This articles is from @SahilBloom who is one of the best mentor about finance that willing to share all of his knowledge for free. So if you like the post, please give him a follow and share his lessons.

Is This a Stock Market Bubble? There has been plenty of talk calling our current market environment a “bubble” following its meteoric rise from March lows. I’d like to take an objective look. Let’s use Ray Dalio’s “7 Classic Signs of a Bubble” as our framework...

This is a qualified yes. P:E ratios are broadly quite high, though perhaps misleading given the lack of forward guidance.

Some valuation measures (adjusted for historically low rates) are more reasonable.

Yes. There is a broad-based expectation of rapid, face ripping earnings growth (the “V-shaped recovery” everyone keeps talking about).

We have severely contracted, but the market is expecting massive expansion.

Yes. Stocks only go up!

Equity put/call ratios hit historically low levels in recent weeks. “Stocks only go up” has become a mantra repeated by bloggers, tweeters, live-streamers and the media alike.

This is a qualified no. Use of margin (i.e. leverage) has contracted on a YoY basis, though the data is only through April.

Overall economy debt levels are ballooning, but we are just looking at the stock market for now.

Unclear and a bit hard to determine at a stock market level (vs. in individual industries like housing, etc.).

The use of unemployment and CARES Act benefits to speculate in the markets tilts this one towards a yes.

Yes - no question.

Robinhood has experienced a massive surge in new account openings, as everyone decides to try their hand at “doing the stocks.” Constant media reporting of the rush and returns further accelerate the trend.

Money printer go “Brrrrrrr!”

Central Banks globally have taken dramatic, unprecedented steps to stabilize financial markets, including through lowering interest rates and massive direct purchases.

So where does this all leave us? Based on this framework, it seems that most of the signs of a bubble either exist or may exist in the stock market today. This doesn’t mean that there aren’t opportunities (always money to be made!), but manage risk carefully as you proceed.

There is so much talk of “credit” and “debt” right now, but as with most topics in finance, the discussion turns complex and leaves most people scratching their heads. What does it all mean? Why should you care? A quick primer on the topic...

Credit is the granting of buying power. Debt is a promise to pay it back at a later date. Contrary to popular belief, credit and debt are not evil - in fact, they can be good! Whether they are good or bad largely depends on what the buying power produces in terms of income.

Take a loan to buy a couch, that is bad. You won’t have income to pay off (“service”) the debt. Take a loan to buy a delivery robot who earns you money, that is good. You have income to service the debt.

Income Growth > Debt Growth = Good

Debt Growth > Income Growth = Bad

Taking on debt is really just pulling forward future spending into the present. It reduces your future spending as you service that debt. If you are earning more at that future date, that is fine! If you aren’t, you may be unable to service the debt (a “default”).

Economy wise, the key is that spending is used to fund productive activities that stimulate growth and enable us to service the debt. So what’s the problem today? Well in short, we have not been doing that. Since 2000, we have added $185T in debt to achieve $46T of growth.

If that seems unsustainable, it’s because it is. At some point, that bill comes due! Sure, we could print more money (kick the can!), but eventually, if debt service costs exceed incomes, we are in trouble. These are the “Zombie” companies or economies you read about.

Our global credit binge has set our course for a wave of defaults. This is a classic “debt cycle” and has repeated itself throughout history. We play with fire, get burned, then we do it again! So this is where we are and why it matters. This concludes Credit & Debt 101.

This articles is from @SahilBloom who is one of the best mentor about finance that willing to share all of his knowledge for free. So if you like the post, please give him a follow and share his lessons.