“Another sign to watch for: In every bubble, there are always people trying to burst it by declaring that financial assets have become overvalued. At first, Prof. Goetzmann says, such skeptics earn respectful attention. But eventually, investors turn on them with anger and ridicule.” – Jason Zweig WSJ

The recent record breaking IPO of Alibaba has got me thinking about where we are in the stock market cycle.

A couple of years ago the stock market had risen smartly off the 2008/9 bottom, but there were still a lot of doubters. I distinctly remember those in the bullish camp making the argument that there was no way we were in a bubble because far too many investors were worried about the possibility of another bubble. At the time everybody was a bubble meteorologist.

Contrast that to today. Although there is not the widespread public participation like the late 1990s, amongst professionals the sentiment is as rabidly bullish as it has ever been. Apart from the perma-bears there are zero professionals that are bearish on risk assets. There are virtually zero prognostications about being in the midst of a bubble.

The complete lack of fear was exemplified by CNBC’s recent interview of hedge fund manager Bill Fleckenstein. I am a big fan of Fleck, and although he has probably being too bearish, he is one of the few perma-bears that has been smart enough to not fight it on the way up. He closed his fund (which was mainly a short fund) at the lows in 2009 and has been waiting on the sidelines ever since. Regardless of whether you think he is a smart guy or not (I happen to think he is), there is a level of basic human decency with which a TV anchor should conduct themselves.

This was all thrown out the window as CNBC continued to embarrass themselves in a pathetic attempt to discredit Bill. If you haven’t watched the whole interview, I suggest you watch it. The vehemency that the anchor attacked Bill is not the sort of stuff you see at market bottoms (unless they are attacking the bulls).

Most market pundits are afraid of saying we are in a bubble because if the bubble continues they are going to look stupid. I am not as afraid of looking stupid as I am well practiced in that regard. Therefore I will say it. We are in another stock market bubble. The fact that few people are highlighting this fact today as opposed to a couple of years ago does not make it less true.

There is a well known Wall Street saying about not being able to recognize a bubble when you are in it. Well, never has been this more true.

More and more, amongst professionals, I am observing an abandonment of fear. There is a growing confidence that risk assets will continue to rise forever. Confidence has reached a startling level of complacency.

The party like atmosphere with Friday’s floating of the world’s largest IPO is just another sign. Although there are a couple of wise old sages reminding everyone to have a look at where the exits are in the theatre, most everyone is partying like Prince has written a new song. There is a very definitely a 1999 feel to this euphoria.

Of course it is different. It always is… This time there are also Chinese tech zillionaires being created. In a sign of how things have changed, I came across this amusing article about monks blessing Porsches in China.


A monk sparked an online backlash when he blessed a new Porsche in a temple located at Xiaogan City, Hubei, allegedly endowing the owner with safety and luck, according to Tencent News.

Alibaba’s founder Jack Ma has catapulted himself to the world’s 7th richest tech tighten with Friday’s listing of his company’s shares. From school teacher in 1999 to being worth $26 billion in 2014 is not bad. And although I don’t begrudge his success, I do question whether investors should be falling all over themselves trying to buy the shares today at this record setting valuation.

On Friday I tried to soak it all up and commit the atmosphere to memory. This sort of enthusiasm is the sort of thing that tops are made out of. Remember markets top on good news, not bad.

I realize that right now everything feels great. I know that it seems like stocks are impervious to any sort of bad news. The logic of the bulls seems so convincing, and most importantly, stocks keep going up, so it is such an easier trade.

I haven’t provided a lot of fundamental reasons why stocks are going to go down, but that doesn’t really matter today. I don’t want to focus on that aspect. The point I want to make today is that everyone is convinced we are not in a bubble. Although I have no idea how long this madness can continue, the fact that so few people are fighting the rise leads me to believe we are getting much closer to a top.

But we are definitely in another stock market bubble. There I said it. Right there in black and white. When it will end I have no clue. What will be the trigger also escapes me. I haven’t been bearish the whole way up, so it is not like I am an end of the world bunker monkey who thinks that anything over 5 times earnings is absurdly priced. But the fact that I am so lonely in my willingness to put this thought to paper should not bring the bulls solace.

Precious metals puke

On Friday, as investors fell all over themselves like giddy 13 year old girls at a One Direction concert to buy shares in Alibaba, silver was taken out to the woodshed.


I had been patient, planning on waiting for silver to decisively break $19 before getting long. Unfortunately I succumbed to temptation and bought a little last week before the big break.

I am not going to buy more yet, but I am hopeful that we are in the midst of the washout. As bullish as investors are towards equities, there is a corresponding equal ferocity of bearishness towards precious metals. Gold and silver are completed hated.

This is completely understandable given their unrelenting three year bear market.


The technicians will tell you that silver looks terrible and that it is headed lower because it broke all sorts of support. Maybe they are right, but I think that is a little backward looking. I am more hopeful that we are close to the bottom but I am watching for signs of stabilization before really loading up the boat.

I was encouraged when Bill Fleckenstein last week wrote:

On a related, useful, yet somewhat distasteful note, both my good friend Fred Hickey and I received gold-oriented hate mail yesterday (Fred even got phone calls).. Long-time readers know that hate mailers have an uncanny ability to signal turning points.

I am a big believer that when market participants feel confident enough to berate those who disagree with their opinions that the Market Gods are going to punish them. Their arrogance is a sign that the trend is about to change.

Don’t get me wrong, I understand why investors are shooting the precious metals. The short end of the US yield curve is rising in anticipation of the Fed tightening cycle and this is gold’s worst nightmare.

The US dollar is going straight up:


The strength of the US Dollar is weighing heavily on gold. It is tough for gold to rally in an environment of a strengthening US dollar and also rising short term rates:


However I believe that the precious metals are influenced by more than just the US dollar direction and short term rates. Over time, I believe that gold is highly correlated to the long term real rate of interest. Gold does best when the opportunity cost of holding it are low. The real rate of interest (nominal interest rate minus rate of inflation) is the best way of measuring this cost.

Everyone mistakenly thinks that gold is solely an inflation hedge. It is an inflation hedge but that is only half the story.

If inflation is running 10% and interest rates are at 7%, then gold is a great investment because the real rate of interest is negative 3%. But gold is equally appealing in an environment of 5% inflation and 2% rates even though inflation is half. The real rate of interest is still negative 3%. The absolute level of inflation is not as important as the real rate of interest.

After the credit crisis of 2008/9 real rates went deeply negative. This encouraged investors to buy gold.


Gold topped at the very moment real rates bottomed. As real rates have drifted higher, gold has been under continual pressure.

However this relationship has recently broken down as the yield curve has dramatically shifted shape. Although 30 year real rates have declined from 3% a year ago to 1% in the summer, gold has not rallied. This is because the short end of the curve has been rising, thus making the short term cost of holding gold (especially in US dollar terms) increasingly more expensive.

Why then am I bullish on precious metals? I believe that although the Fed is about to embark on a tightening cycle, they are going to consistently be slow to raise rates. They are loath to get ahead of the curve, so I expect the Fed will not push real rates higher.

It is more complicated than that because they don’t control the long end, but at the end of the day, I believe that the Fed will continue a policy of financial repression (low or even negative real rates) for many, many years to come. Given the massive indebted nature of the global economy, they simply don’t have any choice. Any sort of return to positive real rates is going to stop the economy in its tracks.

Therefore I think you want to be accumulating gold and silver into weakness.

It’s hard to believe but it was only three years ago that gold was worth 1.75 times the level of the S&P 500. Since then the gold mania has waned and shifted into stocks. The ratio has collapsed to 0.60!


I have prematurely been calling for the bottoming of this ratio, but this time I really think it will work! (which is what every degenerate gambler/trader says) I don’t have many fingers left from trying to catch this knife, so I am hopeful that this is finally the time…

There is so much frothy cockiness in the stock market and so much depressed despair in the precious metals market that I suspect that we have to be close.

I will leave you with a reminder that everyone knows but few follow – be fearful when others are greedy and greedy when others are fearful.