…[A] bubble is the state of a market before the crash. It is a situation in which assets trade at a price that is considerably higher than their intrinsic value…[and,] in my view…we’re currently in a bubble…The current S&P 500 P/E is at 25.09 (when the historical average is 15.61). [The question is,] “When will the market crash?” and [I see]…worrying signs that this could happen soon.
The comments above and below are excerpts from an article by Greed & Fear which may have been enhanced – edited ([ ]) and abridged (…) – by munKNEE.com (Your Key to Making Money!) to provide you with a faster & easier read.
Today everybody knows there’s too much liquidity in the financial system that is being provided by Central Banks’ ultra-loose monetary policies through quantitative easing, asset purchase programs of sovereign bonds, corporate bonds and even equities and too low (virtually zero or even negative) interest rates for too long. As a consequence, we have bonds trading with negative yields, not only sovereign but also corporate bonds.
I have no doubt that in a few years, we’ll look back and say this was a nonsense and an obvious bubble. In fact, savers are paying borrowers to lend them their own money and they still have the risk of losing their principal. Another way to put it is that savers are paying a new wealth tax to the government or that bondholders are subsidizing the companies they lend money to.
Don’t be mistaken, however, to think that this bubble is limited to negative-yielding bonds. Instead, it is fueling very rich valuations across all asset classes. In fact, if the safest bonds have negative yields, high yield bonds also trade at historical low yields, while real estate and equity prices are pushed higher for comparison reasons (or absence of a better alternative).
Are we in a bubble today?
My view is yes, we’re in a bubble. I call it the Central Bank bubble or the ZIRP bubble (zero interest rate policy) or NIRP (negative interest rate policy) bubble…
- the current P/E is at 25.09 (when the historical average is 15.61), the Shiller P/E is at 26.93 (when the historical average is 16.69) and current price-to-sales is at 1.92 (when the available historical average is 1.48).
- For the S&P to trade at its historical average, it would need to correct between 23% and 38%, depending on the metric used…
- [Any] attempts to justify current equity valuations with the fact that the earnings yield is higher than the Treasury yield, or through the idea that equities offer a higher dividend yield than Treasuries, are…flawed.
When will the market crash?
The current asset prices are being fueled by the Fed’s (and other Central Banks’) ultra-loose monetary policy so normalization of monetary policy poses a big threat to current equity prices (as well as real estate, fixed income, commodity and all other asset classes).
In this regard, there are worrying signs that this could happen soon:
- the libor rose to 83 basis points over the summer, the highest since 2009 and surpassing the levels seen at the peak of the European sovereign debt crisis and it seems to have already incorporated a potential 25 basis point rate increase by the Fed.
- Furthermore, Government bond yields in Germany, Japan and the U.S. have been rising over the summer specially in the longer part of the curve.
Few argue against the fact that asset valuations today are very expensive but many say that you should be in the game because this bubble can go on much longer than we think. They believe interest rates will stay “low for long” or “low forever” or “will get even lower” and that being in a bubble alone is not “actionable” enough. I disagree.
What other reason do you need to act? You have:
- eye-watering asset valuations,
- earnings declining for 5 consecutive quarters,
- the libor and government yields rising and
- the Central Bank’s speech changing as
- the inflation ticks up and
- the unemployment declines.
It is time to take profits, to increase your cash position or at least to buy some protection.
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We’re hurdling toward a massive financial crisis, and all we have to show for it are financial asset bubbles destined to burst, and when they do, they’ll wipe out the artificial wealth they’ve created for many decades in just a few years, as they did from late 1929 into late 1932!
In this article we review the characteristics and different stages of a bubble, present some recent asset price bubbles, and identify current conditions which match up with traditional bubble criteria.
While CNBC and other perma-bulls claim that the stock market is a great investment today, the smart money is already prepping for a disaster. Goldman Sachs has told its clients to “sell at the new high.” Credit Suisse just told its clients stocks “haven’t looked this worrisome since the tech bubble.” They’re correct. Stocks are in a bubble by virtually every reasonable metric.
The unwinding of the “Central Bank Bubble” will be worse than either the Dot.Com Bubble or the Housing Bubble. It seems like most investors continue to show apathy even with the warnings by us and quite a few others of the “unintended consequences” of the central banks doing things that have never been done before. Those investors are in good company because it appears to us that the leaders of the major central banks of the world do not have any idea of the “unintended consequences” either.
Where does the Dow go from here? Maybe up a little higher but, more likely, it’s all downhill from here though perhaps that statement is misleading. More like, down a cliff.
There is literally nowhere for the bond market to go except down and, when this bull market turns into a bear, it will create chaos and financial devastation all over the planet.
Many investors think that we could never have a crash like the melt-down in 2008 but they are wrong. The 2008 Crisis was a stock and investment bank crisis – but it was not THE Crisis. That will happen when the biggest bubble in financial history – the epic Bond bubble – bursts. Let me explain.
Should we be concerned when tepid economic growth and low inflation are accompanied by increasing public and private debt? Are we borrowing just to stay alive? [As I see it,] national governments will increase national debt loads in order to stay in power until one or more of them default. Then their will be financial panic which will most certainly be deflationary. Here’s why.
These days anything with a sustained gain is called a bubble that’s just about to burst so what’s an investor to do?
With valuations stretched, investors seem to be justifying their stock purchases here with the argument that we have yet to reach the mania of 1999-2000 but history has shown us that there doesn’t have to be a bubble for there to be a sharp decline in stocks. As we saw in 2007, it doesn’t mean there is no risk of a significant market decline or that valuations are compelling and that investors should be expecting above average long-term returns from here. They should not.
Once again the stock market is in full bubble mode. The market was already overvalued earlier this year and the froth continues to build. Valuations are off the chart and euphoria is setting in while, at the same time, you have inflation eroding the purchasing power of regular Americans not participating in this casino. All the signs of a bubble top are there – massive speculation, unexplainable valuations, and blind optimism – even though the fundamentals don’t make any sense. This article substantiates that contention.
In their infinite wisdom the Fed thinks they have rescued the economy by inflating asset prices and creating a so called “wealth affect”. In reality they have created the conditions for the next Great Depression and now it’s just a matter of time…[until] the forces of regression collapse this parabolic structure. When they do it will drag the global economy into the next depression. Let me explain further.
History strongly suggests that, rather than a return to a nice, placid world of “normal” interest rates, we are likely to see a continuation of the borrowing binge/asset bubble until real rates spike as a result of either soaring nominal rates soar or plummeting inflation. Here’s why that is the case.
So much analysis we see and hear lately is concerned with whether the stock market is in a bubble or not. The truth of the matter, however, is that bear markets do not begin due to bubble-level valuations being reached and then bursting, but in anticipation of half a dozen mitigating factors as outlined in this article.
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The benefits of being able to detect a bubble, when you are in its midst, rather than after it bursts, is that you may be able to protect yourself from its consequences. [Below are possible] mechanisms to detect bubbles, how well they work and what to do when you think a particular asset is in one.
The benefits of being able to detect a bubble, when you are in its midst, rather than after it bursts, is that you may be able to protect yourself from its consequences. [Below are possible] mechanisms to detect bubbles [and insights as to] how well they work:
The Fed has manufactured a parabolic move in the stock market…which is much more aggressive (and thus even more unsustainable) than witnessed at either the 2000 or 2007 stock market tops. Parabolas always collapse – there are never any exceptions – so when the pin finds this bubble it’s going to take down not only our stock market, but unleash a destructive force on the global economy.
Bubble predictions are headline-grabbing claims that are sure to attract reader/viewership and more than a few worried individuals who will be pushed to act but, like all forecasts, these bubble warnings should be taken with a grain of salt.
At some point we are going to see another wave of panic hit the financial markets like we saw back in 2008. The false stock market bubble will burst, major banks will fail and the financial system will implode. It could unfold something like this: Words: 660