This topic contains 3 replies, has 3 voices, and was last updated by JIM G. 4 years, 9 months ago.
April 6, 2013 at 11:49 am #17646
I just Rob’s very thorough and insightful piece. I think he is right about the US equities market being extended. But I do question how much downside is there in the market. The past two market crashes were a result of INDUSTRY bubbles. During the dotcom era, there were thousands of companies founded and raised money which had no sustainable business model. There were many telecommunication companies laying fiiber around the globe with no users to absorb the bandwidth. So eventually, the lack of financial performance of these companies exposed the industry bubble. The same is true for the housing market, which lead to the crash in 2007. Eventually, people started defaulting on their mortgages, and the market collapsed. But now, where is the industry bubble. Yes the market is over extended and needs to come back. But I do not see it collapsing, as many here expect. Obviously, a global shock, like Japan imploding or a war w North Korea would all lead to a major market sell off, but that is true at every point in the economic cycle. I would be interested to hear, what industry in the US economy is in bubble territory and will lead to the major sell off.April 8, 2013 at 2:00 pm #27036
The “financial industry”, cheap money from the Fed, the reserve currency. Without it deflation would be much more obvious.April 11, 2013 at 4:41 pm #27037
Right, so money printing and inflating asset prices….so valuations are stretched….but fundamentally the banking sector has been recapitalized. I wouldn’t characterize the current lending standards by banks as bubble territory and fundamentally excessive…many are arguing for the banks to lower their lending standards……..maybe on the junk bond side…..although I do agree the actions of the Fed would mean the GOVT is fundamentally in a bubble.April 20, 2013 at 11:19 am #18052
I think you are tight that there is no obvious bubble other than the one that people are talking about for US treasury debt, but then the Fed is purchasing a lot of that, and this is presumably helping to keep rices up. Having said this, the market currently does look like it is pricing in perfection as far as earnings are concerned. The argument now, that the Fed will print money if the market goes down so there is no real risk is a very cogent one. However, it is very similar to the arguments in the run up to the 2007-2009 bear market that equities would not fall as the Fed has banished the business cycle. When a lot of people start to believe this, you may be at a top. Also, I would argue that the Fed has only partly recapitalised the banks through allowing them to generate earnings off the back of QE. We mustn’t forget that these guys still sit on loan portfolios that need to be written down. Foreclosures have been slowed in order to avoid taking larger losses. This is very reminiscent of the 70’s when the banks were bailed out after the Latin American crisis. Furthermore, most of the large banks still have some very large European exposures. Specifically, derivatives with government entities where the banks are owed some staggeringly large sums on a mark to market basis. Chances are that if Italy gets into trouble Goldman, Morgan Stanley, Bank of America will also get into trouble. I am not sure that a major sell off in the US is precipitated by a US bubble, but that it would be by credit problems in Europe or Japan, and given the level that the US markets have stretched, it will be very easy for them to fall significantly.
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