Most Americans are currently living out an economic version of an iconic Disney movie.
They’re Cinderella, dancing at the ball. The food is wonderful, the fashions dazzling, champagne bubbles over the tips of chilled glasses, and Prince Charming is there in a spacious hall teeming with merry, delightful guests.
It’s five minutes to midnight, and because they feel it will never end, they’re partying like it’s only 9 p.m. But the reality is that in 5 minutes, the fancy trappings will vanish.
“How could that be possible?”, they think. “President Biden and his economic team announced that the next several rounds of drinks are on the house, encouraging everyone to keep drinking and be merry.”
But a party this large can’t last forever.
If my fellow Americans will step away from the music for some fresh air, they’ll begin to gain some perspective. In fact, when we slow down and think about all of the things that are going on — the whole picture starts to come together and we can start to see how this story plays out.
To begin, our current stock market boom is starting to show signs of exuberance. Many stocks are pricing in a perfect future, margin debt is at record levels, and SPACs are proliferating. Economist John Maynard Keynes would describe this scenario as the “animal spirits” at work, the idea that in times of economic stress or uncertainty people make decisions based off of their gut rather than any brain.
Consider that Tesla is trading over six times the combined value of Ford and GM. This despite the fact that Tesla has been losing market share in Western Europe, is facing quality problems in China and has only a small share of the global automobile market.
Bitcoin has surged more than 300% in the past three months. This soaring rise is the result of momentum trading, people buying because they see the price rising as others rush to buy more … also known as fear of missing out.
On top of all this is the news of the spending plans being proposed and enacted by the new Biden administration.
With more than $1 trillion in so-called free money already being prepared to hand out to Americans and businesses, they are now discussing forgiving up to $50,000 in college debt per person and sending monthly checks to parents with children.
At the same time, the Federal Reserve is keeping interest rates near zero, fueling speculation in areas like the housing market, where people are rushing to buy, driving prices even higher.
All of these factors should give us pause.
But just as experts assured us the Dot-com bubble wouldn’t burst in 2000, or that the housing market would not collapse in 2007, this time is different. If history has taught us anything it’s that trees do not grow to the sky, and this time is not different.
We don’t know exactly how this story will end, but it doesn’t take a genius to see it likely won’t end well. While no one has a crystal ball to predict the future, we would be wise to realize that this level of exuberance across so many financial sectors can’t last forever. At some point, interest rates will start to rise, markets and economies will shift, and just as Cinderella’s dreams were dashed when the clock struck midnight, many investors will face the same fate.
Now is the time for the average investor to be cautious, sticking to the basics, remembering that an investment that can’t be understood is not an investment at all, but rather a risky endeavor.
As Warren Buffet so wisely said, “Be fearful when others are greedy and be greedy when others are fearful.” Now is the time intelligent investors should start becoming fearful, or at least cautious.
As the old song says ”fools rush in where angels fear to tread.” when money is being made easily, and people with no apparent expertise are suddenly getting rich, smart investors should proceed with care.
The everyday investor would be wise to realize that the clock could strike 12 at any time, and only those who have acted wisely will be prepared when the magic ends and markets return to reality.
• Wall Street veteran Charles Mizrahi is editor of Alpha Investor and host of “The Charles Mizrahi Show.”
Copyright © 2021 The Washington Times, LLC.