Market Update: Overstimulated!

The melt-up discussed last week remains in full force, with the S&P 500 hitting a new intraday all-time high on Wednesday.

Just to make sure we’re all clear on this: stocks are back to their highest prices BEFORE the coronavirus pandemic exploded. Before Q2 GDP plummeted -33% in the US. Before 50+ million Americans lost their jobs.

Thanks to the $trillions shoved into the system by both central banks and national legislatures since April, “investors” now believe the markets are a 1-way ride to forever-increasing wealth.

As the chart below from the National Association of Active Investment Managers shows, financial advisory firms that manage client capital are more fully-invested in the markets than at any other time in the past several years:

<img class=“aligncenter wp-image-578298 size-large” src=“” alt="“NAAIM chart” width=“1024” height=“669” />

So everyone in “all-in” on the belief that the markets are both fully backstopped and rising higher from here.

How realistic is this belief?

Michael Pento, this week’s Market Update video expert guest, thinks it’s willful delusion. History is crystal clear that disconnects like we have today between (over-inflated) asset prices and the underlying (contracting) economic reality always result in crisis – either a deflationary repricing, or a destruction of the purchasing power of the currency.

Michael shares the 20 financial and economic metrics on the dashboard of indicators he tracks to determine where we are in this story, and which outcome is looking most likely to happen when. This week’s interview is worth listening to for that list alone.

Not one to mince words, Pento believes this is the most treacherous time ever for investors – which means those blindly long the current melt-up will get slaughtered if indeed the risks he predicts play out. As always, we recommend working in partnership with an independent financial advisor who appreciates these risks, prioritizes preservation of your investment capital, and can help you chart the turbulent waters ahead when the reckoning arrives:

Anyone interested in scheduling a free consultation and portfolio review with Mike Preston and John Llodra and their team at New Harbor Financial can do so by clicking here.

And if you’re one of the many readers brand new to Peak Prosperity over the past few months, we strongly urge you get your financial situation in order in parallel with your ongoing physical coronavirus preparations.

We recommend you do so in partnership with a professional financial advisor who understands the macro risks to the market that we discuss on this website. If you’ve already got one, great.

But if not, consider talking to the team at New Harbor. We’ve set up this ‘free consultation’ relationship with them to help folks exactly like you.


This is a companion discussion topic for the original entry at

  1. First, I want to say I appreciate these stock market discussions. Adam, you are a dang workaholic; I can’t keep up! Great job bringing in SH guys, great way to provide a hard-to-find service, get good content, and help keep the blog alive.
  2. It’s interesting to have open discussion about a frothy bull market from the POV of conservative professional investors. Clearly a rock and a hard place.
  3. One thing I would like to see discussed: select conservative blue-chips with high Bk value are not nosebleed based on the metrics like tech and are paying good dividends…so are not overly bubbly and could be considered to be an inflation hedge with careful stop losses.
    Quality interviewing again. Hope more folk comment. I may have a few more comments as I re-watch.

Stock market to GDP ratio

Stocks vs GDP show 4 distinct “shifts”:
1700-1850 at ~10
1850-1950 at ~40
1950-2000 at ~60
2000-2020 at ~140
Two points:
Stocks are having more “value” over time, or GDP is a phooey metric. And if you’ve read GDP: A Brief But Affectionate History it’s obvious that GDP is a fake metric (hell, it even includes government spending, which is meaningless and has grown massively in each period).
But there is also no question that GDP (as it really is meant to be, not the faux metric) has went up many times since 1700 (we’ve invented electricity/planes/trains/autos/atom bomb/flew to the moon). The data and basic common sense implies all our technology growth has also lead to more demand for stocks (stocks are the vehicle that creates the tech); the ratio went from ~10 to ~140 over 300 years and is still rising.
Now, the last 20 years has shown excessive and historic growth in the ratio. But since it has been rising in the past, and of course GDP is a joke metric, who knows why?
Combine this reality with the fact that the term “stock market” in an era of no-dividend stocks a difficult metric to make sense of as well. Stocks like Amazon and IBM and Phillip Morris and Exxon are not the same thing at all (what do earnings from a non-dividend paying company that loses money mean anyway) yet all these stocks are lumped together and called the “stock market”. That’s like saying Atlantic salmon and a Big Mac belong in the same plate.
So the ratio is a tough one to use to verify stocks are overpriced. I’m not saying they are not, either. I think it depends on the stock.

You should try and get Michael Green of Logica Capital on. He can explain how the move to passive investing by millennials and most people with 401k contributions is a structural change in the markets.
Currently passive inflows into index funds account for than 100 percent of the net change in contributions to stock market. His research shows that fund managers for “target date funds” only hold 0.5 % cash at any given time. While most active managers hold around 5% cash. Changing from 5 percent cash to 0.5 percent cash (If everyone did it) will cause the market to go up 50x. He has explained this phenomenon on other podcasts if people are interested. 401ks only offer about 10 choices in most cases and 3 or 4 of them are typically target date funds.
More and more money is coming out of active and moving into passive. And the passive is controlled by fewer and fewer players i.e. Vangaurd and Blackrock.
The problem with passive target date funds are they only look at 2 variables. If you put money in and you are so many years old it buys x amount of stock and y amount of bonds. Thats it. They don’t care about price or value.
I think Michael Green thinks the system will blow up too. But I think he would have a different opinion about if the markets are over valued and where we might be heading.

Thanks for bringing that up MF. Here’s a link to Green’s talk on your point. You are right; they don’t care about price or value.
IMO, this is an opportunity…dividend-paying stocks with real value (not the high-flying ones dominating index funds) may be actually under-priced, all other things equal, since the garbage is dominating the index. When the worm turns, and people flee to value, those rare value stocks could actually go up in a falling market (along with PM & oil, methinks) as the general market tanks. Do you think I’m crazy here?

Michael Burry called the passive investing trend a bubble awhile ago.
”The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,”
“The worry is that the prices of these less-traded equities are being influenced by the billions of dollars flowing into them from funds. If passive investors suddenly sell their funds (including institutional investors and pension funds), the stocks linked to them will be badly affected and their prices rapidly decline. Many investors’ decisions are made by algorithms that will automatically sell stocks if they fall a certain percentage. There’s little to no human involvement. Stop losses are set at comparable levels so should some big event (US/China trade war, Brexit, a global crisis) cause a market decline, it could trigger a sell-off. Once large investors start selling, others will follow suit and the price will plummet.”
Price discovery through the free market is premised on large numbers of investors independently judging the market, with market prices coming as the net result. But passive investing removes the assessment of stocks and companies. Instead, the higher-weighted companies receive even greater shares of marginal investments, since index funds are overwhelmingly cap weighted instead of equally weighted, further distorting market prices.

Redneck Engineer This statement - “Price discovery through the free market is premised on large numbers of investors independently judging the market, with market prices coming as the net result.” is what Michael Green talks about when he discusses the assumption of efficient markets.
The guys who invented passive investing also stated that it only works because there are “efficient markets.” What Michael Green argues is that when the only variables used are age combined with automatic contributions to 401k it = buy at any price. Passive does not care about value/price. Its an algorithm where putting in money = buy. Thats the only condition buy at any price. So how can there be an efficient market if there is no consideration about price/value by the largest number of investors.
Another aspect is passive keeps next to zero cash in its portfolio. That alone has enormous implications. Watch his stuff on youtube he shows the math where the whole stock market goes up 50x from where it is at today just by moving from active (5% cash on the sideline) t0 passive (0.5%).
As for passive being a bubble - He also talks about laws that make 401k people use passive do to low fees. Congress would literally have to pass new laws to change how HR Departments allocate 401k choices for employees. There just aren’t many options for people in these plans. A bubble implies that it would blow up and stop at some point. There just aren’t any alternatives available so it seems highly unlikely. Unless everyone goes into treasuries or money market funds. Something like that.

This was such a great talk! Many excellent points, although quite sobering too….
With respect to the expectation of market crashes (I assume this means globally?) and potential inflation (also global in terms of major fiat currencies?), are there other good options for hard assets outside of PMs and land? What’s the thinking about diamonds and watches? Although some people have preserved or made money with art and car collections, I don’t include art or cars here because unless one is in possession of Old Master pieces, these are speculative and one only finds out after the fact if they held their value, or if the artist or model fell out of favour in the meantime.
I recently heard a wealth manager recommend diamonds in addition to gold as an inflation hedge. It occurs to me that there could be advantages to holding some investments in the form of diamonds and/or watches if they are carefully selected, as they are not taxed by governments, cost little or nothing to maintain, the transfer of ownership doesn’t need to be registered in a central database, they don’t take up much space and are easily portable if the owner moves. Over time, it does seem that there has continued to be a market for rare/quality diamonds and watches.
Are there any thoughts on this? Also, are there other assets that could be considered safe in terms of wealth preservation while diversifying outside of stocks, bonds and cash?

Markets for rare/quality diamonds/watches. Any thoughts? Other assets?
Diamonds have no longevity like PM does plus have assessing issues; the demand is fairly recent and fully artificial via advertising/cartel. But gold rings are excellent, since they can't easily be regulated like bullion is. Their problem is they don't have immediate valuation like bullion and are less practical to store. To me, this debate has a clear answer: gold bullion: practical size-wise, international, historic, and can be quickly assessed "on the street". The only problem is that because it's historic, it is also taxed and may well be outlawed at any time in any area (as it recently was in the USA). As a backup to the legal issues, gold rings can be kept, so I like both. Every replacement has drawbacks too, so IMO gold bullion or rings is still the best choice.

I had recently thought about diamonds as well and noticed the Perth Mint was selling loose diamonds in an assay card similar to gold, but then I also found out they’re actually growing diamonds in labs these days and even De Beers is on board so that put me off of that, though I agree it is interesting to look at alternatives. I read about a lady who bought a regular new Mustang a few years ago, drove it a month, and then sold for a nice gain. Lots of costs to think about, but still a good exercise in my opinion. Watches is also viable, and even Hermes bags, but it’s a whole world I’d have to learn about. Interesting ideas.

78 trillion by 2028?

One thing to keep in mind about Diamonds is they are not fungible the way gold is.
So if the Elizabeth Taylor diamond is a certain size and has a certain value, your diamond that is 1/100th the size is not worth 1/100 of the bigger diamond. Only the Elizabeth Taylor Diamond is that diamond and a lot of its value is tied up in that uniqueness. This doesn’t happen with Gold. Your 10 ounces is really worth about 1/10th of some other guys 100 ounce bar and always will be unless there is some numismatic thing going on.
The great thing about Gold is that the average joe really can buy the same kind of protection that the elites can buy. Fine art, and thousands of acres of prime farm land or mineral deposits are out of reach for us little guys.

I thought this article about synthetic diamonds and pricing was interesting:
Just like collector cars, signed baseballs, an historical armored tank collection, a 300 can collection of theme-inspired (and “collectable”) beer cans, or “designer” bird plates; in the end, it’s only worth what someone is willing to pay for it. I’d rather stick with things that have less “up for discussion” potential (and are more fungible, as already mentioned).

Thanks for the thoughts.
I should clarify that my question refers to natural diamonds, not lab created diamonds. Coloured diamonds, which are more rare, has been specifically mentioned, and I read several months ago that the single mine which produced pink diamonds is now closed (or will be soon). With respect to assessment of white stones, I would think that colourless and flawless, or internally flawless diamonds shouldn’t be subject to major issues of assessment, if the cut of the stone(s) is excellent, and a GIA lab would be recommended, as they are the gold standard. MKI - I assume this was what you meant - that different labs assess stones differently?
Also, my general question as to alternatives is based on the assumption that one has already invested a sizeable amount or % in PMs and doesn’t want to put all their ‘eggs in one basket’.
MKI - I wasn’t aware the demand for diamonds was so recent. I hadn’t thought about gold rings (I suppose other fine gold jewellery like bracelets or necklaces could also be suitable, as they would simply get weighed and costed according to composition). Out of curiosity, is there a reason you propose bullion over coins?
I like gold a lot, although the risk of confiscation of gold coins & bullion (ie. registered ownership) could be a bit of a concern going forward. In some areas (in Europe) silver is taxable, whereas gold is not as long as it is held for > 12 months.
It would seem that gold is the most liquid and easiest to sell, but like diamonds, land can take time to get rid of…
Are there any thoughts on watches (ie. men’s watches), or any other assets to diversify with?

Dennis - I wouldn’t buy synthetic diamonds and would not recommend them as an investment. Actually I wouldn’t invest in any of the items you mentioned, as, like you said their future value is highly subjective :slight_smile:
Your comment also causes me to reflect that, like stocks, it is advisable to invest in things you understand and know something about…

The question I have is what asset is least subject to manipulation, and retention of value in times of flux. I remember a factory owner (not caucasian) from Zimbabwe in the early 80’s grateful to get 10 cents on the dollar for his factory.

While I do have some PMs, I’m an even bigger fan of Bitcoin. It can be a wild ride, with all the volatility one should expect from a very young enterprise, so it’s not for everyone, and no one should put the family’s dinner money into it, but it is only going up over time (higher lows constantly) and it’s still very early days. However, in any 4-year period, BTC has increased in value even if the time in-between saw significant roller coaster gyrations - and appreciated significantly more than stocks, bonds, or precious metals.
That’s due to its youth; because it’s not yet a mature sector, it has asymmetrical upside potential, just like any new, young company. The risk : reward is significantly tilted toward reward. Even if you lost your investment, that’s all you’d lose. If it’s not dinner money, it’s not the end of the world. So invest what you can afford to lose. Then watch for the upside growth. This is, at the least, a 100x opportunity.
Best of all, you can access crypto from any computer anywhere in the world. That means no one can confiscate it at the border or in a midnight robbery, but you can always get to it. It will, however, take 3-5 days to turn some of it into cash - although there are credit/debit cards linked to custodied BTC, now, the same way there are now cards linked to custodied gold. lets people buy for as little as $10, on a recurring basis. is one of the oldest and most reliable, “established” exchanges, although its fees are on the high side. lets people buy with credit cards, no fee through September, and provides both credit cards and loans tied to crypto held on account with them.

If you’re worried about moving wealth across borders, diamonds are a good choice. I once worked for a couple of Jewish fellows who moved their wealth out of south Africa that way. No judgement.

asset least subject to manipulation & retention of value in times of flux.
Easy. Gold bullion. Liquid anywhere in the world in all times. Impossible to fake due to density. Easy to verify. Easy to hide. Imperishable. The only (potential) issues are 1) legal 2) gold fluctuates in price at times so you may need to sell at lower prices than desired (but it may go the other way too).
I suppose other fine gold jewellery like bracelets or necklaces could also be suitable, as they would simply get weighed and costed according to composition.
The problem is knowing the composition; no easy way to know. Rings, OTOH, are generally easy to guess and are usually stamped so they trade very easy. And it's unlikely they will be regulated IMO.
Out of curiosity, is there a reason you propose bullion over coins?
Yes. Bullion is created exactly for what we need: an international recognized coin that is easy to spot and prove validity. Other coins are not as well known; I won't buy them due to the liquidity issue so stick with Gold Eagles or Krugerrands, since they are the best known and most used (for Americans). Also, Eagles are technically US "currency" so fall into a special legal category. I like to have both, because who knows what the future legal landscape will look like. I strongly doubt gold will be made illegal in the future as it was in the USA, because it makes no sense to outlaw gold unless you are a creditor nation holding all the gold and pushing fiat (like we were back then). Now, we are a debtor nation and fiat is the norm. The bigger risk is our insane taxes on transactions. For this, it makes sense to build trading networks for your bullion so it never enters the systems. Family is best; older generations sell, younger one's buy. One thing I never forget: gold has no yield. I never hold more than 10% PM for this reason - I would rather hold real estate or own money-generating assets. I view assets as something that puts money in my pocket, and liabilities as something that takes it out. PM is neither, it's just insurance, so I never go above 10%.