<February 20, 2025>
At the end of 1999, I developed a small rash on the back of my head. It felt like a bug bite and itched badly. After a few days, the hair around the rash began falling out. My hair loss continued and started to form a perfect circle. After the circle grew to the size of a golf ball, I decided to go to the doctor. My doctor informed me that it wasn’t a bug bite, it was alopecia.
“What’s alopecia?” I asked.
“It’s an autoimmune disorder that attacks your hair follicles,” he explained. “Have you been under a lot of stress?”
“Stress? Have you seen the Nasdaq? And how about eToys! Of course I’m stressed. We’re in the middle of a stock market bubble, and I’m about to lose my job!”
He responded, “If you don’t manage your stress better, you could lose every hair on your body.”
“You can’t be serious! Every hair? You sure know how to make a patient feel better!”
While steroid treatments helped slow the spread, my hair refused to grow back. However, one day in March 2000, I walked into work and everything changed. Without warning, Internet stocks were crashing. In addition to no longer feeling like an idiot for not participating in the tech bubble, my hair grew back almost instantly! To this day, I’m asked by investors attempting to time the market if my hair is falling out.
The tech bubble had a profound impact on me as an investor and person. It was an extremely challenging and humbling experience. I went from thinking I knew everything about investing to feeling I no longer understood the financial markets. After years of strong performance, I found myself in last place among my peers and benchmark. As tech and growth stocks soared to unimaginable heights, most of my small cap value holdings declined day after day. In relative and absolute terms, 1999 was the worst year of my career. It was so bad that I enrolled in graduate school!
Fortunately, as all asset bubbles do, the technology bubble popped. With a full head of hair, I felt vindicated, but more importantly, relieved. The fight was over, and my life was back to normal. Considering how large the bubble inflated, it was considered by many, including myself, as a once-in-a-lifetime event. Thank goodness! I never wanted to go through that again.
Of course, it wasn’t over. In response to the market crash and resulting recession, the Federal Reserve responded with easy money and inflated another asset bubble: this time in stocks and housing.
While my hair didn’t fall out, near the peak of the housing bubble in 2007 I developed a sinus infection. It was strange because I didn’t feel sick and never had a fever. After a couple of months, I visited my doctor and learned I had a chronic sinus infection. He said stubborn sinus infections can often be related to an autoimmune disease. Just as my doctor asked me during the tech bubble, he asked if I was under a lot of stress.
“Are you kidding me? Have you seen the price of real estate in Ponte Vedra Beach? Condos are going up all around us!” I exclaimed. “We’re in an enormous housing bubble! And don’t even get me started on the stock market.”
Treatments, including sinus surgery, were ineffective. Just as was the case with the tech bubble, the ultimate cure didn’t come until after the housing and stock market bubbles crashed. In addition to creating tremendous value in small cap stocks, the market’s collapse cleared up my sinuses. There was value in the air, and I could smell it! It was wonderful.
After the housing bubble popped, I was certain Wall Street, investors, and policy makers had finally learned their lesson. No more asset bubbles! As a double-bubble survivor, I was looking forward to the return of rational financial markets. Unfortunately, I was mistaken again. The Federal Reserve responded to the collapse of the housing bubble with even more easy money and “emergency” policies that lasted for over a decade. Asset prices and equity valuations spiked again, forming what some have called the Everything Bubble.
In early November 2024, the small cap market ripped higher, increasing 8% in a week. For most of the current market cycle, I’ve been in good health, refusing to let excessive asset inflation bring me down. However, there was something about the November rally that got to me. Maybe it was exhaustion, disappointment, or I just let my guard down. Regardless of how it happened, my sinus infection returned.
After several weeks of suffering, I visited my doctor. He asked the usual questions, and I informed him of my history with sinus infections. He followed up by asking if I was under a lot of stress.
“Well, let’s see. Stock valuations are insanely expensive. Home prices are through the roof. There’s a cryptocurrency called Fartcoin with over a billion-dollar valuation. Credit spreads are tight as a drum. And don’t even get me started about zero-day stock options and leveraged ETFs! Oh, and with all this going on, the Fed says monetary policy is restrictive. You can’t make this stuff up, Doc!” I explained.
My doctor told me I had a sinus infection and offered me antibiotics. However, I knew antibiotics were ineffective against what was really ailing me. I didn’t have an ordinary sinus infection, I had bubbleitis!
Bubbleitis is an autoimmune disorder that is caused when the immune system responds to runaway asset inflation and extreme overvaluation. In effect, in its effort to defend the body from asset bubbles, the immune system becomes overprotective and inadvertently harms healthy tissue. Unfortunately, there are no known cures for bubbleitis. However, over the years, we’ve developed a list of steps that can help investors avoid bubbleitis or reduce its symptoms.
1) Avoid CNBC, a known carrier of the bubbleitis virus. Frequent guests touting overvalued stocks, cryptocurrencies, or whatever else is soaring in price can infect rational investors with bubbleitis.
2) Use social media wisely or not at all. Reading about or watching others get rich without effort can irritate the skin, sinuses, and significantly reduce productivity.
3) Step away from the screen or office and go for a walk. Since being reinfected with bubbleitis, I’ve been taking walks or exercising during lunch. It’s been very helpful.
4) Avoid Federal Reserve press releases, speeches, and press conferences. While we may be accused of being conspiracy theorists, we believe bubbleitis was leaked from a lab in the Eccles building. Don’t be fooled by the Fed’s message about inflation and employment—their main goal is to inflate asset prices and spread the virus.
5) At all times, keep at least six feet away from wealth-flaunting crypto and tech bros, option traders, and top-performing managers wearing expensive loafers.
6) Remain patient and disciplined. We believe history is on your side—bubbles always pop and bubbleitis always goes away. In the meantime, there’s nothing you can do to stop the mania. Let those around you overpay and let the cycle run its course. Instead of fighting the trend or arguing with an overconfident crowd, spend your time preparing for the end of the cycle and future opportunities.
As believers in full market cycles, we’re often asked when the current cycle will end. Although we don’t time markets, there is one indicator that has nailed the top of the last two stock market bubbles: my immune system. With another sinus infection corresponding to record high equity valuations, we’re currently on alert and hopeful we’re approaching the end of what has been an extraordinary cycle of asset inflation. For investors infected with bubbleitis, the end of the current stock market bubble (the third of our careers) can’t come soon enough!
Eric Cinnamond
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Definitions:
S&P 500: The Standard and Poor's 500 (S&P 500) is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
Nasdaq 100: The Nasdaq 100 Index is a list of the 100 largest non-financial companies by modified market cap trading on Nasdaq exchanges.
Crypto and tech bros: Investors that speculate in cryptocurrencies and technology stocks for short-term gains.