Double Bubble Trouble!

Double, double, toil and trouble;
Stocks and bonds form massive bubble!

Well, that is not exactly how Shakespeare wrote it in Macbeth, but some economic soothsayers are putting out a very similar message to their clients—and are doing so in no uncertain terms.

In times of easy money, the Federal Reserve pours a lot of liquidity into the economy. When they do, assets tend to inflate in value, soaking up the easy money and forming “price bubbles.” Stocks are one example of such inflating assets. Since early 2009, prices on the Standard and Poor’s index have doubled to nearly 1,800. At the same time, the Federal Reserve’s balance sheet has approximately doubled to more than $1.2 trillion. The Dow Jones Industrial Average has also approximately doubled. One analysis shows that the growth in the S&P 500 stock index has had an 89.7 percent correlation  to the growth of the Federal Reserve’s balance sheet since mid-2009.

In June 2013, Fed Chairman Benjamin Bernanke briefly mentioned the possibility that the Federal Reserve might begin to reduce its $85 billion per month in bond purchases by year-end, and both stocks and bond prices fell dramatically. It is no wonder that investors are very worried that the Fed’s “Quantitative Easing” will at some point “taper off”—a decision that could let a lot of air out of the stock market bubble.

Bond prices are also a concern. The lower the bond yield for a particular security, the higher the price. Recently, economist John Mauldin’s commented, “Wilbur L. Ross Jr., chairman and CEO of WL Ross & Co. has pointed to a ‘ticking time bomb’ in the debt markets… One day, all the debt will come due, and it will end with a bang. ‘We are building a bigger time bomb’ with $500 billion a year in debt coming due between 2018 and 2020, at a point in time when the bonds might not be able to be refinanced as easily as they are today, Mr. Ross said. Government bonds are not even safe because if they revert to the average yield seen between 2000 and 2010, ten-year Treasuries would be down 23 percent. ‘If there is so much downside risk in normal Treasuries,’ riskier high yield is even more mispriced, Mr. Ross said. ‘We may look back and say the real bubble is debt’” (“Bubbles, Bubbles Everywhere,” Thoughts from the Frontline, November 1, 2013).

Mr. Mauldin continues, “Financial bubbles happen frequently. In the 1970s, gold went from $35 to $850 before crashing. In the 1980s, the Japanese Nikkei went from 8,000 to 40,000 before losing 80 percent of its value. In the 1990s, the NASDAQ experienced the dot-com bubble and stocks went from 440 to 5,000 before crashing spectacularly in 2000. The NASDAQ lost 80 percent of its value in less than two years. Many housing bubbles over the past decade in the United Kingdom, United States, Ireland, Spain, and Iceland saw house prices go up 200 and even 500 percent and then lose over half their value in real terms. The U.S. market has had frequent crashes: 1929, 1962, 1987, 1998, 2000, and 2008.… Economists and investors have spilled a lot of ink describing bubbles, yet central bankers and investors never seem to learn and people get caught up in them” (ibid.).

Are we in a bubble economy, fed by massive deficits and money printing? Time will tell. But all agree that the Fed cannot continue its Quantitative Easing policy indefinitely. Nor can the huge fiscal deficits continue. Herbert Stein, former chairman of the Council of Economic Advisers, coined what is called Stein’s Law: “If something cannot go on forever, it will stop.” Wise man! And many analysts are saying that it is not a question of whether the asset bubble will pop… but when.

What does the Bible say about how all of this has come about, and where is it heading? Read our timely articles, “A World of Greed!” and “The Tipping Point,” and take the time to order your free subscription to the Tomorrow’s World magazine today.