Most investors remain indifferent to negative divergences and historic dangerous valuations. This is primarily because they’re ahead on most of their holdings and assume that they will continue to experience gains indefinitely.

Of late, people have been buying into bonds and real estate with an insatiable appetite, again based upon recent outperformance, with complete disregard for some of these assets being at or near all-time highs. These highs are not just in absolute terms, but also compared with relative benchmarks which have existed for decades or centuries.

Meanwhile, investors remain indifferent toward the relatively few true bargains that do exist because most of those assets fit into the category of “fallen angels”. Whenever the greatest number of investors is most eager to own whatever is incredibly expensive, the biggest negative surprises inevitably follow. This is precisely what will occur over the next two or three years. When we finally reach the opposite extremes almost no one will want to participate in some of the best bargains for stocks, corporate bonds, and real estate in more than two decades. Why Because they’ll be traumatized by the extent of their losses, frightened by the extreme up-and-down volatility of most assets in years including 2016 and 2017, and easily brainwashed by the mainstream media into believing that it will take many years for the economy to recover.

During a transition from a multi-year bull market to a multi-year bear market, the outperformance by companies which benefit from rising inflation relative to companies which are harmed by it become obvious to average investors. By that time it will be too late to have a good piece of the run. The commodity producers and emerging markets completed their bottoms mostly in late 2013 and early 2014. Since then the shares of many commodity producers and emerging-markets have been among the top performers. However, this pattern has been choppy and investors are mostly indifferent toward participating, both of which indicate that the greatest gains for inflation-loving assets still lie ahead of us.

Remember that before we reach a market top in inflationary expectations, the average investor has to believe that inflation is indeed, a major concern.