The Source Of The Speculative Bubble

As you can see from the chart below, Nomura’s prime finance gross balances in the US exploded from June 2020 until February 2021. That’s a period when many stocks rallied. If other unwinds occur, they can cause a domino effect that causes more forced selling. Lower prices can act like a feedback loop just like momentum led us higher in the prior year. When valuations are extreme, there is no floor for prices when the momentum reverses, especially with low short interest.

Inflation Is Bad For Valuations

The chart below is yet another illustration of how important inflation is to valuations.

The most expensive high growth stocks would get killed by 3% core PCE inflation. That’s unlikely to occur though. It takes a lot to get core PCE inflation to move at all. Headline CPI could get to 3%. However, PCE inflation is usually below CPI. Core inflation will be lower than headline inflation this summer because energy prices are likely to increase. July 1992 was the last time core PCE inflation was above 3%. That’s an improbable feat in the current environment, at least at this point in time. With that being said, even 3% headline CPI will cause somewhat of a problem for the market; it should cause a major problem for stocks trading at above 20 times sales.

NFT Craze

There has been a burst in activity in non-fungible tokens. This is noteworthy because it seems like right around when NFTs took off, the meme stocks started to fall. Bubbles popping haven’t catalyzed a return to normalcy in the past five years. Instead, new bubbles form. We are in the era of mini-bubbles. These crashes aren’t enough to impact the system luckily. They turn an asset into a gambling vehicle, leaving it worse off after the crash.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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