> Countdown to the next crisis is already under way
> By Wolfgang Munchau
> Financial Times
> Monday Oct 19 2009
>
> We did not need to wait until the Dow Jones Industrial Average hit
> 10,000.
> It has been clear for some time that global equity markets are bubbling
> again. On the surface, this looks like 2003 and 2004 when the previous
> housing, credit, commodity and equity bubbles started to inflate,
> helped by
> low nominal interest rates and a lack of inflation. There is one big
> difference, though. This bubble will burst sooner.
This is a good column. I've been thinking about this stuff for a while. I don't think anyone really knows the answers. One correction:
> Cape was invented by Robert Shiller, professor of economics
> and finance at Yale University. It measures the 10-year moving average of
> the inflation-adjusted p/e ratio.
Actually, this measure was invented by Benjamin Graham in the 30's and is sometimes called the Graham Ratio.
I don't know how Munchau can determine that it shows the market "overvalued" by 40%, but it's certainly above its long-run average. Right now, Shiller's data show that the market is 20% above its long-run average and 30% above its pre-1996 average. Of course, one could well argue that the market right now *should* be well *below* its long-run average, given the expectation that growth will be sub-par at best over the next several years. So maybe it is 40% overvalued.
It's hard to deny that the powers that be have once again inflated major bubbles. Real estate agents in places like Las Vegas are reporting the housing market "going crazy" right now, with sellers flooded by offers from speculators. House prices nationwide are starting to rise again. One could argue optimistically, however, that as long as the stock and house markets can be kept from crashing over the next two years, the various stimuli plans might have time to gradually repair US households balance-sheets - which are the ultimate root of the problem - and thus lay the groundwork for a soft landing.
Munchau seems to think that before that can happen, the bond market will collapse from rising inflation expectations. Maybe - but then that would make the bond market pretty stupid. Inflation isn't caused by quantities of electronic bank reserves or ethereal "expectations," it's caused by actual wages and actual prices rising due to those expectations. How that's supposed to happen with 10% unemployment is a mystery. On the other hand, all it would take is central banks *thinking* the bond market will think that, and they'll do the dirty work themselves by raising interest rates and bringing on a market crash all by themselves. Some of the Fed Reserve Bank presidents already sound like they have itchy trigger fingers, and the ECB is no doubt thinking even darker thoughts, as it usually does.
It will be interesting to watch. But in the meantime, assuming no market crash, the 3rd and 4th quarters will post robust GDP growth, so there will be many more months of jubilant talk of the salvation of world capitalism.
SA