It Might Be Time To Become A Bear

There are signs that the stock market is overvalued.  It’s trading at 32 times earnings where it traditionally trades at 16 times earnings. Companies with no earnings are trading at crazy valuations.  Celebrities are raising capital for SPACs very easily.  The Fed continues its easy money policy.

In this age of politics infecting everything, it is awfully hard to be objective.  I will try.

I wouldn’t be bearish simply because there has been a change in administrations with a 180 degree change in direction.  Biden inherited things that he couldn’t control just like Trump did.  The train on some issues, like what will happen to commercial real estate, was far out of the station and can’t be called back.

I don’t think it’s time to become a mad bear and claw at everything, but you can be a happy selective bear.  There is no harm in thinking about how to hedge, or how to take some risk off the table.   I sold some stock last April after the rally back and diversified it into some other things.  However, I am 58 going on 59 so my risk tolerance is different than when I was 25.  Of course, it’s a fact and twist of life but if I had the wisdom of the 58-year-old at age 25, I would have made some different decisions.

There are certainly places where some asset classes have gotten crowded and it might be time to reign them in.   I was reading about Bitcoin this morning and read this about a Canadian Bitcoin ETF

This is just wild. The Canada Bitcoin ETF was the most traded ETF in the country on its FIRST DAY. I’ve never seen that. It would be like an ETF here trading more than $SPY on its first day. And this is just the CAD class, USD class was 11th most traded.

Some people like Warren Buffett might substitute the word “tulip bulbs” for Bitcoin.  Personally, I buy a little crypto every month so I average in my investment.  I do think that crypto is a thing, but it might be getting ahead of itself.   Sometimes markets do that when they don’t have the liquidity pool necessary to absorb big shocks.  I don’t think Bitcoin has that sort of liquidity pool to handle the big buyers that have come in recently.

Bears will always make the case that there is too much government debt. There is too much government debt.  Not just national debt.  Look at local and state debts.  It’s monstrous.  However, economists say we aren’t at the tipping point yet.  By the way, if you are not concerned about muni debt, don’t point to the recent auctions that ate up the bonds Chicago and Detroit auctioned at low levels of interest.  There is a reason that happened.  Government debt mutual funds are sitting on cash and they have to invest.  They don’t have a choice.  There just isn’t a good supply of local muni debt to buy.

Michael Burry of The Big Short fame worried yesterday about hyperinflation coming.  I am not sure I buy into his total premise, but certainly, inflation ought to be a worry.  Government spending has ramped up to incredible levels with more on the way.  Supply chains are still in disarray because of Covid.  People are still sorting things out in their own homes.  There isn’t a routine.  There isn’t a predictable pattern in our lives yet.  That variability will lead to uncertainty.  Remember the panic on toilet paper?  What happens when it hits something like meat?

Easy money will create inflation eventually although it hasn’t created much since 2009.  We see pockets of it, but not broad-based 1970s style inflation.  Try buying a house in a hot area and you will see some inflation.

However, as my friend Yra Harris aptly put it, what tools does the government have left in its toolbox to work on the ills that plague our economy plus take on inflation?

As Tim Knight, a permabear, wrote this morning, we have hit 7/7 for Ray Dalio’s metrics for bubbles.

The day of reckoning for business verticals like commercial real estate hasn’t happened yet.  Everything has been artificially propped up by government spending, stimulus, and the like.  The stock market is up 100% since last March.  That cannot go on. The old adage was when you heard stock tips from your shoeshine guy, sell.  Or, as Peter Lynch used to say, if he was shopping at a mall and heard everyone talking about the stock market, it was time to sell.

I suspect in April when we have herd immunity and more people get the vaccine for Covid, the cracks in the egg will become a bit more severe.   Remember, buy on rumor, sell on fact.

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