'Party on, Wayne!'... You're getting richer, not smarter... 'What, me worry?'... Bubbles are based in reality... Ride first, worry second... See you in Vegas...
I (Dan Ferris) was right, but it didn't matter...
On Tuesday, I wrote in Stock Market Trends that the Federal Reserve was about to cut rates the next day... and multiple reasons why that rate cut troubled me.
As I noted, past cutting cycles have coincided with recessions and bear markets. I also noted that longer-term rates are set by the market, not the Fed. Those rates rose when the Fed cut its own federal-funds rate three times last year.
As was widely expected, the Fed did indeed cut its benchmark federal-funds target rate by 0.25 percentage points, to a range of 4% to 4.25%. That puts the rate back where it was in December 2022.
Technically speaking, I was right. The S&P 500 and Nasdaq Composite indexes both closed down on Wednesday, though only slightly. And interest rates on the 10-year and 30-year bonds did rise... but again, not enough to matter.
Stocks rose again yesterday, but longer-term bonds did fall yesterday and today, pushing the 10-year Treasury yield up about a 10th of a percentage point. We'll see what the longer term holds, but it's no big deal for now.
I was more worried about what happens over the length of an entire Fed cutting cycle of perhaps several months or a year. But yesterday's price action clearly reflected a stock market that is not worried at all.
It's the market's Wayne's World moment...
The movie franchise, birthed from a Saturday Night Live skit, features clueless teens Wayne and Garth (Mike Myers and Dana Carvey) hosting a rock-music-focused cable TV show from Wayne's basement.
In one film, they encounter rock star Alice Cooper and proclaim, in a fit of starstruck teenage insecurity, "We're not worthy."
But as equity futures and Treasury prices rose in yesterday's premarket trading, Bloomberg's "Macro Man," Cameron Crise, saw the duo's other side... Crise wrote to Bloomberg Terminal subscribers that the market was shouting "Party on, Wayne!"
Wayne and Garth's jubilant highs and humiliating lows provide an apt metaphor. Today, many investors cluelessly pour money into a bubble as it ramps higher and higher. And they'll feel cowed and stupid when the inevitable rug pull cuts their retirement accounts in half.
The ride from confidence to humiliation is typical of financial bubbles and busts. It was well described by economist John K. Galbraith in his must-read 1990 classic, A Short History of Financial Euphoria. After asserting the first common denominator of bubbles is the shortness of financial memory, Galbraith writes:
The second factor contributing to speculative euphoria and programmed collapse is the specious association of money and intelligence... there is a strong tendency to believe that, the more money, either as income or assets, of which an individual is possessed or with which he is associated... the more astute and penetrating his mental processes.
The reality is quite the contrary, as Galbraith ultimately concludes that:
Speculation buys up, in a very practical way, the intelligence of those involved.
Like I said last week, there's nothing wrong with letting a bubble carry your net worth higher. Just don't pretend it's making you smarter, too.
Speaking of a lack of intelligence...
I am reminded of Alfred E. Neumann, who often asked, 'What, me worry?'...
Neumann, of course, is the cluelessly happy mascot on the cover of MAD Magazine. He'd ask that question when he was about to do something very dangerous, or which had already gone horribly wrong.
If he were in the markets today, Neumann would be using maximum margin to buy AI stocks. And he'd be in good company. Margin debt in brokerage accounts stands at roughly 3.5% of GDP today, heading toward its 2021 all-time high of 3.9%.
That's blatant leverage: borrowing to buy more. Plus, folks are also enjoying the embedded leverage of options, which give the buyer exposure to 100 shares per contract at a tiny fraction of the price of buying the shares outright.
Options that expire in one day or even the same day they're purchased have exploded over the past few years.
Now, I don't mean you should live in fear about your retirement account and other investments. But the solution isn't to delude yourself. It's to allocate your portfolio into investments that eliminate the need for constant worry.
You want to buy great stocks and enjoy the compounding over the long term. You want to build wealth without undue risk. You want to provide for yourself and your family's future. If you do that, the stock market's ups and downs won't leave you in jeopardy.
I'm risk-averse by nature...
I want all those things, too. For me, that means I'm always looking around the next corner to see if there's some larger-than-expected risk that nobody else seems worried about. By being aware of those risks and preparing for the biggest ones, I can worry less... not more. I can see how to prepare myself and protect my financial future.
Right now, it seems that U.S. stock market investors would rather ignore the possibility of major risks.
Regular Digest readers have heard these warning signs before...
- The S&P 500's cyclically adjusted price-to-earnings ("CAPE") ratio is 39.9 and getting closer all the time to its late 1999 high of 44.2.
- The S&P 500 price-to-sales ratio is at a new all-time high of around 3.3, about 40% higher than its one-time high of around 2.4 at the dot-com bubble peak.
- The total U.S. stock market capitalization as a percentage of GDP (the "Buffett indicator"), is at all-time highs, around 215%, versus its dot-com-era high of 138%.
I won't be surprised if the AI bubble pushes them all much higher in the next few years. But only time will tell, and you won't catch me making any predictions (a fool's errand at the best of times).
Comparing valuations with their long-term levels tells us that investors are deeply in "fear of missing out" mode.
As I said last week, you needn't fear being left out of the AI revolution in 2025 any more than you needed to fear being left out of the Internet revolution in the 1990s.
As long as you stay invested in a portfolio of great businesses, AI will find virtually every business in your portfolio, just as the Internet found them all and pushed them higher and higher since the dot-com peak more than 25 years ago. It's impossible to escape the effects of a technological transformation this big on your investments.
At this point, with market valuations elevated and AI spending still climbing rapidly, AI is more of an opportunity to speculate intelligently than to invest for the long term. The latter opportunity won't likely arrive until after the bubble bursts.
In the meantime, we have all the ingredients in place for an even bigger bubble to form.
The foundational ingredient of many bubbles is the potential wealth creation of a new technology...
Bubbles are always based in reality. Among other causes of the 1929 bubble, the advent of radio really was set to change the daily fabric of American life in the decades that followed. In the late 1990s, the Internet really was just beginning its massive transformation of the global economy and daily life.
Today, artificial intelligence looks destined to transform our lives in ways we can barely fathom right now. Just imagine each of us having our own personally tailored AI assistant that monitors and helps us with just about everything to do with our health, wealth, and the mundane and not-so-mundane aspects of our daily lives.
In an interview earlier this year, Meta Platforms (META) founder and CEO Mark Zuckerberg suggested that personal AI bots could fill the spaces left in our lives by a lack of friends... and even be our own private therapist.
I don't need to tell you how hard folks in the media and elsewhere pushed back on that idea. Search the Internet if you're curious. But Zuckerberg is correct to suggest that AI is highly likely to become ever more intertwined with just about every aspect of our lives from now on.
The technology is real... but the level of speculation and hype in bubbles detaches financial markets from that firm foundation.
And Galbraith and I aren't the only ones who've catalogued the primary excesses of a speculative bubble. Santiago Capital's Brent Johnson recently noted that bubbles tend to contain "three explosive ingredients"...
Inflated valuations that defy gravity, abundant credit flowing like an open bar, and an intoxicating narrative of unstoppable progress.
We've got 'em... inflated valuations (higher than during the dot-com bubble), abundant credit (widespread leverage), and the intoxicating narrative (AI).
Brent is also right about another typical bubble behavior. Bulls often wildly exaggerate claims about a new technology's potential before we really get any idea of how it'll play out in the coming decades.
In normal market conditions (if there is such a thing anymore), investors can take advantage of interesting financial speculations about a new technology's future wealth creation. Bubbles turn that into overhyped toxic waste that's nearly guaranteed to decimate portfolios.
By now, you might be saying, 'But Dan, last week you told us to enjoy the ride and not worry'...
Perhaps it's too confusing to hold the contradictory ideas in your head at once... Saying AI will transform the global economy seems directly at odds with saying AI will soon become a massive bubble that'll burst, obliterating trillions of investor capital.
But that apparent contradiction is just the way it is. We don't get to control the nature of financial markets. We simply must accept them as they are and submit to what they require of us if we wish to exploit them to our benefit.
Accepting means understanding they won't always conform to a neat storyline... But if you really think about it, a bubble based in reality followed by a bust that acknowledges the reality of the financial proposition at hand is a pretty tidy story.
When I told you to enjoy the ride, I meant it. Don't worry about a falling market when we all know it rises most of the time anyway. And especially don't worry about a falling market if you've taken my consistent advice to build a diversified portfolio.
But as Galbraith might counsel, don't make the mistake of confusing a rising net worth with a corresponding rise in financial acumen. He might even tell you to beware the bubble's tendency to buy up whatever financial intelligence you possess.
And you must never forget that the bigger the bubble becomes, the more you should expect it to someday blow sky-high.
For what it's worth, I'll be doing it all right along with you... enjoying the ride, remembering that getting richer doesn't make you smarter, learning about the new technology, and minding the risks.
We'll see how it all turns out.
Before I sign off for the weekend, there's one more thing today...
There's just one more week to register for our annual conference, held this year at the Encore at Wynn, right on the strip in Las Vegas.
I'll be there this year, just like every other year since we started doing it more than 20 years ago. I'll be on stage a few times over the two-day event and again at least twice at our annual Alliance meeting the day after that.
In my main presentation, titled "The Stock Market Is Right. Again," I'll have more to say about the AI boom, bubble, and potential bust.
In addition to my fellow Stansberry Research editors, we've confirmed some big-name speakers for this year's event, including New York Times best-selling author Kara Swisher, Xprize founder and executive chairman Peter Diamandis, Ritholtz Wealth Management CEO Josh Brown, and Marketwise founder Porter Stansberry. I'm also looking forward to Las Vegas headliner Jeff Civillico's comedy performance.
In-person registration ends next Friday, September 26. After that, you'll only be able to attend online. Register here.
If you decide to attend, you'll see me around throughout each day, so please don't be shy. Be sure to say hello. It'll be great to meet you in Vegas. See you there.
New 52-week highs (as of 9/18/25): AbbVie (ABBV), Agnico Eagle Mines (AEM), Allegion (ALLE), Altius Minerals (ALS.TO), Valterra Platinum (ANGPY), ASML (ASML), American Express (AXP), Barrick Mining (B), Alpha Architect 1-3 Month Box Fund (BOXX), Ciena (CIEN), Commvault Systems (CVLT), iShares MSCI Emerging Markets ex China Fund (EMXC), EnerSys (ENS), SPDR Euro STOXX 50 Fund (FEZ), Comfort Systems USA (FIX), Franklin FTSE Japan Fund (FLJP), Alphabet (GOOGL), Houlihan Lokey (HLI), iShares Convertible Bond Fund (ICVT), iShares U.S. Aerospace & Defense Fund (ITA), Nuveen Preferred & Income Opportunities Fund (JPC), JPMorgan Chase (JPM), Lumentum (LITE), Lynas Rare Earths (LYSDY), Medtronic (MDT), Mueller Industries (MLI), Neuberger Berman Next Generation Connectivity Fund (NBXG), Invesco WilderHill Clean Energy Fund (PBW), Construction Partners (ROAD), ProShares Ultra Technology (ROM), Valero Energy (VLO), and Vanguard S&P 500 Fund (VOO).
A quiet mailbag today... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
Good investing,
Dan Ferris
Medford, Oregon
September 19, 2025
