Is the Market Bubble About to Burst?
The Truth About Today's Overvalued Markets
After a week of uncertainty in financial markets and major risk assets like cryptocurrencies, I have received several messages asking whether my investment thesis remains consistent.
This prompted me to write this article to share my perspective amidst the considerable noise we’ve seen this week in the markets.
To begin, I’d like to focus on key economic indicators. One particularly popular indicator is the following:
An indicator from Elliott Wave International considers multiple valuation measures to determine whether the U.S. stock market is expensive or cheap. Currently, it is at one of its most expensive points in history. If you were to trust any random investor you meet on the street, they might say that a massive bubble is about to burst and that you should buy gold, several guns, and build a bunker at home.
I believe there are several overlooked aspects here.
The first two rounded data points correspond to the gold standard period. Although it may not seem so, this is crucial because prices and earnings should be related.
However, the current scenario would only make sense if you told me that productivity in 1999 is the same as it is today.
It’s simple to explain: if the metric is price/earnings and the chart rises, it’s because either prices have risen or earnings have fallen. Considering we live in a world with far more liquidity than 25 years ago, it’s expected that both have increased.
However, if productivity differs, it means that with more money, we accomplish less and earn less.
This doesn’t mean there won’t be drawdowns—there will be, and they’ll be far more pronounced than what we’ve seen so far. For instance, look at what happened in 2022.
Another chart that attempts to illustrate the same concept as the previous one is this:
So, what’s my view? In the short term, I won’t make predictions, but in the medium and long term, I will. In the medium term, I think this is just a typical drawdown and perhaps a reversal of the euphoria following Trump’s victory.
In the long term, however, I believe things are very different. Only those who continue allocating their money into indices will face decades of losses. This has happened multiple times before and, in my view, will happen again.
During such times, it’s crucial to have uncorrelated assets that allow us to rebalance and take profits from market downturns.
As a final scenario, I always recommend holding non-confiscatable assets like Bitcoin or physical gold. Any investors with portfolios exceeding $500k who lack these assets will struggle significantly.
Meanwhile, in the medium term, I believe there’s a meme that perfectly describes what’s happening:
Now let’s move on to our portfolio.
Updated on 26th February
