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When the Music Stops and the Bubble Pops

Written by Jason Williams
Posted January 8, 2021

I’ve stopped asking why stocks are going up. I’ve accepted the fact that they’re going up simply because they’re going up.

Because there is no other real reason. The economy is in far worse shape than it was last January. Unemployment numbers are far worse a year later, too, but the markets are higher by a good amount.

I know you’re going to say something about how markets are predictors of the future and don’t respond to the present. But right now, if that’s the case, then the future will be perfect forever.

And I don’t know how long you’ve been around, but I’ve been around long enough to know that’s never the case.

The market has priced in near-zero interest rates and near-limitless Fed stimulus for the rest of history.

So I’m not wasting my time asking why stocks are going up; I’m wasting it wondering when they’ll go back down.

And I say "wasting" because it’s impossible to time a top in the market. It’s impossible to nail exactly when a bubble will burst.

But we’re in a bubble, and judging by the outsized moves stocks are making on a daily basis, we’re nearing the end of it.

Printing and Power

Need an example of ridiculous moves that only happen in bubble territory? Look no further than yesterday.

I opened my investing platform and saw one of my stocks was up over 30% before the markets had even opened.

Plug Power (NASDAQ: PLUG) got a massive investment from a South Korean firm that’ll be partnering with it in the future. In response, investors sent Plug’s shares from around $35 to over $45.

Now, I bought into Plug a while back because I think there’s a bright future for fuel cells — I still think there is. But Plug did about $230m in revenue in 2019, and right now, it’s sporting a $20.2 billion market cap.

Granted, the investment is great and it’ll expand Plug’s market into Korea. Is it really worth 30% more than it was the day before? I don’t know about that.

But Plug wasn’t even the most outsized move I saw upon opening my browser. That one belongs to 3D Systems (NYSE: DDD).

You may remember about five or six years ago when the industry was talking up 3D printing and how it was going to change the world. 3D Systems was the subject of a lot of those recommendations.

But for years, all it did was lose investors’ money. It was up and down and up and back down. But yesterday, the company released preliminary quarterly numbers and the market went crazy.

As of the time I’m writing this (around 1 p.m. EST on Thursday), the stock is up 112% — on preliminary numbers!

Not on an official report. Not on audited financials. And not even on numbers that are incredibly higher than what analysts were expecting. Remember, this is not a small-cap company, people. It should not be moving that way.

But it’s up over 100% in a day. If that’s not an outsized move caused by irrational exuberance, I don’t know what is.

Maybe it’s bankrupt Hertz going from a few cents to a few dollars (even though the company was and is still bankrupt). Or maybe it’s Kodak, the failed camera company, soaring from $2 to $33 in a day.

Or maybe it’s the EV companies that rise and fall by double digits on a daily basis. Or maybe it’s Tesla, where investors value each car the company sells at $1.25 million versus $9,000 per car for GM.

I could go on and on and on, but I think you get the point. These are not the moves of a healthy market. These are the throes of death that come before a market collapses.

The Day the Music Died

So I’m not asking why stocks are going up; I’m asking when they’re going to fall and what’s going to cause it.

I ventured that question in one of my group chats with some of the other editors here at Angel Publishing. The best answer I got was this:

Either the Fed or aliens. Probably the Fed.

That one came from my partner in crime, Briton Ryle. He's always good for some white-hot commentary.

And I laughed a little bit when I read it. Because that’s funny, I don’t care who you are. And also, because, right about now, it looks like the market thinks the latter is more possible.

But as funny as the statement is, it’s true. It’ll either be aliens or the Fed, and I’m pretty sure the aliens are still watching from a distance, waiting until it looks safe down here.

So that leaves the Fed. These days, investors are pricing in near-zero rates for eternity. They’re also assuming the Fed will keep pumping liquidity into the market on top of those low low rates.

Back in 1929, they were assuming that the economy had hit a “permanent high plateau.” In 2000, they were predicting continuous improvements in productivity. In 2006, they were assuming that soaring housing prices were a reflection of a strong economy.

In every single case, they were wrong. Why would it be different this time?

What’s going to happen when inflation hits 5%–6%? The Fed isn’t going to keep that in check with some laughable quarter-percent rate hikes. Small moves will be measured in full percentage points.

And judging from what we’ve heard from the leaders of our central bank, they’re going to let inflation get up there before they do anything about it.

So don’t expect too many proactive fixes. It’ll be reactive when it happens. And the reaction will be bad.

Testing Your Mettle

But when is the piper going to come for his payment? This week or next? This month or next?

I really don’t know. What I do know is that markets can run higher. And they likely will as we near the breaking point of this massive bubble.

When you start to hear investors clamoring for the heads of money managers who’ve kept them out of high-flying growth stocks, you’ll know it’s coming.

When everyone you talk to has a stock tip for you or just opened a new Robinhood account, you can bet we’re almost there.

When the vaccines are distributed and the fog of war surrounding COVID clears, you’ll see them start to waver.

But it won’t be until that last dollar is invested that the top will form and the markets will drop.

I can’t say for sure when that’ll be the case.

I can say that it'll be fast and furious when it does happen. And it’s those kinds of markets that really test your acumen as an investor. Any idiot can make money in a bull market. Just look at Twitter.

Old Davey Day Trader was just tossing darts at a board, talking trash about Warren Buffett, and then pumping those tickers until he could buy a new boat. Like I said, any idiot can make money in a bull market.

It’s when those markets turn that real investors shine. And it’s when those markets turn that you really need the kind of analysis you’re getting here in the pages of Wealth Daily.

We’re not worried about you pulling your money out of our funds, because we’re not fund managers. So we'll tell you the truth even if we think you won't like it.

We don’t live and die on your fees. We don’t get paid commissions based on how much money you keep with us.

And if we don’t guide you down the right path, we’re not going to get a percentage of your account like a professional money manager. You’re going to leave and never come back.

Our entire motivation is to keep you coming here again and again for more analysis. We’re not going to achieve that by leading you astray.

So when that day does come and the final dollar succumbs to FOMO and hits the stock market, remember when I told you this bubble would burst.

And make sure you’re tuning in here first to figure out your next move.

To your wealth,

jason-williams-signature-transparent

Jason Williams

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After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter, and co-authors The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.

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