U.S. stocks are hitting all-time highs again.  This will be a theme for 2020.  It’s not to say that the “all-time highs” part will be the main theme, even though that could continue for a while.  The theme is that this is one of the biggest stock bubbles this country has ever seen, and its implosion will be significant.

There was a tiny setback for stocks at the beginning of the year with the prospect of a full-blown war with Iran.  But after Iran’s rather mild response, and Trump seemingly backing off, stock investors cheered on the reduced tensions with another rally this past week.

Every time a new high is notched, it is a signal of just how much more painful it will be when it all comes crashing down.

It’s not that U.S. stock indexes making new highs is by itself a problem or any kind of signal of a bubble.  The problem is that the returns in stocks have been extraordinary over the last decade and much of this is due to easy money from the Fed.  A much smaller portion is due to actual corporate profits, and these profits can quickly vanish with the arrival of a recession.

In my predictions post for the year 2020, I predicted that stocks would hit new all-time highs again early in this year. So far, I am right, but I admit this didn’t take a lot of skill to predict accurately.  The odds were good that this would happen.

Part of getting predictions right is luck.  As I noted, the timing and exact nature of events is impossible to predict because we are dealing with the action of billions of human beings.

So I don’t know when this whole thing is going to implode, but I am confident that it is going to implode.  I am not talking about a 15 to 20 percent correction.  I am talking about a major crash that will see U.S. indexes fall by at least 50%, but probably even more.

Stocks are often tied to economic growth or the overall health of the economy.  I do think this is a mistake, but it’s not altogether wrong either.

Do Asset Bubbles Help the Middle Class?

Right now, the American people are struggling.  This is a generalization, but the average middle class person is finding it hard to save any significant money.  We can blame smartphones all we want, but this isn’t a major expenditure, especially when compared to housing and medical care.  We should be able to have smartphones without experiencing a decline in living standards elsewhere.

In many ways, this does remind me of how things were in the mid 2000s.  There was a supposedly booming economy then, yet many people were feeling the pinch of debt and a high cost of living.  There is no question that many people made bad decisions, but we have to acknowledge that there was a cluster of bad decision making largely due to government policies and the Federal Reserve.

Just as housing prices and stock prices were going up in the mid 2000s, so it is today.  This time around, there seems to be more of a bubble in stocks and a milder bubble in housing as compared to last time. We won’t know for sure until it all shakes out.

People hear about the booming stock market, so they tend not to question out loud the supposed strength of the economy.  They wonder why they are struggling to pay their bills when those around them seem to be doing well.  But those around them probably aren’t doing well either.

Admittedly, this is a first-world problem.  I know there has been a spike in homelessness, especially in California. But most Americans have a roof over their head and food on the table every night.  This shouldn’t prevent us from exploring why our living standards aren’t higher than they should be.

Most Americans don’t have any significant ownership of stocks outside of a retirement plan. So think about someone who is an adult but still well below the official retirement age.

Let’s say someone owns a house and has a 401k through their employer.  Housing prices may be going up in their area.  The stock market is going up.  On paper, their net worth is increasing.  It has increased a great deal since 2009.

The problem here is obvious.  All of the wealth is on paper.  You can’t touch the 401k money in most cases, especially if you still work for the same employer. Other than possibly getting a loan and going further into debt, you can’t touch that money until you are almost 60 years old.  If you leave your job, then you can access it, but you will pay income taxes and an early withdrawal penalty.

The equity in the house is mostly useless unless you plan to sell it and move somewhere cheaper. You could do a cash-out refinancing, but this just adds to personal debt and makes it harder in the longer-term future.  It is reminiscent of the mid 2000s.

So people see rising house equity and larger retirement accounts, but these things don’t really pay for the electric bill or the higher cost of repairs for the house.  It certainly doesn’t pay for the rising costs in insurance and medical care.

The recession, to a large degree, is already happening.  It is happening in the sense that people are struggling.  We just haven’t seen the rise in unemployment yet.

There needs to be a correction.  The falling stock market will correspond with the correction.  The problem is that the correction – a precise word here – is not typically allowed to fully happen by the government and central bank. The Fed does not allow a full cleansing of the misallocated resources.

A correction will actually help many struggling American families.  It will be painful.  It will be especially painful for those who lose their job.  The positive side is that prices should come down (until the Fed’s monetary inflation ruins that), which will make life a little more affordable for many people.

The virtually inevitable crash in stocks that is coming is not just relevant to your investment portfolio.  It is relevant in its symbolism in the unsustainable boom that we are in.  The crash in stocks will occur mostly in tandem with the coming correction.