Where’s the Market Bubble?

Memories of the “frothy” markets of 2000 and 2007 is tempering investors’ enthusiasm, according to The Wall Street Journal. “After an eight-year bull market and the cheapest borrowing costs in history,” the article says, “the big surprise isn’t that the stock market’s high, but that it isn’t higher still.” While suggesting that “mini-bubbles have been appearing,” the article says this isn’t leading to investors to “getting carried away and mispricing risks across the market.” It adds that consumer sentiment is positive and that, based on PE, price-book and price-sales ratios, valuations have “rarely been pricier.” Bonds (Treasuries, corporate and junk) […]

Goldman Chief Concerns Regarding Demand for U.S. Stocks

As investors turn to stocks and away from bonds in search of income, Goldman Sachs chief executive Lloyd Blankfein suggests the possible “risk of the protracted era of low interest rates fueling bubbles,” according to a recent Bloomberg article. The article explains that the difference between European stock dividends and yields on low-grade debt, “which inverted in 2013, recently widened in favor of stock dividends” to the highest degree since at least 2005—evidence of increased demand for risky assets. Low yields on government bonds are adding fuel to the U.S. equity price fire, the article argues, adding that treasury investors are […]

The Genesis of Market Bubbles

The concept of market bubbles and how they come about is addressed in a recent report authored by Morgan Housel of Collaborative Fund. In the report, Housel supports the following arguments: Bubbles are an “unavoidable feature in markets where investors with different goals compete on the same field.” Bubbles are more closely related to “shrinking time horizon” than to rising valuations. Investors can best protect themselves by “understanding and acting upon your own time horizon, accepting that other people’s goals are different than your own.” Citing the research of Hyman Minsky, an economist who attempted to provide an understanding and […]

Grantham: Current Market is an “Anti-Bubble”

The U.S. market is unlikely to “go bang” the way some have in the past, says Jeremy Grantham, chief investment strategist and co-founder of asset management firm GMO. In a recent Barron’s article, Grantham argues that we are not facing a “classic bubble, not even close.” In Grantham’s opinion, it is more likely that a correction, or mean reversion, will be “slow and incomplete,” leading to “dismal consequences for investors: we are likely to limp into the setting sun with very low returns.” He cites factors such as the decade-long decline in interest rates and a shift in the global […]

Buffett on Bubbles: A “This Can’t Go Wrong” Mentality Gets Investors in Trouble

A piece appearing on Yahoo Finance quotes at length from Warren Buffett’s response to the Financial Crisis Inquiry Commission about what caused the housing bubble and related 2008-09 financial crisis. Buffett began by quoting his mentor, Benjamin Graham: “Ben Graham made an observation 50 or so years ago to me. . . . He said, ‘You can get in a whole lot more trouble in investing with a sound premise than with a false premise.’” Buffett explained: “When you have a sound premise, you may also have a ‘This can’t go wrong’ mentality. And when you add money to that […]