bull market beer goggles

Take Off Your Bull Market Beer Goggles

Erik Financial Education, Markets, Thoughts of a Mastermind 5 Comments


Let me vent here a little bit.

I’m so sick of the constant bull market cheer leading from the personal finance blogging community that we need to have a chat.

It’s time that we take a second to have a rational conversation about the stock market. Many people have on, what I’m calling, Bull (Stock) Market Beer Goggles. (for those of you who may not know, beer goggles are when you’ve been drinking alcohol and things look and seem more attractive than they actually are).

Maybe that last line offended you and you are thinking, “The stock market always goes up!” or “Sure dude, the stock market will go down at some point, let’s move on” or maybe even “My investing timeline is 30 years, so I’ll be able to weather whatever you are talking about.”

I’ve heard all of those arguments – what I’m talking about is more systemic and big picture. 

You are going to have to think bigger here and get out of your echo chamber for a few minutes.

I’m not an expert, nor will I ever call myself that.

Instead, this post is a call to action for rational thinking about investing and thinking critically about how you view your money.

“People start being interested in something because it’s going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren’t, and their spouse is saying can’t you figure it out, too? It is so contagious. So that’s a permanent part of the system.” – Warren Buffett

First, a Discussion about Capital

Let’s start off by going back to the fundamentals of capital and work.

What drives the economy? Investment and money which is deployed towards productivity.

Traditionally (and I’m talking about over the last 5000 years here – not over the last 5 years as non-critically thinking people love to look at), capital was deployed to produce something of value: food, transportation, housing or things which contribute to the development of these things.

Over time, private companies and private property were established (LLC’s are only 40 years old), and now, ownership of companies are traded on a daily basis (through the stock market, but also in private companies – though this is less liquid).

Healthy economies have a steady flow of money throughout where companies are investing in their present and future (through paying their employees a fair wage, and also performing research and development), while also not engaging in speculative business or overextending themselves financially. The currency in use and assets throughout the country have values which are consistent in this scenario.

Unhealthy economics have companies exhibiting other behaviors: going way into debt to finance their operations, buying back their own stocks, not paying their employees’ a fair wage, and not looking to provide actual value. Unhealthy economics have a devalued currency which has lead to inflated asset levels – leading to a wealth gap between asset owners and non-asset owners.

I’d argue that we are in the second case instead of the first case here.

You might not agree, but that’s fine.

Let me explain.

Take off Your Long Run Bull Market Beer Goggles

As I mentioned in the introduction, I’m going to make you get out of your 21st century bubble. What I’m talking about here isn’t some doomsday b.s. that is going to plague us tomorrow.

No, again, this is a discussion which I hope to be rational and leading to critical thinking on your part. I’m not an expert nor a prophet.

With that being said, I think it’s time for me to ask you to take off your long run bull market beer goggles.

No, I’m not saying that stocks are a bad investment. No, I’m not saying that the stock market is going to crash and never come back (I don’t have a crystal ball).

What I’m saying here, is there are some facts which you need to consider before continuing to parrot the advice of financial advisers, authors, and CNBC “market experts”.

There are four things I want to cover here in the argument against this long run bull market beer goggle discussion:

  • GDP vs. Stock Market
  • GDP vs. Stock Market vs. Debt vs. Central Bank Holdings
  • Wages vs. GDP
  • Weak form of Energy and Technology Development and Ingenuity

Note: it’s hard to draw conclusions and generalizations looking at big picture things, but when trends, convergences and divergences are pronounced and stick out, we can’t ignore them.

GDP vs. Stock Market

Many economists love Gross Domestic Product, or GDP. Providing a number for “GDP” helps a government make decisions on the economy. If the GDP is not growing, maybe it’s time for some stimulus. If the GDP is growing too fast, maybe it’s time to cut back a little bit.

A country’s gross domestic product can be calculated using the following formula: GDP = C + G + I + NX. C is equal to all private consumer spending in a nation’s economy, G is the sum of government spending, I is the sum of all the country’s investment, including businesses capital expenditures and NX is the nation’s total net exports, calculated as total exports minus total imports (NX = Exports – Imports).

Would you say that the stock market should roughly follow this number? If the GDP is a measure of economic activity and growth, then it roughly follows that companies within the same nation should probably be growing at a similar rate.

Below, I’ve plotted two lines on the same chart – indexed to 1970 (this is an apples to apples comparison with this indexing). One line is GDP for the United States. The other line is the Wilshire 5000 Price index, or the price index which looks to follow all of the publicly traded stocks in the United States. Currently, there are around 3,600 in this index – I’ll be using this as a proxy for the stock market.

You would think that these lines should be about the same given our reasoning above… right?

wilshire vs gdp 1970-2018

Looking at the graph above, up until the late 90s, the stock market and GDP were roughly in line. After 1995, there have been huge fluctuations in the stock market, and now looking, when indexed to 1970, the stock market has grown to a level almost double that of what the level GDP has grown.

Is this right or wrong? Is the stock market overvalued or not? Let’s move on to the next point where I added 2 more lines to the chart above.

GDP vs. Stock Market vs. Federal Debt

We already had seen GDP vs. the stock market above. Now, I want to talk about something commonly ignored when discussing the economic situation: federal debt.

“Deficits don’t matter” – Dick Cheney, former Vice President

Here’s a question for you: where do you think federal debt plays into the economic growth and prosperity that we saw above?

Debt pulls the future to today. Debt is a future claim on energy and productivity. We all know this from personal finance: going into debt today will require sacrifice in the future to get out of that debt.

Interestingly enough, apparently our politicians and many of our fellow citizens don’t realize this, as, since 1970, the level of total debt has increased to a level nearly triple the level of GDP!

This debt will need to be handled at some point (either though default or through hyperinflation). It won’t be pretty but to say it never could/will happen is a little bit ignorant and arrogant of history (history doesn’t repeat but it sure does rhyme).

debt wilshire and gdp over time 1970-2018

If the economy is doing so well, why we have to keep borrowing more and more money? Just a question to ponder. I’m not an expert and I have no idea if what I’m saying makes any sense.

Wages vs. GDP

Let’s keep it high level here. From the first example, we already looked at the relationship between the stock market and GDP (the stock market is nearly double the level from 1970 when compared GDP).

Now, let’s look at median personal income. Median personal income is the level at which 50% of working individuals (ages 15+) earn below this amount, and 50% of working individuals earn more than this amount.

Note here, real means that there it is inflation adjusted. There’s no non-real median income time series.

If the “economy” is so great that is has tripled in real terms in the last 40 years, then why haven’t wages? Median wages are up about 30% in 40 years. How is this sustainable? How can a consumerism based economy keep going without a strong working class?

Thinking a little bit bigger picture, if the level of the stock market is nearly double the level of the GDP, then how does this make sense when thinking about wages? How can this inequality be acceptable? Again, how can this party keep rocking when a large majority of the population (and arguably the world) is contributing to this fictionalized financialized mess?

personal income vs gdp 1974-2018

At some point, wages either need to come up, or the stock market will have to come down. This divergence will not last long term.

Weak Form of Peak Energy and Technological Growth and Ingenuity

All of the above was speaking financially.

What I hate about all of talk about investing and financials though is the ignorance towards what actually goes into the economy: ENERGY.

Any conversation about the future cannot start by not considering the environment and where we are going to get energy to power our new iPhones, Androids, big moving pieces of metal (cars, airplanes, etc.), and basically everything else most people use on a daily basis.

I’ve already went down the “Earth is a closed system” path on this blog, and I don’t have a crystal ball, so I’m not going to make any assertions or predictions because my guess on a decrease of the availability of natural resources is as good (bad) as anyone.

Instead, here’s what I’ll say: a common argument against peak energy is that governments and companies will transition to another energy source.

While this is a guarantee (it’s happened over time), do you think this transition will be a clean one? What happens if we have to go to 100% nuclear energy because oil dries up? Right now, in the United States, nuclear energy only accounts for 20% of power today.

To increase the energy production by 5 times, this couldn’t be done because we don’t have the infrastructure in place. We would need to build more nuclear plants to do this. How could we do that swiftly? With oil – but in this scenario, we don’t have this.

This scenario too is under the assumption that a solution could be formalized and finalized with an agreement from both sides of the political aisle. (good luck on a quick one there)

Oil is What Powers the World (Today)

Another interesting thing to think about under this category is both how much oil the United States uses, how and from who the United States gets their oil, how the dollar has played a substantial role in this trade, and how dependent on oil we are as a globe.

Without plentiful oil, globalism is reduced significantly. It’s not rocket science – without plentiful oil, shipping would take longer. Things would “shrink” (become more regional again).

One thing I’m keeping my eye on is shale oil. In the late 2000s, shale fracking became the new hot thing to get oil out of the ground in the United States. It has provided a buffer for us to figure out an alternative to oil, but instead of this, it seems just more of the same (more oil will always be there for us (?)).

One thing though to watch out for is not just the oil production, but the companies that are doing the shale oil fracking themselves. As the NY Times just reported on recently, many of these companies are up to their eye balls in debt. Look out below if the price of oil starts downwards.

I’m not an energy expert but hope you look into these things for yourself as they relate to the overall economic picture. I’m writing this post to challenge your thinking.

Let’s move on to some short term developments you should think about.

Take Off Your Short Term Bull Market Beer Goggles

While I think that this bull market beer goggles discussion is predominantly a long term and long run argument, we need to think rationally about, there are a number of red flags when you dig in today to be a little bit worried about the current situation.

Again, I don’t have a crystal ball, I’m not recommending you do anything from this information, and I’m not going to try to predict anything.

That being said, here a number of things you need to think about when looking at stocks as an investment in 2018.

For short term considerations, I’m going to talk about:

  • Corporate Buybacks vs. Capital Expenditures
  • Price to Sales Ratio
  • Geopolitical, Political, and Social Issues

Corporate Buybacks vs. Capital Expenditures

Corporate buybacks are the most absurd thing ever. Buybacks are when companies take money and “buy back” their own stock.

When someone is buying in the stock market, stock prices tend to go up. That being said, corporate buyback price movements are not market driven (and you could argue they are legalized insider trading moves).

Buybacks are a way of “giving back” to the shareholder, but at what cost?

This year, in 2018, buybacks are up 48% on a year over year basis for S&P 500 companies.

buybacks vs capex

At the beginning of 2018, the tax cut went into effect. Where $4,000 could have been given to every employee in America, most companies decided they would go the risk-free route and buyback their stock.

The price movements are not market driven and not indicative of the underlying companies’ performance.

Remember our discussion about capital from above? If capital is not allocated towards investment and research, then you better be sure it’s being used wisely elsewhere.

You might have a different opinion of buybacks and their use, but I just want to present this as something to be aware of in 2018.

Price to Sales Ratio

A financial ratio which is not favored too much but is less likely to be manipulated is the Price to Sales Ratio of a company or companies.

Simply put, this ratio looks at the stock price of a company divided by it’s revenues. We can all agree here that good companies make a lot of money (have high sales aka revenues?)

If the price goes up, the ratio goes up. If the price goes down, the ratio goes down. Similarly, if sales go up, the ratio goes down and if sales go down, the ratio goes up.

In September 2018, the Price to Sales Ratio for the S&P 500 is higher than it was in 1929 and 2000.

This means that compared to 1929 and 2000, 2 years preceding the biggest crashes in history, the biggest 500 companies have price to sales ratios which are higher.

Since we know how ratios work, this means that sales are either slow, or prices are high – neither indicative of strong performance going forward in my non-expert opinion.

Geopolitical, Political and Social Issues

I rarely write about politics on this blog, but they are constantly in our face these days. Take the Supreme Court nomination process which is occurring right now: both sides of the aisle are spewing hatred at each other.

Sexual assault is never welcome and is a horrible thing. At the same time, if the United States is a nation where you are innocent until proven guilty, then why are people so quick to judge an individual based on an accusation?

I don’t know all the facts of the story, so I’m going to stop here, but looking as an outsider and seeing the hatred and division, I can’t say with a straight face that things are going to get better any time soon.

Taking a step back a little bit, there are a number of other things which are occurring in the world which are posing risks to the greater US stock market:

  • Emerging Markets
  • Trade War
  • Supposed “Election Collusion”, FBI probes, etc.

While you could say, “Oh well, there has always been crap going on politically around the world which didn’t affect the stock market in the long run”.

I don’t see a logical inconsistency here, and these are short term risks. That being said though, things are also more connected than ever. There is $500+ trillion in outstanding notional for derivatives out there in the world. Good luck unraveling that cleanly if things start moving wildly.

Crushing Student Loans

Check out this tweet from my friend, Matt.

This is absolutely absurd.

$300,000+ in student loans??!!??!!

This isn’t a student loan article, so I’m not going to comment on this too much, but let’s think critically for a second.

Matt cannot be the only one in this kind of student debt. Oh right, that’s because he isn’t.

Student debt is 33% of the government’s assets and totals $1.5 trillion in balance. New graduates, instead of paying off their loans, could be using their paychecks to buy houses or start businesses. Student loans are a serious plague for millennials and it’s not a joke – it’s just sad.

When 44 million people have student loans (out of 325 million, or nearly 15%), how can this be a bullish indicator for the economy?

Look back 30 years: how many people had student loans? Answer: very few.

Over the last 30 years, the stock market has been an unstoppable bull. Again, my question to you is, can this be sustained when a majority of consumers are swamped in debt?

I don’t know the answers, but I’m sure thinking hard about these different things with regards to my investments.

Concluding Thoughts on Taking off the Bull Market Beer Goggles

Just because the market is at all time highs, doesn’t mean that these highs are indicative of the overall economy.There have been huge doses of stimulus (tax cut and super low interest rates for years) which have inflated the various mainstream assets classes here in 21st century.

Take off the Bull Market Beer Goggles and think critically for a minute. 

I get math: the market has returned 7% over the last 100 years (I have 2 math degrees, thank you). Stocks are great for young people supposedly but there are plenty of risks and other factors to consider.

To ignore the assumptions (namely, to ignore how those 7% returns were achieved), is to be ignorant and arrogant of what could and probably will happen in the future: a decline which could look similar to Japan.

Countries, individuals, and companies are all saddled with debt, and with debt, there is an extreme need for lots of plentiful and cheap energy. Out of this energy, lots of productivity is required to get out of that debt. With these production needs, cooperation will need to occur and at this point, it’s not looking great for many individuals.

I hope I’m wrong because I truly want peace, happiness, and simplicity.

Critical thinking is SO IMPORTANT in life. I hope this article has challenged your thoughts, and you can take this information and do what you believe is right for your situation.

Thanks for reading,


Take off your Bull Market Beer Googles



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Comments 5

  1. I really appreciate this article. Personal finance bloggers do tout the stock market as the golden goose for financial independence, and it can be extremely useful. I myself wish I’d known more about investing earlier and started earlier. However, it is important to have a diversification of assets and to not put all your golden goose eggs in one basket. This is where I get a little concerned about people trying to become FIRE’d at a really young age, as it takes a lot of money to sustain yourself for 40+ years and you might be in trouble if something does happen in the stock market for an extended period of time. Thank you for sharing.

    1. Post

      Thank you Tawnya for your thoughtful comment and thank you for stopping by 🙂

      Yes I completely agree and through some of my recent articles dating back to this July, I talk about why it’s important to consider all assets. Going overweight stocks is great in a backtest, but when looking at the factors which lead to this performance, how can one say it’s a guarantee to keep going up?

      Have a great day!

  2. This is a great piece of work, I was looking forward to seeing it when I heard you on a podcast. I think you’re on to a number of reasons we’re going to have to temper our expectation on equities, the biggest of which is the markets are self-correcting. I’m a bit optomistic the market is already self-correcting. This isn’t from firm data that’s out there, but what I’m seeing from talking to and lending to small businesses all the time.

    Labor costs are going up and getting scarce, that’s already and will continue to be a big redistribution of corporate profits from buybacks/dividends to a combination of Capital Spending and Labor.

    Rising interest rates are causing some companies to rethink how much leverage they put on their balance sheet. This is especially true for commercial real estate. There’s still too much bank capacity out there driving terms looser, but that should correct itself in time.

    The student loan debt issue is real, but the government took over most of that and its more of a taxpayer issue. These tax rates aren’t sustainable with this level of spending, so something eventually gives. Unfortunately politicians only seem to do the right thing after all other options have failed. There’s still the healthcare bomb with some obvious but politically unpopular solutions for both sides.

    Personally, I’m slowly growing my cash allocation and moving a bit more conservative with the equities I own. That isn’t necessarily right for everyone though, I’m at my FI number and preservation of capital is as important as growing it.

    Keep up the good work

    1. Post

      Thank you very much Mr. Shirts for this thoughtful comment 🙂

      What I love about your perspective is that it comes from a banker point of view. When you are a person who has spent time in a role determining who gets funding and who doesn’t, the view is more rational (in my opinion).

      At your level of being well into the 7 figures, going more conservative is great and I’m glad you’ve been able to get to that point, but also glad you are taking steps to solidify your financial position.

      That’s what scares me the most here is people who have huge allocations towards stocks and consider themselves “RE”. Sequence of returns risk is a real thing. Look at Japan since 1990. Good luck to many if we have something like that here.

  3. Pingback: Q3 Recap and Asset Allocation - Stop Ironing Shirts

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