Does Yellen See A Bubble In Stocks?
Does anyone else find the public's obsession with identifying the next bubble amusing? Almost by definition, a bubble forms - and then ultimately bursts - when no one is looking.
To be sure, there wasn't a public outcry in early 2000 when one could purchase something like twenty of the Dow 30 stocks using the valuation of Cisco Systems (CSCO) alone. No one really cared that technology stocks, many of which had no real revenues, let alone any potential for profit, were coming public with billion-dollar valuations.
There also wasn't too terribly much concern in the mid-2000's when home prices were appreciating at a double-digit clip year after year. Nobody seemed overly worried when the ability to breathe on a glass meant you could qualify for a big mortgage on a house you couldn't afford. And next to no one sounded the alarm when scores of fishermen turned in their nets and began running hedge funds in Iceland.
Nope, the bottom line is when things are truly rolling (and the bubbles are forming), almost nobody notices.
Fighting The Last War
And yet, for the last four years, everyone everywhere has had their eyes peeled for the next big bubble, which would lead to the next big crisis. In short, "We won't get fooled again!" appears to be the battle cry of cautious investors these days.
It is especially humorous to hear so-called experts analysts talk about a bubble forming again in Real Estate. This at a time when the number of homeowners who are still upside down on their mortgages remains astounding. Talk about fighting the last war!
Are Stocks In A Bubble?
Then there are the perma-bears who continue to yammer on about stocks being in a bubble. The argument seems to be that since the S&P 500 is up more than 25 percent this year, up 32.3 percent in the last twelve months, and has gained 168 percent over the past four and one-half years, stocks must be bubbling over!
Never mind the fact that valuation measures are not even in the overvalued zone at the present time, let alone at the stratospheric levels seen in 2000 - or even the levels seen in 2007.
Never mind that the Credit Crisis bear market had crushed stocks to the tune of 56 percent. Never mind that something like half of the DJIA companies were selling at valuation levels below the cash on their books when the bear ended. So, in early 2009, one could argue that the market might have been just a wee bit "overdone" to the downside and that the levels seen on March 9, 2009 could have been artificially low.
Nope, facts don't seem to deter the uber-bears these days. Investors got smoked twice since 2000, so naturally it is going to happen again, right?
Inquiring Congressmen Want To Know
Even Janet Yellen, who will likely become the next head of the Federal Reserve, was asked on Thursday at her confirmation hearing if she thought the stock market was in a bubble.
“Stock prices have risen pretty robustly,” Ms. Yellen said Thursday. But looking at several valuation measures and according to the WSJ, she specifically cited equity-risk premiums, she said “you would not see stock prices in territory that suggest... bubble-like conditions.”
Yellen went on to say that it is important for the Fed to “attempt to detect asset bubbles.” But for now at least, she doesn’t see any forming.
Senator Mike Johanns (a Republican from Nebraska) apparently is keeping his eyes peeled for the next bubble too. During the Q&A session he said to Ms. Yellen, “What am I missing here? I see asset bubbles.”
On that topic bubbles bursting and systemic risk, when asked about the idea of QE creating risks in the future, Ms. Yellen said, “At this stage, I don’t see risks to financial stability” from the Fed's current monetary policies.
Oh, and then when the future Fed Chairwoman was asked if the Fed had created policies designed to specifically support the stock market, Ms. Yellen offered up a one-word answer: “No.”
However, Yellen also admitted that the FOMC is watching what happens at the corner of Broad and Wall. “We do have to take account of what’s happening in the markets,” Yellen said. She then added, “We are not a prisoner of the markets” and went on to suggest that the Fed would do what's right for the economy.
So There You Have It
So... Are stocks in a bubble? In a word, no. And for those new to the game, what's happening now is called a bull market.
But investors can rest assured that their congressmen, most analysts, as well as the next Fed Chair are ALL hard at work looking for the next bubble. And for anyone long the stock market right now, this is probably a good thing, for as long as everyone is looking for one, a bubble is unlikely to develop.
Publishing Note: I have early commitments Monday through Wednesday next week and will publish my morning missive as time permits.
Turning to this morning... Word is that the 'Yellen Effect' is responsible for the improvement in global markets. The fact that the next Fed Chair sounded uber-dovish in front of the Senate Banking Committee on Thursday has reassured markets that monetary policy is not going to change and that a 'Dectaper' would seem to be unlikely. Although there is some economic data before the bell, U.S. futures are pointing to modest improvement at the open on Wall Street.
Positions in stocks mentioned: none
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