Given Bullard's earlier comments on 'bubbles' being so obvious to spot [4] in the prior two examples he noted, we thought the following chart was instructive. As Global Financial Data's Ralph Dillon [5] notes, They often say that the past is a mirror of the future. This has rung true a few times in our markets' history and this chart demonstrates that precisely. Except for one thing...
[6]
In looking at this chart you will see 3 distinct bubbles. Each one bigger than the previous one and each one has the same characteristics except for the last. In looking at the first during the early 1920’s we saw a huge expansion in both equity prices and real estate followed by a huge collapse in 1932. During that depression, we saw equity prices and home prices all fall dramatically and converge at the price of gold in 1932.
From the 1950’s thru the 1970’s, our economy made great economic progress. We became a global super power, innovation and technological advances flourished and we became the beacon of prosperity around the world. With that, equity and real estate prices once again expanded at a tremendous rate. In the early 1970’s, with sky high interest rates and massive inflation, we saw yet another market bubble eviscerate. Ironically, all of these asset classes once again converged on gold in 1979. Only this time the bubble was larger from the 1929 bubble. The 80’s were ushered in by Ronald Reagan and a new feeling of optimism spurred in much part by patriotism and great global economic expansion. From the early 80’s to the present we have enjoyed much prosperity until 2008.
If the past is a reflection of the future, then shouldn’t have equity prices, real estate prices and gold all have converged as they did in 1932 and 1979 in 2008 or 2009?
In looking at the chart, it’s clear that they began that convergence once again but something different happened. The FED started pumping massive amounts of liquidity into the system. Something they have never done before at this level and certainly, never seen in our history. I would speculate that if the FED did not intervene, then we may have seen all of these asset levels converge at around the 256 level and we may have had a normal reset.
But instead, what we got was a complete reversal in all of these asset prices. Today we sit at historic highs in the equity markets and home prices are just off a time high. Gold on the other hand has taken a sharp decline and I can only speculate that if the pumping continues, we will only see this bubble inflate even more.
All of these asset classes are being artificially inflated to levels never seen before. What happens when it stops? And how does the FED exit? I hope we will not be Yellen and screaming when it pops...
Source: Global Financial Data [5] [5]