{"id":23187,"date":"2020-12-12T02:02:13","date_gmt":"2020-12-12T02:02:13","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=23187"},"modified":"2020-12-12T04:27:11","modified_gmt":"2020-12-12T04:27:11","slug":"a-stock-market-bubble-of-epic-proportions","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2020\/12\/12\/a-stock-market-bubble-of-epic-proportions\/","title":{"rendered":"A stock market bubble of epic proportions"},"content":{"rendered":"

A great deal has been written in recent years about real estate bubbles, stock market bubbles and even bond market bubbles. But there is really only one kind of bubble \u2014 that is a debt bubble. Without low interest rates fueling rapid debt growth, any form of bubble would wither on the vine.<\/p>\n

The Wilshire 5000 broad market index, compared to profits before tax, recently peaked above 15.0 for only the second time in history before retreating to 13.97 in Q3. The fall in Q3 is attributable to recovering profits rather than falling stock prices, so a return to above 15.0 seems likely if the index rises in response.<\/p>\n

\"Wilshire<\/p>\n

The reason for the surge in stock prices is clear on the chart below: interest rates at close to zero for an extended period act like rocket fuel.<\/p>\n

\"Wilshire<\/p>\n

Anna Schwartz, co-author of A Monetary History of the United States<\/em> (with Milton Friedman, 1963) once said:<\/p>\n

If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates.<\/p><\/blockquote>\n

That is particularly true of the current bubble.<\/p>\n

When will it end?<\/h2>\n

The Fed seems unlikely to change course and is expected to keep interest rates near zero for an extended period, so when is the bubble likely to end?<\/p>\n

If bank credit growth stalls, falling to zero (the red line) as it did before the last three recessions, stock prices are likely to tumble.<\/p>\n

\"Wilshire<\/p>\n

There may be three possible causes of slowing credit growth:<\/p>\n

    \n
  1. Inflation surges, forcing the Fed to raise interest rates;<\/li>\n
  2. Low interest rates cause investment misallocation, as in the Dotcom and subprime bubbles, leading to rising defaults and tighter bank credit; or<\/li>\n
  3. An external shock causes falling aggregate demand and high unemployment, with banks tightening credit policies in anticipation of rising defaults.<\/li>\n<\/ol>\n

    Chairman Jay Powell has assured us that the Fed will tolerate higher inflation, with its new policy of inflation averaging, so higher interest rates do not seem to be a major risk. While there has been some investment misallocation, falling aggregate demand and high unemployment seem to be the greatest threat.<\/p>\n

    Initial claims for unemployment insurance jumped to 853,000 for the week ended December 5th, while initial claims for pandemic unemployment assistance surged to 427,600.<\/p>\n

    \"Initial<\/p>\n

    Latest Department of Labor figures (November 21) show total unemployment claims remain high at 19 million — or 1 in 8 people who had a job in February 2020.<\/p>\n

    Bank credit standards have tightened significantly.<\/p>\n

    \"Bank<\/p>\n

    Conclusion<\/h2>\n

    Keep a close watch on bank credit growth. If this falls to zero, then stock prices are likely to tumble.<\/p>\n

    \"Bank<\/p>\n

    Commercial paper often acts as the canary in the coal mine, giving advance warning of a credit contraction.<\/p>\n

    \"Commercial<\/p>\n","protected":false},"excerpt":{"rendered":"

    A great deal has been written in recent years about real estate bubbles, stock market bubbles and even bond market bubbles. But there is really only one kind of bubble \u2014 that is a debt bubble. Without low interest rates fueling rapid debt growth, any form of bubble would wither on the vine. The Wilshire … <\/p>\n

    Continue reading “A stock market bubble of epic proportions”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,45,46,3761,34],"tags":[],"class_list":["post-23187","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-debt-levels","category-deficit-spending-employment","category-gdp-and-activity","category-us-canada-countries-regions"],"yoast_head":"\nA stock market bubble of epic proportions - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"A stock market bubble of epic proportions - the patient investor\" \/>\n<meta property=\"og:description\" content=\"A great deal has been written in recent years about real estate bubbles, stock market bubbles and even bond market bubbles. 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He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-61Z","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":13713,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/11\/06\/is-the-market-in-a-bubble\/","url_meta":{"origin":23187,"position":0},"title":"Is the market in a bubble?","author":"ColinTwiggs","date":"November 6, 2013","format":false,"excerpt":"As global growth recovers we expect equity markets to be buoyed by improvements in both earnings and dividends, with strong momentum over the quarter. There is much discussion in the media as to whether various markets are in a \"bubble\". Little attention is devoted to the fact that bubbles can\u2026","rel":"","context":"In "Market Insights"","block_context":{"text":"Market Insights","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/market-insights\/"},"img":{"alt_text":"US Household Debt","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2013\/2013-11-18-us-excsresns.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2013\/2013-11-18-us-excsresns.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2013\/2013-11-18-us-excsresns.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":21333,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/08\/29\/sp-500-and-stock-market-bubbles\/","url_meta":{"origin":23187,"position":1},"title":"S&P 500: Another stock market bubble?","author":"Colin Twiggs","date":"August 29, 2020","format":false,"excerpt":"We see plenty of charts comparing major indices to GDP. Both the S&P 500 and Wilshire 5000 made new highs relative to GDP, warning that stock pricing is at a new extreme. But comparing indices like these to an economy-wide measure like GDP is inaccurate for two key reasons: Index\u2026","rel":"","context":"In "GDP and Activity"","block_context":{"text":"GDP and Activity","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/gdp-and-activity\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":24659,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/03\/27\/a-fed-with-no-fear-of-inflation\/","url_meta":{"origin":23187,"position":2},"title":"A Fed with no fear of inflation","author":"Colin Twiggs","date":"March 27, 2021","format":false,"excerpt":"Morgan Stanley\u2019s Ruchir Sharma wrote an excellent op-ed in the FT ....He identifies the major flaw of the current system of inflation targeting: namely that secular global deflationary forces have pushed CPI inflation well below their c.2% targets, resulting in super-stimulative monetary policy. And although that can do little to\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":26139,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/06\/04\/debt-irrational-exuberance-disaster\/","url_meta":{"origin":23187,"position":3},"title":"Debt + irrational exuberance = danger","author":"Colin Twiggs","date":"June 4, 2021","format":false,"excerpt":"Three charts from Jesse Felder highlight the sharp rise in leverage, fueling the current stock bubble: 1) Margin debt. 2) Leveraged ETFs. 3) The net position of \u201cnon-reportable\u201d small speculators in S&P 500 futures contracts. The Put\/Call ratio is close to a record low, increasing the risk of a market\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Put\/Call Ratio","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-06-04-putcall.png?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":13730,"url":"https:\/\/thepatientinvestor.com\/index.php\/2014\/08\/02\/bubble-bubble-toil-and-trouble-the-costs-and-benefits-of-market-timing-2\/","url_meta":{"origin":23187,"position":4},"title":"Bubble, Bubble, Toil and Trouble: The Costs and Benefits of Market Timing","author":"ColinTwiggs","date":"August 2, 2014","format":false,"excerpt":"The following article was originally published in Musings on Markets and is reproduced with kind permission of the author, Aswath Damodaran. Aswath is a Professor of Finance at the Stern School of Business at NYU and teaches classes in corporate finance and valuation. The essay is lengthy, but shows great\u2026","rel":"","context":"In "Market Insights"","block_context":{"text":"Market Insights","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/market-insights\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2014\/08\/9b8da-valuationpicture.jpg?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":10485,"url":"https:\/\/thepatientinvestor.com\/index.php\/2014\/08\/01\/bubble-bubble-toil-and-trouble-the-costs-and-benefits-of-market-timing\/","url_meta":{"origin":23187,"position":5},"title":"Bubble, Bubble, Toil and Trouble: The Costs and Benefits of Market Timing","author":"ColinTwiggs","date":"August 1, 2014","format":false,"excerpt":"The following article was originally published in Musings on Markets and is reproduced with kind permission of the author, Aswath Damodaran. Aswath is a Professor of Finance at the Stern School of Business at NYU and teaches classes in corporate finance and valuation. The essay is lengthy, but shows great\u2026","rel":"","context":"In "Active Investing"","block_context":{"text":"Active Investing","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/active-investing\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2014\/08\/53216-actonbubblebreakeven.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2014\/08\/53216-actonbubblebreakeven.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2014\/08\/53216-actonbubblebreakeven.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2014\/08\/53216-actonbubblebreakeven.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2014\/08\/53216-actonbubblebreakeven.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/23187","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=23187"}],"version-history":[{"count":8,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/23187\/revisions"}],"predecessor-version":[{"id":23209,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/23187\/revisions\/23209"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=23187"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=23187"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=23187"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}