I believe this is Tech Bubble 2.  The first tech bubble was in the late 1990s, which popped in the early 2000s.

To be sure, this tech bubble looks a bit different.  In January 2020, I asked whether we would see the Dow hit 30,000, and I also wondered whether the Nasdaq would hit 10,000.  Then the coronavirus fear struck, along with widespread government shutdowns.  That sent stocks on a quick nosedive in March.

But something strange happened in the midst of what is likely a severe recession.  The federal government sent out massive stimulus checks to nearly everyone, along with $600 per week unemployment bonuses for the tens of millions of newly unemployed Americans.  This meant that a majority of people on unemployment were making more money than they were working.

This was all done courtesy of the Federal Reserve, which allowed massive deficit spending. The Fed created about $3 trillion in new money in the matter of a few months.

So when it comes to judging the stock market, never underestimate the power of the Fed to juice things up.  I guess we also shouldn’t underestimate sending a bunch of young adults home to sit on the couch with thousands of new dollars deposited into their accounts. It makes it a lot easier – with regard to both time and money – to sit on the couch and buy a few shares of Tesla through the Robinhood app.

Now here we are, starting September 2020, and I am wondering if the Nasdaq will hit 12,000 soon. This is 20% above the mark that I set 7 months ago when there weren’t tens of millions of unemployed people and hundreds of thousands of businesses shut down.  It was before there was massive rioting in cities across the country.  It was before Manhattan was essentially abandoned.  It was before businesses had to worry about following new pages of regulations and wondering if they would be shut down again next week.

At the end of 2019 and beginning of 2020, I said that the theme for 2020 would be the massive stock market bubble.  I thought it was a bubble then, so you can just imagine what I think now. It is really beyond ridiculous.

There is so much money sloshing through our economy, it is hard to say when all of this will implode.  The Fed is basically promising inflation for a long time to come.

The broad market has done really well over the last several months, but the Nasdaq has been extraordinary.  Amazon actually makes a little bit of sense because people are staying home more and ordering more things online.  Even Apple makes a little bit of sense, although not too much.

Tesla is beyond ridiculous when it is worth more than many of the other major car companies combined.  Even though Tesla produces cars, it is still in the technology realm because people are betting on the company for its innovations.  They are banking on the car company to come up with the next great car battery that can run much longer or recharge much faster.

Overall, the stock market doesn’t make much sense right now other than the factors mentioned above. There are always individual stocks that do well though, even in a bear market.

Unsustainability

I just want to emphasize that there are limits as to what the Fed can do.  It has already surpassed what I thought was possible. It nearly quintupled its balance sheet from 2008 to 2014 without causing really high price inflation.  And now it is on the verge of doubling it again.

But there are limits. The ultimate limit is hyperinflation, and I don’t think the Fed wants to go there.

I also want to emphasize that monetary inflation doesn’t automatically mean higher stock prices. For the most part, this wasn’t the case in the 1970s.  When price inflation gets out of control, it really distorts the economy. It becomes harder to run a profitable business.  It isn’t good for business.

You could see a scenario where price inflation is going up 10% annually, while stocks are going up 5% annually on average.  This would mean that stocks are still going higher nominally, but stockholders are still losing money in real terms.

But the movements in the near future are not going to be gradual or smooth for the most part. We are going to see wild swings, and eventually we are going to see a major crash similar to what started in the year 2000.

The crazy thing is that the Nasdaq peaked just above the 5,000 mark in the first tech bubble.  We are now getting close to 12,000, which is more than double what the last bubble was.  So even if prices have doubled in the last 20 years, the Nasdaq is still in a bigger bubble now than it was then.

While there was a recession in 2001, it was nothing close to what we have now.  The debt and spending are magnitudes worse, and the wreckage from the government shutdowns is still looming and continuing.  On top of this, let’s remember that we still haven’t had a correction from the massive Fed intervention that has taken place since the 2008 financial crisis.

In conclusion, I am very bearish on this market.  I believe it is going to crash very hard one day, and it is going to hurt a lot of people really hard.  It is impossible to predict when that day will be.  Maybe it will come with the uncertainty of the presidential election.  Maybe it will come in early 2021.  Maybe it will somehow hold on for another couple of years, although I rather doubt it.

I had already predicted a major drop in 2020 based on the inverted yield curve that we saw last year.  But the government shutdowns and the Fed’s response in creating trillions of new dollars have changed all of that by giving another blast of stimulus to stock investors.

The economy is already ugly.  There is a disconnect with the stock market.  I don’t expect that disconnect to continue for a long time, and I don’t think the overall economy will be booming again any time soon.  Stocks will eventually be hit hard.