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.