And finally, a little local news for many of you from my partner Ian Krietzberg…

Now, on to the main event…

No one rings a bell at the top of the market and declares that it’s been a nice run, so it’s time to get out. But there’s no denying that the stock market is very frothy these days. (As usual, this is not investment advice.) Both the narrow equity market index (the Dow Jones Industrial Average) and the broader indices (the Nasdaq and the S&P 500) are at, or near, their all-time highs, and have been steadily climbing week after week, month after month, despite the slight pullback this week. And this is not just a Trump II phenomenon, as the president likes to claim. This era of irrational exuberance began at least five years ago, when the Federal Reserve stepped into the Covid fray and resumed its policies of quantitative easing, which boosted the bond market and restored confidence in the stock market. (And if you take a longer view, it’s been going on since the aftermath of the 2008 financial crisis, and maybe even as far back as 1982, when the equity markets really took off after decades of stagnation.) Since March 2020—when Tom Hanks got Covid while filming in Australia and the world shut down—the D.J.I.A. is up 63 percent. During the same period, the Nasdaq is up 165 percent. The S&P 500 is up 126 percent.

There has also been a significant rally in the market for the riskiest high-yield bonds, or so-called junk bonds. During the aftermath of Liberation Day, in April, the yield on the junk bond index spiked to 8.5 percent. It’s now nearly 200 basis points lower, at 6.8 percent. In other words, we’re back to being very comfortable with taking risks.

But there have been plenty of warning signs that trouble is ahead, as I’ve been noting recently—including talk of private credit cockroaches from Jamie Dimon, and the even more evocative cockroaches in the coal mine from Howard Marks. On a recent episode of Bloomberg’s Odd Lots podcast, DoubleLine Capital founder and bond king Jeffrey Gundlach warned of growing risks in both the debt and equity markets. He suggested that the $1.7 trillion private credit market, which has been ablaze for years now, is rife with “garbage lending.” He then offered a comment that aligned with my own recent reporting. “The next big crisis in the financial markets is going to be private credit,” Gundlach said. “It has the same trappings as subprime mortgage repackaging had back in 2006.”

As for the equity markets, Gundlach didn’t mince words there, either. “The market is incredibly speculative, and speculative markets always go to insanely high levels,” he warned, citing in particular his concerns about the seemingly out-of-control speculation in both A.I. and its attendant data centers. He said he doesn’t see many good investment options and is shifting into cash, taking a page from the legendary Warren Buffett’s playbook. Berkshire Hathaway now has nearly $400 billion socked away in cash and short-term investments—a record—just as Buffett is stepping back from his company and turning it over to his chosen successor, Greg Abel. (What Abel should do with all that cash will be a topic for another day.)

So, what to do? Keep riding the wave or hunker down in the relative safety of cash, Treasuries, gold, or, gulp, maybe even Bitcoin? (Alas, the latter has had a rough month, falling 15 percent, to around $91,000 per coin.) Fortunately, as I discovered in reading our friend Andrew Ross Sorkin’s excellent new book, 1929, this is not a new debate. So, return with me, if you will, to a similar discussion about the risks, real or imagined, that surrounded the stock market back in September 1929.

On the concerned side was Roger Babson, whom The New York Times described back then as a “statistician.” He was more than that, of course—a graduate of M.I.T., an economist, and an entrepreneur. He founded several colleges, including the eponymous Babson College, outside of Boston, that is renowned for graduating leading entrepreneurs.

Babson had grown increasingly worried about the growing stock market bubble in the years leading up to his September 5, 1929, speech at the 16th annual National Business Conference, in Wellesley. “I repeat what I said at this time last year and the year before,” he said, “that sooner or later a crash is coming which will take in the leading stocks and cause a decline of from 60 to 80 points in the Dow Jones Barometer.” He continued: “Fair weather cannot always continue. The economic cycle is in progress today, as it was in the past. The Federal Reserve System has put the banks in a strong position, but it has not changed human nature. More people are borrowing and speculating today than ever in our history. Sooner or later a crash is coming, and it may be terrific. Wise are those investors who now get out of debt and reef their sails.” Shades of Gundlach?

Notably, in a parallel to today’s Magnificent Seven (or 10), Babson highlighted that the D.J.I.A. was being driven by the performance of a mere 40 or so of the 1,200 stocks listed on the New York Stock Exchange. If the performance of those 40 stocks was removed from the index, he argued, “we find that about one-half of the remaining stocks have declined during the past year. This means that a great many people have lost money as well as made money.”

He ended the speech on a particularly grim note: “Some day the time is coming when the market will begin to slide off, sellers will exceed buyers, and paper profits will begin to disappear. Then there will immediately be a stampede to save what paper profits then exist. Investment trusts will first begin to sell. They have so broadly advertised their paper profits that they will be very anxious to cash in on them.” Once the selling starts, he hypothesized, “there may be a stampede for selling which will exceed anything that the stock exchange has ever witnessed.”

Did the audience heed Babson’s admonition? Of course not. Soon after his speech at Wellesley, the Yale economist Irving Fisher sought to refute Babson’s prediction of a near-term stock market crash. “Stock prices are not too high and Wall Street will not experience anything in the nature of a crash,” he averred.

Then Fisher launched into a shtick that now sounds like a precursor of the Elon Musk worldview. “We are living in an age of increasing prosperity and consequent increasing earning power of corporations and individuals,” he declared. “This is due in large measure to mass production and inventions such as the world never before has witnessed. The rapidity with which worthwhile inventions are brought out is the result of the tremendous research laboratories of our great industrial concerns. Application of these inventions to industry means greatly enhanced earning power. This is a new and tremendously powerful factor in the industrial world and one which never before existed.” Stock dividends were increasing, he said, because corporate earnings were growing “rapidly,” and stocks, he predicted, would become no more risky than high-grade bonds. Imagine that!

Anyway, we all know who won this little debate. A month later, the markets cratered, ushering in the Great Depression and a period of economic hardship (exacerbated by tariffs, of course, and the Fed’s tight money policies) that lasted from 1929 well into World War II. I don’t know if we’re headed for something like that again. But I do know that financial crises, on average, occur once every 20 years. And the last one was 17 years ago.

I also know that Sorkin has been expressing concern when asked about the current parallels to 1929. So let’s give him nearly the last word, from the literal last page of his book. There, he wrote that, ultimately, the “story” of 1929 was about human nature: “No matter how many warnings are issued or how many laws are written, people will find new ways to believe that the good times can last forever. They will dress up hope as certainty. And in that collective fever, humanity will again and again lose its head. The enduring lesson is not that booms can be prevented or that busts can be fully averted. It is that we need to remember how easily we forget. The antidote to irrational exuberance is not regulation by itself, nor skepticism, but humility—the humility to know that no system is foolproof, no market fully rational, and no generation exempt. The greater the heights of our certainty, the longer and harder we fall.” I couldn’t agree with him more.

We’re living in an era when all the guardrails have come down. When was the last time you heard the words “Securities and Exchange Commission” or “Commodity Futures Trading Commission” in connection with any real enforcement? The regulators have tuned out, and animal spirits are running wild. And no one complains (even if they object or are seriously worried) because, after all, who doesn’t love a party? And who dares question the ultimate authority in the White House for fear of him turning the power of the federal government on them? If you doubt me, just take a look at the guest list for last night’s “formal dinner” honoring M.B.S.

So the markets just carry on unabated, unchecked, with the Mag 7-10 pushing higher and higher, as if somehow a $4.6 trillion market capitalization for Nvidia or a $1.3 trillion valuation for Tesla were justified by their fundamentals. Again, not investment advice, but I can’t help but think we’re closer to Roger Babson’s prophecy than Irving Fisher’s.

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