Frothy Signals Suggest Caution, Says Puplava

Imagine the following two scenarios: You're a money manager and one of your bearish clients has been waiting for a stock market crash for years to get back in. Most of their wealth is in real estate, cash, and gold, and they are unwilling to invest in anything else. Suddenly, you get a call from this person asking if they should invest in bitcoin.

Second scenario: You're at your son's baseball game and one of the other dads mentions that he just invested over $100,000 in bitcoin but admits that he doesn't know much about it other than it's going straight up and people are making tons of money.

This is the type of irrational exuberance you typically see in a bubble, Chris Puplava at Financial Sense Wealth Management said in an interview with us last week.

Consider Bitcoin Is Ground Zero for Late-Cycle Market Euphoria

Market Signals

“What we typically see near tops is a tremendous amount of excess liquidity and credit chasing asset prices higher,” Puplava said.

That’s what we’re seeing now, he added. For example, the same thing occurred during the housing bubble, with so much credit in the system chasing home prices higher.

There are other anecdotal signals, such as the recent sale of a da Vinci painting for a record-smashing $450 million. Or the fact that the Bank of Japan and ECB have bought more than $2 trillion of financial assets this year alone.

This is part of the reason European junk bonds are yielding less than US treasuries, Puplava noted. A 10-year US Treasury is yielding 2.4%, while in Italy, which has third largest debt-to-GDP ratio of any country, bonds are yielding 1.75.

“You’re compensating for less risk in Italy than you are in the US Treasury,” Puplava said. “This tells you how much money is artificially inflating prices above where they should be.”

A Cryptocurrency Bubble

With bitcoin hitting stratospheric levels, many are concerned we’re seeing a cryptocurrency bubble.

For example, Puplava mentioned the two anecdotal scenarios above, illustrating a level of euphoria and herding we haven't seen with investors since gold in 2011, housing in 2005-2006, and the tech bubble before that.

Bitcoin has gone from $1,000 to over $10,000 in less than a year and people are chasing it, he said. For someone to drop $150,000 after a massive move “when they know nothing about Bitcoin, but just want to speculate in does that not smell of a bubble?”

When it came to his more bearish clients who, after remaining in cash for years, are now calling him about bitcoin, Puplava told listeners:

“I can’t get them to buy a 3-month T-bill, but they want to buy Bitcoin. I can understand the mania, but given the anecdotal evidence, to me, this does signal that we’re probably near a top. … It’s too easy right now to make money, and that should concern people.”

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