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

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

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

Several reliable signals have been flashing bright red.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Tuesday, April 2, 2024. Each position is listed as its percentage of my total liquid net worth.

I computed the exact totals for each position and grouped these according to sector.

The order is as follows: 1) U.S. government bonds; 2) shorts; 3) bear funds; 4) gold/silver mining; 5) coins; 6) miscellaneous securities.

VMFXX/TIAA(Traditional)bank CDs/FZDXX/FZFXX/SPRXX/SPAXX/Savings/Checking long: 37.13%;

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

I Bonds long: 10.88%;

TLT long: 10.86%;

PMM long: 0.01%;

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

QQQ short: 20.17%;

XLE short: 5.48%;

XLI short: 3.05%;

XLV short: 1.82%;

SMH short: 1.33%;

AAPL short: 0.03%;

SARK long: 0.88%;

PSQ long: 0.04%;

PALL long: 0.17%;

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

Gold/silver/platinum coins: 7.01%;

FXY long: 0.24%.

"Patience and discipline can make you look foolishly out of touch until they make you look prudent and even prescient." --Seth A. Klarman

TRAPPED BOGLEHEADS (March 22, 2023): If it doesn't rain outside for several weeks in a row then you may stop taking an umbrella with you even when it's cloudy. As a result you'll get rained on sooner or later. Worse, if the lack of rain continues for years then you may start building houses without roofs. Then you'll have a catastrophe. Investors have been building portfolios in the same manner, ensuring that they'll be flooded and thoroughly ruined sooner or later. The water is already coming in and they're not even putting on plastic blue roofs.

We had such a lengthy bull market that, even with the overall mediocre 23-year performance for U.S. large-cap equity index funds since March 2000, investors who made foolish decisions were generally rewarded instead of punished. Those who used margin, or who kept piling blindly into U.S. equity growth funds in classic Boglehead style, or who simply purchased shares of the best-known big U.S. companies, generally outperformed those who used more scientific methods. Buying whatever was out of fashion or which was most undervalued often did more poorly than picking the popular names, especially in years like 2021. When inferior performance is rewarded and careful analysis is not, investors will naturally pile into whatever is "doing well" regardless of merit. Even assets with essentially zero value like cryptocurrencies became highly desired because they were going up.

Most investors have been piling into U.S. large-cap equity growth funds in 2023 at an even more intense pace than during 2021, which at that time had set a record for greater total net calendar year inflows than 2001 through 2020 combined.

2021 experienced by far the highest total net inflows into U.S. equity funds in history even if you adjust generously for inflation. 2022 would have been an all-time record except for 2021. Not learning anything from their mistakes, 2023 has shown greater average daily net inflows into U.S. stock funds than either 2021 or 2022. The following article highlights this astonishing phenomenon of supreme overconfidence at the worst possible time:

Retail Investors Are Pouring a Record 1.5 Billion [U.S.] Dollars Per Day Into the Stock Market

Many baby boomers know they didn't save nearly enough to enjoy a comfortable retirement. Now that these folks are mostly in their 60s and 70s, they have been hoping that the stock market's gains will magically compensate for their savings shortage.

Millions of baby boomers didn't save anywhere close to the amount they knew they would need to retire comfortably. They have adopted the Boglehead philosophy that they have a divine right to come out ahead, and have therefore ignored compelling alternatives. More importantly, far too many investors of all ages haven't been reducing risk by moving into guaranteed U.S. Treasury bills and similar insured time deposits. Most people have no idea why it matters that large-cap U.S. stocks are still mostly trading at more than double fair value based upon their future profitability.

Now that U.S. Treasuries have been paying close to 5% with zero risk and zero state and local income taxes, a small minority of investors have been intelligently accumulating these since last summer. Tragically, far more investors are actually more confident about the U.S. stock market after experiencing a losing year like 2022, because they figure that was the one bad year of the decade and they'll get even bigger gains from now on. The media have been encouraging this sort of behavior, reporting that something like 90% of all down years for U.S. stocks are followed by up years. The problem is that 100% of all the first years of bubble collapses are followed by down years, and since we had experienced all-time record overvaluations, net inflows, and insider selling in 2021, the current scenario cannot be anything other than a bubble collapse.

The longest bull markets are followed by the lengthiest bear markets in a simple case of Newton's Third Law applied to investing.

The longest bear market in U.S. history was from September 1929 through July 1932, or 34 months. This was preceded by a bull market from August 1921 through September 1929 which was over 8 years. The second-longest bear market in U.S. history of 31 months occurred from March 2000 through October 2002 when QQQ had plummeted 83.6%. This had been preceded by a bull market from October 1990 through March 2000 which lasted for more than nine years.

The most recent bull market extended from March 6, 2009, when the S&P 500 had slid to 666.79, followed by the final peak on January 4, 2022 when the S&P 500 topped out at 4818.62. This was nearly 13 years altogether. Therefore, the current bear market is going to be a lengthy and severe one, perhaps lasting into 2025, and with the S&P 500 Index likely losing more than 70% of its peak valuation.

History always repeats itself with minor variations.

In any true bear market the S&P 500 moves below its previous bull-market top. Prior to early 2022 the most recent bull-market top for the S&P 500 had been 1576.09 on October 11, 2007. Therefore this index will have to drop below such a level sooner or later, although there is no way in advance to know when or by how much.

You have to adjust intelligently to everything in life, not just investing.

Imagine that you are a frequent sailboat racer. You adopt the following approach in every single race: within seconds of the official start, you hoist the spinnaker to go full speed ahead in a straight line toward your target. You don't care how the winds are blowing, or what the other boats are doing, or anything about the capabilities and personalities of their crews. It's always a direct all-or-nothing rush toward the finish. You have concluded that tacking (playing defense in unfavorable or shifting wind conditions), observing what other sailors are doing, or anything other than a straight-ahead approach is an irrelevant distraction.

No serious sailor would do this except on rare occasions. Unless the wind is firmly at your back and everything should be full speed ahead, you have to keep adjusting your strategy depending upon the conditions, what the competitors are planning, what you know they're likely to do based upon their past history, and dozens of other considerations. You don't wear the same clothing on a sweltering day in July as you do during a blizzard in January. Therefore, why would you want to invest with blinders on and zero consideration for the prevailing conditions?

While the stock market's long-term upward direction is a meaningful force, mean regression from a rare extreme is a far more powerful force. Whenever any asset is dangerously overpriced it will inevitably collapse before it resumes its next rally.

A married couple I have known for many years love to tell me how they remain nearly fully invested in U.S. large-cap passive equity funds at all times, no matter what the market is doing, as though I'll reward them with bones for being such faithful dogs.

Whenever I meet a certain lovely couple whom I've known for many years, the first thing they tell me is how they're staying the course no matter what and refusing to alter their asset allocation. These are folks who know they're on the Titanic and they've hit an iceberg, and the ship is probably sinking, but they're going to refuse the lifeboats and keep singing bravely on into the unknown. They're already starting to take on water, but their foolish consistency and pride will always trump their common sense.

It's better to be confused than to be wrongly overconfident.

Those who are baffled when the market has been more volatile or disappointing than usual might sell some of their stocks and reduce their risk because they don't understand what's happening. Those who are supremely confident that they have to come out ahead in the long run will keep buying, and buying, and buying, and will eventually lose a lot more than their counterparts. Being unsure is far superior to a false certainty.

Top U.S. corporate insiders have been persistently selling into rallies for more than two years. Since February 2021, insiders set a new all-time record for insider selling relative to insider buying.

Just as average investors have never been more aggressively buying large-cap U.S. equity index funds, top corporate insiders have never demonstrated a higher ratio of selling to buying in U.S. dollar terms than they have done for more than two years. These are the same executives who made all-time record purchases near major market bottoms including 2002-2003 and 2008-2009, and who no doubt will eventually become even more aggressive in accumulating shares of their companies.

However, insiders haven't been making purchases in any notable way since their massive buying spree of March 2020, even near the lowest points of 2021-2023. Therefore, the U.S. stock market has a very long way to go to the downside. Once insiders become heavy buyers it will be time to buy also, but it would be absurd to want to front-run those who know the most about the financial markets.

U.S. Treasury bills provide nearly 5% risk-free interest which is free of state and local income taxes.

A month ago, most U.S. Treasury bills were yielding over 5%. Now that we had the U.S. bank crisis, some investors have taken their money out of banks to put into U.S. Treasuries which has pushed their yields below 5% across the board. These are still well worth buying and I participate in all auctions of 8, 17, 26, and 52 weeks as well as those of 2 and 3 years.

Here's a little secret with U.S. Treasuries: hardly anyone knows about the 17-week U.S. Treasury which was only introduced in October 2022 when the U.S. government needed to increase its net borrowing. Some brokers including TD Ameritrade don't even offer this maturity to its customers, while older computer systems haven't added it to its inventory. You will therefore often get a higher yield on the 17-week U.S. Treasury than on other maturities including 13-week and 26-week; the March 22, 2023 17-week U.S. Treasury auction yielded an investment rate of 4.964%.

TLT sounds like a boring fund of U.S. Treasuries, but I expect it to gain more than 50% including all monthly dividends over the next two years.

Longer-term U.S. Treasury bonds and their funds including TLT suffered substantial losses in 2022, followed by a moderate recovery since then. TLT became so undervalued that, even if you don't count its rebound from its 11-year bottom in October 2022 until today, it will likely gain another 50% or more (including all monthly dividends) over the next two years. Usually investors don't think of U.S. Treasuries as being so volatile, but they were by far the biggest winners of all sectors in 2008.

Precious metals will likely correct for several weeks or more, but will thereafter become among the top performers of the 2020s.

Gold bullion recently briefly surpassed two thousand U.S. dollars per troy ounce. Historically moves above each exact multiple of one thousand have generated lots of excitement among the wrong investors, meaning those with the least experience who are most susceptible to chasing after trends which have already nearly fully matured. Therefore, I expect pullbacks for most assets related to precious metals until we reach some kind of important higher lows this spring or summer.

Over a longer-term basis, bubbles for large-cap U.S. equity growth shares are consistently followed by gains of hundreds of percent for gold mining and silver mining shares during subsequent years. There is a key parallel with the previous bubble peak for the S&P 500: in both cases, gold mining shares began to rally eight months after the top in the S&P 500. The March 2000 zenith was followed by a rally for gold/silver mining shares which started in November 2000; the January 2022 peak for the S&P 500 Index was similarly followed by September 2022 start for the long-term uptrends for GDXJ, GDX, ASA, and similar securities which had all lost more than half their value from their August 2020 peaks (a critical time to sell them) while retreating to 2-1/2-year lows.

VIX has continued to provide the most reliable signal telling us when to sell short during the current U.S. equity bear market.

Some market signals have an inconsistent record or send false messages, but fortunately VIX is spot on. Since 2021 VIX has told us precisely when to sell short QQQ and related large-cap passive U.S. equity growth funds. Whenever VIX is near 20 and especially whenever it is below 19, you get the green light for selling short large-cap passive U.S. equity funds including QQQ and XLK. The reason this works repeatedly is that a depressed level for VIX in a bear market tells us loudly and clearly that there exists a dangerous environment of complacency and a widespread misguided belief that, usually due to a recent extended stock-market rebound, the bear market is probably over. During the 2000-2003 and 2007-2009 U.S. equity bear markets we heard similar repeated pronouncements about the bear market being over, with some analysts making such a statement a dozen times or more within a few years and being wrong each time.

As has always been the case in past bear markets, whenever the downtrends for QQQ, the S&P 500, and similar funds and indices really are over, you won't be hearing about it in the media. Instead, almost everyone will be asking how much lower the market still has to go to the downside.

In recent months I had added to short positions in XLV, XLE, and XLI. More recently I have been adding to my short positions in QQQ and SMH whenever VIX is near 20 or lower.

Investors tend to be mesmerized by the "recency bias": whenever a given asset has been enjoying an extended uptrend most people take for granted that additional gains will follow, whereas protracted downturns cause people to conclude that additional losses will soon occur. This is where tracking VIX, insider activity, fund flows, and traders' commitments has a huge advantage. You will get reliable forecasts while most investors are overly reliant upon the recent past continuing into the indefinite future.

If you're not sure about whether or not we're in a U.S. equity bear market, check to see if women's clothing length has been extended to the feet--amazingly this signal has been accurate for over a century:

Maxi Skirts Are Everywhere

Here are some useful charts which illustrate the above points.

The following chart shows that for more than a century an unusually low spread between corporate bond yields and U.S. Treasury yields signals a major decline for the U.S. stock market, while an especially high spread precedes the biggest rallies in percentage terms:

We have also experienced unprecedented buying of call options in 2023 even when compared with previous all-time record speculative call buying in 2021 and parts of 2022:

The traders' commitments for all U.S. Treasuries, including the 30-year and 5-year maturities shown below, have demonstrated commercial accumulation (equivalent to insider buying for futures by those who are trading any given security as part of their career) which is near their highest percentiles ever recorded:

The bottom line: we have two crushing down years still ahead for U.S. assets including especially large-cap growth stocks, high-yield corporate bonds, real estate, art, and other collectibles.

Why did the Fed wait at least a year too long before raising the overnight lending rates? It was primarily due to the foolish conclusion that, since we hadn't experienced above-average inflation for decades, it couldn't reoccur. Don't make the mistake of thinking that, since we haven't suffered a severe U.S. equity bear market since March 2009, it is somehow less likely to happen. Exactly the opposite is true as this extended period without a real decline has psychologically caused most people to believe that it won't occur again at least in their lifetimes, thereby causing valuations for U.S. stocks and real estate to be near or above double fair value and higher than that for many large-cap U.S. growth shares.

Don't live in a house without a roof. Protecting against adversity is far more important than stretching for dangerous additional gains.

Disclosure of current holdings:

Here is my current asset allocation as of the close on Wednesday, March 22, 2023:

TIAA(Traditional)/VMFXX/FZDXX/FZFXX/SPRXX/Savings/Checking long: 33.63%;

XLK short (all shorts currently unhedged): 20.36%;

QQQ short: 7.70%;

XLE short: 4.29%;

XLI short: 2.28%;

XLV short: 1.51%;

SMH short: 0.67%;

GDXJ long: 10.74%;

ASA long: 6.64%;

GDX long: 2.95%;

BGEIX long: 1.45%;

2-Year/3-Year/52-Week/26-Week/13-Week/5,10-Year TIPS long: 12.56%;

TLT long: 9.33%;

I Bonds long: 9.31%;

Gold/silver/platinum coins: 5.86%;

HBI long: 0.27%;

EWZ long: 0.07%;

EWZS long: 0.04%;

PAK long: 0.01%;

EGPT long: 0.01%.

The numbers add up to more than 100% because short positions only require 30% collateral in stocks/funds and less than that in U.S. Treasuries (by SEC regulations; some brokers require more) to hold them with no margin required.

"A value strategy is of little use to the impatient investor since it usually takes time to pay off." --Seth A. Klarman

BIG BOTTOMS (October 16, 2022): Most investors misunderstand bear markets. Bear markets create opportunities for much greater and much faster profits than bull markets. This is because 1) bear markets on average last about one-third the total time of bull markets; and 2) the annualized percentage fluctuations in bear markets are roughly triple those during bull markets.

A bear-market bottom is a lengthy process, not an event.

During bear markets some assets tend to complete their lowest points within one year of the original top. If we begin counting this bear market starting with the S&P 500 all-time zenith of 4818.62 on January 4, 2022 then the bear market is 9-1/2 months old. This is roughly the time when a wide variety of assets including U.S. Treasuries, gold mining and silver mining shares, and some currencies including the Swiss franc and Japanese yen often complete their bottoms prior to powerful uptrends.

Most investors don't respect fair value or differentiation.

Fair value refers to the price at which any asset precisely reflects its fundamentals. Currently the price at which the fund QQQ would exactly match its historic average valuations relative to the profit growth of its components would be about 114. This is very far from its all-time record overvaluation of 408.71 less than one year ago. While QQQ has slumped below 260 several times in recent days, this is still far above 114, so the overall long-term downward trend for QQQ must remain lower for another two or three years until it is trading at a typical discount of 30% to 50% below fair value.

Investors are as baffled about bear-market rebounds as they are about bear markets.

One of the least-understood characteristics of any true bear market is that these feature frequent intense rebounds. Already in 2022 we had two surges higher, from mid-March to late March and then from mid-June to mid-August. We are probably transitioning to the third powerful surge higher of 2022. This recovery has been clearly signaled with the highest put-call ratios ever recorded in the history of the stock market (see chart near the bottom of this update), all-time record net outflows from many U.S. equity funds, the highest ratio of insider buying to insider selling since March 2020, and other reliable rebound foreshadowing. The U.S. dollar index and VIX have formed lower highs since September 28, 2022 which, in an environment of generally falling stock prices, usually indicates that equity prices are set for a sharp bounce higher.

Here is an example of the huge frequent bounces for QQQ during its 2000-2002 bear market when it had lost 83.6% of its value in 31 months:

Differentiation is likely to be among the top stories of the next two years.

What has happened so far in 2022? Investors have sold everything, especially in recent months: stocks, bonds, gold, currencies, real estate, art, etc. Almost nothing has been spared. This is common to the way that bear markets behave: in their early stages, investors are so confused that they sell everything and ask questions later.

Sooner or later, assets which classically bottom earliest tend to recover sharply. This usually includes U.S. Treasuries of all maturities, gold mining and silver mining shares, and safe-haven currencies like the Swiss franc and Japanese yen--and in this case also the British pound due to its widespread unpopularity. The more these assets diverge from QQQ and SPY, the more that investors will pay attention to them. Since very few assets are rallying in any bear market, the few which are climbing enjoy outsized attention and enthusiastic participation. Once funds like GDXJ have gained 50% or 100%, investors will be eagerly chasing after them because they desperately want to own something that is rising when almost everything else is falling.

Energy shares have been outperforming so far in 2022, thereby enjoying far too much attention relative to their fundamentals.

Why have energy shares been among the few winners so far in 2022? You will hear lots of explanations in the media, but the real reason is that they have been one of the few assets with positive gains in this calendar year. Investors are therefore crowding into them because they want to own something which is going up instead of going down. I believe this will end badly so I am staying away from energy until we have much lower valuations and much heavier insider buying in the energy sector. The lows in 2021 for funds including XLE and XES are warning of trouble ahead, representing a drop of almost half from their current levels whenever their 2021 lows are revisited eventually.

Gold mining shares and U.S. Treasuries will probably be among the biggest winners of the next two to three years.

Funds like GDXJ could triple or more from their recent lows including 25.80 for GDXJ, while "boring" U.S. Treasury funds like TLT will probably return 50% or more including reinvested dividends. This would not put either GDXJ or TLT anywhere near their respective historic highs. The more these ascend, the more that people will notice this behavior and will want to jump aboard the bandwagon. The secret to success with investing is to purchase these classic early-bottoming shares far ahead of everyone else, relying on their consistent bear-market outperformance to shine sooner or later. Investors become overly obsessed with only buying an asset which has already been rising, thereby causing such investors to miss out on half or more of their total percentage gains.

Selling puts on oversold but still-overvalued assets is a little-appreciated method which is even more profitable than selling covered calls.

Put prices tend to be their most overvalued when investors are panicking. If you are short something which is likely to eventually drop by 80% or more from its zenith--think QQQ--but which is temporarily being sold in a panic, then instead of covering your short position consider selling covered puts against it. This will allow you to capture temporarily-inflated time premium while retaining your short position. If there is an imminent collapse then you won't make as big a profit as you would have done otherwise, but you will usually get much more up front than you deserve in options premiums. Far more investors buy options instead of selling them, causing their prices to be inflated. Options buyers in general are buying hope via expensive lottery tickets, while options sellers tend to be more-experienced successful long-term options traders.

Long bull markets are followed by long bear markets.

The bull market which lasted from August 1921 through September 1929 was followed by a bear market which ended in July 1932, 34 months later. The bull market from October 1990 through March 2000 was followed by a bear market from March 10, 2000 to October 10, 2002, 31 months later. We just had the lengthiest bull market in history from March 2009 through January 2022, so expect the current bear market to last for at least 2-1/2 years and perhaps longer.

This gives us numerous opportunities to profit from--or to lose money by misreading--both the long and short sides.

Many assets will not bottom until 2024 or 2025.

The Nasdaq and the S&P 500 Index, along with related funds including QQQ and SPY, will probably not bottom until late 2024 or early 2025. Real estate, art, collectibles, and other non-financial assets will probably bottom several months later than U.S. equity indices just as they had mostly peaked several months later in 2022.

Here are five useful charts.

Investors are suddenly chasing after downside protection at a more frenetic pace than at any time in the 21st century:

The average investor has been panicking out of the market as aggressively as they were piling in near the end of 2021 and the start of 2022:

Commodity trading advisors are repeatedly buying near tops and selling near bottoms:

Gold's traders' commitments recently achieved a four-year bullish net extreme:

Commercials for the 2-year U.S. Treasury note reached an all-time extreme of net accumulation:

The bottom line: expect a powerful rebound but the U.S. equity bear market will not end for another two years or more.

Only buy something if it is historically likely to be in the process of completing a bottom which will be followed by dramatic percentage gains. Gold mining and silver mining shares often bottom within a year following a topping pattern for large-cap growth favorites, while U.S. Treasuries and safe-haven currencies also tend to bottom early. Most assets will not likely bottom for another two or three years.

Disclosure of current holdings:

Here is my current asset allocation, with the funds in each group ordered from my largest to my smallest positions:

VMFXX/FZDXX/Savings/Checking long: 33.4%;

XLK/QQQ/TSLA short, hedged with covered puts: 27.9%;

TLT/I Bonds/2-Year/3-Year/52-Week/26-Week long: 23.5%;

GDXJ/ASA/GDX/BGEIX long: 19.2%;

Gold/silver/platinum coins: 5.3%;

INTC long: 2.21%;

TKC long: 1.67%;

GEO long: 1.50%;

TEI long: 1.29%;

KWEB long: 1.17%;

FXY/FXB/FXF long: 1.16%;

VZ long: 0.63%;

EPOL long: 0.29%;

T long: 0.20%;

WBD long: 0.20%;

LEMB long: 0.04%;

PCY long: 0.03%;

NGL.PR.B long: 0.03%;

CEE long: 0.02%.

The numbers add up to more than 100% because short positions only require about 30% to hold them with no margin required.

"Here's how to know if you have the makeup to be an investor. How would you handle the following situation? Let's say you own a Procter & Gamble in your portfolio and the stock price goes down by half. Do you like it better? If it falls in half, do you reinvest dividends? Do you take cash out of savings to buy more? If you have the confidence to do that, then you're an investor. If you don't, you're not an investor, you're a speculator, and you shouldn't be in the stock market in the first place." --Seth A. Klarman

MAMA BEAR (August 9, 2022): Throughout 2021 some analysts compared the U.S. stock market with Goldilocks and her porridge: not too hot, not too cold, but just right. Unfortunately many of them played hooky in kindergarten so they never learned that Goldilocks is always followed by the three bears. This truancy has come home to haunt analysts and investors in 2022 which featured the appearance of Baby Bear throughout the first half of this year.

Far too many analysts have recently rushed to declare that "the bear market is over" but, alas, we haven't seen either Mama or Papa so far. Mama Bear is about to surprise many with her dramatic entrance. Unlike Baby Bear, Mama needs a lot to keep her well fed, so she's going to be around for a year or two. Once she's had her fill, Papa Bear will bring the proceedings to a thunderous grand finale.

The U.S. equity bear market has a long way to go, with QQQ facing additional losses of 75% or 80%.

On November 22, 2021 at 10:16:19 a.m., just after Jerome Powell was reappointed as Fed chair, QQQ completed its all-time record zenith at 408.71. After making lower highs through January 4, 2022, it didn't take long for QQQ to lose one-third of its value by June 15, 2022. Since then it has been generally rebounding for several weeks which has encouraged a surprising number of people, especially those who haven't studied market history, to conclude loudly that "the bear market is over." Often they'll mention something about inflation receding or a recession not being imminent or something equally irrelevant as justification for their outlook.

Quite a few of these folks declared in both late March and more recently that "the bear market is over," probably on the way to doing so several more times.

The bear market of 2021-2025 has almost nothing to do with inflation, recession, Ukraine, or energy. It has everything to do with all-time record overvaluations, insider selling, net inflows, and public participation in 2021.

The media have been completely clueless about why we're in a bear market and why it must continue for at least two more years. We had the highest overpricings in history last year combined with by far the most intense insider selling and greater total net inflows for 2021 than we had for 2001 through 2020 combined. The market has to reward insiders for bailing out and punish the average investor in a way which will be unforgettable, at least until the next bear market comes along and no one respects it either.

The two previous longest bull markets in history were followed by bear markets of 34 and 31 months respectively.

Some analysts would have you believe that the bull market from March 2009 through January 2022, almost 13 years altogether and by far the longest in U.S. history, ended with a 5-1/2-month mild bear market. If we look at the second- and third-longest bull markets then this is what we find: the powerful uptrend from August 1921 through September 1929 was followed by the most severe bear market ever recorded which terminated in July 1932, 34 months later. The bull market from October 1990 through March 2000 was followed by a bear market which ended in the U.S. in October 2002 after 31 months and in most of Europe in March 2003 which was three years (36 months) altogether.

If this pattern repeats itself then the current bear market won't end until either the second half of 2024 or sometime in 2025.

Bear markets aren't "healthy corrections." They destroy an average of one decade's worth of investors' total accumulation.

In any bear market a major index like the S&P 500 will return to its top from the bull market prior to the previous one. In this case that means going back to its October 11, 2007 top of 1576.09 which had been the previous all-time intraday record prior to the 2007-2009 collapse. Since the S&P 500 on January 4, 2022 had reached 4,818.62 this means a loss of more than two-thirds from top to bottom and it could be significantly higher than that.

From its top of March 10, 2000 through its bottom of October 10, 2002, QQQ dropped 83.6%. Not many investors have prepared their portfolios for a repeat performance.

U.S. government bonds are irrationally underappreciated.

As I have discussed in previous essays, the best deal you can get is to put up to 65K each calendar year into I Bonds per couple or 35K if you are single. These are currently paying 9.62% free of state and local income taxes, and possibly free of federal income taxes if the money is eventually used for someone's college education. Once you have maxed out your I Bonds you can still get the highest guaranteed yields since October 2007 by purchasing U.S. Treasuries at each auction at TreasuryDirect.gov. The 52-week, 1-year, 2-year, and 3-year Treasuries are auctioned once per month, while the 26-week Treasuries are issued each week. I have recently been buying all of the above including the auctions on August 8 and August 9, 2022. Recent yields include 3.325% on today's 52-week auction and 3.202% for the 3-year U.S. Treasuries. Yesterday's 26-week auction yielded 3.130% which is much higher than you will get from any bank, plus the interest is free of state and local income taxes.

Bogleheads would do much better getting 3.2% guaranteed by the U.S. government than continuing to pile into U.S. equity index funds which are near double or triple fair value and which could still be behind after adjusting for inflation a half century from now.

Here is the official U.S. government link for the results of recent U.S. Treasury auctions:

U.S. Treasury Auction Results

Sell short in any bear market whenever VIX drops below 20.

Huge insider selling combined with massive net fund inflows are two clear signals that U.S. equities are headed much lower regardless of what they do in the short run. If you're uncertain about when to sell short, a useful guideline in a bear market is to track VIX. Whenever this measure of the average implied volatility of a basket of options on the S&P 500 Index goes below 20 it is safe to add to your short positions. The lower VIX goes below 20, the more aggressively you can add to your shorts, although always continue to do so gradually into extended equity strength.

Partially balance your short positions with long positions.

While funds including QQQ and XLK remain near triple fair value, other sectors tend to perform strongly during bear markets which follow growth-stock bubble tops. Gold mining shares consistently rally strongly following Nasdaq-style bubble peaks after an eight-month delay as we saw after September 1929, January 1973, and March 2000. For example, QQQ completed a key zenith on March 10, 2000; $HUI which is a long-running index of gold mining shares began a huge uptrend starting on November 15, 2000. In the current cycle QQQ peaked on November 22, 2021, so it is possible that the recent lows for gold mining shares eight months later may be following a similar pattern.

GDXJ is an ideal fund to hold during the current U.S. equity bear market. Other funds will likely become compelling over the next several months if they retreat irrationally during the next major downward phase for QQQ and SPY.

Not counting TLT and other funds of U.S. Treasuries, my equity short-to-long ratio is currently about 9:8. In other words, my combined short equity positions are modestly greater than my combined long equity positions, constantly adjusting both sides by buying into extended weakness and selling into extended strength.

Probably we will soon retest the upside a few more times for QQQ and SPY before we suffer their severe plunges.

It's somewhat unlikely that August will be the month where the U.S. equity bear market accelerates. Looking back at similar bear-market years including 1929, 1937, 1973, 2000, and 2008, it is probable that equity indices will periodically try to rally on "good news," especially near the opening bell, before we experience a more sustained decline after Labor Day to what will likely be the lowest points this autumn since April-May 2020.

A likely downside target for QQQ in the next phase of the bear market will be 215. We could bottom slightly higher and potentially much lower. Right now I expect this to occur before the end of 2022 although there exists a smaller chance of a slower descent into early 2023. If VIX suddenly spikes above 60 then expect this intermediate-term bottom to occur sooner rather than later.

Here are three useful charts.

Top corporate executives set new all-time records of insider selling to insider buying in 2021 and have recently been selling at their most intense pace since the beginning of 2022:

It's not just stocks which are overpriced; new homes under construction set a new all-time record as housing inventory is being transformed from a record shortage to a record surplus:

Among the few undervalued assets are precious metals, with silver's traders' commitments demonstrating the 99th percentile of its historic range. When commercials aren't hedging it's because they expect a substantial price increase in coming years:

The bottom line: the bear market is far from over as Mama Bear is about to make her appearance. An ideal way to ride out the current bear market is to keep a substantial percentage of your money in U.S. Treasury bills averaging 3.2% guaranteed which is free of state and local income taxes.

Disclosure of current holdings:

Here is my asset allocation in order from largest to smallest position: U.S. I Bonds along with 26-week, 52-week, 1-year, 2-year, and 3-year Treasuries, VMFXX, and similar cash reserves; short XLK; short QQQ; long TLT; long GDXJ (some bought in July); long GDX (some bought in July); short TSLA; long ASA (many bought in July); long GEO; long KWEB; long EWZ; long XBI; long TEI (many bought in July); long INTC (many bought recently including today); long TKC (many bought in July); long EPOL (some bought in July); long LEMB (many bought in July); long PCY (many bought in July); long TUR; short AAPL; long T; long ECH; short XLU; short XLE; long VZ (many bought in July); long FXF (some bought in July); long FXY (many bought in July); long FXB (many bought in July); short IWF; short SMH; long WBD; long VMBS; long EGPT (many bought in July); long PAK (many bought in July); long UGP; long ITUB; long BBD; long TIMB.