Common Sense Living

Markets Can Remain Irrational Longer Than You Can Remain Solvent

Over the past few months, I made several financial predictions:

  1. Gold is the place to be.
  2. The Bitcoin bubble will pop.
  3. The stock & bond market bubbles will pop.


As the dollar collapsed over the past year, gold has been a big winner.  We are only at the beginning of a long term dollar slide, and a resulting rise in gold prices.  The Federal Reserve is purposely behind the curve in raising interest rates to hold back inflation.  To recover from a recession the Fed has had to drop rates an average of 5 percentage points, and with interest rates only at 2-3%, those 5 points don’t exist!  An acceleration of inflation will help interest rates move higher…..along with gold prices.

Other factors helping gold, and pushing the dollar lower, are higher interest rates overseas, a jittery stock market, and a bitcoin collapse.


It finally appears the bitcoin frenzy is ending.  This bubble went on far longer than I thought it would, and I am reminded of John Maynard Keynes quote about his trading experiences in the 1920s:  “Markets can remain irrational longer than you can remain solvent”.  Eventually though, irrational markets adjust to reason.

Just as nearly a Trillion dollars poured into cryptocurrencies, nearly a trillion is now pouring out.  After hitting a peak of $19,000 a coin, bitcoin this morning touched below $10,000, as it continues a reversion to a more normalized level.

All which begs the question……where is that $1 trillion going, if not in bitcoin?  Nobody can say for sure, but I suspect it will go into real stuff, including gold!  Bitcoin investors are not fans of the US dollar, or government controlled/influenced assets like stocks & bonds.


Stocks & bonds has been the one area where I have totally underestimated the ability of the market to remain irrational, longer than I expected.  What was overpriced previously, has become even more overpriced as the stock market continues to make new highs.

Last year, the stock market saw 6 days where the Dow Jones Industrial Average rose over 200 points.  In the first 2 weeks of this year, we have seen 3 such rises, and we may see another today.  Either we are are missing some very large important piece of news, or the already overpriced market is becoming more seriously overpriced.  It kinda feels like the bitcoin frenzy, and those never end well!

This bull market is nearing the longest on record.  Stocks are priced at some of the highest valuations on record.  And interest rates are gradually rising as the bond market bubble pops.

The eventual drop we see in stocks will therefore be longer and deeper than anyone is expecting.  It’s not different this time!  In spite of what you read, markets have not changed much in 5000 years!

History is a better guide than the professionals when it comes to stock bubbles.  Famed economist from the 1920s, Irving Fisher, stated just weeks prior to the 1929 stock crash: “Stocks have reached what looks like a permanently high plateau.”  Soon after he made this comment, the Dow Industrial Average proceeded to drop 90% over the next couple years!

The best time to buy quality assets is when nobody else wants them.  We are at the other end of this when it comes to stocks and bonds!

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