More Bubble Trouble

More Bubble Trouble
Profile photo of David Howden

With stocks at all-time highs, it’s hard not to think that we are in the midst of a bubble. According to one analyst, not only are we in a bubble, but it’s one of the biggest of all time.

Stocks are now about 80% overvalued on certain key long-term measures, according to research by financial consultant Andrew Smithers, the chairman of Smithers & Co. and one of the few to warn about the bubble of the late 1990s at the time.

The five dates listed at the start of this article, he says, are the only times since 1802, when data began being tracked, when stocks have been 50% or more overvalued according to these measures. And only two of those bubbles — 1929 and 1999, both of which were followed by disastrous crashes — were bigger than today.

Just to clarify, Smithers thinks we are in the third biggest bubble in U.S. history.

The Fed has been adamant that the most expansionist monetary policy in history is not causing inflation. That could well be, if one defines inflation narrowly with a focus on consumers’ prices.

More broadly stated, the Fed has generated an immense amount of price inflation in the asset markets. The third biggest stock bubble of all time is just one way to look at the situation.

Janet Yellen inherited the “successful” monetary policies that Ben Bernanke started. The banking system is saved for the time being by a the Fed purchasing its bad assets, and price inflation remains soft given the ongoing sluggish recovery. But as this “recovery” has resulted in new stock bubble, I’ll be holding off a little while before celebrating.

  • Richard

    I think it's the biggest bubble ever.. never before has the government and individuals had so much debt. Not only that, but how much lower can interest rates go?

  • Indian Share Academy

    Thanks David for this great blog content. I too believe that the global economy today is in decreasing trend and all the technical analysts worldwide worried about it.

  • Patrick Barron

    The analysts say that the P/E ratios are within normal bounds. But I made the point in a lecture yesterday in Philadelphia that reported earnings are very suspect. For instance, in an inflationary environment businesses can write off depreciation expense on assets that almost certainly will cost more to replace. Professor George Reisman claimed that this was one cause of the "Rust Belt" phenomenon in the Midwest in the 1980's. Capital intensive companies were paying taxes on their inflated earnings and had no resources with which to replace aging plants whose historical costs were much lower.

Profile photo of David Howden

David Howden is Chair of the Department of Business and Economics, and professor of economics at St. Louis University, at its Madrid Campus, Academic Vice President of the Ludwig von Mises Institute of Canada, and winner of the Mises Institute's Douglas E. French Prize. Send him mail.

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