Time Travel, Bubbles, and a 'Melt Down' Warning

Time travel, bubbles, and a 'Melt Down' warning... Journeying through recent stock market bubbles... Comparing Tesla today with RCA of the 1920s... The time machine is collecting dust... This is what a bubble feels like... Watch Dr. Steve Sjuggerud's urgent message...

Every market bubble is a time machine...

On the way up, it catapults you into the future... with asset prices rising on the highest of hopes.

Then, it wrenches you back into the past on the way down... as hopes go unrealized and investors flee risky assets in a panic.

To help you see what I (Dan Ferris) mean, in today's Digest, we'll run through a couple of history's time machine journeys. I want to make sure you know what a bubble feels like.

We'll also get into what we're seeing in the stock market right now. And as I believe you'll see, the time machine is stuck careening into the future... headed for a crash landing.

We'll start with the example of the dot-com bubble...

The Nasdaq Composite Index peaked at 5,048 on March 10, 2000. That moment provided a glimpse into the future – as the index wouldn't see that level again for 15 years.

Then, the time machine shifted into reverse at top speed... The dot-com bust took the Nasdaq down 78% to as low as 1,114 on October 9, 2002 – a level it hadn't seen since 1996.

Within a span of just 31 months, the Nasdaq time machine shifted from gazing 15 years into the future to six years in the past. Take a look at this incredible round trip...

The stock market places a value on the businesses that trade within it. By buying and selling stocks, investors assign a value on companies' future earnings every day.

And with this round trip, it was almost as if the world didn't believe in the promise of the Internet bubble...

You see, in the 1990s, most of the new Internet companies traded on the Nasdaq. And the index rose more than 570% from the start of 1995 through its March 2000 peak – effectively discounting decades' worth of massive earnings growth. But most of that never materialized... Many early dot-com companies didn't have any revenues, let alone earnings.

So then, starting in March 2000, the market swiftly transported investors back in time...

As I said, the Nasdaq fell 78% over the next two and a half years to its bottom in October 2002. The time machine transported investors back to August 1996... the same year that then-Federal Reserve Chair Alan Greenspan coined the term "irrational exuberance" to describe the growing stock market mania.

It was like that scene in the 1981 action movie, Raiders of the Lost Ark, where Indiana Jones' friend, Dr. Marcus Brody, described the destruction of an ancient city as having been "wiped clean by the wrath of God."

Likewise, the market's wrath wiped the bubble clean out of existence... The Nasdaq didn't eclipse its March 2000 peak until April 2015. The benchmark S&P 500 Index, which isn't as tech-heavy, peaked in April 2000 and took eight years to travel back to a new high.

The Federal Reserve lowered interest rates throughout the dot-com bust. The market bottomed in October 2002... and by the end of that year, 30-year mortgage rates dipped below 6% for the first time in history.

But wait, there's more...

It wouldn't be long before the stock market went on another trip in the time machine...

By 2006, just six years after the last bubble peaked, housing prices had soared. Folks who had soured on technology investments were taking out low-interest mortgages and buying their dream houses.

A full-blown housing and mortgage bubble was raging... The share prices of homebuilders, subprime lenders, banks, furniture stores, home-improvement chains, and anything else connected with the housing industry soared.

Housing stocks and subprime mortgage companies began to weaken in 2007. The S&P 500 peaked in October of that year, and the housing bubble blew up completely in 2008.

This trip in the time machine caused the biggest crisis since the Great Depression. By March 2009, the S&P 500 had fallen 58% – transporting it back 13 years to its 1996 level...

Two bubbles within less than a decade of each other... The time machine can get busy.

And that brings us to today, with the time machine collecting dust and ready to get going again...

With the S&P 500 at new all-time highs, the stock market has its gaze fixed on the future. And it's the brightest future the market has ever contemplated... brighter even than the one it glimpsed in March 2000.

You can tell the market thinks the future is brighter than ever because stocks are more expensive than they've ever been at any time, including the 1929 and 2000 peaks.

Of course, it's one thing to know that stocks are expensive... But it's another thing altogether to learn to feel it in your bones. And in every bubble, one stock typically captures the essence of the times...

In the 1920s, for example, it was the Radio Corporation of America ("RCA"). Radio was a new technology back then. And RCA's stock captivated investors over the course of the decade, rising from $1.50 per share in 1921 to more than $110 in 1929.

From 1928 to 1929 alone, RCA's stock soared fivefold. Market manipulators bought and sold shares to one another at higher and higher prices to lure greater fools into the stock... so the manipulators could then take their profits. The practice of such stock pools was legal then, but it was outlawed after the 1929 crash.

And in the end, like almost everything else, RCA's stock hit reverse in the time machine. After the bottom fell out in 1929, it crashed all the way back to $2.50 per share by 1932.

The journey for RCA's stock in 1928 and 1929 looks a lot like the trek for Tesla (TSLA) these days...

The electric-car maker's stock opened on the first trading day of 2020 at a split-adjusted $84.90 per share. (Tesla completed a 5-for-1 stock split in late August.)

It closed on the last trading day of the year at $705.67 – an eightfold increase in a single year. And as I write, it's trading around $880 per share, a 10-bagger since January 1, 2020. (This is a good time for a reminder... The company has yet to log a profitable year.)

It's as if the stock market were predicting that, in the very near future, the internal combustion engine will cease to exist. And everyone will not only drive electric cars... they'll all be Teslas instead of any of the dozens of competitors emerging in the space.

How else can you explain why Tesla's market cap (at around $830 billion) is currently greater than the world's next 10 most valuable car companies combined?

Do investors really believe there will soon be more Teslas on the road than all those other companies combined? It's either that or Tesla's stock is an inevitable (if not imminent) disaster.

It's hard for me to imagine a successful person with a ton of money and time on his hands, saying to himself...

Gee, I was going to buy a Ferrari, the dream car I've been waiting my whole life to own, with an engine that growls like a tiger and a paint job that will make every man not sitting in it invisible to the opposite sex...

Instead, I think I'll just buy a Tesla because there's nothing sexier than a metal box full of software that has no exhaust pipes and has to be plugged in and charged up for hours like a 5-year-old iPhone because somebody thinks it's really smart that it doesn't run on the cheapest, most abundant fuel on Earth.

Call me old-fashioned, but that doesn't sound right to me.

Let me be clear... I don't doubt that electric cars will play a big role in our future. I've driven a Tesla Model S. It was great... The acceleration beats any car with a combustion engine.

I'm not against electric cars, and it's not about the future of electric cars. It's the fact that if Tesla can't ramp up its production 50-fold or more very soon and sell tens of millions of cars per year, the stock is way overvalued today.

Financially, the investment proposition is utter lunacy...

Toyota Motor (TM) alone sold 17 times more cars through November 2020 than Tesla did all year. Tesla lost $862 million last year, while Toyota made $13 billion. Toyota's stock trades for nine times earnings and pays a dividend yield of 2.7% – more than two and a half times the current yield on the 10-year U.S. Treasury bond.

I suspect the market will transport Tesla's share price back to a simpler time soon enough... Maybe it will go back to a time when nobody had ever heard of it.

Here's an interesting tidbit about one other profitable car company in the above list...

General Motors (GM) isn't sexy today, but once upon a time, in the 1920s – the scene of one of the biggest market bubbles in history – GM was far from neglected. It was one of the bubbliest Wall Street darlings of the day...

Back then, regular cars were as new as electric cars are today. They started out as a curiosity in the first decade of the 20th century. Automobile registrations in the U.S. totaled around 600,000 in 1911... then soared to more than 23 million by 1929.

GM's share price reflected the trend... In August 1921, it traded for less than $10 per share. By the peak of the bubble, on September 3, 1929, each share bought in 1921 was worth $111 – an 11-fold return (adjusted for splits). Unlike Tesla today, however, GM was profitable and paid huge dividends... It yielded 12% in 1925 and 5% in 1929.

As I've said time and again here in the Digest, I don't make predictions...

It's too hard to get them right. And even if you're eventually proven right, the ride is still likely to be very painful...

Economists Robert Shiller and John Campbell predicted zero returns from stocks for a decade starting in 1996. And they were proven approximately right... but they had to watch the market go up 20% annually for four years before their prediction came true.

Right now, the market's time machine seems to be looking far into Tesla's future. It sees everything coming with crystal clarity and is 100% certain it will all be glorious.

I'll leave it to you to decide if that's reasonable. As for me, I think it's absolutely nuts... and a classic sign of a bubble getting ready to burst.

I said that I want you to know what a bubble feels like. Here's a great example...

Most business leaders knew the dot-com bubble was ridiculous.

Perhaps the most famous quote to that effect comes from a founder and CEO who knew his company was drastically overvalued at the time. But he had to keep it to himself, for fear of being sued and losing control of his company. Here's what the founder and CEO said...

Two years ago, we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends.

That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate.

Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking?

The quote comes from Scott McNealy, the founder and CEO of dot-com darling Sun Microsystems. He was talking to a Bloomberg reporter in March 2002, two years after the dot-com bubble peaked.

Bloomberg then asked McNealy, "What were you thinking?" He replied...

I was thinking it was at $64, what do I do? I'm here to represent the shareholders. Do I stand up and say, "Sell"? I'd get sued if I said that. Do I stand up and say, "Buy"? Then they say you're [Enron Chairman] Ken Lay.

So you just sit there and go, "I'm going to be a bum for the next two years. I'm just going to keep my mouth shut, and I'm not going to predict anything."

And that's what I did.

McNealy was probably worrying too much.

Last May, Elon Musk did exactly what McNealy was afraid to do at the top of the dot-com bubble...

And hardly anyone noticed or cared.

Musk posted on Twitter on May 1, 2020, "Tesla stock price is too high [in my opinion]."

The stock was trading at a split-adjusted price of between roughly $150 and $170 per share at the time... And it had showed some weakness for two trading sessions, dipping into the high $130s. Then, after Musk's post, it was off to the races again... hitting $200 by June 10 and $300 a month after that.

The founder and CEO told the whole world his company was overvalued. He effectively told the whole world to sell his stock, exactly what McNealy said he could not do for fear of getting sued. Yet Tesla's stock has more than quadrupled since Musk's tweet...

This is what a bubble looks like.

Tesla's stock is crazier than ever nowadays... Just yesterday, the company's market cap increased by $56 billion – more than two times its annual revenue. It now trades at a vertigo-inducing 25.5 times annual sales.

That might work for some software companies, but not for a car company. And no matter what Musk or the starstruck Wall Streeters in his orbit might tell you, it's a car company. It's a capital-intensive, low-margin, highly competitive car company.

Some investors can help you get the feel of a bubble in your bones...

Jeremy Grantham, co-founder of asset manager GMO, is one of those investors.

My colleague Corey McLaughlin highlighted the key points of Grantham's latest investor letter in Wednesday's Digest. And as my "Quote of the Week" for the Stansberry Investor Hour podcast this week, I shared the opening paragraphs of Grantham's missive...

The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.

But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.

Not only has Grantham lived and invested successfully through previous bubbles, his firm has studied a couple dozen of them. Plain and simple, they know bubbles.

Grantham uses the word "bubble" six times in the above paragraphs. And when he talks about bubbles, I stop what I'm doing and pay attention.

Tesla's soaring valuation despite the founder issuing a clear sell signal, going further than McNealy circa 2002... and Grantham, a battle-hardened bubble veteran, warning us all...

This is what a bubble feels like.

I'll leave you with one final example this week...

My colleague Dr. Steve Sjuggerud has alerted folks about the market "Melt Up" for several years. And frankly, he has been spot-on... The S&P 500 keeps marching higher and higher.

Steve debuted his call for a Melt Up in stocks in October 2015, during our exclusive Stansberry Alliance Conference in Las Vegas. The S&P 500 has roughly doubled since then.

But now, Steve has shifted gears a bit... He's now also talking about the Melt DOWN.

Steve and I are always busy with our respective obligations here at Stansberry Research, so we don't get to talk as much as we'd like. I learned of the change in Steve's outlook just days ago, when I received an e-mail from him for subscribers called, "Melt Down Warning."

I've been warning you that stocks were expensive since May 2017. Since then, the market has hit a series of higher highs and lower lows. And with the market's time machine running out of control today, I don't believe it's done hitting higher highs and lower lows yet.

But eventually, it will... At some point, we'll be blasted back into the market's past.

So I can't think of anything better to leave you with this week than Steve's own words. This excerpt is taken straight from his "Melt Down Warning" e-mail earlier this week...

The Melt Down is coming, and it will arrive at the exact moment you least expect.

Which is why I recently put together my own plan for when I'll personally exit stocks.

And you should know, this same plan can work on any portfolio of stocks – not just my own.

If you just do one thing in 2021 to improve your financial health, this should be it.

Sometime this weekend, I urge you to make some time to watch Steve's entire message right here. If you have any money invested in stocks today, it's one you won't want to miss.

When the guy who has been telling you to buy the Melt Up for the past five years starts warning you about the Melt Down, you know you're in a bubble. So do yourself a favor...

Listen to Steve and the other warning signs. Prepare while you still can, before it's too late.

New 52-week highs (as of 1/7/21): ABB (ABB), Analog Devices (ADI), Altius Minerals (ALS.TO), Booz Allen Hamilton (BAH), Siren Nasdaq NexGen Economy Fund (BLCN), Cognex (CGNX), Cresco Labs (CRLBF), Crispr Therapeutics (CRSP), Corteva (CTVA), Commvault Systems (CVLT), Dow (DOW), Editas Medicine (EDIT), ProShares Ultra MSCI Emerging Markets Fund (EET), Eagle Materials (EXP), Comfort Systems USA (FIX), Fortescue Metals (FMG.AX), GrowGeneration (GRWG), Green Thumb Industries (GTBIF), Ingersoll Rand (IR), KraneShares Bosera MSCI China A Fund (KBA), KraneShares CICC China Leaders 100 Index Fund (KFYP), SPDR S&P Regional Banking Fund (KRE), KraneShares MSCI All China Health Care Index Fund (KURE), LCI Industries (LCII), Maxar Technologies (MAXR), MSA Safety (MSA), MasTec (MTZ), NetEase (NTES), Intellia Therapeutics (NTLA), OptimizeRx (OPRX), PowerFleet (PWFL), Radius Health (RDUS), Construction Partners (ROAD), Southern Copper (SCCO), Simulations Plus (SLP), Scotts Miracle-Gro (SMG), ProShares Ultra S&P 500 Fund (SSO), Constellation Brands (STZ), Trulieve Cannabis (TCNNF), TFI International (TFII), Trane Technologies (TT), Take-Two Interactive Software (TTWO), U.S. Concrete (USCR), ProShares Ultra Semiconductors Fund (USD), Vanguard S&P 500 Fund (VOO), Vestas Wind Systems (VWDRY), Zebra Technologies (ZBRA), and Zendesk (ZEN).

In today's mailbag, feedback on bitcoin bull Max Keiser's 2021 predictions, published exclusively on our Stansberry Research YouTube page... and more thoughts about our "angry nation" and what to do about it. Do you have a question or comment? As always, e-mail us at feedback@stansberryresearch.com.

"Thank you for posting Daniela Cambone's interview with Max Keiser about his 2021 bitcoin forecast. I found it very interesting, humorous, and thought-provoking.

"So I started thinking about Max's hypothesis that one central bank will default in 2021 and that the Federal Reserve will print money until we become the Weimar Republic and other central banks following suit, which will leave bitcoin as the only stable currency. This would leave bitcoin as the reserve currency by default.

"This would be many years from now but if bitcoin is the reserve currency then most everyone on earth would want to own it. So I did some back of the envelope calculations using the following data points...

"According to visualcapitalist.com, the amount of wealth in the world is $360.603 trillion as of 2019 (the latest data I could find for that number) and there are currently 18.22 million bitcoin in circulation. Dividing 360.603 trillion by 18.22 million gives us a bitcoin price of $19,791,603.

"Admittedly, this is a rough estimate using old data, but if the scenario laid out takes 10 years to materialize we could be looking at a bitcoin price of around $30 million. This is feasible because it is possible to own one millionth of a bitcoin, which in 10 years would only cost you $30.

"Personally, I don't think bitcoin would be worth $30 million in 10 years even if everything worked out as I stated because there are other crypto assets out there that people would invest in, with the most logical one to be Ethereum, which has the second highest market value behind Bitcoin. Food for thought." – Stansberry Flex Alliance member K.S.

"The gap [between the rich and the poor, you wrote about in Thursday's Digest] is the result of productivity gains going to profits (the rich) rather than the worker wages (the poor). That is the exact prediction that Marx gave for the eventual collapse of capitalism. That same allocation of productivity gains to the rich occurred in the 1920s and led to the Great Depression.

"Alternatively after WWII, productivity gains accrued to worker wages, which led to the rise of the middle class and the long period of rapid American growth. That ended about the 1970s as union busting, exportation of manufacturing overseas and most importantly disregard for vigorous anti-trust enforcement created crony monopoly capitalism.

"The basic problem is not the Fed but American Corporation, which through uncontested mergers and anti-competitive practices are now mega evil enterprises. The U.S. needs to trust bust almost every firm listed on the stock exchanges. We need to make lobbying a felony. We need to make it a felony for organizations to contribute to political campaigns. And we need to reform all our regulatory agencies to felonize any attempt by industry to 'own or control' regulators.

"Oh, and we need to terminate the Fed." – Paid-up subscriber Kendrick M.

"Hi, [Kim Iskyan] wrote that this sort of thing 'happens in Belarus.' Absolutely wrong. In Belarus, the protestors would be beaten and potentially shot and carted off to jail.

"The fact that this didn't happen here is a testament to our freedoms here!! People don't realize that the greatest threat to us is not our fellow citizens (no matter how rowdy they get) but our own government." – Paid-up subscriber Alex M.

"'Four Dead in Ohio.' We've heard it all before. Nothing new or useful coming out of Washington." – Paid-up subscriber Todd N.

"To those who say this country cannot recover from this week's factional violence in D.C. and the previous nine months in other U.S. cities, John Adams provides a brief and perhaps hopeful chronicle of late 1780s and 1790s political violence, very similar to what we have now. It nearly broke up the just-born country at its founding (literally – New England was ready to bolt).

"Two political factions formed early in our Republic, and were even more roused by the 1789 French Revolution which in the U.S. inflamed pro and con opposing groups, some of whom resorted to mob violence and 'insurrection' with violent demonstrations of support for the new French Republic. They even pushed for the U.S. to take an active role, and go back to war against Great Britain to support the fledgling French revolution, among other notions quite removed from us today, but which at the time fueled raging passions.

"The quotes below are from John Adams. His generation survived this, and even returned to comity in the following decades.

"I. During President Washington's Administration (in our first Capital, Philadelphia – the city of 'brotherly love'):

"Tens of thousands of people in the streets of Philadelphia, day after day, threatened to drag Washington out of his house and effect a Revolution in government or compel it to declare War in favor of the French Revolution, and against England ... a mob of over a thousand even came to the President's door, so close that some of his servants offered to 'sacrifice their lives in my defense' [per Washington].

"Yes, even the sacrosanct hero General now President Washington was not spared the mob's ire!

"II. And then, under the next Administration of John Adams:

"1798 was exceedingly parlous ... Mobs wearing the contrasting cockades [black for Federalists / Anglophiles, Tricolor for Republicans / Francophiles] became involved in skirmishes, fist fights, and other violence, even at church doors.

"Adams the Federalist and Jefferson the Francophile, once very close friends, were on opposite sides of this vituperative debate. They didn't speak to each other after this period for two decades. One-term President John Adams left Washington D.C. in the early morning hours on the day of Jefferson's inauguration, March 4, 1801, so as not to have to sit through it... It [was the first] time a living outgoing president [did not attend] the inauguration of his successor. There were hard feelings all around.

"With the mellowing of time, these two great individuals once again corresponded in their last decade of life, buried the hatchet and realized the nation was stronger together than apart. In a strange (or providential?) gesture of fate, they both died on July 4, 1826. By then, most of the internecine violence of three to four decades earlier was long forgotten by the next generation of U.S. citizens and new immigrants, busy building their own pursuit of happiness.

"A lesson for us?" – Stansberry Alliance member Mark N.

Corey McLaughlin comment: Sounds like it, Mark. It reminds us again of the idea that we've living through a "fourth turning," which we've written about in the past... Thanks for writing in and sharing the information and analysis with everyone.

Good investing,

Dan Ferris
Vancouver, Washington
January 8, 2021