We are in an Everything Bubble.  It doesn’t mean that literally everything is in a bubble, but most major asset classes are likely in some kind of a bubble.  The two major categories are stocks (equities) and real estate.  If and when these two things pop, a lot of damage will be inflicted.  Tens of millions of Americans will feel the pain.

Then there are the new asset classes, if you can even call them that.  These are “things” that have been created in recent times that are being used for speculation.  Mostly, I am thinking of cryptocurrencies and non-fungible tokens (NFTs).

The term cryptocurrency is a misnomer.  They certainly don’t serve as a currency.  Even the biggest player, Bitcoin, is not used as money in any widespread sense.  The few things that you can buy using Bitcoin are still priced in dollars or some other currency.  You just pay the conversion price.

Cryptos and NFTs are probably the biggest bubbles because most of these could go to zero.  It is a joke that all cryptos combined recently hit a market cap of over $3 trillion.  They are all just made up things.  You are owning a bunch of computer code.

There are now thousands of these cryptos, and most of them will eventually go bust.  They will go to zero or something close to zero.  In fact, all of them, including Bitcoin, will eventually reach this fate.  A bitcoin may still be worth something because of the few techie nerds who hang on for dear life.  It will become a novelty.  It’s kind of like how you can buy an old $100 trillion Zimbabwe note for a few bucks on Ebay.  It is a novelty to show off to your friends or to use as a homeschool lesson on money for your kids.

People who are heavily “invested” in cryptos and NFTs will be hit the hardest when the Everything Bubble pops.  But they don’t necessarily have the most in terms of wealth.  A 28-year old who put all $20,000 of his money into crypto to see it wiped out is in a better position than a 60-year old who is about to retire who sees their one-million dollar stock portfolio decline by 80%.

Before addressing stocks, it is important to mention that bonds may or may not be in a bubble.  If we have a deep recession without massive monetary inflation, then bonds might do well in the short run as investors seek safety.  So while bonds are probably in a bubble because of the Federal Reserve, they could be propped up for many years to come.  It certainly isn’t clear one way or the other.

The one asset class that probably isn’t in much of a bubble is certain commodities, particularly precious metals.  Gold and silver have not been terrible, but they have been terrible compared to other asset classes like stocks and real estate in recent times.

The Buy-and-Hold Strategy Works, Until it Doesn’t

There are many people who haven’t gotten involved in speculating in things like cryptocurrencies.  Or if they have, it has only been dipping a toe in the water with maybe 1 or 2 percent of their net worth.

Instead, they employ a strategy of buying mostly equities.  They follow the Warren Buffett advice of buying and holding index funds that invest in the broad U.S. stock market.  They don’t actually follow what Buffett did to get extremely wealthy.  They just follow his words.

Up until now, this strategy has mostly paid off as long as someone sticks to it.  There have been some major downturns such as 2000 to 2002, and again in 2008 and early 2009.  There was also a big, but very brief, downturn in March 2020.  But every single time, if you just held on long enough, you would recover any losses and then see big gains.

This strategy would not have worked in Japan starting in the late 1980s.  If you had invested in the Japanese market in 1989 near the peak, you would still be down in nominal terms today.  Over 30 years should certainly qualify as “the long term”.

In the U.S., every time there is a major dip in the market, it has paid off to just hold on.  Even better, it really paid off to buy more stocks with any cash sitting on the sidelines.

I saw people buying in late March 2020, and they weren’t doing so because they were predicting that the Fed would double its balance sheet.  They just figured that the market always goes up over a longer period of time.  And again, this has worked up until now.

The problem for most of these people is that they haven’t collected any substantial portion of their paper gains.  If you don’t sell, then did you really make a gain?

Yes, anyone can sell at any time.  This is particularly true today with online brokerage accounts.  When the market is open, you can sell almost instantaneously.  And with most stocks and mutual funds, there are plenty of buyers waiting.

The problem, once again, is that most people don’t sell.  I mean, why would you sell unless you plan to buy something else right away?  If the market always goes up, then it is better to be making money than not making money.  At least, that is the theory.

What if we have a stock market crash of 50%?  What if we have a market crash of 80%?  Worse than that, what if we have a major crash and stocks don’t recover any time soon?

As we saw with Japan, this isn’t an impossible scenario.  Even if we saw stocks fall by 50% and then slowly get back to where we are today over the course of 15 years, how is that going to sit with some people?  What about the people who were planning to retire in less than 15 years from now?

We have no idea how this is going to play out.  But at some point, if we don’t move into hyperinflation, there is going to be some kind of reversion to the mean.

When you consider that the Nasdaq has gone up more than 10-fold since the low in 2002, it should make you wonder when this will end.  Has our economy really seen such massive growth to justify these stock prices?  Is the American economy that much more productive today than it was, say, 10 years ago?

We just don’t know when it will all come crashing down.  In the meantime, more conservative investors will be seen as the losers.  And that will be true until it isn’t any more.

So we don’t know when this strategy of buy-and-hold stock index funds will come crashing down.  But we can be pretty certain that it will at some point.  And the higher things go now, the harder they will fall later.

Tens of millions of people are going to see their retirement plans ruined.  They will have to work longer than they expected.  They will have to save more than they expected.

They currently think there is a free lunch of getting an almost guaranteed return of at least 10% per year.  And if stocks drop, just buy more and then you can make 20% or more the next year.

This is unsustainable.  When it stops, it is going to be quite painful for a lot of people.

The U.S. economy will go on.  We will continue to see some productivity gains and technological breakthroughs.  But millions of individuals will have to adjust their lives and their living standards when their buy-and-hold strategy no longer works.