The punch bowl is still full... The collapse is in the bubble... We're still finding value... Everything is a trade-off... Bart Simpson nails Mensa... Waiting for the dots to connect...

Even the mainstream press is onto me (Dan Ferris)...

Reader Scott H. forwarded a Business Insider story also published on Yahoo Finance this week. It covers the "relentless bid" of workers contributing to 401(k) accounts that I covered in last Friday's Digest.

Business Insider cites a recent note by analysts at Goldman Sachs:

Strategists at the bank pointed to red-hot demand for stocks in US retirement accounts, with total 401(k) allocations to equities in the US swelling to $8.9 trillion in 2024.

It concludes that "insatiable demand from American retirement accounts" is "the stock market's secret weapon."

If it's in Business Insider and Yahoo, it's not much of a secret now, is it?

Nor has it been a secret to Digest readers. I've mentioned it at least a dozen times in my Friday essays starting last year. Welcome to the party, Business Insider and Yahoo. Lucky for you two, the punch bowl is still full.

Thanks largely to that 'relentless bid,' stocks are still expensive...

This is also something regular Digest readers have heard many times... But the news isn't getting any better.

Let's start with data from John Hussman of Hussman Funds. He uses the ratio of the market cap of U.S. nonfinancial stocks to their gross value added ("GVA," a measure of revenues), including an estimate of foreign revenues (MarketCap/GVA). According to Hussman...

[It is] our most reliable valuation measure, based on correlation with actual subsequent S&P 500 10-12 year total returns in historical data spanning a century of market cycles.

Right now, MarketCap/GVA is "less than 1% from the most extreme level in U.S. history, which was set in February of this year," according to Hussman's most recent market comment.

Hussman said of the current MarketCap/GVA reading:

Investors have been able to expect historically run-of-the-mill returns on the order of 10% annually when MarketCap/GVA has been close to 0.97. The current extreme stands at 3.50. One would need the S&P 500 to lose about 72% of its value to reach that run-of-the-mill valuation norm. Emphatically, that's not a "forecast," but it's clearly a risk to consider.

I'm not predicting stocks will fall 72% and neither is Hussman. The normal progression of a developed economy is from agriculture to manufacturing to services (as the U.S. has done). The tech-enabled service economy does deserve a higher valuation than the capital intensive, highly cyclical business of the agricultural and manufacturing economies that preceded it.

Still, it's foolish to believe we'll never have another bear market, or that we'll never have another sideways market (like the Dow Jones Industrial Average from 1929 to 1954 or the Nasdaq Composite Index from 2000 to 2015).

And once that bear market arrives, are we any less likely to look backward at the peak of the bull market and realize stocks were extremely expensive by MarketCap/GVA, along with all kinds of other measures?

Hussman made a more profound point, one I may have taken for granted...

Here's how he put it...

If you look deeply into a speculative bubble, you can see the market collapse in it. If you look deeply into a market collapse, you can see the bull market in it. Each is a continuation of the other.

If you understand bubbles and other overvalued assets, you see the correction where everybody else just sees rising prices.

After decades at this game, when I look at a bubble, I only see the collapse.

I don't feel jealous of my neighbor who's up 300% in a few months on some speculative bet. I'm looking at the unsound nature of what he's doing and anticipating how he'll feel when it unwinds... as it always does.

But there's something even deeper than this idea of a constant ebb and flow of market valuations. There's the fact that you can never quite pin down the market as a whole.

For example, I've been saying stocks were overvalued for a few years now. I first started doing so in mid-2017.

Yet in that time, Mike Barrett and I have recommended 11 triple-digit winners (eight still open, three closed) and many more healthy double-digit gainers. Extreme Value earned an A+ for 2024 in the Stansberry Report Card, based on its five-year track record. Value exists, if you know where to look.

All I'm saying this week (and most weeks) is that I'm just not finding value in the stuff most people own – especially the endlessly popular S&P 500 Index. I bet few Digest readers have heard of our most recent Extreme Value recommendation, even though it's one of the most powerful, valuable companies in the health care industry.

My Friday Digests are often warnings, but I have never told you and never will tell you to abandon stocks. The very best way to grow wealth is to own great businesses, either publicly traded or privately owned, as long as you buy them intelligently.

I understand that being bearish on U.S. stocks has risks...

For example, folks who were skeptical of the tech bull market in 1996 were wrong for four years. Selling a great business at any time is another common mistake (which I've made).

By definition, trying to see around corners and get a glance at what hasn't happened yet means I'll always be wrong for some time... or maybe just wrong, period.

Doing so rarely looks fruitful while you're doing it. I'm often told that the cyclically adjusted price-to-earnings ("CAPE") ratio of the S&P 500 (which I often cite in the Digest) is no longer a valid way to gauge a market trading at unattractive extremes.

You can probably guess my response: That is exactly the sort of thing people say when stocks are at their least attractive valuations.

But everything in this universe is a trade-off. Everything costs something. Bulls never realize that being bullish costs something. Being bearish costs something, too. Sooner or later, everybody pays for their decisions.

Maybe the payment is lightly felt because the decision was good. Maybe it's a steep penalty because the decision was bad. But you will pay, and the bill will arrive when you least expect it.

Confident as I may seem, I'm not saying that mine is a superior way of looking at financial markets...

But it is a different way.

For example, I've written about the popularity of funds holding one stock – like Tesla (TSLA) or Strategy (MSTR) – with 2x leverage.

They're not looking at investing the way I do. I want to buy shares of undervalued companies. And they look at a stock that has risen a lot and think, "That's cool, but I need to get rich even faster."

Folks who buy these one-stock leveraged funds are "YOLOing." YOLO stands for "you only live once," as if it's essential that you seize the opportunity to flush your hard-earned wealth down the toilet while you still can.

These "investors" bring to the capital markets – where the securities of real businesses trade – the same attitude and understanding of risk as they'd bring to a craps table in Vegas. It's as if Bart Simpson were speaking about physics at a Mensa meeting, supremely confident that he was nailing it.

Some of these folks suffer from the Dunning-Kruger effect...

In 1999, psychologists David Dunning and Justin Kruger demonstrated that people with limited skill in a particular task tend to overestimate their abilities... and those with greater skill tend to underestimate their abilities.

Or maybe it's worse than that. Maybe they're not feigning skill. Maybe they know full well that they're just rolling the dice. With that mindset, what's the difference if you roll them at the gambling tables or in the securities market?

How often have you heard online finance pundits refer to modern financial markets as a casino? The accusation is well-deserved.

Awareness of risk is important. If folks know they're gambling, they should have a good idea that they could lose. That puts them ahead of folks who put 6% of their paycheck into the S&P 500 every two weeks while assuming they won't take a loss over any period of several years.

I hope reading these Digests helps you think differently than the great stampeding herd of investors...

The power of the herd is awesome while you're in it. You feel safe and strong as you hurtle yourself across the open ground.

But when that ground suddenly falls from beneath your feet and the cliff face quickly rises behind you, you realize all too late that the herd was never as trustworthy as you (and apparently Goldman Sachs) believed it to be.

I'm also trying to get you to consider the potential implications and risks of President Donald Trump's efforts to reorder global trade.

Long term, it might not be terrible. But if he keeps the general level of U.S. import duties (tariffs) well above its recent historical level, I just don't see how we can escape the negative consequences.

That doesn't mean I know the consequences. It means that you pay for everything you get in this world (trade-offs again), and paying for tariffs could be costly and will likely fall on those who can afford it least.

A tariff is a tax – and generally speaking, if you tax something, you get less of it...

We're virtually guaranteed to get fewer tariffed goods. That will mean fewer people working to transport, distribute, market, and sell those goods. This higher unemployment will never be offset by the high-paying manufacturing jobs the government says it wants to bring back (even though we import goods because foreign workers are paid less than domestic ones).

Even if the U.S. economy benefits over the long term, it's hard to see how it won't suffer in the short term. I don't want to get into all the gobbledygook of tariffs. If you want a decent analysis, check out Howard Marks' latest essay here.

Like I said earlier, everything in this universe is a trade-off, and if you want to protect domestic manufacturing with tariffs, you can only do it at the expense of domestic consumers.

And there's no guarantee tariffs will have a good long-term effect on the U.S. economy. What if, for example, high tariffs lead to a global backlash of tariffs on U.S. goods, making our exports less attractive...?

Besides paying more for tariffed goods, and having fewer of them land on our shores, don't expect anything to happen quickly. Trade negotiations could easily drag on for years. We've heard numerous times in the press about the trade deals the government is working on, and that many countries are lined up to make them with the U.S. But so far, it's all hat, no cow.

Even if the government is successful in bringing production back to the U.S., it'll take years to build new factories. And it's bound to have unintended consequences nobody can fathom right now.

Overall, it would be foolish to ignore the great uncertainty and risk facing the U.S. economy right now...

But that's exactly what the market is doing when it assigns valuations near the highest in all recorded history to U.S. stocks. It's ignoring risk and uncertainty.

I just can't take my eye off that ball.

And I won't take it off until U.S. stocks present investors with a much more attractive proposition.

During his 2005 Stanford University commencement speech, Steve Jobs said:

You can't connect the dots looking forward. You can only connect them looking backwards, so you have to trust that the dots will somehow connect in your future.

When the market is filled with speculation and valued very near its most expensive moment ever... I can't tell you what will happen next. I can only tell you that it's not an attractive proposition right now.

I can't tell when or if a bear market will begin, though history strongly suggests it's inevitable. I just stay focused on risk and believe that the dots will connect somewhere in the future – in a good way, for those who heed my warning.

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Recommended Links:

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New 52-week highs (as of 6/18/25): Antero Resources (AR), Cameco (CCJ), EQT (EQT), K+S (KPLUY), Lynas Rare Earths (LYSDY), Microsoft (MSFT), Ormat Technologies (ORA), Sprott (SII), and United States Commodity Index Fund (USCI).

In today's mailbag, feedback on the Federal Reserve's current policy, which we wrote about in Wednesday's edition... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"In 2019 core inflation averaged 0.2% [month over month ("MoM")] in summer (higher than today), unemployment rate was 3.7% (lower than today, and stable), and the Fed moved on to cut rates from 2.25% to 1.50% in Q3 2019.

"Now, core inflation averages 0.14% MoM with weaker services inflation, unemployment rate is steadily climbing up at 4.24%, and Fed Funds is 2% above summer 2019.

"Does this make any sense? Where is the consistency of approach from the Fed?" – Subscriber S.J.I.

Good investing,

Dan Ferris
Medford, Oregon
June 20, 2025