If This Isn’t A Blow-Off Top …

Financial history includes plenty of extreme years. That’s not surprising, since we’re emotional beings with short memories. Combine those two traits and you get cycles, many of which end with a bang.

Even so, this one stands out. A full accounting of the ways in which today’s financial markets have exceeded previous bounds of rationality would tax the average reader’s attention span. So let’s just hit a few high points.

Home prices up 14% during a recession

In a typical downturn, housing tends to either stagnate or contract, depending on what it did in the preceding expansion. This time, home prices had been rising for a solid decade, to levels comparable to the bubble year of 2007. Then came the pandemic lockdowns and a deep recession … and home prices spiked. 14% in one year is epic when you consider that most houses are financed. If you put down 20% on something and it then rises by 14%, the return on the money you actually risked is 70%. In one year. While you’re living in it. Almost unprecedented.

home prices 2021 blow-off top

Option traders bet the farm

While home prices were soaring, stocks were doing even better, quickly recovering from the “Oh my God it’s a pandemic” flash crash in March of 2020 to blow through all-time highs a few months later. Now, options traders – i.e., people who swing for the fences with leveraged bets – are all-in on the bull market. The ratio of puts (bets that stocks will fall) to calls (bets that stocks will rise) is the lowest since the 2000 dot-com mania. As with houses, everyone seems to think the good times are going to roll on, pretty much forever.

put call ratio blow-off top

Small businesses leverage themselves to the hilt

Small businesses are either struggling to survive or have been gripped by the same euphoria as the rest of the financial system, because their debt to EBITDA (the broadest and most generous measure of cash flow) has spiked to levels last seen, well, never.

Russell 2000 debt to EBITDA blow-off top

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