Stocks closed out the first half of the year with a boom. All major indexes rose on June 30, capping off a great first half of 2023 for bullish stock investors.

While the Dow rose 3.8% for the first six months of 2023, the S&P 500 was up 15.9%.

But the biggest winner of them all was the Nasdaq. It went up by 31.7% in the first half of 2023. It’s the best first half since 1983 during Reagan’s first term in office. That would be a great 3-year return, and it happened in six months.

To be sure, stocks got hit hard in 2022 when the Fed was aggressively hiking interest rates and slowly draining its balance sheet.

The rate hikes have slowed in 2023, and perhaps even come to a stop at this point. If stocks keep booming though, it might make it more likely that the Fed will raise its target rate again at the next meeting.

The Fed’s balance sheet keeps slowly declining if you ignore the blip in March 2023 when Silicon Valley Bank failed.

This all looks promising for stock investors, especially if they owned stocks the last 6 months. The problem here is that we were already in a major bubble before 2022. So the rise in stocks so far in 2023 will just make the inevitable fall that much worse.

The Yield Curve is Still Inverted

The yield curve for U.S. Treasury rates is still heavily inverted. The 3-month yield finished June at 5.43%. In contrast, the 10-year yield stood at 3.81% and the 30-year stood at 3.85%.

This means that there is a spread of over 150 basis points from short-term yields and long-term yields. This is insane. It seems illogical that someone would invest in a 30-year bond paying 3.85% when you can buy a 3-month Treasury bill at 5.43%.

It actually is insane and illogical unless you think that a deep recession is on the horizon that will knock rates back down.

The inverted yield curve is the most reliable predictor of a coming recession. It didn’t work out in 2020 because the Fed went on an unprecedented money printing spree starting in March 2020. But barring any further virus hysteria, we shouldn’t expect something like that this year.

Also consider that price inflation is a lot higher today than it was in 2020. (That is largely due to what the Fed did in 2020.) So it will not be easy for the Fed to start another round of so-called quantitative easing this time around. I think it will only happen if we see major bank failures or major turmoil in the bond market.

The yield curve was already inverted at the beginning of 2023. So it has been inverted longer than six months. It has only gotten worse since that time.

You can’t get a bigger warning than what we’ve got now. It’s not just that a recession is coming. It’s that a major recession is coming, and the Everything Bubble is likely to implode.

The Higher They Rise

The higher that stocks go in the face of the inverted yield curve, the harder they are likely to fall. It was already a major bubble. It was a major bubble after stocks took a hit in 2022. Now the Nasdaq has added over 31% to its bubble. This is absurd.

What is the basis of having these tech stocks valued at 31% higher than they were 6 months ago? Are these companies that much more profitable now? Are they somehow benefitting from the price inflation? Or do they see the declining rate of price inflation continuing and being a great benefit?

The Nasdaq today is over 2 and a half times what it was at the peak of its bubble in March 2000. That was 23 years ago, but it proceeded to fall 78% from its peak at that time.

Are you ready for something like a 78% drop from its current levels?

I know this. If we see a dramatic fall like this in U.S. stocks over the next couple of years, a lot of hopes and dreams are going to be shattered. A lot of retirements are going to be postponed or ended.

The wealthy people – who have seemed little bothered by the inflation economy of today – will take the biggest percentage hit in a stock market crash. They will also take the biggest percentage hit if there is a real estate crash.

But it will still be felt the worst by middle class America. If a billionaire loses 60% of his wealth, he is still extremely wealthy. If a middle class person has a 401k with $500,000 in it, he will feel it much more if that balance goes to $200,000. That is especially true if the person was looking at a near-term retirement.

Shorting Stocks?

I still advocate a permanent portfolio. This would mean an exposure of 25% to stocks. Even though I see a recession coming, the first half of 2023 was great for stocks. Who could have seen that coming? That is why the permanent portfolio is there to protect wealth, and hopefully grow wealth, in any environment.

With that said, we are in a situation now where it could benefit a speculator who sees the writing on the wall. That writing is the inverted yield curve and the growing bubble in stocks.

The problem with shorting stocks is the timing. If you get the timing wrong, it is easy to lose money quickly. So even if the crash comes to fruition, you may have already lost a great deal of money or just gotten out of the game.

So I caution on speculating too much. The inverse ETFs that are available to bet against rising stocks are usually good for short-term trading. You don’t want to be in them for a long time or you will lose money.

With a very small percentage of money, I may take a gamble soon by shorting stocks. I would really just buy an ETF that shorts stocks.

Since the most insane index at this point is the Nasdaq, I will probably focus on shorting the Nasdaq. Again, this would just be with a relatively small amount of money. I haven’t done it yet, but I think the time is coming soon.

The name of this game is wealth protection. A lot of people are going to be badly hurt when this bubble implodes. We can’t predict how this will play out, but it is relatively easy to take steps now to avoid the things that are predictable or likely to happen.

If you are heavy in stocks, just know that your investments are at high risk right now.