FOMO: “You've Never Been Paid Less to Take on Risk”

By the Curmudgeon with Victor Sperandeo

Week in Review:

The 25-bps cut in the Fed Funds rate on Wednesday, September 17^th was widely expected. Victor called for a 50bps rate cut as did Trump appointed Fed Governor Stephen Miran, who also serves as chair of the White House Council of Economic Advisers which threatens the Fed’s independence.

The Fed’s “dot plot” revealed a wide dispersion of views, but the consensus was that the Fed would cut rates at least two more times this year, equaling another 50 bps. Miran was again the outlier suggesting that rates should fall below 3% in 2025, penciling in three more quarter-point cuts than any of his Fed colleagues did.

U. S. bonds, oil and other commodities declined from Wednesday, while stocks rallied (much more below). Most well-known economists are still looking for a slowdown in the economy as is Victor.

l U.S. retail sales increased by 0.6% in August 2025 with “seasonal adjustments.” Without those adjustments, sales would have decreased. It should be stressed economic numbers coming from the U.S. government are to be observed but taken with “a grain of salt.”

l The National Association of Home Builders (NAHB) Builder Confidence Index held steady near its lowest reading on record at 32 indicating that builders remain very pessimistic about the current and near-term outlook for the housing market.

l Housing Starts fell -8.5% in August while Building Permits fell -3.7% to a new cycle low. The breakdown in Permits is a warning flag for the housing market, and a leading signal that the economy could be in trouble.

l The Leading Economic Index (LEI) from the Conference Board fell -0.5%, well below expectations, as it continues to trigger the Conference Board’s Recession signal.

Multi- Asset Mania:

The S&P 500 and tech-heavy Nasdaq Composite — up 14% and 17%, respectively, this year — set fresh record highs on Friday along with the DJI average. The small-cap Russell 2000 also topped its November 2024 peak on Thursday – one day after the Federal Reserve cut interest rates 25bps. Not to be outdone, the MSCI All Country World stock index also closed at new all-time high (see chart below).

Corporate credit spreads –the interest rate that high-grade U.S. companies pay over U.S. Treasuries are now below 0.8%, their tightest level since 1998. In fact, Microsoft's 2027 bond is yielding approximately 3.87% and its 2026 bond yields about 3.74%—both noticeably below the 10-year U.S. Treasury yield of 4.133%. Meanwhile, high yield credit spreads are at an all-time low. As of September 18^th, the ICE BofA U.S. High Yield Index Option-Adjusted Spread (OAS) was 2.71% vs. the index's long-term average of 5.24%. Low credit spreads typically indicate optimism about the economy, as investors are willing to accept less compensation for the higher default risk of holding junk bonds over much safer U.S. Treasuries.

Equities, Bitcoin (and other crypto currencies), Gold, junk bonds, residential real estate, and AI private company valuations are either at or near historic highs.

For example, AI mania poster child Open AI is valued at >$500 billion, even though it is not expected to be profitable until 2029. The company reportedly told investors it expects a cumulative cash burn of $115 billion through 2029, significantly higher than earlier projections. This is roughly $80 billion more than previously estimated.

U.S. Economic Uncertainty Index:

What’s so astonishing about this multi-asset mania is that U.S. economic uncertainty has never been higher than this year. The U.S. Economic Policy Uncertainty Index (see graph below) is sky high due to factors like increased uncertainty surrounding trade/tariffs, immigration (deportations and restrictions), increased inflation expectations, soft job market, declining consumer confidence, huge budget deficits, high long-term U.S. interest rates and a highly volatile political environment. All those factors combine to create an unpredictable economic outlook that can hinder investment and real economic growth. For example, real personal consumption expenditures are expected to decline from 2.8% in 2024 to 1.9% in 2025 and 1.4% in 2026.

Other Voices:

“It’s fair to say that you’ve never been paid less to take risk,” said Jamie Patton, co-head of global rates at US asset manager TCW. “It’s not like this is specific to any particular asset class. Every price seems to be indicating perfection.”  Yet she warned there was an “increasing paradox” with rising geopolitical and trade risks, as the economic impact of Donald Trump’s trade war becomes clear.

Ben Inker, co-head of asset allocation at GMO, said “fear of missing out (FOMO). . . does seem to be what is going on, the assumption that everybody should be able to get rich.” Inker opined that wafer-thin credit spreads were the “most mystifying” element of the rally, while the small-caps record high was striking given the weakening U.S. economy. “I just do not understand how you could not think that the path of economic outcomes is pretty volatile.”

-->Much more on the U.S. Economic Uncertainty Index below.

“We’ve got really, really high geopolitical risks, an economic situation where the [US] job market is slowing and inflation is not fully under control, and extreme and historic market concentration,” warned Kasper Elmgreen, chief investment officer for fixed income and equities at Nordea Asset Management. “Valuations don’t leave a lot of room for error.”

Investment firm GQG Partners this month described the stock market as “dotcom on steroids” — a reference to the 1990s internet stock boom and bust.  “Investors [are] seemingly making a one-way bet on the AI mania, while appearing to ignore alarming fundamental issues,” said the GQG client note, pointing to lofty earnings multiples, slowing revenue growth and the rising investment needs of the big AI firms like chipmaker Nvidia. 

Matt Eagan, portfolio manager at Loomis Sayles, said that sky-high asset prices suggested investors were banking on “productivity gains of the kind we have never seen before” from AI. “It is the number one thing that could go wrong.”

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Margin Debt Surges to Record High:

Margin debt is the total funds that speculators have borrowed from their broker to invest in stocks, ETFs and other financial assets. The higher it is, the more bullish retail investors are.

U.S. margin debt jumped +$37 billion in August, to a record $1.06 trillion. Over the last three months, margin debt has surged +$139 BILLION. On a YoY basis, the margin debt levels have risen to a whopping +$798 billion, or +33%. When adjusted for inflation, margin debt increased +3% MoM and +29% YoY, reaching its highest level since November 2021.

Consider this chart (courtesy of Yardeni Research) showing the correlation between the enormous rise in margin debt vs. the Wilshire 5000 market cap:

Margin debt is considered a "double-edged sword" because it offers the potential for magnified gains (in bull markets) using leverage while simultaneously exposing investors to the risk of amplified losses due to falling prices and margin calls (in bear markets or sharp selloffs).

For example, if a stock or ETF is funded 50% by margin debt and drops by 50%, the speculator loses 100% of their cash and still owes the brokerage firm interest.

If the margined security falls below a certain level (the maintenance margin), the brokerage will issue a "margin call," demanding that the speculator deposit more funds or sell off some securities to cover the shortfall. cannot meet the margin call, the brokerage has the right to sell their securities without warning to cover the loan, often at an unfavorable price. This forced selling can lead to even greater losses and contribute to huge market downturns.

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ULTRA-Extreme Stock Market Valuations:

As we’ve covered this topic extensively in the past, we substitute further comments with charts and explanations. Pictures speak louder than words!

1. The Buffett Indicator (Market Cap to GDP Ratio) has entered the exosphere. The 2000 dot-com bubble looks undervalued in comparison.

2. The Shiller P/E ratio, also known as the Cyclically Adjusted Price-to-Earnings (CAPE) Ratio, is an S&P 500 stock market valuation metric that averages the index's inflation-adjusted earnings over the last 10 years to smooth out earnings volatility. It provides a long-term perspective on market valuation, with higher ratios suggesting potential overvaluation and lower ratios suggesting undervaluation. It is now at its second highest level of all-time.

Current Shiller P/E Ratio: 39.95 +0.09 (0.22%) - 4:00 PM EDT, Fri Sep 19, 2025 (see chart below):

Mean: 17.28

Median: 16.05

Min: 4.78 (Dec 1920)

Max: 44.19 (Dec 1999)

Shiller P/E Ratio for the S&P 500:

Economist David Rosenberg believes the very high Shiller CAPE ratio on the S&P 500 signals an ongoing "gigantic price bubble" and predicts negative stock market returns. Historical data shows that when the Shiller CAPE ratio is above 35, subsequent one-year forward returns for the S&P 500 have consistently been negative. Forward returns over 1-, 3-, 5-, and 10-year periods when the Shiller CAPE ratio gets above 35 are shown in the right most column of the table below. "It's the only cutoff point where every single time is negative," Rosenberg said in an interview with Business Insider on Thursday.

Source; Rosenberg Research

Rosenberg believes that the seemingly never-ending stock market price bubble is characterized by rising prices even when fundamental economic indicators are worsening.

"This is what a euphoric state looks like we're seeing it in real time. We are in a gigantic price bubble that is ongoing. And you know it's a price bubble when prices move up in the face of negative fundamentals." More on this theme in our Conclusions below.

3. Parabolic Rise in Stock Market Valuation - March 2009 to date:

The injection of liquidity into the financial system by global central banks coupled with government stimulus programs to fight COVID played a significant role in fueling the enormous rise in stock market valuations since the last significant bear market ended in March 2009. That’s illustrated by the chart below.

When a market rises in a parabolic manner, it typically indicates a period of unsustainable price appreciation driven by speculation, unrealistic expectations and super strong investor sentiment.

4. InvesTech’s Artificial Intelligence Index:

It’s made up of AI-heavy stocks that are representative of investor sentiment and the potential asset bubble surrounding the AI phenomenon. Where those AI bubble stocks go, so will investor sentiment and the market will likely follow. What does this chart (2019-2025) look like to you?

5. Stock Market Concentration:

We’ve noted in several past Curmudgeon posts, the excessive stock market concentration. Only 10 companies in the S&P 500 account for 40% of its capitalization. This concentration is even greater than 2000 at the height of the dot.com boom. In essence, the health of this bull market has become increasingly dependent on a handful of stocks. Once they fall from favor, this concentration will have the opposite effect and send the S&P 500 spiraling lower which will have a severe negative effect on passive index investments.

"The vast majority of the top 10 are all very likely to move together," Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth. told Business Insider. "So if you have one or two of those tech names come out with, let's say, weak earnings next quarter, it's likely that all eight of those are going to move downward and sell off simultaneously, which is going to have an outsized impact on the level of that index…..If you go back to a period like April, where we had the post-Liberation Day sell-off, those names also led the market downward. There are a lot of things that are lining up to be concerning," Dominic added.

Victor’s Market Comments:

The excuse for equity market strength is that corporate earnings are being boosted by interest rate cuts. Since everyone has long ago discounted lower rates that is questionable. With the bull market now very “long in the tooth,” any event that is bearish will cause a steep sell-off as margin is at all-time highs.

My portfolio is long Gold, Silver, and 5-year T-Note futures, plus T-Bills. I’d rather be conservative under these conditions. Risks are very high.

Conclusions:

Asset bubbles never have a happy ending. They eventually burst when speculative demand can no longer sustain inflated prices. When they pop the declines can be steep and sudden, catching many investors off-guard.

The collapse wipes out significant investor/speculator wealth, particularly for those who bought into the bubble late. The resulting loan losses and declines in asset prices can erode the balance sheets of financial institutions, potentially leading to crises. Businesses often fail, leading to job losses, reduced spending, debt deflation, and potentially triggering a recession or depression.

End Quote:

“At the same time that the labor market appears to be slowing, risk markets seem exuberant,” wrote Neel Kashkari, Minneapolis Fed president, in a Friday blog post, adding that “any sign of new economic weakness could pop [that] exuberance.”

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Wishing you good health, success and good luck. Till next time……

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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