Bubbles, Booms, Busts, and Bummers

Miles Franklin sponsored this article by Gary Christenson. The opinions are his and are not investment advice.

For the week ending September 11, 2020:

• Gold rose $13 to $1939.
• Silver rose $0.14 to $26.86.
• Tesla stock fell $45 to $372, down 26% since early last week.

Bubbles are a fact of life. They occur, like hurricanes, when conditions are right. Like hurricanes, they can be deadly. In the financial world, for a bubble to expand, we need a great story, an excess of credit, mass appeal, and suspension of critical thinking while individuals embrace greed and fear.

EXAMPLES:

• The South Sea Bubble in England in the 1700s.
• The stock market bubble in the late 1920s.
• The silver bubble in 1978 – 1980.
• Japanese real estate bubble during the late 1980s.
• The NASDAQ 100 tech bubble in 1998 – 2000.
• The housing bubble in 2004 – 2007.
• Bitcoin in 2017.
• Tesla stock prices in 2018 – 2020.

GREAT STORIES:

• Everyone is getting rich in the stock market in 1928 – 1929. Don’t miss out…

• Silver is going to the moon. Inflation is out of control. Buy hard assets.

• Tech stocks and the internet will change everything. Get into those stocks now.

• House prices always rise. They aren’t making any more land. Mortgage money is available and easy to get. No assets, no job, no income, no problem. Buy the biggest house you can finance.

• Bitcoin will rise to $100,000. The quantity is limited, while dollars are created with no limit. Buy, buy, buy.

• Tesla is a great company and … whatever.

Each bubble is different, but they depend upon easy credit, inexpensive debt, and a “perfect storm” of conditions that boost prices beyond any reasonable level. What goes up must come down, and after the bubbles implode, prices often crash to pre-bubble levels. Suicides, foreclosures, bankruptcies, and lost savings result. The post-crash “hangover” is hard on individuals, businesses, and economies.

Consider the charts of several bubbles.

Silver sold for $5 in 1978. But in January 1980 it rose to $50 for a few minutes. People stood in long lines to exchange their fiat dollars to buy ounces of silver because consumer price inflation raged out of control and silver looked safe. The Hunt brothers wanted silver to hedge other investments, and people blamed them for the bubble. However, gold prices rose almost as much, and the Hunts were not buying gold. COMEX changed the rules, forced sales, and crashed the silver market. Protect the insiders…

Silver sold for $5 in 1978, over $50 in 1980, and for $4.78 in June 1982. Silver prices rose too far, too fast, crashed, and returned to pre-bubble levels. After the 1980 metals mania, investment dollars flowed into the stock market, real estate, Japanese stocks, and Japanese real estate.

Silver prices fell to $3.51 in early 1991 and $4.01 in November 2001. It took two decades to correct the silver bubble.

The tech heavy NASDAQ 100 index sold for under 1,000 in early 1998. It peaked at 4,800 in March 2000 and fell to 795 in October 2002. The NASDAQ rose to unsustainable levels, based on a good story and credit, and crashed back to pre-bubble levels in two years.

Tesla stock sold for under $40 in June 2019 (split-adjusted) and for $502 in September 2020. Prices rose too far, too fast, like the silver market in early 1979-1980. Tesla stock prices have fallen 26% from all-time highs as of September 11, with more downside ahead.

COMPARISONS:

Take silver prices, the NASDAQ, and Tesla prices, normalize them to their two-year lows before the bubbles, and compare. Each graph of their weekly ratio prices starts near one, rises rapidly, and falls hard (Tesla – not yet).

Tesla stock prices rose more rapidly than 1979-80 silver prices (weekly data) and created many millionaires. Hopefully, the big winners will convert stock profits from fiat dollars into real money—gold and silver. Tesla prices may collapse and fall to much lower levels. We shall see.

Option traders are boosting the stock price bubble. Expect a correction. Examine the following chart showing call option activity.

SO WHAT?

Despite the shutdown, FAANG stocks and other high-flyers made new highs in August and September. The weighted indices were boosted by Apple and a few others. The Fed provided $trillions of newly created debts to boost the market and make credit (for Wall Street) easily available. Bubbles resulted.

Silver and gold prices have risen 128% and 31% since their March lows as the Fed devalued dollars and supported stock and bond markets at the expense of the dollar’s purchasing power.

From Michael Pento:

“… Fed policies that are coming soon on inflation and interest rate suppression will be rocket fuel for gold and silver…

“And gold and silver are just getting started… If bitcoin is $10,000 per unit, why can’t gold be $5,000, $10,000, or $15,000 per ounce? With the amount of dollars out there, it could easily be $5,000 or $8,000 per ounce, and that is where it is headed.”

From Alasdair Macleod:

“There can be little doubt that macroeconomic policies are failing around the world.”

LOOKING AHEAD:

• The NASDAQ to S&P 500 ratio shows that the NASDAQ is as high in comparison as it was in 2000. Expect the NASDAQ to fall hard again.

• The Fed will pump dollars into the market and economy. Government will spend and increase debt. Current national debt of nearly $27 trillion will soon exceed $30 trillion. Is $40 trillion far away? Does it matter? Yes, it matters when the consequences will devastate the economic landscape like a category 5 hurricane.

• The dollar may rally from a current over-sold condition or maybe not, but in the long term we know it will decline in purchasing power. Today a dollar buys 1/2000^th of an ounce of gold. In a few years it will purchase less than 1/5000^th of an ounce of gold. How soon that occurs depends on fiscal and monetary stupidity, failed Fed policies, and how long it takes the public to realize they need to protect their savings with hard assets.

• A global currency crisis could propel gold and silver into another bubble later this decade.

• Hard assets maintain their value. Tesla and Apple stock prices are likely to fall, perhaps hard, along with many other stocks.

• Consequences of the economic shutdown are wide and deep and continuing. Expect more trauma, especially around election day and thereafter.

• A new financial system may be needed to restore confidence after massive debt defaults. That could occur in 2023 – 2026. It will probably meet the needs of the political and financial elite. The rest of us should exit bubbles, protect assets with gold and silver, and be suspicious regarding government, pandemics, and The Fed.

Miles Franklin will convert fiat dollars that devalue every year into gold and silver. Call them at 1-800-822-8080.

Gary Christenson