TSP Investing: In a Mania

Yes, it is a mania. The signs are everywhere…

…except in the financial media that tries to normalize it and many other things that should not be normalized.

I feel compelled to explain that the chart is NOT the the SP500 index fund, because it looks similar. It is a ratio that reverts to a much lower ratio. I used to say “reversion to mean” but it does not really revert to some static level. It often passes through it on the way down, then again on the way up.

So I now like to point out that the highest reversion ever was the 2003 bear market bottom… which is about 60% lower than that today’s price. But if the market merely corrects to the 2000 bubble market *top* then it still has to lose about 30%. And the GNP part of the equation is not going to close the gap for us.


What else happens in manias? People borrow to load up on stocks and borrowing surges into the peak… which can not be maintained.


So we are close to the end. This summer probably.

What else? Retail investors load up on equities near the tops.

Check, and then some.

But the economy is surging back? Yeah okay sure. But you do know year-over-year comparisons AFTER the economy went full-stop a year ago will look pretty good, right. And the media will still peddle it.

And you do know the gov’t filled the massive holes last year and into this year on both the demand side (stimmy checks) and on the corporate giveaways, right?

So not only is the stock market on life support, the economy has been too for the last year.

What else?

A record low in bullish positions over bearish positions. Which means it can not get much better, but it can get a lot worse. And last time reversion happened quite rapidly.

What else? Hmmm.

At least inflation is not an issue about to put pressure on interest rates which would tumble the stock market and implode the bond market…

Ka Pow. Oh this is going to be interesting to watch inflation hit 5% and the Fed trying to not allow interest rates to follow. Not really. It will be pathetic.

What else?

You can NOT rotate into housing this time like in 2000. Too late. Bubble city. Or I mean, bubble suburbs.

And rising interest rates could send monthly payments through the roof (so to speak) for new home purchases. (Note: a 1% rise in mortgage rates requires a 10% haircut in prices to hold monthly payments flat).

But the housing bubble is truly different this time. Cost of building new homes is way up and the home building industry was gutted after the 2008 bust. So we have bubbles in some areas and bust in others (cities).

Oh and please don’t let anyone tell you the economy is back on track. We are not there yet. You would think it would be common sense, but the economic models do not employ common sense. They use trend data and gerry-rigged inflation to come up with their growth rate.

Minor detail, but they have included trillions in stimmy payments as Personal Income which is part of GNP while not deducting the small landlords not collecting rent and many other items of distortion. I can also guarantee that the 400% rise in lumber prices has translated into a 400% gain in lumber retail sales within their models, because they do not calculate units sold or price inflation item by item. It happens with oil prices too.

So price-to-sales or revenue is a good yardstick for the SP500 valuation. And we went from dangerously high levels to mania levels thanks to many trillions in central bank printing last year.

I have a secret to tell.

The central banks have no idea how to get out of the mess and distortions they have created. Which makes it real hard to predict what they will do next. So I point out the distortions and tell you that in the long run (10-12 years), the purchasing power of the stock market will be much, much lower than today.

In 10-12 years.

But that does not mean the market can not crash and present a good buying opportunity in say 2-3 years. It happened in 2000 and it happened in 2007 and many other times.

I send out warnings when I see the risk-sensitive investors bail which has signaled deep corrections and bear markets… or pending fed interventions. But the risk built into the market today has never been higher which means tread lightly or not at all in the distortions.

Michael Bond

TSP Smart & Vanguard Smart Investor serves serious and reluctant investors. My primary goal is to help investors make more informed decisions, and understand the investing environment which is quite hostile these days.

Categories: Perspectives

%d bloggers like this: