Kevin Duffy on left- and right-wing delusions

The latest bull run was kicked off by the release of ChatGPT just over two years ago.  From trough to all-time high, the S&P 500 vaulted from 3,840 to 6,090, good for a gain of 59%.  The previous high was set on January 3, 2021, with the S&P perched at 4,797.  I believe we are seeing all of the classic signs of another significant peak in U.S. stocks. 

The symmetry of this second major market top is hard to miss.  The broad market actually crested in early 2021, coinciding with the Biden victory and inauguration.  Speculative excesses were quite obvious in meme stocks and Cathie Wood’s “growth at any price” moonshots.  Left wing delusions included Covid vaccine rollouts, DEI, ESG and male athletes competing with women.  Today’s speculative excesses include bitcoin, generative AI and Big Tech.  Right wing delusions include trade wars, hot wars, deportations and American exceptionalism. 

The Trump victory was the cherry on the speculative sundae, the catalyst for a euphoric blowoff rally.

~ Kevin Duffy, "Portfolio Review," p. 17, The Coffee Can Portfolio, December 20, 2024

Fred Hickey on the everything bubble

The notion that we could be in a new bull market without correcting the unprecedented valuations, the enormous debt levels, all the malinvestments throughout the economy created from years of "free money" and the egregiously excessive investor enthusiasm is ridiculous, but that's how misguided the dancers can become when FOMO takes over.  Investor desire to believe that the good times will continue is nothing new.  There were ten double-digit rallies during the 1929 to 1932 bear market and 16 double-digit rallies during the 2000-2002 bear.  In both periods the stock market rallies averaged 23%.

~ Fred Hickey, The High-Tech Strategist, "Up It Goes, Before It Blows III," June 28, 2023

Kevin Duffy on the everything bust

As the tide goes out on the everything bubble, the first layer of uneconomic structures is being laid bare: cryptocurrencies, money-losing tech unicorns, expensive exercise equipment (Peloton), used car vending machines (Carvana) and even schemes to capture asteroids in a giant bag.  Meanwhile, Amazon warehouses, Tesla gigafactories, wokeness, ESG and the American empire are coming into view.  Still buried below the ocean floor: fiat currencies, central banking, fractional reserve banking and the myth of vigilant and protective regulation.

~ Kevin Duffy, "FTX Collapse," The Coffee Can Portfolio, p. 8, January 24, 2023

Jim Grant on the everything bubble's malinvestments

I think the way to imagine this is to put ourselves in mind of the old college freshman fraternity initiation trick, and that is yanking a tablecloth out from under a set table of china, glassware and porcelain.  Now, if you go on WikiHow to investigate how to do this, WikiHow will advise, "Always try it with plastic cutlery and cups."  But notice the Fed has not got that option because the table is set proverbially and metaphorically... with the most brittle glassware and the most precious porcelain and bull market champagne flutes because of 12 years of suppressed interest rates which have fostered risk taking, which have brought forth into the world all these companies called unicorns because they come to market with a billion dollars and generate not much earnings.  So the world is full of uneconomic economic projects, fostered through financial stimulus, principally low interest rates, right?

So, what happens when you raise the rate of interest on companies that need to borrow just to stay alive?  Well, they can't stay alive, so they're cascading failures.  And companies supply those uneconomic things.  Think of craft beer makers that sold beer to WeWork in the day, right?  So there's a whole chain of economic activity that goes to support uneconomic activity.

So that's the metaphor for the yanking the tablecloth.

~ Jim Grant, interview with William Green, 58:15 mark, August 20, 2022

Jim Grant on the everything bubble

What people came to believe is that the Fed would be there for them.  The Fed wanted things to go up, that the Fed would make us rich.  And the if perchance, if by accident, if by some cyclical hiccup, the market pulled back, the Fed would make it go back up again...  

So fast forward to 2020, and comes the pandemic, comes the falling off the cliff in March.  And what does the Fed do?  The Fed - never mind the kitchen sink - the furnace, the plumbing, the furniture, everything in that house got tossed at the problem...  The Fed took charge of that this pandemic did not lead to a depression.  And what follows is one of the most astonishing light shows in the history of central banking.  By the time 2021 came to a close, the broadly defined money supply was showing growth year-over-year in excess of 20%, never before seen in such a short period.  Interest rates collapsed.  The speculative fervor that this created was lifting stocks, bonds, real estate... cryptos, NFTs, everything that wasn't nailed down.  Nothing was nailed down.  Massive levitation of the everything bubble, some of us called it.

What also occurred was an undesired inflation on Main Street itself, at the cash register, at the checkout counter.  So the Fed never minded the inflation at the corner of Broad and Wall Streets, New York Stock Exchange.  That was desirable because that made people spend and encouraged investment outlays and the like, but the Fed is in business to prevent and ameliorate, if it does occur, inflation at Main Street.  It wrecks wages, it wrecks budgets that distorts the values that gets elected officials defeated at the polls.  That's the kind of inflation they don't like.  But we got that, too.  

So now here we are with inflation rampant. It's not an exaggeration.  Stock prices still elevated by historical lights, bond yields still very low by historical reckoning.  So what does the Fed do?  Well, it's rather in a quandary.

~ Jim Grant, interview with William Green, 39:20 mark, August 20, 2022

Kevin Duffy on the role of deflation

Deflation is the market’s instinctive response to a particularly insidious strain of monetary inflation: one that leads to asset bubbles.  The artificial boom is seductive, pulling in the retail investor at the end.  As the bust does its all-important work of rediscovering prices, redirecting scarce capital to its best uses, and restoring economic health, hopefully some lessons will be learned.  Chief among them: the great stimulus experiments of 2008 and 2020 caused this train wreck.  The interventionists have done enough damage.  It is high-time they are swept into the dustbin of history.  Vive le laissez-faire!

~ Kevin Duffy, "Breaking Point: The interventionists lose control," The Coffee Can Portfolio, p. 9, June 15, 2022

Kevin Duffy on the seeds of the everything bubble

Most stocks peaked one month after Biden took office while large cap stocks peaked about 11 months later. The factors that create a stock market bubble take years to build up, so if you really want to understand what happened, you have to study that earlier period.

The sad truth is that government stimulus to fight a virus created this mess (but the seeds were planted earlier with the stimulus/bailouts of 2008). That includes checks mailed directly to people. Where did this money come from? The Federal Reserve "printed it," as its balance sheet more than doubled. This all happened under the Trump administration, but was supported by BOTH parties.

As for the quagmire in Afghanistan, this began under G. W. Bush and was continued under Obama and Trump. The chickens finally came home to roost. I'm not excusing the exit strategy, which was a typical government boondoggle, just pointing out that we never should've gone in there in the first place. This was supported by BOTH parties and 80% of the American people who wanted vengeance after 9/11.

People need to look in the mirror and take responsibility for these disastrous policies. Instead, they will blame anyone but themselves and the problems will get worse. As Einstein may have said (or not), "insanity is doing the same thing over and over and expecting different results."

~ Kevin Duffy, Facebook post, June 24, 2022

Peter Atwater on the parallel peak in stock and bond prices

What I think is underway, though, is a real reversal in sentiment that didn't begin this year, but began almost 18 months ago when you saw Gamestop and SPAC mania accompanied by record volumes of negative yielding interest rate bonds.  So you had this parallel peak in stock prices and in bond prices.  And that is an unprecedented moment in the markets.  We 've never seen this kind of coincidence before.  And so what I don't think investors quite appreciate is we're having an unwinding in both fixed income and equities simultaneous here and there's not going to be any place to hide in that.

~ Peter Atwater, interview with Stephanie Pomboy, Wealthion, 10:50 mark

Kevin Duffy on the everything bubble

Meme stock madness was the umbrella on top of an all-encompassing cocktail served to far more than retail investors.  Central bankers, mainstream media, academia, Silicon Valley and the military industrial complex all imbibed from the same glass: a belief that government is the solution to all problems.  These institutions, drunk with power, formed twin personalities: enabler and disciplinarian, arsonist and fireman, gas-lighter and psychologist, social butterfly and censor, trouble-maker and policeman.  They created a new reality to justify their existence, but it was always a delusion. 

Morning comes soon enough.  The party was fun while it lasted, but tremendous damage was done.  The hangover is never pretty, but signifies a much needed, albeit unpleasant, return to health.  Likewise, bear markets and recessions have their place: They remove toxins, impart lessons, encourage productive behaviors and provide a path back to financial health.

~ Kevin Duffy, "The Hangover," The Coffee Can Portfolio, March 1, 2022

Kevin Duffy on the everything bubble

The everything bubble is all encompassing: financial, economic, monetary, fiscal, medical, military, academic, journalistic, political, ideological and cultural. 

Bubbles feed on simple narratives, false promises, true believers and new believers.  The crowd takes on a life of its own. Emboldened, they become utterly intolerant of dissent.  The conflicted mob buys every dip and chases every get-rich-quick scheme, all while deriding success, tipping over statues, signaling their virtue, rushing to judgment, and trying to silence anyone who gets in their way.

~ Kevin Duffy, The Coffee Can Portfolio, December 17, 2021

Jim Grant on 2021: a record year of issuance

So far in 2021, a record $156 billion's worth of IPOs have come to market in the United States alone, not counting SPACs, which easily tops the prior, $97 billion record set in the bubbly year 2000.  Year-to-date issuance of leveraged loans and junk bonds ($613 billion and $461 billion, respectively) have similarly roared to records.

~ Jim Grant, "All except for the human beings," Grant's Interest Rate Observer, December 24, 2021

Kevin Duffy: "This kind of wild frenetic rotation is not unusual at the top of bubbles"

I think we’re in a rotation phase right now.  All of the speculators – young people and day traders – have been drawn into the casino, and they’re not going to leave until they’re flat broke: When the poker table shuts down, they move to the roulette section, and when that stops working, they go to the blackjack table.  This kind of wild frenetic rotation is not unusual at the top of bubbles.

~ Kevin Duffy, "The Next Bear Market Has Already Started," The Market, July 1, 2021

Ben Inker on the bubble in speculative stocks unwinding

If the whole of the market is dominated by speculators with outsized expectations, it seems likely that deflation in the obviously speculative tier will take the overall market with it.

It is not a coincidence that value today is close to as cheap as it has ever been relative to the market, but it is convenient nevertheless. You can protect your equity portfolios by choosing to bias them toward value and away from the most expensive end of growth.

~ Ben Inker, head of asset allocation at GMO, "This signal is telling investors that highflying stocks are ready to fall back to Earth, says fund manager," MarketWatch, May 19, 2021

Jeremy Grantham on the everything bubble

This is pretty bad on a very broad front [stocks, bonds, commodities and real estate]. We will have to live potentially, possibly, with the biggest loss of perceived value from assets that we have ever seen.

~ Jeremy Grantham, recent Business Insider article

(As cited by Dan Ferris in his Quote of the Week on his Stansberry Investor Hour podcast, May 13, 2021.)

Paul Singer on "head-smacking craziness in the American stock market"

We believe that hindsight will show the champion of head-smacking craziness in the American stock market to be the period playing out right now. 

[...]

‘Trouble ahead’ is signaled by a rare combination of low-quality securities, staggering valuation metrics, overleveraged capital structures, a scarcity of honest profits, a desperate dearth of understanding evinced by the most active traders, and economic macro prospects that are not as thrilling as the mobs braying ‘Buy! Buy!’ seem to think. 

[...]

Pulling out your hair is an option, though only if you have hair to spare.  Hiding under the bed to avoid people who gloat about being long Bitcoin can get…tiring.  Deep breathing exercises can work, but only for short periods.  We continue to press on for the day when we can say, ‘We told you so.’

~ Paul Singer, $42 billion AUM Elliott Management letter to shareholders on January 28, "Paul Singer Warns of Trouble, and Is Eager to Say ‘Told You So’," Bloomberg, February 26, 2021

Andy Serwer on the boom in SPACs

The growth has been wack. In 2019, according to SPACInsider, 59 SPACs worth $13 billion were created.  Last year there were 248 worth $83 billion.  And already, just six weeks into this year, there are 135 SPACs which have raised $40 billion.  Many more are on tap.

~ Andy Serwer with Max Zahn, "What the SPAC frenzy tells us about the market and ourselves," Yahoo!Finance, February 13, 2021

Kevin Duffy on compulsive gambling and the everything bubble

Compulsive gambling is a progressive disease.  The parabolic pattern of a bubble mirrors the willingness to take on risk.  Last week, former darlings like Amazon and Tesla sold off as they lack the sheer adrenaline rush of pumping up the stocks of dying companies and taking down billion dollar hedge funds.  (We witnessed a similar phenomenon in 2000 when “Old Economy” stalwarts were dumped for dot-com lottery tickets.)   Lately, speculators have gone from picking up quarters in front of a steamroller to dodging Ferraris for pennies.

~ Kevin Duffy, "Game Over," LewRockwell.com, February 1, 2021

Kevin Duffy on the GameStop frenzy

There is a cyclical aspect of the the GameStop frenzy few are talking about.  Bob Murphy made an interesting point that this is flipping "The Big Short," which was written by Michael Lewis right after the GFC in early 2010, close to the stock market bottom.  Short sellers were held out as heroes.  A decade later, after stocks have quadrupled and short sellers practically wiped out, they're the bad guys.  And the greedy and reckless speculators dancing on their graves are the heroes! 

We've come full circle, i.e. we're probably at peak euphoria for the so-called "everything bubble." 

As for Robinhood temporarily closing the casino doors for a day, this likley had more to do with existing regulations and capital requirements which go up with increased volatility.  Robinhood apparently had to raise another $1 billion so they could fully open the casino for business on Friday (helping push GME stock up 68%). 

Btw, AOC, Ted Cruz and Donald Trump, Jr. all attacked Robinhood for the same reason.  If they're all on the same side of an issue, laissez faire types have to be suspicious.  This will end in tears for the Reddit crowd who, as Bob said, refuse to take their chips and leave the poker table because they're "mad." 

This is amateur hour at the casino, and some angry, young, ideologically-charged traders are about to learn a very expensive lesson.  Who will AOC & Co. then blame?  Will they bail these people out?  The plot sickens...

~ Kevin Duffy, comment about "Ep. 1825: The Reddit/GameStop Phenomenon," The Tom Woods Show, January 30, 2021

Jeremy Grantham on the everything bubble and "burst of euphoria"

It's the burst of euphoria that typically brings these things end and we are seeing it all around us today.

[...]

When you have reached this level of obvious super enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years.  It's always.  You can't maintain this level of near ecstasy.  It can't be done because you've put in your last dollar.  You are all in.  What are you supposed to do at that point?  You can't borrow any more money.  You can't take any more risk.

~ Jeremy Grantham, "Why Grantham Says the Next Crash Will Rival 1929, 2000," Bloomberg interview, January 22, 2021, 8:00 and 10:00 mark

Kevin Duffy compares today's everything bubble to the late '90s/2000 tech and dot-com bubble

I was short some of the dot-coms, big tech stocks during that time.  Brutal.  IPOs were insane, big 1st-day pops.  Priced on eyeballs, not profits.  Seemed to go on forever.  New Economy bubble next to Old Economy anti-bubble (the latter bottomed in Mar-00 right at the Nasdaq peak). 

Today is far worse: 

1) IPOs in 2020 topped previous record set in 2000 

2) Valuations higher, dollar amounts much higher 

3) SPACs... nothing like it  

4) Enthusiasm of young speculators is similar - online trading was new in 2000 

5) Greenspan and Powell both walked on water 

6) Wall Street strategists like Abby Cohen at GS were bullish in 2000; Wall St. was taken down a notch by GFC, but uniformly bullish 

7) CNBC pundits bullish in 2000, but some bears allowed on; today they've been nearly all excommunicated. 

8) There were more places to hide in 2000 

9) Bonds were out-of-favor in 2000, today they're the epicenter of the bubble 

10) Economy was on much sounder footing in 2000; debt levels are far higher today 

11) New passive bubble today; no ETFs then 

12) Cancel culture hadn't broken a sweat in 2000, now in full gallop 

13) Currency was on sounder footing in 2000, gold was near multi-decade lows; today gold is 6x higher 

14) Fed's balance sheet was a bit over $500B in 2000, now over $7T

~ Kevin Duffy, tweet, January 26, 2021

September 27, 1999