Are Bubble Concerns Overblown?

Marc Faber thinks “we are in a gigantic financial asset bubble.” He gave this economic diagnosis on Bloomberg‘s “Street Smart” Tuesday. Faber is an economist who publishes a monthly newsletter, ”The Gloom Boom & Doom Report.” Faber said that, “It is interesting that that despite of all the money printing, bond yields didn’t go down.” Instead, the bottom for 10-year bonds was hit in July 2012, when they reached 1.43 percent. Now, it is about 2.85 percent, Faber said.

“But we’re up substantially. Now, this hasn’t had an impact on stocks yet. In fact, it pushed money into the stock market out of the bond market. But if the 10-years goes to say 3 percent to 4 percent, then the 30-year goes to close to 5 percent , the mortgage rates go to 6 percent. That will hit the economy very hard.”

Faber predicted that it’s possible bubble could burst before then. “It could burst any day,” he said. Although “everybody’s bullish,” Faber took the contrarian position. “The global economy is slowing down, because the global economy’s largely emerging economies nowadays, and there’s no growth in exports in emerging economies, there’s no growth, in the local economies,” Faber explained. “So, I feel that the valuations are high, the corporate profits have been boosted largely because of the falling interest rates.”

In the press conference following the conclusion of the December meeting of the Federal Reserve’s Federal Open Market Committee, outgoing Chair Ben Bernanke addressed bubbles.”We look at the possibility that asset purchases have led to bubbly pricing in certain markets or in excessive leverage or excessive risk-taking,” Bernanke stated. “We don’t think that that’s happened to an extent which is a danger to the system, except other than that when those positions unwind, like we saw over the summer, they can create some bumpiness in interest rate markets, in particular.”

“The Fed is looking for evidence that they may be creating asset bubbles,” Dan Greenhaus, chief global strategist at brokerage firm BTIG LLC told the Wall Street Journal recently. “That’s better than not looking.” An interview with John Williams, the President of the Federal Reserve Bank of San Francisco, was also quoted. Williams says economic indicators have boosted his “confidence that the underlying improvement in the momentum of the economy is real.” According to Williams, the current ”situation is not one where we are seeing broad indicators of a lot of excesses in financial markets that pose a lot of dangers to the financial system or the economy.”

Others — like Faber — are less certain, and trying to identify the signs a bubble may be creeping into the market. On Forbeseconomic analyst Jesse Colombo has warned of bubbles in the past several months. Last week, in a blog for the Wall Street Journal, Jason Zweig analyzed the mentality of a bubble. For Zweig, it isn’t the worry about a bubble that matters, but investor reaction. He interviewed Jason Hsu, chief investment officer at Research Affiliates, who said “[w]hen everyone starts to use ‘bubble’ anytime prices go up, it’s probably not one. The time to worry is when people are using all kinds of rationalizations as to why it’s not a bubble.”

More From Wall St. Cheat Sheet:

More from The Cheat Sheet