We Are In The Middle Of A Stock Market Bubble...And Just Don't Know It

32.9 Percent...That was the contraction of the United States economy during the second quarter of 2020. That announcement combined with an unemployment rate of 11.1%, and the highest bankruptcy rate since the financial crisis, have caused the stock market to crash…or not. In fact, over the last 4 months, the stock market has actually had one of its best 4 month periods in history. You heard that right, during the worst economic crisis of our lifetime, the stock market has seen some of the most rapid gains in history.

Many people have attributed this strange behavior to special circumstances and a new kind of market and economy. Yet some people are saying something different.

In fact, there’s a small percentage of investors that have seen this strange pattern...a few times...before

For example, in the year 1993 a new technology called ‘web browsers’ started gaining popularity around the world. These web browsers, or more specifically the Mosaic web browser, allowed for the average computer user to connect to the internet in a simple and straightforward manor for the first time in human history.

And it was this technology that helped lead to the expansion of the internet and computers into the homes of the average person.

In fact from 1990 to 1997, the computer ownership rate more than doubled, from 15% to 35%, and from 1995 to 1999, the number of internet users grew from just 15 million to over 260 million.

Essentially investors could feel the wave of a new economy coming forward. I mean with upstart companies like Amazon selling books over the internet, and Ebay selling almost anything else, investors became extremely excited at the prospects of a new type of economy.

But also during this time, we saw one of the biggest cuts to interest rates in history. From 1989 to 1993, interest rates fell from 9.8 % to just 2.9%. All this meant was that investors could access capital much easier than they could’ve just 4 years prior.

And the last cherry on top was that there was a significant tax reform in the year 1997, which cut taxes on capital gains.

And it was these 3 factors that lead to one of the craziest periods that the stock market had ever seen.

You see, if you invest in the stock market, you can typically expect a 5 to 10% return per year.
But if you were an average investor and started investing in the stock market in october of 1990. You would have seen on average... a return of about 39% per year for the next 10 years.
But...if you were to have invested heavily in the tech sector with an index like the Nasdaq, you would have on average seen returns of 111.8% per year from 1990, up until the year 2000.

Meaning that if you were to have invested $100,000 into the tech sector in 1990, and simply held your investments for a decade, your portfolio would have been worth 1.1 Million dollars.

But the thing is that, this appreciation in the tech sector, and the stock market as a whole, wasn’t really because their was an influx of new companies that were raking in billions of dollars in profits. IT was mainly because there was an influx of investment capital from the excitement of a new economy, low interest rates, and tax cuts.

And one of the key metrics used to tell you how overvalued the stock market is, the P/E ratio. Essentially all this does is compare the price of a stock, to its earnings per share. Even though the value of a company is a lot more complex than a simple P/E ratio, this metric still is a good general indicator for determining if a stock is overvalued.

So in 1990, the average p/e ratio of the s and p 500 index was about 15, which has been close to the average p/e ratio for the past several decades.

But after the influx of new capital started flooding the stock market in the 1990’s, the average p/e ratio on the s and p 500 jumped up to just over 30.

All this meant was that the average company had doubled its value in relation to it earnings, from 1990 to the year 2000.

And during this time, it was common to hear stories through family and friends, and through the news, of people getting very interested in investing and even day trading to try and take advantage of these insane gains.

End of transcript. Too long

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[JackChappleShow]

Hey Everyone! So just a heads up, I am still going through some health issues right now. Most of this was edited when I was not feeling well, so if there is any errors, my apologies.

[kansasmile]

I don't lose a penny when the market goes down, or get too excited when a day like today happens... I am not selling, won't touch the money I have invested for another 10+ years, that's investing my friends. I want throw in another $100k just curious on where to diversify

[kashkat]

I revisit this video occasionally. The recent market conditions hit my portfolio hard, especially my tech and A.I stocks. I lost nearly $100, 000—a tough ride.

[rickmanley]

1990’s big catchphrase: “it’s different this time”.

[pauld]

-32.9% is the annualized GDP drop. The actual Q2 drop was -9.54%.

[duanefranklin]

Stock market is future expectations of others people future expectations. Not the economy

[stevent]

Can’t wait for this bubble to collapse and purchase all these stocks for discount prices once they arrive at the sale rack. Real estate as well, stay liquid and prepare to capitalize on opportunities friends.

[NotDanValentine]

Title: "We are in the middle of a stock market bubble"
Narrator: "I'm not saying we're in a stock market bubble right now"

[SuperZander]

The stock market is no longer the economy. They do not react the same.

[logansnow]

R.I.P all the guys that listened to this and tried shorting the stimulus market

[RearAdmiralTootToot]

The stock market isn't going up in value, the dollar is just losing value.

[darryllipscomb]

We are in a bubble, everyone just doesn't feel it yet. The pain is still to come.

[phil_]

This time it's a National Bubble, not just one industry. It's brought on by the Fed's overspending.

[jeffsetter]

P.E. ratio's of today simply are not comparable to those of any previous period for two major fundamental reasons:

1) There are fewer stocks to invest in. Today, there are less than half the number of publicly traded stocks than there were in 1998, for example. Globalization has caused wave after wave of consolidation while increased regulations & low interest rates have caused many corporations to stay private as they avoid the scrutiny & hassles of going public while maintaining access to huge amounts of capital via private equity, which has always been the biggest reason for going public in the first place.

2) Technological advancements now allow virtually any person/fund/firm to invest in any market from anywhere in the world at any time. As little as 10 years ago it was much more difficult for an investor to buy equities or treasuries in foreign markets. This has consolidated money from around the World into fewer & fewer markets over time.

This combination of an unprecedented influx of investment capital from around the globe into the most successful, liquid & stable markets combined with halving the number of public corporations in those markets has necessarily pushed up P.E. Ratios dramatically. This has caused a "black hole effect" as the more capital that is sucked up by the most successful markets, the more capital is attracted to those markets, pushing P.E.'s higher & higher regardless of the underlying fundamentals and further disconnecting them from historical values. As long as the leading markets stay the leading markets this trend will almost certainly continue, skewing P.E's even further over time and making historical comparisons less & less relevant.

There are also a number of other, slightly less relevant but still important reasons P.E.'s are fundamentally higher as well. For example, the rise of the 401k retirement system that has replaced the pension, the unprecedented waves of stimulus from central banks around the globe, insanely low interest rates that push investors/savers away from treasuries & into equities, low energy costs & supply chain improvements which decrease global shipping & logistics expenses and a low inflation rate which depresses other basic commodity input prices, to name just a few. The cumulative effect and complexity of these massive changes make understanding the exact magnitude & effect on the system as a whole virtually incalculable but one thing that is for certain is these changes have massively changed the meaning of P.E. Ratio's as we have known them.

But this is not to say the trend will never be broken & a reversion to something resembling historical normalcy won't happen eventually. We already see the seeds being planted as waves of nationalism are sweeping the globe but make no mistake, when it does actually happen, you'll know it, as it will likely be accompanied by a violent down swing in prices and a massive shakeup in global economic market fundamentals as markets, economies & supply chains decouple causing the largest corporations to rapidly lose global market share, allowing small-medium sized enterprises to claw it back, returning some normalcy to P.E. ratios in the process. Until then, my advice is to assume the trend will continue and P.E. Ratio's will continue to climb while being less & less relevant as a comparison to history.

But what do I know? I'm just some guy on the internet giving his unsolicited opinion.

Cheers!

[ufoinsider]

None of those four companies are investment banks, they don’t all trade their own money, and they aren’t reliant on capital markets for purchases.

[jamesdonald]

You can't counterfeit trillions of dollars into the financial system without some very adverse effect

[pianomanutube]

All the chart comparisons to previous crashes were within times where trillions of dollars were not injected into the economy. So the main difference between the previous crashes before 2009 is about 6-8 trillion dollars just for starters.

[blahsomethingclever]

Redistributing wealth to the top never ends well

[karlaxel]

“No one can see a bubble, Mike. That’s what makes it a bubble.”
- The Big Short

[alexanderrowan]

The bubble on housing caused a real down.
I believe no matter the situation of the economy finding a way to profit of it priority . I don’t mind a stock bubble, with the right bet profit is still guaranteed.