U.S. companies rather than selling.

Gold/silver mining, energy, and numerous emerging-market funds will likely be among the biggest winners in the upcoming year, while the most overvalued U.S. equity and high-yield bond funds will be among the most notable losers.

GDXJ (mid-cap gold/silver mining) is likely completing important higher lows along with other gold mining and silver mining shares, while XES (oil and gas equipment and services) remains among my favorite energy funds with a ten-year high in the purchases of its components by top corporate insiders in December 2018 and recent additional insider buying at modestly higher lows. Many emerging-market and commodity-related funds have suffered substantial net outflows with GDXJ setting a new all-time record. Among other emerging markets, funds of Chinese A-shares including ASHR (A-share large-cap), ASHS (A-share small-cap), and KBA (A-share diversified) are especially worthwhile with negative media headlines obscuring unusually cheap valuations with high-single-digit price-earnings ratios. Other compelling emerging-market funds include TUR (Turkey), PAK (Pakistan), GXG (Colombia), and EPOL (Poland). SCIF (small-cap India) had been a worthwhile bargain although it has been climbing as election results in India were being tabulated. TUR as of its close on May 23, 2019 sported a price-earnings ratio of 5.64 and a price-to-book ratio of 0.92.

Most U.S. technology shares and U.S. high-yield corporate bonds are unusually overpriced even compared with previous bull-market peaks. One common characteristic of U.S. equity bear markets is that high-P/E shares usually end up with dramatic losses not because of falling earnings but due primarily to compressing price-earnings ratios.

Inflationary expectations have become nearly extinct with a recent Bloomberg Businessweek cover asking "Is Inflation Dead?"

Inflationary fears had become almost nonexistent in 2007 which had almost completely reversed during the first several months of 2008. Inflation was also a serious concern in 2000, 1972, 1929, and during the early stages of nearly all major U.S. equity bear markets. Mama bear tends to feature rising wage and price inflation and we are just beginning to see some pressure on the wage front with hardly any price worries so far. This is likely to change considerably between now and the early months of 2020 as inflationary fears become far more prevalent.

Buying U.S. equity index funds and U.S. high-yield corporate bonds today is like trying to reach the top of Mount Everest at the same time as everyone else.

Some people recently died climbing Mount Everest--mainly because they became a dangerously overcrowded herd. Here is an actual photo of Everest Bogleheads which seems unbelievable:

Yes, This Photo From Everest is Real

The bottom line: Goldilocks is always followed by three bears, both in the children's story and when investing. We adored baby bear in the fourth quarter of 2018. Mama bear likely arrived at the beginning of May 2019.

U.S. equity bear markets are far more alike than U.S. equity bull markets. One common characteristic is the existence of three bearish phases, of which baby bear ended shortly after the opening bell on December 26, 2018 while mama bear probably emerged from hibernation shortly after the opening bell on May 1, 2019. Many investors believe that U.S. equity indices are still in bull markets, but the behavior of the Russell 2000 in 2018-2019 and the failure of nearly all U.S. equity indices in 2019 to surpass their 2018 peaks after adjusting for inflation makes it probable that we are already nearly nine months into the current U.S. equity bear market. Mama bear tends to be accompanied by outsized losses for previous top investor favorites along with a generally retreating U.S. dollar versus most global currencies. Inflationary expectations tend to climb when mama bear is present. Emerging-market stocks and bonds, along with commodity-related assets, are often among the top performers until the U.S. dollar finally terminates its downtrend and begins a strong upward surge which heralds the eventual arrival of papa bear. Most likely we are at least several months away from observing the ursine father.

Disclosure of current holdings:

Besides 4-week U.S. Treasuries which I purchase every week, I own numerous exchange-traded and closed-end funds which are listed below. I frequently update my outlook and asset allocation on SeekingAlpha.com.

From my largest to my smallest position I currently am long GDXJ (some new), 4-week U.S. Treasuries (some Thursday, May 23, 2019 yielding 2.378%), the TIAA-CREF Traditional Annuity Fund, SIL, SCIF, ELD, ASHR, XES (some new), SEA (some new), OIH, FCG, ASHS, VNM, GDX, bank CDs, money-market funds, GXG (some new), URA, I-Bonds, PAK, EPOL, EZA, EPHE, SLX (some new), LIT (some new), TUR (some new), ARGT, FM, ECH, EGPT, MTDR, EWG, EWU, EWI, EWW, REMX, FXF, JOF, AFK, RSXJ, COPX, EWD, EWQ, EWK, GREK, HDGE, EWM, CHK, EWN, GOEX, BGEIX, NGE, IDX, RGLD, WPM, SAND, and SILJ. I have no current short positions.

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 bear-market bottoming pattern occurring with frequent sharp downward spikes during the final months of 2020 and perhaps into 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 as late as the winter or spring 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 generally underperformed their large-cap counterparts; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, and 2007-2009. Both the S&P 500 and the Nasdaq surpassed their 2018 peaks in 2019 but only by a half percent each, thereby making lower highs after adjusting for inflation. The Nasdaq in 2018-2019 never surpassed 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 just below 985 and I believe that its valuation will become even more depressed; 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 U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next major bear-market 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.