A Warning About Bubbles

Apr 16, 2021

Vijay Bhambwani, Editor, Fast Profits Daily

A few ago, I recorded a video about why I think the market is not in a bubble.

But I did tell you to be cautious and watch the market carefully for signs of a bubble.

Well there have been signs and now they are getting clearer.

In this video, I'll give you my opinion of these signs of a market bubble and why you should pay attention to them.

Let me know your thoughts on this video in the comments.

Hi everybody. How are you doing today? I hope the markets are moving as per your expectation and as per what you have been analysing the markets and I hope I've made a difference to the way you think because the way you think and how you think is more important than what you think.

This is the first rule of behavioural science because we traders are brain warriors and we win with our minds and ideas.

In this video, I am touching upon a basic tenet of market bubbles, asset bubbles and how at the top or approaching the top there are invariably undeniable signs of excess in the markets.

As I record this video today on Thursday, hopefully will be uploaded on Friday. There are two things that caught my attention, one on individuals and two on institutions.

Revealing Tomorrow: The Great Indian Wealth Project

Now for the institutions. We already know that Archegos Capital is in trouble and Bill Hwang has already been a touted to book losses exceeding US$ 110 billion.

Now, I don't believe this is the final figure. I don't believe Credit Suisse or Nomura Securities have basically given you ultimate figure of how much they are writing off.

As a matter of fact, three days ago, Credit Suisse offered another block of reportedly close to US$ 2 billion of shares to recover even more money that Archegos Capital owed it. Now this is very simply the game plan every time there is a financial scandal or a crisis in the markets.

If you go back in time, right from Harsh Mehta scam, the LTCM scam Harshad Mehta was 1992. LTCM was 1997. The dot com scam and the Ketan Parekh scam in the year 2000. The global financial crisis, Year 2008, which was also a hedge fund crisis. Many hedge funds went up. Just go by what happened.

Initially, everybody, the governments, the regulators and the stock exchanges told you hey, there is a small problem and it will be contained. It's only later that they admitted that the problem was bigger than what they thought or it is going on, we are checking the books of accounts etc.

So typically, then they became contagious events. Just when you think Archegos Capital was the final straw that you've actually witnessed in the markets, you are now being told that there is a bad assets or distressed assets management company called Huarong Asset Management, which is threatening to go under.

Its credit default swaps, which means the probability of it defaulting, now this is a term you'd have heard in the movie The Big Short, are trading at life highs. Now this is part one of what I want to discuss in the video.

Part two is individuals. They are very prominent people from the rogue's gallery. Number one late Bernie Madoff. He died in prison, serving 150 year old sentence.

For people of my generation, Bernie Madoff is somebody who will not leave your mind space. He the guy who ran a hedge fund and created the largest Ponzi scheme and a scam in the world. He gave a above normal, stupendous returns quarter after quarter in payouts to people.

It was nothing but a multi-level marketing scheme where he would take money from new entrants and pay to the older guys with stupendous amount of profit, till the bubble became bigger and bigger. His modus operandi was two-fold.

Number one, he said, I have a very complex options trading secret, which I will not reveal to you.

Number two, when you went and threw money at him. Hey Bernie, take 50 million from me, he would tell you, my fund is closed, we are not accepting any new guys. It was only after you begged and pleaded with him that he would tell you, okay, just because I like you instead of 50 million I'm gonna take only US$ 20 million from you.

Guess what? The guys who were giving him money actually felt as if they were being obliged that their money was being accepted.

Finally, the bubble burst. Now Bernie left the earth two days ago. Similarly, I'm reading events about how a 23 year old swashbuckling trader in Singapore has been caught on four counts of fraud. Now this reminds me of another young yuppie trader around the time around which there was another scam. A big market scam. If you Google search and name, his name is Nick Leeson. A movie call rouge trader has been made on him.

Students of financial history in the markets will be blessed that they will not get caught and the heat of an asset bubble if they learn lessons from history. This is not just a video about an old man rambling like one of the guys, one of the viewers commented, why do you ramble? This is not a ramble. This is for you to learn. If you think it's a ramble, feel free to log out. It's that simple.

So this guy, the Singapore guy, has amassed more than at this point in time, more than 8 to $10 million Singapore dollars in wealth. Disproportionate assets and collateral worth 100 million have been seized by the regulators among other things.

If you know Singapore, you'll realise that living space is extremely expensive. There he was living in a three storey villa in Singapore. For a small island nation city that's steep. US$ 5 million worth of cars, each car.

Now, this guy collected US$ 1 billion from a rich set of clients based on commodity trades that were non-existent, and he was promising 15% profit every quarter and people were raining money on him.

So at some point in time, we ran out of ideas. He started collecting new money, started paying money to the older guys. Remember Bernie Madoff, but at some point in time, the chakkar has to stop spinning.

Why my telling you about Huarong Capital? Archegos Capital? Huarong Asset Management? Bernie Madoff? Why am I am telling you about Nick Leeson and why my telling you about Mr 10%? The guy who manipulated copper prices? The Japanese trader who manipulated copper prices? Why my telling you about the SRB trader was indicted in 2005 for manipulating prices of copper on the Chinese Commodity Exchange?

Does this all ring a bell? This has all happened during the phase of inflation of asset bubbles. If you read Calvali's book how bubbles burst, you will realise that there are palpable signs the markets are telling you that excesses are being committed.

People are taking shortcuts. They have over leveraging themselves. Bill Hwang of Archegos Capital l was actually reportedly now here again because his trades are masked swaps under various banks and friendly obliging brokerage firms will not know the exact exposure now, but there are reports that he was leveraged, hold your breath, up to 500 times.

So you have US$ 1. You're taking bets of US$ 500. Now what does that tell you? Just a quarter percent or half percent decline in the assets that you have, will wipe you out. That's your margin of error. Now, these are guys who will go first. Number two, Ponzi schemes like Bernie Madoff, Nick Leeson, etcetera will also go.

Typically these other small fries. These are actually the small fries. Even though Bernie Madoff was running the world's largest Ponzi scheme, it was tiny compared to the decline that occurred after the dot com bust.

Which means that a whole lot of people have taken shortcuts, which is human nature and the more you find such red flags being raised, the more you will feel that you're closer to a point where the market will stop rising, pause for breath, reassess itself and realise that there were some scandals, short cuts ,setting fitting, call it what you want in different languages, different slang terminologies. You will realise that shortcuts were being used to propel market prices higher.

Let us not forget the name of Henry Blodget that dot com Pied Piper who used to come on prominent television channels in the dot com era of 2000 and talk dot com stock prices up. Whenever he came on TV and recommended a dot com stock, the stock used to go up by 5, 10, and 20 times. Times, not percent, and he would go back to office and brag to his colleagues as to how stupid people were to listen to all and bullshit advice.

So this also happens. Henry Blodget, if you Google search him been debarred for life by the Securities and Exchange Commission from giving stock advice ever. These are very strange times, and you need to exercise abundant caution. It does not mean that you sell your portfolio tomorrow morning. These were signs that were coming out from the markets minimum of 12, if not 15 months before the bubble popped.

So nothing is happening tomorrow morning but for serious investors who are thinking of pumping money now for the fear of missing out, FOMO, I think this is time for a rethink. You need to be extremely careful.

For my friends who are looking at 8, 10, 12, 15 year, long term view on building portfolios, you have absolutely nothing to worry. The long term trend remains up. We remain bullish over the longer period, but there would be some quarters of declines. We don't know when.

I have never said I have a magic wand but if these signs are any indications, I think the market is actually giving out sirens of alert that you should be very careful in wary of putting young money. Plan ahead. Let's be careful out there and deploy our money as safely as possible.

On this conscious note, this is Vijay Bhambwani signing off for now, not before reminding you to click like on my video, if you agreed with what you saw. Click on the bell icon to receive instant alerts about fresh content being put up out here.

In the comments section, do let me know what you think about this video and help me reach out to fellow like-minded traders by referring my video to your family and friends.

I hope you have a very profitable day ahead. Vijay Bhambwani signing off for now. Thank you for watching. Take care. Bye.

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst

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3 Responses to "A Warning About Bubbles"

Vijay Bhambwani

Apr 21, 2021

Thanks Mr Agarwal. Please standby for trade alerts.

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Premkumar R

Apr 17, 2021

Thanks for your words of caution again.

Like 

Pankaj Agarwal

Apr 16, 2021

Hi Vijay

Great fan and a blind follower of yours.

Watching/reading all your daily Videos/Letters and have learnt a lot till date & this process continues.

Thanx for revealing this "BUBBLE TRUTH/TRIGGER/WARNING". 100% agreed.

whenever this happens we should be ready and in order to be ready for this, I request you to advice me few Derivative Stocks for SHORT SELLING, please.

THANKS
PANKAJ





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