Below chart shows the Dow Jones Index from 1988 until today. Major US indices such as the S&P 500 and the Dow Jones index are currently trading at or near an all time high. Janet Yellen, current chairperson of the US Federal Reserve, was questioned during this week’s FOMC press conference if the current all time highs in US equities are a bubble or not (please note that asset price bubbles pose a long term threat for the health of an economy). She was quoted saying that there is “no bubble here”. Now, without having an economics degree or being an investment banker you can find out for yourself if that is the truth or not. It is very simple. “The economy and the stock market are closely related. Many people examine the stock market to find out how the economy is doing. It’s long been known that if the stock market is in a period of decline, the economy is sure to follow.” source Economic theory basically says that prices of stocks are closely correlated to the state of an economy. If companies are earning well, paying good dividends and invest in order to expand their business this is reflected in higher stock prices. If companies overall are doing well the economy of a country is usually also doing very well. Keeping in mind the above chart of the Dow Jones we can summarize that the US economy is doing very well at the moment, right? Good then. Let’s take a look at another chart. The above chart shows the US benchmark interest rate for the last 22 years. As you can easily spot interest rates are close to zero since 2009. The official reason for this artificially low interest rate is that the US Federal Reserve wants to stimulate the economy and create employment. Stimulate the economy? Wait a minute; we just concluded that the US economy must be in really good shape because all equity indices are near all time highs! Something must be wrong here… What is happening in the US and elsewhere is the following: Interest rates were lowered to zero in the aftermath of the Lehman Brothers collapse in order to prevent a financial panic. This was more than 5 years ago but the Fed still keeps interest rates at zero. Investors are basically forced to buy equities because they cannot get a meaningful return elsewhere. The US Federal Reserve is artificially inflating equity prices. This is called an asset price bubble, nothing else.
Wow. I have never looked at it all that way. The way you put it makes a lot of sense and it is clear that we are in a bubble. How long do you think we have until it crashes?
So why is she {Janet Yellen} saying there is no bubble? What the Federal Reserve is doing here is utterly wrong, can't someone or anybody stop them from twisting the ropes?
The reason the markets are racing up is simply because the banks are fueling it with Fed/ECB money and the other big 'fueller' is corporations who are buying back there own shares. http://usatoday30.usatoday.com/money/perfi/stocks/story/2012-03-20/stock-buybacks/53674154/1 If the Retail trade get involved, thats when it will tank, taking their money with it... double, treble whammy. The other way it will tank is if enough countries stop buying the $, which has been happening for a while. The Fed is playing with fire. Shoulda let the banks go down and jailed the culprits. As is, they have carte blanche to do what the hell they like.
We've been expecting another crash for about 5 years now. We will see another bear market eventually, and there's not a damn thing we can do about it or know exactly when it will happen. The best thing to do for most is to invest on fundamentals using mainly a bottom-up approach. Find and buy companies you believe are the best for longterm growth, and hold them as long as they remain fundamentally strong and maintain whatever competitive advantages you see them as having. If markets tank and those companies continue making so much money, they are likely to get even cheaper when the broad markets sell off, enabling you to buy more of those good companies at lower prices, and to perhaps also find new bargains at big discounts. If you're really fearful and somewhat advanced with a pretty decent bankroll to play with, you can perhaps put a few bucks into a broad market short ETF as a hedge, and also look at commodities like gold and crude as hedges via ETF. You can also consider buying put options on companies that appear to be declining fundamentally or that are way overpriced with weak fundamentals.
Wall St Journal looks a bit bearish today http://online.wsj.com/articles/u-s-...on-europe-worries-1404997111?mod=markets_data
More trouble for the USD? http://www.bloomberg.com/news/2014-06-11/ecb-s-noyer-says-bnp-may-prompt-shift-away-from-dollar.html
This does not look good if I'm understanding it, but can someone explain why there has to be a bubble? I mean, surely at some point the USD is going to settle, no?
A bubble is when the price of a stock, commodity or whatever is driven unrealistically high and without any substance. I.e. Indexes like S&P500, NASDAQ etc keep going up in value even though the companies upon which they are based are making less growth or smaller profits. It is driven by Central banks/The Fed creating trillions of currency out of thin air and then using that money to buy into the markets. http://www.telegraph.co.uk/finance/...-Lehman-crisis-from-worldwide-debt-surge.html
According to this guy, and Yellen, the markets are 'fairly valued' and there is no bubble. Not really sure what to make of it but I thought it may interest some so here it is: http://seekingalpha.com/article/233...ateau-if-the-fed-does-not-mess-up-again?ifp=0
