EDITOR'S NOTE: Robert Kiyosaki of “Rich Dad” fame may say things with a bit of a sensationalist flair, but when you separate style from substance, he’s actually offering some very practical and plain advice. Take his 2002 book Rich Dad's Prophecy: Why the Biggest Stock Market Crash in History Is Still Coming… and How You Can Prepare Yourself and Profit from It! The biggest crash is “always” still coming. It just so happens that the 2008 financial crisis, which a smart few saw coming, occurred after the publication of his book. Kiyosaki also calls gold and silver “God’s money” which smacks of cheap evangelism worthy of a cringe response among most critically-minded thinkers. Still, they’re “natural” elements that happen to be considered "sound" monetary assets. The point is: the guy has got a lot of useful things to say, and the essence of his advice isn't nearly as outlandish as his way of saying things. Well, now he’s warning us about S&P 500; that the SPY (S&P 500 index fund) is due for a “terrible” crash, one he describes as absolutely catastrophic. Should we believe him? Read on to get a sense of the rationale behind the warning.
- The famous founder of the 'Rich Dad' wealth-building business recently offered an extremely unsettling assessment of the global economy.
- He believes that SPY is in for a terrible crash.
- We share our view on his grim warning and how we are navigating the markets right now.
- We're currently running a sale at my private investing ideas service, High Yield Investor, where members get access to portfolios, market alerts, real-time chat, and more
The famous founder of the 'Rich Dad' wealth building business - Robert Kiyosaki - recently offered an extremely unsettling assessment of the global economy, tweeting:
Many of you know I do not invest in equities, bonds, ETS or MFs. Please DO NOT listen to what I'm going to say next: "I would get out of paper assets." The world economy is not a "Market." I believe economy is the biggest bubble in world history. God have mercy on us all.
Taking a bearish view on the near-term outlook of the economy and possibly even the stock market NYSEARCA:SPY is nothing extraordinary given that many mainstream economists and financial institutions are expecting a recession to hit much of the world in 2023. However, what 'Rich Dad' is insinuating is much worse. He is not merely predicting a downturn for the broader economy and a period of weak performance for the stock market, he is predicting economic calamity. As he also recently stated:
Gold, silver, Bitcoin may protect your WEALTH…but not your INCOME. As economy crashes, stock markets go bust, pensions crash and unemployment rises a SIDE HUSTLE may provide you income. Who knows? Your side hustle may grow into the next Amazon or Bitcoin. Take care. Be aware... The biggest losers are people who have never lost. Those are the people sitting on their 401ks right now. My generation. The former generation. They're in serious trouble...When they came into the market in the '70s, the stock market was taking off; the housing market was taking off. The U.S. came off the gold standard in '71. So the baby boomers will get the biggest shellacking of all generations. It's really sad. I can see it coming.
Effectively what he is saying is that investing in stocks is a losing proposition, real estate will likely crash, and that cash will also prove to be ineffective against inflation. Instead, he views gold (GLD), silver (SLV), Bitcoin (BTC-USD), guns, and individual side businesses/hustles as the best ways to protect against what is coming.
While we certainly share his view that an economic downturn is coming to the United States, in this article we will look at his gloom and doom prediction for SPY much closer in order to see if SPY is likely headed for a total crash. On top of that, we will also share how we are navigating the markets right now.
Is The S&P 500 Really In The Greatest Bubble In History?
There is no doubt that the SPY has had a strong decade with a 9.34% CAGR for investors, its rough 2022 notwithstanding:
When going back over the past 30 years, the total returns were roughly in-line with the 9.64% CAGR that the index has generated for investors. When looking at the surface level numbers, while it certainly does not look like SPY is trading at a deep discount to its historical total return trend, it also does not appear that SPY is stretched at overextended levels and due for a major crash.
Now, let's look at five different popular market valuation models to see if we come to the same conclusion:
First, the Buffett Indicator - which is the ratio of the total U.S. stock market to U.S. GDP - indicates that the market is currently valued slightly above the historical trendline, and therefore in the fairly valued to slightly overvalued range:
Source: Seeking Alpha
The yield curve valuation model implies that the stock market is significantly overvalued as the recent inversion of the yield curve is sending a strong recession signal to the markets given that past yield curve inversions have been very reliable indicators of recessions:
Source: Seeking Alpha
The SPY's current P/E ratio relative to its historical average since 1950 indicates that the stock market is currently overvalued as well given that it is current 45% higher than its modern-era average of 19.6. What this is essentially saying is that the market is currently pricing in some combination of above-average growth and below-average interest rates well into the future. While this is certainly possible given the exponential technological innovation taking place today, if inflation does not come down soon, interest rates will probably not be able to remain in a below average range for long:
Source: Seeking Alpha
Given that the SPY's current value is above the historical trendline by 0.9 standard deviations while the 10-Year Treasury yield is about 0.7 standard deviations below its historical trendline, it appears that the SPY is currently in between being fairly valued and slightly overvalued when looking at the performance of SPY relative to interest rate levels:
Source: Seeking Alpha
The final model we will look at here is the inflation-adjusted SPY Mean Reversion model. This model assumes ~10% annualized total returns for SPY in setting its trendline. Based on the current data, SPY is overvalued, but is still less than 1 standard deviation above its historical trendline. Typically, the market reaches a level of 2 standard deviations above the historical trendline before crashing:
Source: Seeking Alpha
What does all of this mean? Well, obviously no one knows the future for sure and there could always be a black swan that emerges - such as a Chinese invasion of Taiwan or a nuclear war in Eastern Europe or Korean Peninsula - that could send the stock market crashing. On top of that, inflation remains a threat which - if not effectively reigned in by policymakers - could seriously damage the economy and equity markets for years to come. If either of those bearish scenarios come to fruition in the not-too-distant future, 'Rich Dad' will likely be proven prescient in his predictions.
That said, from the data we see in these models, we can conclude that while the market is certainly not cheap right now and is likely to deliver below average returns over the medium term, it does not appear to be in the "biggest bubble in history." Could we enter a severe depression? Of course, it is always possible. However, given the very bullish trends in technological innovation, barring the emergence of a severe black swan, we believe we are unlikely to experience an epic economic collapse.
Given our view that a recession is likely, the SPY is likely to underperform but not totally crash moving forward, and that there are a growing number of potential black swan catalysts emerging, SPY does not appear to be a particularly attractive investment right now.
As a result, at High Yield Investor, we are investing in individual dividend paying stocks where we find pockets of value and quality converging. As a result, we can enjoy and live off of the steadily growing and attractive stream of passive income from our investments even if the market goes through a prolonged period of below average returns. Furthermore, during periods of relative market weakness, it can be easier for diligent stock pickers to outperform the market as has proven to be the case with us at High Yield Investor. We are also investing in some undervalued, high yielding stocks that tend to benefit from periods of high volatility and macro uncertainty in the world as a way of hedging against a black swan event emerging and proving Mr. Kiyosaki's prediction prescient.
For long-term patient investors who are committed to dollar cost averaging into low-cost funds like SPY, however, we think the market is not so overvalued that panicking and running for the hills is prudent either at this point. Rather than selling your position, investors with 5+ year time horizons, limited debt, and plenty of liquidity to handle living expenses should be able to continue to calmly dollar cost average into their SPY position and view any meaningful dips - over even crashes - in the market as an even more exciting buying opportunity. Only when the market reaches severe levels of overvaluation in the aforementioned valuation models do we think it is prudent to try to meaningfully trim your stock portfolio in favor of cash or other more conservative investments. Otherwise, in general, time in the market has proven to be a far superior long-term investing strategy to trying to time the market.
Originally published on Seeking Alpha.