Bubbly

Is it a bubble?  Since bubbles are defined by their popping I’m not making any predictions, but:

On the affirmative side, only something like 15% of run ups have lasted longer than the current stock market rise. (I’d give you a citation for that factoid past my own math but really you should just go over to zhedge and try to wade through all the crap Tyler’s been throwing lately. I can’t be bothered). Additionally, multiples are at unusual highs and measures like the S&P market cap to GDP ratio that Buffet likes (one of his failings honestly, why use a ratio of a stock to a flow?). So all of the skeptics are using historical standards.

On the other hand, look at bond yields. They’re low. Why should equity yields (multiples) be any higher, beside the standard risk premium. Real interest rates are negative-ish. It would be more concerning if equity yields were way off. The whole idea of a “new normal” indicates that historic comparisons aren’t worth much.

The ultimate question to ask is about what the current run up is based upon. The internet bubble was based on speculation that unprofitable companies would eventually become gold mines. The payoff was pretty far down the road. The housing bubble was even worse because the assumption was even more problematic; asset prices only go up. Can a bubble be created on the basis that “there’s no where else worth investing”?

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