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  • One of the tricky things about asset bubbles is that they

  • cannot be conclusively identified while they still

  • exist.

  • Only once a bubble has popped can we be sure

  • that it was ever there at all.

  • There are, however, two necessary if not sufficient

  • conditions for the existence of a bubble.

  • The first is an accelerating increase in prices

  • that forces valuations near historical highs.

  • The second is increasingly speculative and insane

  • behaviour among investors.

  • In the US stock market we clearly

  • have that first box ticked.

  • Here is the Nasdaq index, which is heavily

  • weighted towards technology, the sector where valuations

  • have been the frothiest.

  • It has risen 40 per cent this year

  • despite the small matter of a global pandemic

  • and an accompanying weak economy.

  • Crazy behaviour?

  • There's plenty of that going around, too.

  • Perhaps the ripest example of investor insanity

  • is a barely profitable electric car

  • company that has seen its share price octuple this year.

  • Here is a chart of Tesla shares.

  • There was a two-day period a couple of weeks

  • ago in which Tesla added the entire market value of the Ford

  • Motor Company twice over.

  • Or how about the rocketing price of an asset

  • that, depending who you talk to, may have

  • no underlying value at all?

  • The cryptocurrency Bitcoin.

  • Now, the argument that there is not

  • a bubble in the American stock market

  • is that stocks have to be so expensive because government

  • bond yields are so low.

  • That is to say while stock prices are high,

  • the premium that investors receive

  • for owning stocks as opposed to bonds

  • is actually at the low end of the historical range.

  • Here is a chart of the 10-year inflation

  • adjusted or real yield.

  • The great investor Jeremy Grantham

  • says that justifying the high prices of stocks

  • by pointing to historically low bond yields

  • is nothing more than justifying one asset bubble by reference

  • to another.

  • He may have a point.

  • But the fact remains that the Federal Reserve

  • can keep bond yields low simply by buying

  • more and more Treasuries, that is,

  • unless inflation spikes and the situation

  • gets out of the Fed's control.

  • The question of whether we have an asset bubble in the US stock

  • market is nothing more or less than the question

  • of whether we have been too complacent

  • about the possibility of inflation.

  • If you own stocks, keep a close eye on the prices of everything

  • else.

One of the tricky things about asset bubbles is that they

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B1 US FinancialTimes bubble stock market stock asset inflation

Are we in a stock market bubble

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    洪子雯 posted on 2021/01/15
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