You can make all types of insights by studying human beings throughout history, but the one that stands out is that we’re predisposed to bubbles. And no matter how obvious they always are in retrospect, most people never see them when they’re happening.
Why is that?
Because we want each bubble to be real.
We want to get rich overnight, with little effort.
We want to go to heaven when we die.
So we delude ourselves into believing that there is no bubble. It’s just how life should be. And we do this every single time.
I just saw the movie Nebraska…
It stars Bruce Dern, who got an Oscar nomination for his role as an aging alcoholic in Billings, Montana, who gets the classic “you won a million dollars” notification in the mail (you know, the promotional scam kind?).
But Dern’s character, Woody Grant, is on his last leg in life. He just wants to believe he’s won a million dollars… that he’s finally made it… that he is a somebody.
Woody is so delusional, he begins walking the 800 miles to Nebraska (he’s too old to drive anymore). Winning that money is that important to him. After all, all he’d ever wanted, all his life, was a brand new pick-up truck so he could feel and look like a winner… he wanted it even when he was too old to drive. And that million bucks is going to help him get it.
After the police pick him up on the road, his son agrees to take him to Nebraska, despite knowing that his father has not won anything at all.
Along the way, they stop at their hometown in Hawthorne, Nebraska, where Woody becomes an instant celebrity. Everyone in the town wants desperately to believe that anyone could make it big overnight… or die and go to heaven. They want to be a part of the bubble as well…
And of course, dozens of people suddenly find some reason or other why Woody owes them money.
Only when they finally get to Lincoln, Nebraska… to the magazine company that sent Woody the flyer announcing him a winner… does he realize there is no million bucks. There is no free prize or bubble.
Touched by his father’s desperation, Dave bought him that pick-up truck anyway, and let him drive it through his hometown so Woody could have that feeling he’s so longed for. So that he could make it seem that he had actually won that money.
The bubble re-created one last time!
I tell you about this story because Dave is the Fed and those being fooled by the Fed’s actions are Woody. And all vehemently deny that we’re in a bubble. They’re absolutely delusional.
If I had a nickel for every economist or analyst that has declared that the current stock boom is not a bubble, I could die and go to heaven knowing my wife and kids would be set for life!
You don’t have to walk or drive to Lincoln, Nebraska to see the obvious. Just look at the chart below:
Anybody with half a brain would agree that the stock market from late 1994 into early 2000 was a bubble — but only now, in retrospect. It was most extreme in the Nasdaq and Internet stocks. But even in the broader Dow, stocks gained 8,280 points in just over five years. In fact, during that time frame, stocks got to the highest valuations in P/E ratios ever… even greater than the infamous bubble in the Roaring 20s.
And this recent bull market, from March of 2009 to January of 2014, isn’t a bubble?
The point gain during this latest run has been even greater, in slightly less time. It’s gone up 10,146 points in just less than five years… and it could go as high as 17,200 before it peaks just ahead, but it may peak before that.
How could anyone look at these two bull market runs (shown in the chart above) and say that we’re not in a bubble?
But it gets worse.
It’s not positive demographics and technology-adoption trends driving this bull market, as in the last two. This bubble has been entirely created by unprecedented stimulus from the Fed and central banks around the world.
Mark my words: We are about to see a bigger bubble burst than in 2008… something closer to the likes of the Great Depression.
You can prosper by simply stepping out of the way before this obvious bubble bursts, just like every other bubble in history has.
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