But if you look into the history of financial bubbles going back to the Dutch tulip craze you will find that the current bull run does not bear the hallmarks of a bubble.
You bring up some good points as does Mauser who has historically been a pretty tempered investor and most certainly has not been a permabear from my years of interacting with him.
However, there is a great deal of complexity comparing prior bubbles with today’s market condition largely because circumstances are rarely the same between bubbles. As you know, the Fed has taken unprecedented steps in QE, essentially buying up over four times assets than existed in 2009 and kept interest rates at zero.
These actions have DIRECTLY been responsible for the market rise since 2009…numerous charts show the direct cause and effect. No doubt that businesses and consumers have benefited from these actions in the form of less expenses and greater disposable income…both which also drove the market.
At some point, the Fed tightens and many believe the market will be in for some degree of pullback:
From early 2009 when the S & P 500 index bottomed at 700, the broad stock market average has hit new record peaks above 1900, nearly a tripling of stock prices. This astounding performance would never have happened had the Fed not been pouring $85 billion every month into Treasury securities and mortgage backed bonds which pushed down interest rates and pushed up bond prices as well as stock prices.
Here’s Jim Bianco of Arbor Research, a widely respected bond analyst, on what he expected in a report to investors last fall. “QE has been extraordinarily effective in boosting stock prices and the FOMC (the Federal Reserve Open Market Committee) is correct to worry what happens when they stop. Restated, the bull market of the last 4+ years has a lot to do with FOMC stimulus. If history is any guide, its removal would figure to be a profound negative for equity prices.”
Now…one can argue that if you are invested in high quality stocks and lower PE with high growth, that you would be insulated from any downturn. But that is simply not the case…in all cases. These stocks are taken down with everything else and if the consumer loses buying discretion…so goes the company’s sales growth rate.
I believe what you and Saul are suggesting is that even were the above be the case, these companies with low PE, PEG, debt and high growth rates would at least statistically weather the storm and recover better. That does sound logical to me as well…but they will take an initial hit along with everything else and what appeared to be insulation may be minimal if the consumer bows out again.
However, one interesting aspect of the market is that as logical as one may be with one’s trading/investing “systems”, analysis, TA…the market is substantially emotional…and that emotion doesn’t care what your calculated PEG, growth rates, debt loads were.
Shiller who wrote Irrational Exuberance right before the 2000 stock collapse, has tried to quantify this emotional component and wrote about it here:
In an interview with Goldman Sachs published over the weekend, the Yale professor and Nobel Laureate said there is a “bubble element” to the behavior we’re seeing in the stock market.
The fact that people don’t believe in the valuation of the market is a source of concern and might be a symptom of a bubble, though I don’t know that we have enough data to provide it is a bubble."
His point really is that despite our number crunching, technical analysis, etc…sometimes there is just an emotional component that is the trigger for substantial swings in the market.
He has published the well known Shiller Index that suggests the market is overvalued here:
There are other data points that suggest an overvalued market:
The BMW method:
The Buffet Market to GDP:
I could go on of course and there are many permabears that have been calling for a market collapse every year forever.
But I do think this concept by Shiller of what defines a bubble is fairly good:
Robert Shiller: I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there is certainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going. So there is a bubble element to what we see.
But I’m not sure that the current situation is a classic bubble because I’m not certain that most people have extravagant expectations. In fact, the current environment may be driven more by fear than by a sense of a new era. I detect a tinge of anxiety and insecurity now that is a factor in markets, which is quite different from other market booms historically.
So it would appear if we are to try to bring all this together that we likely do have significantly overvalued markets and yet at the same time, there is anxiety and insecurity about our future…hence no “bubble”.
But that can change quickly and everyone I know is focused on the effect of Yellen’s plans to discontinue assets purchases and raise rates and ? off-load those trillions of assets. These previous actions taken by the Fed, directly relates to the stock market rise…take them away and what is the outcome???
No one knows…this time is truly different…because it is nothing like last time.