This past weekend, I was in Florida with Chris Martenson and Nomi Prins discussing the current backdrop of the markets, economic cycles, and future outcomes. A bulk of the conversations centered around the current “everything bubble” that currently exists globally. Elevated valuations in stock prices, extremely low yields between in “junk bonds,” or intense speculation around “cryptocurrencies” all suggest we have entered once again into “bubble” territory.”

Let me state this:

“Market bubbles have NOTHING to do with valuations or fundamentals.”

Hold on…don’t start screaming “heretic” and building gallows just yet. Let me explain.

Stock market bubbles are driven by speculation, greed, and emotional biases – therefore valuations and fundamentals are simply a reflection of those emotions.

In other words, bubbles can exist even at times when valuations and fundamentals might argue otherwise. Let me show you a very basic example of what I mean. The chart below is the long-term valuation of the S&P 500 going back to 1871.

First, it is important to notice that with the exception of only 1929, 2000 and 2007, every other major market crash occurred with valuations at levels LOWER than they are currently. Secondly, all of these crashes have been the result of things unrelated to valuation levels such as liquidity issues, government actions, monetary policy mistakes, recessions or inflationary spikes. However, those events were only a catalyst, or trigger, that started the “panic for the exits” by investors.

Market crashes are an “emotionally” driven imbalance in supply and demand. You will commonly hear that “for every buyer, there must be a seller.” This is absolutely true. The issue becomes at “what price.” What moves prices up and down, in a normal market environment, is the price level at which a buyer and seller complete a transaction.