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The Wolf is At the Door (Or How to Protect Yourself Against This Bubble)

By Paul Lamont




  More than 1 Trillion shares traded in speculative over-the-counter (pink sheets) stocks in December.   In the options market, option trading by retail investors registered 46 million contracts in one day in early January. Reporters for Bloomberg described events as "another day of euphoria" in "Day-Trader Heaven." Non-profitable tech companies have gone bonkers (see below).





  Wall Street is warning of "market excess" but is unable to provide useful advice. As Bloomberg reported; "BofA has also asked fund managers for the last 20 years whether they consider themselves to be taking a risk. This number has never been higher.”




Wall Street knows if they recommend anything other than "BUY", clients who are only focused on immediate satisfaction will take their money elsewhere.


The correction from this kind of speculative frenzy won't be the one-month correction of 30% we saw in March of last year. The mania is greater and the valuations are higher.



This is the third great bubble of the last 22 years. Jeremy Grantham, legendary investor and fellow student of financial bubbles, calls it “epic.”  He envisions a collapse rivaling the 1929 crash or the dot-com bust of 2000, when the Nasdaq Composite index plunged almost 80% in 31 months.



So, what to do?


As Sam Zell likes to say; "If everyone is going left, look right."


     If everyone is speculating, you should be allocating to cash (FDIC-insured bank deposits and/or short-term U.S. Treasuries). Just as it did from 2000-2010, cash will have a positive return (while stock indexes deflate.)


     What about the U.S. Dollar? Speculators have built up record short bets against the dollar. They will be forced to buy dollars when the margin calls arrive (since margin debt is at record highs.)


     Therefore, focus on not losing progress and hold cash. It’s an easy solution. Think of it as a portfolio holiday. Or a sabbatical.



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