Angry Bear Cave

You should never let your emotions get in the way of investing, but I am starting to get angry at this bull market.

I usually don’t put a bunch of charts and figures and supporting data in this newsletter. It is all known to everyone. You want my thoughts—I will give you my thoughts. But the one data point that you should know is that the stock market is now the most overvalued in history, more so than 2000 or even 1929.

Last week, I had a Daily Dirtnap subscriber decline to renew his subscription because I wasn’t recommending any AI stocks. He said that AI was “the future of the human race.” He’s 74 years old.

Gather ’round while I dispense some financial market wisdom. If you are 74 years old, you have no business buying AI stocks. Technically, you should be 74% invested in bonds, and the 26% stocks should be in high-dividend payers and such. You don’t want to get cut in half (or worse) in retirement and have to reduce your standard of living, which is a fancy way of saying that you will be eating Alpo. This is just common-sense stuff. Incredible. But that’s what happens in bubbles: People absolutely lose their minds.

I’m not going to give away the secret sauce, but yes, I have been recommending stocks in The Daily Dirtnap. What kind of stocks? The stuff people hate. The stuff that is bombed out, the chart is in the lower right-hand corner, abandon all hope ye who enter here. These stocks have been written off as complete failures. And the reason I picked these stocks is because they are likely to massively outperform if the bubble bursts—which is what happened from 2000 to 2003.

You want to know one of the best-performing mutual funds in America from 2000 to 2003? The Dodge & Cox Stock Fund. It’s a large-cap value fund, all bottoms-up, and buys big, ugly stocks. It’s based out of San Francisco. I liked the mandate, so I invested. I was 23 years old. That was my best performer over the next six years while all the dot-com mayhem was going on. Value outperformed growth by thousands of basis points. I am betting on a repeat of that happening. And if it doesn’t, oh well, these stocks can’t get much cheaper. Anyway, that’s my story. If you like it, subscribe to the newsletter.

What the Dot-Com Bubble Was Like

My friend Helene Meisler tweeted recently that if you weren’t around for the dot-com bubble, now you know what it was like in the dot-com bubble. The difference being that so many more people own stocks this time around. It is estimated that 62% of Americans own stocks. If we have a 50% bear market, it’s going to be Mad Max Beyond Thunderdome. We are really going to be questioning the wisdom of plowing all our savings into the stock market via 401(k)s. Let’s hope that doesn’t come to pass because the consequences would be too terrible to contemplate, but knowing markets and karma, that is probably exactly what is going to happen.

Do I believe that AI is the future of humanity? Am I bullish on it? Sure, I guess. I mean, the consensus view is that all this capex is going to go to waste, so maybe the out-of-consensus view is that it is actually needed. This is one of these situations in which I am glad I am 52 years old. The internet was also the future of the human race, but capitalism being what it is, there was overinvestment and malinvestment, and eventually supply caught up with demand, and everything crashed.

It looks like a tiny blip on a log chart (which is one reason why I hate log charts), but trust me, the crash was no fun. I lived through it and barely held on to my job. This time is no different. This time is never different! Whether it’s railroads, industrials/utilities, the Nifty Fifty, Japan, or any other bubble. The difference is that this one is bigger than all of them, and it looks like it’s not stopping.

Invest in Bonds

Last week, I wrote about bonds. I am very bullish on bonds. Regardless of what you heard at SIC, I encourage you to invest in bonds. Nothing further on that; I gave you the rationale last week. I encourage you to play defense. I encourage you to buy garbage that nobody else wants to the extent that you invest in stocks at all. Gold is probably a good idea as well.

No discussion of the bubble would be complete without talking about Trump. He is the architect of it. He, and everyone else in his administration, is trading like crazy. This is not normal. One day, we will look back at this and say, Wow, that was crazy! Why wasn’t I paying attention? My 80-year-old mom wants to buy the SpaceX IPO. She actually told me she wanted to buy the Starlink IPO, but she meant SpaceX and was confused. Not a good sentiment indicator.

Let me go further and say that all of you Baby Boomers are out of your tree. Easily the worst investors I have ever seen. Got rinsed in 2000, got rinsed in 2007, and are going to get finished off one last time in 2026 and leave your broke Millennial kids with nothing.

If you are 80, you should be in 80% bonds. Most 80-year-olds I know are in 100% stocks. As a friend of mine once said, trades with high Sharpe ratios attract sponsorship, and it is hard to beat the Sharpe ratio of the SPX in the last few years. Everyone is all-in. Again, this is not normal! There’s no point in sitting around trying to dream up what the catalyst will be because there probably won’t be one. It will just collapse under its own weight. 

Back when I was at Lehman in 2006, I’d drive out in the country and take pictures of all the housing developments under construction that were completely vacant and then send them out in my Bloomberg messages. Maybe I should take a road trip and take some pictures of all the data centers under construction that will be Spirit Halloween stores in a few years.

I ordinarily don’t like to write rants. I like to write reasoned, thoughtful pieces. But I’m currently on a plane to Minneapolis, and S&P futures, which opened lower (because oil was up), just ripped to new highs… again. It’s truly incredible that the market goes up every day. It will be equally incredible when it goes down every day because that is what it felt like in 2002. A bear market without end.

Jared Dillian, MFA