Today 10-26-21 the website is a year old. A lot has happened: the election, the Capitol invasion crisis, the new Administration, the bizarre situation where the Senate can’t decide what economic policy to approve. Investors acted absurdly irresponsible with the silly bubble in January of Gamestop and AME shares. Gasoline is now over $5 in some California stations. International travel has been severely restricted. The pandemic has raged on without a truly reliable solution, although some good news may have developed.
Last year oil traded at negative $37 in April. Who could imagine oil would range from a high in 2008 of $144 to a low of negative $37, a range of 181? Lumber went up to a very high price. Bonds yields were and are extraordinarily low.
If stocks, bond prices, and real estate are too high then what is there to invest in? If Cash yields a real rate of negative 3% or negative 5% then what to do? Even gold maybe too high as investors may have overpaid slightly to attempt to try too hard to protect themselves from inflation that may be transitory.
Typically bubbles go up about 4 times fair value before crashing, with the Japan 1989 bubble going up to 10x fair value. Thus if one buys U.S. stocks today they may end up losing 75%, or even 90%. Some Japanese mortgages were sold for only 5 cents on the dollar because the mortgaged properties had crashed 90%. I would prefer to lose 3% real in bond yields than to lose 90% or 75% in a stock crash.
Rising inflation will help push up interest rates which will act to lower the value of stocks, bonds, and real estate (using the discounted cash flow model). Rising rates will make the U.S. Treasury deficit more dramatic thus making it harder to attract foreign investors into U.S. bonds.