 Are we in a bubble? Is the economy in a bubble? Are stocks in a bubble? Well, I recently summarized Ray Dalio's book Big Debt Crisis and in that book he shares the question list he uses to see whether something is in a bubble. So we're going to go through that question list, through that checklist to see whether the American economy and the stock market are in a bubble or not. But at the end of the video you will know the answer. Well, of course they are in a bubble, but you will at least know why they are in a bubble. These are the questions. Prices are high relative to traditional measures. Prices are discounting future rapid price appreciation from these high levels. There is broad bullish sentiment. Purchases are being financed by high leverage. Buyers have made exceptionally extended forward purchases. New buyers are coming into the market and there is a stimulative monetary policy that threatens to inflate the bubble even more. Good day, fellow investors. My name is Sven Karlin and I am an independent investor, independent stock market researcher and doing the opposite of what the crowd does has done very very well for me in the past and I think it will do well for me in the future. So as I'm a little bit a contrarian, I like to position myself in relation to the risk and reward. I am a little bit scared about what's going on now in the market. Nevertheless, let's go through each of those questions that Ray Dalio shared with us and see where are we now in the bubble top probability of recession point. Let's start. Prices are high relative to traditional measures. Well, the US stock market is expensive and prices are much much higher than traditional measures. If we look at the cyclically adjusted price-to-earnings ratio for the SAP 500 that takes into account 10 years of earnings, 10 year average earnings, it shows how stock prices were higher only during the dot-com bubble in the last 150-40 years. But let's not focus only on stocks. Let's look at housing. The housing price-to-income ratio that shows what are home prices in relation to what you earn is also extremely high. It's not that high as it was in 2008, but it is 50% higher than it was in 1995 or 1997. So home prices are also relatively expensive. So to answer question one, yes, prices are expensive when looked from a historical perspective. First indication that we are in a bubble. Let's go to number two. Number two, prices are discounting future rapid price appreciation from these high levels, which means that everybody expects that in the future prices will even increase further. If we take a look at the SAP 500 and SAP 500 forward expected earnings, all we can see is fast growth. So the blue line is the SAP 500 that has reached 2,900 points almost and the black line are SAP 500 earnings that are on the right column. So those earnings expected forward earnings are now above 172 points and rising fastly. As you can see, just a year ago, they were around 140 points expected forward earnings. However, if we look at real earnings, real SAP 500 actual earnings, those level is at 116 points, not 170, 116. And the market expects those earnings to be at 175 points in the next 12 months, which implies huge growth. That's 50% implied growth. As for home prices, the huge run up in prices up to 2018 showed bubble characteristics, but it has been cooling off as interest rates go up. Nevertheless, we look at the macro here, 2014, 2018, huge run up in prices. What's important to look here is that increased interest rates, what the Fed is doing, has been tightening lately and even this week has tightened, is putting down home prices, which is normal, where higher interest rates pull down as it venues. It has not yet happened on stocks, but might happen in the future. So to answer the question, yes, future price appreciation is priced in the stock market. Everybody expects huge growth. It has been priced into the housing market, but there we might have already seen a top. So indication here, housing is a little bit more realistic than the stock market, much more sentiment in the stock market, because buying a house is something real, buying stocks is not that real, into people's perspective. So let's continue with the third question. There is broad bullish sentiment. Let's see, Kudlow states the US economy is crushing it. Consumer confidence is close to record highs. As you can see here, consumer confidence, it's always high just before the next crash comes. The fear and greed index from CNN, you can see, okay, now it's a little bit neutral, perhaps of what's going on with Tesla, Facebook, but one year ago extreme greed, one month ago, greed, one week ago, greed. So during the last month, year, it has been all greed, greed, greed, greed. So extremely bullish sentiment. So what's the answer? Yes, the sentiment is extremely bullish. Number four, purchases are being financed by high leverage. No, this is not a bubble. Consumer credit is just 50% higher than where it was in 2008, and it is just 10 times higher than where it was in 1980. Of course, I'm joking here, 10 times higher, come on people, 50% higher consumer credit. So everything that's going on is financed mostly by debt. And debt is a self-reinforcing cycle that when it turns around, it's a self-reinforcing cycle downward. So clear indication of a bubble. If we look at stocks, margin debt is at historical highs. Here you can see the margin debt is 665 billion, the debit balance account. So extremely high, just to mention as a comparative note, the margin debt was 263 billion in February of 2010, and 314 billion in July of 2008. So the margin debt is now doubled and what it was in July. So the answer, yes, purchases, stocks, inflation, home prices, everything is financed by debt, thus there is more and more leverage in the system. Again, an indication of a bubble. Number five, buyers have made extended forward purchases. If we look at the level of business inventories, those are 33% higher than in 2008. So it's not that much if this is not adjusted by inflation. It could also be okay. So answer, let's say, let's put a maybe or a mild yes here, not that bubbly indication. But okay. Number six, new buyers have entered the market. Now the percentage of Americans owning stocks didn't really go up that much lately, as millennials don't invest that much in stocks. As you can see here, if you are 45 and older, so black line, the percentage of people that own stocks is up to 61%, but millennials have jumped 2014 to 2016 when stocks were doing very good, but have declined to 37% now. So millennials are really not buying and not rushing into the market. Very important to note here is how when stock markets crash, people leave the market. We can see here the middle class ownership of stocks has declined from 72% in April 2007 to 50% in April 2016. This is an indicator of how unfortunately people buy high and sell low because of their fear to lose even more. And this is something you have to keep in mind when investing in stocks. However, the number of new entrants in the market is not high with stocks, but is with buying a house. New buyers are rushing into the home market. They're not buying stocks. They're buying homes. The percentage of mortgages issued to firms time buyers makes up a record share of new mortgages. So now close to 50% while it was down below 30-35% in 2012. So they are rushing into the housing market. To answer the question, new buyers are not into stocks, which is in a bubble because of the wealth gap that has been created. So those who have more and put more into stocks, but they are rushing into buying homes and there is again an indication of a bubble. It doesn't have to be the complete average. It's important that some parts of the economy are in a bubble estate to make everything in a bubble. Number seven, stimulative monetary policy threatens to inflate the bubble even more and tight policy to cause its popping. So interest rates are already tightening and we can expect more in December. However, if you look at the historical interest rates, those interest rates are still accommodative, still supporting the economy. So still there is monetary policy support. You can see here that the interest rates are still much, much, much, much, much, much below the historical average. On top of monetary stimulus, there is huge fiscal stimulus. Look at the federal surplus of or deficit. It is in a deficit of just $665 billion for 2017 and the deficit is expected to reach $1 trillion in 2019. That is huge fiscal stimulus. So to summarize the questions, one, two, three, four, five, six, seven, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes. Yes. Now what to do? Well, it all depends where you are in your life. Are you about to retire? Are you just starting out? Do you want to buy a house? So it's a very, very difficult approach to tell you exactly what you have to do. So I'm going to give you more options. I personally, I have a portfolio that buys, as I said, things around the world that are not in a bubble that are relatively cheap and I like to sell those when those are in a bubble. It's something completely opposite to what is a normal portfolio with SAP 500 stocks. But for me, it has served me very well. And you can check my stock market research platform to see something if you want diversification from what you now own. And that's especially good if you own a lot of SAP 500 stocks, treasuries, to diversify also a little bit away from the dollar. There is a little bit of everything, however, mostly emerging markets and value in those emerging markets. So one is, okay, I can buy good businesses all around the world, be diversified, be hedged a little bit with gold, gold miners, have some hedges, perhaps buy some put options. That's something I will be doing in the future. So that's a different perspective on what to do. However, as we talk about Ray Dalio, tomorrow I'll make a video about an all weather portfolio that might give you an indication of what you can do if you prefer lowering your risk and going more into an all weather so that whatever happens, you are relatively protected. Thank you for watching. Looking forward to the comments. I'll see you tomorrow in the all weather portfolio video.