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Market Updates & Investment Counselling

Is the next stop beyond a stock market bubble-full scale insanity?

That was the gist of the headline of an article I read yesterday morning from Jim Rikards, in his Strategic Intelligence newsletter.

His hypothesis is that the stock market is currently in bubble territory and that the CAPE Ratio (developed by Nobel Prize winning professor Robert Shiller) for the S&P 500 is higher than it was before the 1929 crash and second only to the dot.com bubble.

The good news, is that even if he is correct, timing when the balloon will pop is nearly impossible, as it can remain stretched for quite some time. This is especially true now with interest rates being as low as they are, forcing almost everyone including conservative and prudent investors into the market.

Of greater concern should be the effect millions of new and often young investors are having on the market when they band together to leverage their size and conviction, as they have done to several stocks in the past week, costing professional investors and hedge funds billions of dollars for betting against stocks that the aforementioned group like.

Many of these rookies have made paper fortunes in a relatively small amount of time, with some stocks going up by 50%-100% or more on a daily basis. Unfortunately, only some of the smarter less greedy speculators have taken their profits and have moved on, which means the rest are likely to feel the same pain as the shorts in the near future.

Now, after punishing short sellers (the people betting that their targeted stocks would drop), they have set their sights set on silver and shares of silver mining companies. Their strength in numbers and fanaticism moved silver up over 8.5% yesterday to an eight year high, with some miners up in excess of 25% and over 40% in two days.

While this must feel exhilarating for these newbies to the markets, it is giving them a warped sense of what investing is and how it works. What they are doing is gambling.

Let’s face it, casinos are not in business to give their money away and neither are the markets-at least not to people who only speculate, as oppose to those who buy companies that can produce profits for their shareholders by selling their product or services in the marketplace, while employing thousands of workers and benefiting society at large.

Unfortunately, this recent behavior is making some people begin to question the financial system, for which trust is paramount if people are to continue investing with confidence in the future.

I just hope (and expect) that the insanity we are witnessing right now rapidly fades away and does not hurt too many unsuspecting individuals, as none of us wants to see anything happen to our ever expanding balloon to make it pop, especially while we are trying to cope with a pandemic.