Is The US Stock Market Bubble About To Burst?
March 04, 2014 | Tom Olago
Share this article
According to the stock markets, the U.K and U.S economies are in historic booms. In the U.K, on 21 February 2014 the FTSE 100 climbed to a new height of 6,838. At this rate, it may soon surpass the highest ever level reached since the index began in 1984 – that was 6,930.
This is according to a recent report from theguardian.com titled ‘This is no recovery, this is a bubble – and it will burst’, writes Ha-Joon Chang. “…the current levels of share prices are extraordinary considering the UK economy has not yet recovered the ground lost since the 2008 crash; per capita income in the UK today is still lower than it was in 2007. And let us not forget that share prices back in 2007 were themselves definitely in bubble territory of the first order…
The situation is even more worrying in the US. In March 2013, the Standard & Poor 500 stock market index reached the highest ever level, surpassing the 2007 peak (which was higher than the peak during the dotcom boom), despite the fact that the country's per capita income had not yet recovered to its 2007 level. Since then, the index has risen about 20%, although the US per capita income has not increased even by 2% during the same period.
This is definitely the biggest stock market bubble in modern history…Even more extraordinary than the inflated prices is that, unlike in the two previous share price booms, no one is offering a plausible narrative explaining why the evidently unsustainable levels of share prices are actually justified.”
Analysts typically explain stock market rises based on such factors as prevailing market trends, economic factors and new technologies. Ha-Joon explains that during the dotcom bubble in 1999, the predominant view was that the new information technology was about to completely revolutionize our economies for good. Similarly, in the run-up to the 2008 crisis, inflated asset prices were justified in terms of the supposed progresses in financial innovation in derivatives and structured financial assets, and in the techniques of economic and monetary policy.
This time around, no one is offering a new narrative justifying the new bubbles because, says Ha-Joon, there simply isn't any plausible story: “…Those stories that are generated to encourage the share price to climb to the next level have been decidedly unambitious in scale and ephemeral in nature: higher-than-expected growth rates or number of new jobs created; brighter-than-expected outlook in Japan, China, or wherever; the arrival of the "super-dove" Janet Yellen as the new chair of the Fed; or, indeed, anything else that may suggest the world is not going to end tomorrow…
Most investors know that current levels of share prices are unsustainable…they are aware that share prices are high mainly because of the huge amount of money sloshing around thanks to quantitative easing (QE), not because of the strength of the underlying real economy. This is why they react so nervously to any slight sign that QE may be wound down on a significant scale… investors pretend to believe – or even have to pretend to believe – in those feeble and ephemeral stories because they need those stories to justify (to themselves and their clients) staying in the stock market, given the low returns everywhere else.”
Ha-Joon’s ominous conclusion is that: “…. stock market bubbles of historic proportion are developing in the US and the UK, the two most important stock markets in the world, threatening to create yet another financial crash. One obvious way of dealing with these bubbles is to take the excessive liquidity that is inflating them out of the system through a combination of tighter monetary policy and better financial regulation against stock market speculation…the danger here is that these policies may prick the bubble and create a mess…the best way to deal with these bubbles is to revive the real economy…
This will require a more sustainable increase in consumption based on rising wages rather than debts, greater productive investments that will expand the economy's ability to produce, and the introduction of financial regulation that will make banks lend more to productive enterprises than to consumers. Unfortunately, these are exactly the things that the current policymakers in the US and the UK don't want to do…We are heading for trouble.”
Reports of an imminent stock market crash are gaining widespread acceptance (see a recent PNW article here), however there are those who deny the existence of a stock market bubble. In a recent article titled ‘Here's Why The Stock Market Bubble Deniers Are Completely Wrong’, Jesse Colombo explains several myths that are being peddled by the naysayers regarding the state of the stock market, of which 2 of the key ones are covered below:
1. Argument/Myth #1: Stocks are the cheapest they have been in decades: According to Jesse, this most common argument is technically accurate but misleading: based a longer view, stock are actually overvalued and expensive as supported by the graphs reflecting the Shiller P/E ratio, total stock market capitalization to GDP ratio, Tobin’s Q Ratio (the ratio of the market’s price to replacement costs). Jesse sees the past two decades of stock market overvaluation to be part of a longer-term “Bubble Era” that still has yet to end, and believes it will eventually end when interest rates rise, which will result in a severe global economic crisis.
2. Argument/Myth #2: The Bull Market Is Justified By Earnings Growth: Jesse asserts that U.S. corporate earnings are instead experiencing a bubble in their own right, based on low interest rates. This is exemplified in the 2003 -2007 “bubble cycle” that fueled a bubble in housing and credit growth, which in turn spurred a temporary U.S. corporate earnings boom in various bubble-related sectors, helping to boost the overall economy until the bubble popped. U.S. and global interest rates are even lower during this current cycle, and bubbles are inflating across the entire world.
But who is better placed to verify claims of a stock market crash, than powerful top billionaires who can influence much of what happens in the markets, and are far much more “in the know” than your average investor?
The 2nd March, 2014 article from moneyweek.com titled ‘Billionaires Dumping Stocks, Economist Knows Why’, reports:
“A handful of billionaires are quietly dumping their American stocks . . . and fast.
Warren Buffett, who has been a cheerleader for U.S. stocks for quite some time, is dumping shares at an alarming rate. He recently complained of “disappointing performance” in dyed-in-the-wool American companies like Johnson & Johnson, Procter & Gamble, and Kraft Foods… With 70% of the U.S. economy dependent on consumer spending, Buffett’s apparent lack of faith in these companies’ future prospects is worrisome. Unfortunately Buffett isn’t alone…
Fellow billionaire John Paulson, who made a fortune betting on the subprime mortgage meltdown, is clearing out of U.S. stocks too. During the second quarter of the year, Paulson’s hedge fund, Paulson & Co., dumped 14 million shares of JPMorgan Chase. The fund also dumped its entire position in discount retailer Family Dollar and consumer-goods maker Sara Lee.
Finally, billionaire George Soros recently sold nearly all of his bank stocks, including shares of JPMorgan Chase, Citigroup, and Goldman Sachs. Between the three banks, Soros sold more than a million shares.
So why are these billionaires dumping their shares of U.S. companies? After all, the stock market is still in the midst of its historic rally. Real estate prices have finally leveled off, and for the first time in five years are actually rising in many locations. And the unemployment rate seems to have stabilized. It’s very likely that these professional investors are aware of specific research that points toward a massive market correction, as much as 90%.”
So says Robert Wiedemer, an esteemed economist and author of the New York Times best-selling book Aftershock: “Companies will be spending more money on borrowing costs than business expansion costs. That means lower profit margins, lower dividends, and less hiring. Plus, more layoffs. No investors, let alone billionaires, will want to own stocks with falling profit margins and shrinking dividends. So if that’s why Buffett, Paulson, and Soros are dumping stocks, they have decided to cash out early and leave Main Street investors holding the bag.
The writing is clearly on the wall.
Read more at http://www.prophecynewswatch.com/2014/March04/043.html#M60CwrW4YcAEvwax.99
March 04, 2014 | Tom Olago
Share this article
According to the stock markets, the U.K and U.S economies are in historic booms. In the U.K, on 21 February 2014 the FTSE 100 climbed to a new height of 6,838. At this rate, it may soon surpass the highest ever level reached since the index began in 1984 – that was 6,930.
This is according to a recent report from theguardian.com titled ‘This is no recovery, this is a bubble – and it will burst’, writes Ha-Joon Chang. “…the current levels of share prices are extraordinary considering the UK economy has not yet recovered the ground lost since the 2008 crash; per capita income in the UK today is still lower than it was in 2007. And let us not forget that share prices back in 2007 were themselves definitely in bubble territory of the first order…
The situation is even more worrying in the US. In March 2013, the Standard & Poor 500 stock market index reached the highest ever level, surpassing the 2007 peak (which was higher than the peak during the dotcom boom), despite the fact that the country's per capita income had not yet recovered to its 2007 level. Since then, the index has risen about 20%, although the US per capita income has not increased even by 2% during the same period.
This is definitely the biggest stock market bubble in modern history…Even more extraordinary than the inflated prices is that, unlike in the two previous share price booms, no one is offering a plausible narrative explaining why the evidently unsustainable levels of share prices are actually justified.”
Analysts typically explain stock market rises based on such factors as prevailing market trends, economic factors and new technologies. Ha-Joon explains that during the dotcom bubble in 1999, the predominant view was that the new information technology was about to completely revolutionize our economies for good. Similarly, in the run-up to the 2008 crisis, inflated asset prices were justified in terms of the supposed progresses in financial innovation in derivatives and structured financial assets, and in the techniques of economic and monetary policy.
This time around, no one is offering a new narrative justifying the new bubbles because, says Ha-Joon, there simply isn't any plausible story: “…Those stories that are generated to encourage the share price to climb to the next level have been decidedly unambitious in scale and ephemeral in nature: higher-than-expected growth rates or number of new jobs created; brighter-than-expected outlook in Japan, China, or wherever; the arrival of the "super-dove" Janet Yellen as the new chair of the Fed; or, indeed, anything else that may suggest the world is not going to end tomorrow…
Most investors know that current levels of share prices are unsustainable…they are aware that share prices are high mainly because of the huge amount of money sloshing around thanks to quantitative easing (QE), not because of the strength of the underlying real economy. This is why they react so nervously to any slight sign that QE may be wound down on a significant scale… investors pretend to believe – or even have to pretend to believe – in those feeble and ephemeral stories because they need those stories to justify (to themselves and their clients) staying in the stock market, given the low returns everywhere else.”
Ha-Joon’s ominous conclusion is that: “…. stock market bubbles of historic proportion are developing in the US and the UK, the two most important stock markets in the world, threatening to create yet another financial crash. One obvious way of dealing with these bubbles is to take the excessive liquidity that is inflating them out of the system through a combination of tighter monetary policy and better financial regulation against stock market speculation…the danger here is that these policies may prick the bubble and create a mess…the best way to deal with these bubbles is to revive the real economy…
This will require a more sustainable increase in consumption based on rising wages rather than debts, greater productive investments that will expand the economy's ability to produce, and the introduction of financial regulation that will make banks lend more to productive enterprises than to consumers. Unfortunately, these are exactly the things that the current policymakers in the US and the UK don't want to do…We are heading for trouble.”
Reports of an imminent stock market crash are gaining widespread acceptance (see a recent PNW article here), however there are those who deny the existence of a stock market bubble. In a recent article titled ‘Here's Why The Stock Market Bubble Deniers Are Completely Wrong’, Jesse Colombo explains several myths that are being peddled by the naysayers regarding the state of the stock market, of which 2 of the key ones are covered below:
1. Argument/Myth #1: Stocks are the cheapest they have been in decades: According to Jesse, this most common argument is technically accurate but misleading: based a longer view, stock are actually overvalued and expensive as supported by the graphs reflecting the Shiller P/E ratio, total stock market capitalization to GDP ratio, Tobin’s Q Ratio (the ratio of the market’s price to replacement costs). Jesse sees the past two decades of stock market overvaluation to be part of a longer-term “Bubble Era” that still has yet to end, and believes it will eventually end when interest rates rise, which will result in a severe global economic crisis.
2. Argument/Myth #2: The Bull Market Is Justified By Earnings Growth: Jesse asserts that U.S. corporate earnings are instead experiencing a bubble in their own right, based on low interest rates. This is exemplified in the 2003 -2007 “bubble cycle” that fueled a bubble in housing and credit growth, which in turn spurred a temporary U.S. corporate earnings boom in various bubble-related sectors, helping to boost the overall economy until the bubble popped. U.S. and global interest rates are even lower during this current cycle, and bubbles are inflating across the entire world.
But who is better placed to verify claims of a stock market crash, than powerful top billionaires who can influence much of what happens in the markets, and are far much more “in the know” than your average investor?
The 2nd March, 2014 article from moneyweek.com titled ‘Billionaires Dumping Stocks, Economist Knows Why’, reports:
“A handful of billionaires are quietly dumping their American stocks . . . and fast.
Warren Buffett, who has been a cheerleader for U.S. stocks for quite some time, is dumping shares at an alarming rate. He recently complained of “disappointing performance” in dyed-in-the-wool American companies like Johnson & Johnson, Procter & Gamble, and Kraft Foods… With 70% of the U.S. economy dependent on consumer spending, Buffett’s apparent lack of faith in these companies’ future prospects is worrisome. Unfortunately Buffett isn’t alone…
Fellow billionaire John Paulson, who made a fortune betting on the subprime mortgage meltdown, is clearing out of U.S. stocks too. During the second quarter of the year, Paulson’s hedge fund, Paulson & Co., dumped 14 million shares of JPMorgan Chase. The fund also dumped its entire position in discount retailer Family Dollar and consumer-goods maker Sara Lee.
Finally, billionaire George Soros recently sold nearly all of his bank stocks, including shares of JPMorgan Chase, Citigroup, and Goldman Sachs. Between the three banks, Soros sold more than a million shares.
So why are these billionaires dumping their shares of U.S. companies? After all, the stock market is still in the midst of its historic rally. Real estate prices have finally leveled off, and for the first time in five years are actually rising in many locations. And the unemployment rate seems to have stabilized. It’s very likely that these professional investors are aware of specific research that points toward a massive market correction, as much as 90%.”
So says Robert Wiedemer, an esteemed economist and author of the New York Times best-selling book Aftershock: “Companies will be spending more money on borrowing costs than business expansion costs. That means lower profit margins, lower dividends, and less hiring. Plus, more layoffs. No investors, let alone billionaires, will want to own stocks with falling profit margins and shrinking dividends. So if that’s why Buffett, Paulson, and Soros are dumping stocks, they have decided to cash out early and leave Main Street investors holding the bag.
The writing is clearly on the wall.
Read more at http://www.prophecynewswatch.com/2014/March04/043.html#M60CwrW4YcAEvwax.99
No comments:
Post a Comment