Guest Post: Too Much Bubble Talk?

Tyler Durden's picture

Discussion of a market bubble (in stocks, credit, bonds, Farm-land, residential real estate, or art) have dominated headlines in recent weeks. However, QEeen Yellen gave us the all-clear this morning that there was "no bubble." Are we currently witnessing a market bubble? It is very possible; however, as STA's Lance Roberts notes, if we are, it will be the first market bubble in history to be seen in advance (despite Bullard's comments in opposition to that "fact"). From a contrarian investment view point, there is simply "too much bubble talk" currently which means that there is likely more irrational excess to come. The lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected - and perhaps Hussman's pre-crash bubble anatomy is dead on...


Via Lance Roberts of STA Wealth Management,

"Bubble, Bubble, Toil And Trouble," discussions of a market bubble have dominated the media as stocks have continued to rise unabated.  I have previously asked the question of whether an asset bubble existed and what would cause it to pop:

"The only missing ingredient for such a correction currently is simply a catalyst to put 'fear' into an overly complacent marketplace.  There is currently no shortage of catalysts to pick from whether it is further fiscal policy missteps stemming from the upcoming "Debt Ceiling" debate, a resurgence of the Eurozone crisis, or an unexpected shock from an area yet to be on our radar.


In the long term, it will ultimately be the fundamentals that drive the markets.  Currently, the deterioration in the growth rate of earnings, and economic strength, are not supportive of the speculative rise in asset prices or leverage.  The idea of whether, or not, the Federal Reserve, along with virtually every other central bank in the world, are inflating the next asset bubble is of significant importance to investors who can ill afford to lose a large chunk of their net worth."

However, the question of whether or not we are in a bubble was currently addressed by my colleague Cullen Roche who posted recently:

"The word 'bubble' gets tossed around an awful lot ever since the Nasdaq bubble and the housing bubble. I guess it’s not that surprising.


But first, what is a 'bubble'? I define a bubble as follows:


'A bubble is an environment in which the market price of an asset has deviated from the underlying asset’s fundamentals to an extent that renders the current market price unstable relative to the underlying asset’s ability to deliver the expected result.'


When I try to decipher whether a market is in a bubble I don’t like to rely on valuation metrics because I think bubbles are often the result of irrational behavior that makes valuation metrics unreliable for long periods of time. Instead, I prefer to look at underlying fundamentals relative to behavior. When I look at the current equity market I see corporate profits growing modestly, an economy that is expanding modestly and an equity market that is increasingly enthusiastic, but not showing the types of pure exuberance, greed and delusion that are typical in a bubble environment. There’s still a huge amount of skepticism about the equity market rally. This remains an extremely hated rally.


So, I would say there’s growing risk as we’re seeing increasing signs of euphoria, but I wouldn’t yet describe this as a 'bubble'. I think that implies much more downside risk than is currently present in the economic and corporate fundamentals. And perhaps more importantly, we’re just not seeing the kind of all out delusion that usually accompanies a bubble. When people at dinner parties start telling me that stocks can’t go down then I’ll start getting scared."


I agree with Cullen. 

  • Are the markets grossly extended?  Yes. 
  • Is leverage at levels that pose a disruption threat to stocks?  Yes. 
  • Are we seeing signs of increasing investor exuberance?  Yes.

However, there is one potential overriding issue that suggests that we might have not yet reached the peak of irrational exuberance...there is simply too many people talking about a "bubble in stocks."

Throughout history, there have been repeated boom/bust market cycles and at the peak of each previous bubble the common mantra was "this time is different."  The reality is that the vast majority of market participants only realize the bursting of a bubble after the fact.  This time is likely no different.  Bob Farrell's Rule #9 states that when all experts agree that something else is bound to happen.  If the majority of professional investors being paraded on television are talking about the potential of a Federal Reserve driven asset bubble; it is unlikely to be the case.

Chris Ciovacco recently penned three reasons why stocks could move higher from current levels.

  1. Central banks continue to print
  2. 13-year S&P 500 breakout
  3. The economy is still growing

Chris's comment on the 13-year breakout of stocks is important, however, it is no more important than the breakout of stocks witnessed at the peak of the market in 2007.  While the breakout does clear the markets of overhead resistance on a technical basis - it also marks the beginning of the next major market top.  As far as the economy is concerned it is indeed growing but only sluggishly at best.  That growth can, and likely will, deteriorate rapidly as the Affordable Care Act sinks its teeth into the relative little disposable personal income currently available to the average American family The chart below shows the S&P 500/GDP ratio.  The stock market should be a reflection of the underlying economic strength, however, stocks have currently detached from economic fundamentals.


That leaves the central bank.  Despite signs of growing exuberance in the markets; the Fed is highly likely to remain engaged in their ongoing QE programs longer than most expect.  As I discussed previously in "What Is A Liquidity Trap?:"

 "The issue is that with each economic cycle rates continued to decrease to ever lower levels.  In the short term, it appeared that such accommodative policies did aid in economic stabilization as lower interest rates increased use of leverage.  However, the dark side of those monetary policies was the continued increase in leverage which led to the erosion of economic growth, and increased deflationary pressures, as dollars were diverted from productive investment into debt service. 


Today, with interest rates at zero, the Fed has had to resort to more dramatic forms of stimulus hoping to encourage a return of economic growth and controllable inflation. The Federal Reserve is currently betting on a 'one trick pony' that by increasing the 'wealth effect' it will ultimately lead to a return of consumer confidence and a fostering of economic growth?  Currently, there is little real evidence of success."

That lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected.  The real surprise in 2014 could very well be an increase in size and scope of the current quantitative easing programs if interest rates remain elevated, deflationary pressures continue to increase and economic growth stalls.  The injection of more liquidity could very well drive asset prices to the irrational extremes of a true market bubble.  However, if that occurs, the majority of market analysts and economists will not be talking about a "bubble" in asset prices but why "this time is truly different."  

Are we currently witnessing a market bubble?  It is entirely possible, but if it is it will be the first market bubble in history to be seen in advance.  From a contrarian investment view point, there is simply "too much bubble talk" currently which means that there is likely more irrational excess to come.

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slotmouth's picture

The market is a little bubbly as a whole, but certain areas are extremely bubbly.

knukles's picture

If you like your bubble, you can keep your bubble.

Skateboarder's picture

If you like your bubble, we'll make it double.

Tech -> Housing -> Bond -> Derivatives -> le fin.

Cult_of_Reason's picture

Re: "Are we currently witnessing a market bubble? It is entirely possible, but if it is it will be the first market bubble in history to be seen in advance."


How about the "too much bubble talk" in 2005-2007? A contrarian investment view point my ass? If it looks like a bubble and acts like a bubble, it's a bubble.


Lance Roberts/Tyler Durden in 2013 is as clueless as Ben Bernanke was in 2005 or as Citi's Charles Owen "Chuck" Prince III in 2007

TheLooza's picture

The fucking ramp ain't over until the FED decides it's over.  Until then you can scream bubble all you fucking want.

When SPY is 2300, then we can re-address......

I've gotten my ass handed to me too, so don't neg me. It's just the new normal, folks. Same as the old normal.  Don;t fight the banks. Don't fight the Fed.



Cult_of_Reason's picture

Re: "The fucking ramp ain't over until the FED decides it's over."

Currently, this is the most prevalent attitude (held among both the majority of bulls and bears -- the market consensus).

From a "contrarian investment view point" ...


P.S. I will let Hugh Hendry explain about a "contrarian investment view point"... (Liam = Lance Roberts)


dracos_ghost's picture

I hear you. I'm adopting the old adage "Better to be rich, than right". Trying to make sense out of this insanity is raising my blood pressure.

What did the Indian FBI guy say the other day ....

Wahooo's picture

And all the expert predict disaster if the Fed tapers. Most likely a taper will have very little impact on anything.

max2205's picture

Bubble markets are where you see amzn move 5 to 10% up and down  per day in an uptrend. ...not yet

Running On Bingo Fuel's picture

Do you mean like bitCon? Is that bubblicious or what?


Headbanger's picture

However, all this "bubble talk" may well serve to fuel the fear of a market crash once it starts falling simply because everybody knows it's a bubble!

Call it "self fulfilling prophecy" maybe.

SheepDog-One's picture

'If it is a bubble, it will be the first bubble in history that was seen in advance'

Complete and utter lies, the housing bubble, .com bubble, many others were seen in advance and warned about ahead of when they imploded.

orangegeek's picture

The bubble was forecast months after the bounce post March 2009.  We saw a crash in 2010 and 2011 as seen on this weekly.


After 2011, the Fed vacuumed up all the equity it could handle and here we are.   What a bloody mess.

buzzsaw99's picture

...but if it is it will be the first market bubble in history to be seen in advance.



Dr Benway's picture

Yeah exactly. I remember plenty of bubble talk toward the end of the dot com bubble. In fact, the only people claiming it was not a bubble was those with a vested interest in it continuing. Same as today.

tired_of_manipulation's picture

>>there is simply "too much bubble talk

I remember a lot of bubble talk in 1999 and 2000 regarding dotcoms, same thing with housing in 2006, all that bubble talk didn't stop them from crashing.

GernB's picture

Agreed, there were many analysts warning of the housing bubble over a year in as advance. it's not whether there's bubble talk, that occurred in bubbles, it's whether they bubble talk is broadly dismissed as doomsday talk, just like this article is dismissing the bubble warnings.

Kirk2NCC1701's picture

"Tiny bubbles, in the wine, make me happy, make me feel fine"

- Don & Dona Ho @ Marriner S. Eccles Federal Reserve Board Building

ChaosEquilibrium's picture

The 'catalyst' already exists and is present!!!


The Equity markets are above the value of 2007 where 4-5% growth, 5.3% unemployment, credit/liquidity was flowing, leverage was king, and models were flawed!!


What is irrational?  Markets are above the aforementioned levels with sub 2% growth, above 10% unemployment, manipulated inflation, risk-free yields at zero, leverage increasing and this is with the FED providing ALL liquidity and riskless return!!!


We are doomed....but not until the mirage/illusion is recognized!!!  It will be the Hedge Funds IB who sho their hands first.....might be Japan/China publicly stating large reductions of Dollar assets over past year!! China is acting now with its physical gold.....just the announcement awaits...then the US will be pandemonium and chaos.....from the top down!!

youngman's picture

What scares me is the low volumes to get to this me that makes these highs very unreal

thewhigs's picture

Personally, I have no idea when (if) the market implodes. The good thing is I have basically one investment strategy = gold+other metals. Don't have to deal with the b.s. of the market.

ebworthen's picture

$170 Billion QE per month before we are at a bubble.

They will push this to the edge of credulity.

Full steam ahead for the U.S.S.A. Titanic.

Timmay's picture

Wow. So, we are victims in perpetuity because we can never see it coming.....

Cdad's picture

The problem with this post is:

"it will be the first market bubble in history to be seen in advance"

This statement is simply factually incorrect.  Furthermore, it is the entire premise of the post.  Yeah...I'm simply going to have to pass on this one.

XRAYD's picture

Straight from the horse's mouth:

Yellen on Stocks: This Isn’t a Bubble

NOTaREALmerican's picture

If people are still talking about a bubble it means the top hasn't been reached.

Fiat Burner's picture

"If the majority of professional investors being paraded on television are talking about the potential of a Federal Reserve driven asset bubble; it is unlikely to be the case."

Um, no, the FED IS driving an asset bubble, regardless of what the media parrots are saying. 

Afterall, it is the FED's STATED goal: boost asset prices for the mythical "wealth effect."

The media is just trying to cover their ass this time by throwing out the word bubble here and there, so they can say "See, we saw it coming." after this bitch bursts.

rustymason's picture

I guess it can just go on like this forever.

El Hosel's picture

"Nobody saw it coming".... I call bullshit on that one. We all see it coming. It  takes way longer to get here and bust than common sense would dictate. Now that "The Markets" are fully rigged to reflect/simulate the "Fragile Recovery", it will take even longer for the bust to play out.

The Machine feeds on the fact that plenty do see it coming, highest short interest stocks lead the charge. The subprime lenders got squeezed higher for many months after the jig was up on that game....... Or maybe its different this time, boom forever Bitchez.

moneybots's picture

"Are we currently witnessing a market bubble?  It is entirely possible, but if it is it will be the first market bubble in history to be seen in advance. "


A bubble can be seen in advance.  Krugman noted in advance that Greenspan needed to create a housing bubble to recover the economy from the .com bubble.

novictim's picture

Krugman was making a facetious point with that one, btw...irony is soo tough for some cultures to grasp!

One eyed man's picture

Bubbles can be seen in advance. In fact, one sign of a bubble is an increasing proliferation of articles denying that there is a bubble.


Its Only Rock N Roll's picture

Hate to break this to you Lance but the bubble talk will only get LOUDER as the markets go HIGHER.  People are not going to go away and say "no there is no bubble now that the S&P is crossing 1900"

You should count the amount of bubble denials by everyone involved as your contrarian indicator.   Just a thought

Hohum's picture

Or a possible shale bubble:

I am sure we'll be a net exporter of petroleum products next week.

novictim's picture

Oh...I see.  It's a "balloon" and not a bubble after all.  

And the $4Trillion in QE to-date and the additional $85billion per month with no end in sight is not just a 10 year old condom...errr..balloon being shoved into our economic orifices...and investors are really thinking, after all, that they are building real wealth and not just banking on the bigger fool to take the knob when it blows?!  Oh, I seeeee....

Gee, I feel so relieved now.  I can now relax and get back to watching Jim Cramer's Greatest Predictions.

Clowns on Acid's picture

Yeh... but this time its different.

Obama is President.

RMolineaux's picture

Sometimes contrarians appear to be compulsive disagree-ers.