This stock bubble is beyond 1929 and 2007. The simple fact is that the primary driver of the market here is not valuation, or even fundamentals, but perception. The perception is that somehow the Federal Reserve has the power to keep the stock market in suspended and even diagonally advancing animation, and that zero interest rates offer “no choice” but to hold equities. Be careful here. What’s actually true is that the Fed has now created $4 trillion of idle currency and bank reserves that must be held by someone, and because investors perceive risky assets as having no risk, they have been willing to hold them in search of any near-term return greater than zero. What is actually true is that even an additional year of zero interest rates beyond present expectations would only be worth a roughly 4% bump to market valuations. Given the current perceptions of investors, the Federal Reserve can certainly postpone the collapse of this bubble, but only by making the eventual outcome that much worse.
Posted on: Mon, 28 Jul 2014 17:04:34 +0000
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