We are in the “everything bubble”.  This doesn’t technically mean that everything is going up or is in a bubble, but there is no question that most asset classes are going up in price right now.  It also seems unsustainable, unless the Fed is determined to bring us to some form of hyperinflation.

Stocks are booming.  Housing is booming.  Bitcoin and other cryptocurrencies are booming.  NFTs are booming.  Bonds, to a certain extent, have already boomed, but were limited to booming farther by zero interest rates.

Consumer prices are starting to rise faster.  We are going to get the Fed’s magical 2% inflation good and hard.  I have seen reports of raw materials such as lumber going up in price by 2 to 3 times what it was last year.  This partially explains the higher price for housing in most areas.

The Fed’s balance sheet keeps exploding higher.  It is nearing $8 trillion.  Yet the Fed keeps adding approximately $120 billion per month to get to our 2% average inflation.  We don’t know the time period that this “average” is supposed to take place.

Even going by the government’s own statistics, price inflation has picked up.  This isn’t the metric that the Fed cites, but it is the metric many others look at.  The CPI for March was up 0.6% from the previous month.  If you annualize that, it is an annual inflation rate of 7.2%.

The median CPI was up only 0.2% for March, which tends to be more stable.

While high inflation doesn’t necessarily show in the CPI statistics, there is no question that price inflation is picking up.  You can probably see this in your everyday life.

What should we expect when the government is handing out money to people to not work, while also handing out money to most Americans, just because?  Where does everyone think this money is coming from?  Taxes haven’t been raised on the rich recently.  It is all coming from debt monetization.  The Fed is funding all of this so-called stimulus by creating money out of thin air.

With direct payments, people have money to spend.  Young people can easily set up a Robinhood account and buy Tesla, GameStop, or whatever the newest gambling fad is.  They can also buy Coinbase, a company that briefly became worth $100 billion because it facilitates trading a bunch of computer code.

A friend of mine sent me an article the other day referencing tulip mania.  My comment: At least with tulip mania you might get some pretty flowers out of the deal.  With cryptocurrencies and NFTs, you’ll be left with a bunch of computer code.

Investing or Gambling?

We are in a gambler’s paradise right now.  If you are an “investor”, it has been pretty hard not to make money over the past year.  Don’t tell that to the hedge fund that was heavily shorting GameStop though.

I am a relatively conservative investor compared to what is out there now.  I know others who are similar.  We almost look like chumps right now for not cleaning up in the casino.

If you are in the same boat, or if you have been fortunate enough to get some big wins over the last year, then I will suggest that this cannot go on forever.  It can’t go on forever unless we have some form of hyperinflation.  If that’s the case, then you’ll have other issues.  If we have hyperinflation, then you’ll want to own gold.  Or more importantly, you’ll want to own food, along with guns to protect your food.

We are in a massive boom right now.  I was shopping over the weekend and it almost seemed like Christmas time at the mall.  Maybe a lot of people are tired of being locked up for the last year (whether it was forced or voluntary).

The problem is that it is an artificial boom built on easy money from the Fed.  Some people are paying down debt.  Some people are spending money on necessities.  Some people are buying consumer goods that they don’t need.  Some people are investing, or more accurately, speculating.

People intuitively know that they don’t want a large chunk of money sitting in their checking account.  They know it will lose value (purchasing power) over time.  They also know that it will barely pay anything to have it in a savings account or a U.S. Treasury bill.  This essentially forces people to become speculators so as not to lose money to inflation.

This is why it makes sense to a certain degree for people to be bidding up the price of houses.  This is why people are trying to make a quick buck in the stock market and in cryptocurrencies.  But it is all a giant bubble waiting to be popped.

People look brilliant right now.  There are people bragging about 40% returns over the past year, and this is just for people who are buying index funds.  People in even more speculative investments are largely cleaning up.

I was in my 20s when the tech bubble blew up and then popped.  It was euphoria in the late 1990s, and then it came down hard in the early 2000s.  By the way, the Nasdaq peaked in that bubble at just over 5,000 in March 2020.  It now stands above 14,000, which is almost three times the bubble price 21 years ago.

Most people who make a lot of money from a speculative boom are not disciplined enough to take their money and run.  They don’t know when it will end, so they keep playing the game.  If there are a couple of down days, they don’t know if it is a temporary blip or if it is the start of a bear market.

I can guarantee you that the majority of people who are cleaning up right now will be severely hurt when the bear market arrives.  It will arrive fast and hard.  The people who have done the best will be the people who get hurt the most.

I know it seems like it will keep going, at least for a while.  But consider how quickly it can change.  Let’s say that inflation numbers come out showing that price inflation has spiked to near double digits (10%).

Would the Fed be so insane as to blow it off and say that it will continue with its policy of near-zero interest rates and asset purchases of $120 billion per month?  It’s possible that would happen.  It’s also just as possible that it would announce it has to stop inflating so as to control the price inflation before it goes completely out of control.

If the Fed suddenly announced a stop to its monetary inflation, it could turn the sentiment of investors (gamblers) right away.  It could lead to a major crash.  It could quickly expose the house of sand that this bubble is built upon.

The brilliant investors will become the suckers.  They will be the last to hold the bag.  The ones who got in late will really become the worst of the suckers.

There will be a few who really were brilliant who made a lot of money but were smart enough to head for the exits before everyone else.  There will not be many of those people.

Meanwhile, for the more conservative among us, we will have to be satisfied in knowing that we didn’t get sucked in too much and didn’t get burned too much.  Even if you experience a 10% to 20% reduction in your investment portfolio, you will start to look like the genius compared to all of the people who lost 50% or more in the casino.