Juggling Dynamite

Equity valuations are the most inflated since the infamous bubble tops in 2000 and 1929 before that, and far beyond the 2007 and 2022 cycle tops. This is evident below in one of the most historically insightful valuation metrics, the Shiller Price-to-Earnings Ratio (below since 1860).

No one knows how long bubbles will last, and this one has gone on longer than most. But bubbles have always ended in a violent bust that evaporates years and even decades of prior market gains. It has been wisely noted that those who don’t learn from history tend to repeat it, and people at or nearing retirement have much shorter time horizons than widely imagined.

The question for every capital allocator today is: what did you learn from past bear cycles, and how are those insights incorporated into your capital management choices today? Those without evidence of how they have integrated past loss-cycle lessons into their approach are basically flying blind.

Today, retail investors have a record 73% of their financial assets in equities and a record low 7% in bonds. Few have meaningful levels of cash. When the masses are all in on one thesis, something else is bound to happen.

The discussion below is worth a listen, particularly the second half.

Remember, correlations between global equity and credit markets typically go to one during bear markets. They all go down together; it’s a question of how much each drops and how long they take to recover.  Avoiding portfolio losses requires more than a bunch of different marketing wrappers around the same high-risk assets from different countries and sectors.

Richard Bernstein and David Rosenberg reunite to debate the Federal Reserve, inflation, the AI investment boom, market bubbles, gold and the case for international diversification. The former Merrill Lynch colleagues examine whether the Fed should raise rates, how AI CapEx is reshaping the U.S. economy, why credit markets may lead the AI trade, what is driving gold, and where investors may find opportunities outside the mega-cap U.S. market. Here is a direct video link.

Financial conditions tightened significantly in July, raising borrowing costs across the board. Central banks are now stuck between oil-inspired inflation and recklessly leveraged asset markets digesting the highest borrowing costs since 2007. Good overview in the discussion below.

DoubleLine CEO-CIO Jeffrey Gundlach joins CNBC’s Scott Wapner following Federal Reserve Chairman Kevin Warsh’s second FOMC press conference. Mr. Gundlach’s read is that the market didn’t buy what Chairman Warsh was selling. While the Fed held rates steady, Mr. Gundlach points to the U.S. Treasury yield curve’s sharp steepening during the press conference as the real story, undoing much of the flattening the market had rewarded Chairman Warsh with back in June. His view is straightforward: If Chairman Warsh is truly committed to getting inflation to 2%, and not a “whisper above,” then holding rates steady while war-driven commodity prices keep climbing is inconsistent with that goal. Mr. Gundlach argues the bond market is essentially calling that bluff and now expects the Fed to hike in September to claw back some of the credibility it just gave up…On markets, Mr. Gundlach flags growing stress beneath the surface of corporate credit, with spreads widening meaningfully on AI and hyperscaler names and a growing disconnect between what rating agencies are assigning and how those bonds trade in the market. He continues to favor staying up in credit quality, avoiding leverage and steering clear of the long end of the Treasury curve, which he believes is headed toward the mid-5% range as concerns mount over fiscal and Social Security funding pressures.  Here is a direct video link.

Don’t kid yourself. If you have money in the stock market, you are not in a different stock market; you are in the most overvalued, leveraged stock market in history. Fact.

On this episode of the WTFinance podcast I had the pleasure of welcoming back Mike Green. Mike Green is Chief Strategist and Portfolio Manager at Simplify Asset Management, and one of the most influential voices on market structure in finance today.

During our conversation we spoke about the current situation in markets, the ever increasing leverage through ETF’s, what this means for market structure, geopolitical impact and more.
Here is a direct video link.