Just How BIG Is This Bubble?

This Will Blow Your Mind [The Daily Reckoning] February 29, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Just How BIG Is This Bubble? Annapolis, Maryland [Brian Maher] BRIAN MAHER Dear Reader, Never before have so many… owed so much… to so few. We refer not to Mr. Churchill’s hosannas to the Royal Air Force — concerning 1940’s Battle of Britain. We refer instead to the 2024 Battle of Bulls and Bears… to the stock market. Never have so many investors owed so much of their money to so few stocks. That is because a mere spoonful of stocks are hauling stocks to record heights. These stocks are: Nvidia. Alphabet. Amazon. Apple. Meta. Microsoft. And Tesla — collectively, the “Magnificent Seven.” These sweethearts boast a combined market capitalization of $12 trillion. That is the combined market capitalization of the next 42 leaders of the S&P 500. That is, a mere seven stocks haul the equal load of the next 42. Investors have piled into them and fattened upon them. Investors have also inflated a gorgeous bubble. Bubble: “a good or fortunate situation that is isolated from reality or unlikely to last.” Precisely how gorgeous is this bubble? Mr. Torsten Slok, chief economist for Apollo: The top 10 companies in the S&P 500 today are more overvalued than the top 10 companies were during the tech bubble in the mid-1990s. Kind heaven — can it be? Recall: The 1990s technology boom shamed all others. Yet today’s leading wagon-pullers exceed the valuations of the technology boom’s leading wagon-pullers. Thus we stagger. Thus we reel. Thus we collapse upon the floor… in a heap… dizzied beyond all description. Here is the picture that talks its thousand words: [image 1] Source: Apollo In reminder: A low price-earnings ratio indicates stocks are bargains. A high price-earnings ratio indicates stocks are snares. A price-earnings ratio of 17 is approximately par — as history runs. What is Nvidia’s present price-earnings ratio? It is not stratospheric. It is not even galactic. It is instead a cosmic… 186. 186! That is, investors in this magnificento are offering to ladle out $186 for each $1 of earnings. In all, the seven magnificent stocks — the market’s wagon-pullers — post a price-earnings ratio of 50. Meantime, the price-earnings ratio of the S&P 500… as a whole… runs presently to 27. Thus the market is fabulously “top heavy.” A top heavy market is a lopsided market. And a lopsided market is a vulnerable market. Far too many chicken eggs bunch in one lone basket. Shall we consider Mr. Robert Shiller and his famous CAPE ratio? We will spare you CAPE’s inner wizardry. Know merely that it is a valuation metric. It is a more exotic and nuanced price-earnings ratio. Its historic average — stretching to 1871 — comes in at 17. CAPE scaled 31 in July 1929… 44 in November 1999… 38 in July 2021. What does CAPE presently register? Thirty-four. That is, the third-highest ratio on record. It exceeds even July 1929’s. That is, the stock market is luxuriantly “out of whack.” And that which is out of whack falls ultimately into whack. We are therefore in for what mathematical men term “regression to the mean.” When the S&P 500 regresses to its historical mean, we do not pretend to know. The answer — as always — is on the knees of the gods. Yet as the great Buddha never ever said: “The cost of every pleasure is the pain that succeeds it.” We hazard investors are in for one mighty migraine… Below, Jim Rickards shows you just how easily a complete collapse of the stock market can occur. Read on for details — if you have the nerve. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: While the world is distracted by Israel and Hamas… Ukraine and Russia… and China and Taiwan… Jim Rickards is warning that there’s another [“war”]( just around the corner that NOBODY is talking about. Except himself, that is. [And as Jim explains here, this war directly affects YOU.]( As you’ll see, it even has [biblical connotations.]( This crisis will have rippling consequences Jim fears will cause financial tragedy for millions of unprepared American citizens. Is Jim right? You decide for yourself. [Click here to get the full scoop.]( [⬇️Watch New Video From James Altucher⬇️]( [Click here for more...]( [Click here for more...]( The Daily Reckoning Presents: The greater the complexity, the greater the threat… ****************************** When Complex Systems Collide By Jim Rickards [Jim Rickards] JIM RICKARDS At some point, systems flip from being complicated, which is a challenge to manage, to being complex. Complexity is more than a challenge because it opens the door to all kinds of unexpected crashes and events. Their behavior cannot be reduced to their component parts. It’s as if they take on a life of their own. Complexity theory has four main pillars. The first is the diversity of actors. You’ve got to account for all of the actors in the marketplace. When you consider the size of global markets, that number is obviously vast. The second pillar is interconnectedness. Today’s world is massively interconnected through the internet, through social media and other forms of communications technology. The third pillar of complexity theory is interaction. Markets interact on a massive scale. Trillions of dollars of financial transactions occur every single day. The fourth pillar, and this is the hardest for people to understand, is adaptive behavior. Adaptive behavior just means that your behavior affects my behavior and my behavior affects yours. That in turn affects someone else’s behavior, and so on. If you look out the window and see people bundled up in heavy jackets, for example, you’re probably not going to go out in a T-shirt. Applied to capital markets, adaptive behavior is sometimes called herding. Assume you have a room with 100 people. If two people suddenly sprinted out of the room, most of the others probably wouldn’t make much of it. But if half the people in the room suddenly ran outside, the other half will probably do the same thing. They might not know why the first 50 people left, but the second half will just assume something major has happened. That could be a fire or a bomb threat or something along these lines. The key is to determine the tipping point that compels people to act. Two people fleeing isn’t enough. 50 certainly is. But, maybe 20 people leaving could trigger the panic. Or maybe the number is 30, or 40. You just can’t be sure. But the point is, 20 people out of 100 could trigger a chain reaction. And that’s how easily a total collapse of the capital markets can be triggered. Understanding the four main pillars of complexity gives you a window into the inner workings of markets in a way the Fed’s antiquated equilibrium models can’t. They let you see the world with better eyes. People assume that if you had perfect knowledge of the economy, which nobody does, that you could conceivably plan an economy. You’d have all the information you needed to determine what should be produced and in what number. But complexity theory says that even if you had that perfect knowledge, you still couldn’t predict financial and economic events. They can come seemingly out of nowhere. For example, it was bright and sunny one day out in the eastern Atlantic in 2005. Then it suddenly got cloudy. The winds began to pick up. Then a hurricane formed. That hurricane went on to wipe out New Orleans a short time later. I’m talking about Hurricane Katrina. You never could have predicted New Orleans would be struck on that bright sunny day. You could look back and track it afterwards. It would seem rational in hindsight. But on that sunny day in the eastern Atlantic, there was simply no way of predicting that New Orleans was going to be devastated. Any number of variables could have diverted the storm at some point along the way. And they cannot be known in advance, no matter how much information you have initially. Another example is the Fukushima nuclear incident in Japan a few years back. You had a number of complex systems coming together at once to produce a disaster. [Could You Spot These 2 AI Investing Traps?]( Here’s something no one else will tell you about artificial intelligence. Investing in AI… is BS. Almost every investor out there is falling into 2 AI investing traps. And they’re going to lose their shirts. Before you spend one nickel on AI… [See James Altucher’s Urgent Warning To Investors]( An underwater earthquake triggered a tsunami that just happened to wash up on a nuclear power plant. Each one of these are highly complex systems — plate tectonics, hydrodynamics and the nuclear plant itself. There was no way traditional models could have predicted when or where the tectonic plates were going to slip. Therefore, they couldn’t tell you where the tsunami was heading. And the same applies to financial panics. They seem to come out of nowhere. Traditional forecasting models have no way of detecting them. But complexity theory allows for them. I make the point that a snowflake can cause an avalanche. But of course not every snowflake does. Most snowflakes fall harmlessly, except that they make the ultimate avalanche worse because they’re building up the snowpack. And when one of them hits the wrong way, it could spin out of control. The way to think about it is that the triggering snowflake might not look much different from the harmless snowflake that preceded it. It’s just that it hit the system at the wrong time, at the wrong place. Only the exact time and the specific snowflake that starts the avalanche remain to be seen. This kind of systemic analysis is the primary tool I use to keep investors ahead of the catastrophe curve. The system is getting more and more unstable, and it might not take that much to trigger the avalanche. To switch metaphors, it’s like the straw that breaks the camel’s back. You can’t tell in advance which straw will trigger the collapse. It only becomes obvious afterwards. But that doesn’t mean you can’t have a good idea when the threat can no longer be ignored. Let’s say I’ve got a 35-pound block of enriched uranium sitting in front of me that’s shaped like a big cube. That’s a complex system. There’s a lot going on behind the scenes. At the subatomic level, neutrons are firing off. But it’s not dangerous. You’d actually have to eat it to get sick. But, now, I take the same 35 pounds, I shape part of it into a sphere, I take the rest of it and shape it into a bat. I put it in the tube, and I fire it together with high explosives, I kill 300,000 people. I just engineered an atomic bomb. It’s the same uranium, but under different conditions. The point is, the same basic conditions arrayed in a different way, what physicists call self-organized criticality, can go critical, blow up, and destroy the world or destroy the financial system. That dynamic, which is the way the world works, is not understood by central bankers. They don’t understand complexity theory. They do not see the critical state dynamics going on behind the scenes because they’re using obsolete equilibrium models. In complexity theory and complex dynamics, you can go into the critical state. What look like unconnected distant events are actually indications and warnings of something much more dangerous to come. So what happens when complex dynamic systems crash into each other? We’re seeing that right now. We’re seeing two complex systems colliding into each other, the complex system of markets combined with the complex system of epidemiology. The coronavirus spread was a complex dynamic system. It encompassed virology, meteorology, migratory patterns, mass psychology, etc. Markets are highly complex, dynamic systems. Financial professionals will use the word “contagion” to describe a financial panic. But that’s not just a metaphor. The same complexity that applies to disease epidemics also apply to financial markets. They follow the same principles. And they came together to create a panic that traditional modeling could not foresee. The time scale of global financial contagion is not necessarily limited to days or weeks. These panics can play out over months and years. Just don’t expect the Fed to warn you. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. I don’t know if you’re religious or not. But if you want proof that we’re living in the monetary end times… Then look no further than [this.]( Some people believe the apocalypse from Revelation is playing out in the Middle East. But as I see it, it’s going to start right here, with [this terrifying warning from Genesis.]( I hate to say it, but if events play out like I fear, both your money and your livelihood are at stake. If you haven’t taken the two actions I recommend [here]( to defend your wealth yet, I suggest you do so now. Because once this monetary apocalypse hits, it could already be too late. It’s better to be safe than sorry. [Click here to see what’s coming and the two actions I recommend you take.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Brian Maher] [Brian Maher]( is the Daily Reckoning's Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master's degree in Defense & Strategic Studies. --------------------------------------------------------------- [James G. Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@dailyreckoning.com. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We allow the editors of our publications to recommend securities that they own themselves. However, our policy prohibits editors from exiting a personal trade while the recommendation to subscribers is open. In no circumstance may an editor sell a security before subscribers have a fair opportunity to exit. The length of time an editor must wait after subscribers have been advised to exit a play depends on the type of publication. All other employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. Please read our [Privacy Statement.]( If you are having trouble receiving your The Daily Reckoning subscription, you can ensure its arrival in your mailbox by [whitelisting The Daily Reckoning.](