Monday, January 11, 2010

Bubbles, bubbles everywhere

Here is an image of the cover of the latest issue of The Economist magazine. The bull market in world stock markets is only 10 months old. For the most part world markets are trading visibly below their 2007 tops. The Economist admits that it sees no bubbles at the moment. But it asserts that assets are overvalued world-wide. It also predicts that unless monetary policy around the world gets tighter, bubbles will begin to inflate everywhere.

Here is my view. Assets now may well look overvalued. But markets are forward looking and are anticipating a strong economic recovery. At bull market tops one typically does not find much concern about overvalued assets or bubbles. So I think this cover is one more manifestation of the Wall of Worry that world stock markets are climbing.

I think the bull market is stocks has much further to go and will last at least through the end of 2010.


  1. How did you feel about things in 2000?

  2. Carl,

    By several measures with good historical track records - such as Tobin's Q and Shiller's cyclically adjusted P/E ratios - US stock markets are roughly 40% overvalued. Furthermore, at the trough in March 2009 we never saw the single-digit cyclically adjusted P/E ratios that have characterized past bear market bottoms.

    You may perceive a wall of worry out there, but sentiment measures including Investors' Intelligence, AAII, and put-call ratios are showing extraordinary stock market optimism equaling or surpassing that of prior market peaks.

    That doesn't mean the market is about to crash. You may be right that this rally will run through 2010 (though at least it is surely due for a correction before too long).

    But it seems pretty clear that markets are genuinely overvalued already, even on a basis that takes into account cyclical economic improvements. Also, I don't see how holding the same outlook as the huge majority of the investing public is a contrarian view, or constitutes climbing a wall of worry. I don't think we have seen the end of this bear market, the current powerful and enduring rally notwithstanding.

  3. I'm a daytrader and I love bubbles, Greenspan, Bernanke. Blow, Ben, blow! Gimme more, more!

    another interpretation

  5. depends on what time frame you are watching on whether its a bubble or not. you know you are in a bubble when the people buying know its risky but want to get in anyways, saying they will get out before it really drops...