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reddingrunner (92.80)

Why This Isn't a Bubble*



February 01, 2013 – Comments (2)


Many are saying the stock market, nearing all-time highs, is back in bubble territory, ready to burst at any time.


The stock market is SUPPOSED to consistently achieve all-time highs.  This is the normal course of events.  If it didn't we'd always be better off putting our money in CD's.

Say the stock market, instead of gyrating wildly, had stayed flat right around 14000 for the past five years.  We were at 14K then, we are at 14K now.  Would anyone be calling this a bubble?  Wouldn't they be asking, "What's wrong with the stock market?"

In fact, if you take a chart of the S&P 500 and draw a straight line through it's median valuations since 1950, you will find that you end up right at about 14K in 2008.  And a lot higher 5 years later.  

Maybe it's different this time.  

Or maybe we are due to revert to the mean.

Which of the above two theories has the best track record?  By far?

Granted, the market could still fall (even a lot) before it reverts to the mean.  Or we could be facing the end of civilization as we know it and thus will never revert to the mean.  But the safest bet is always reversion.

Granted also, we are still only in about year 12 or 13 of the (approx) 17 year bear cycle (the market tends to oscillate in 17 year cycles) so the next 5 years could be dicey.  But there has never been a 17 year cycle that ended at or below where it started, and that's where we still are.

The burden of proof is on those who argue that this time it's different.  Maybe it is.  I think not. 


2 Comments – Post Your Own

#1) On February 01, 2013 at 10:52 PM, whereaminow (< 20) wrote:

The stock market is SUPPOSED to consistently achieve all-time highs.  This is the normal course of events.

A widespread belief, but totally incorrect.  The total market capitalization of the stock market only rises due to an increased money supply.  With a stable or flat money supply, total market cap would not change much at all, though individual stocks would still rise and fall.  Wealth would come from increased productivity, as it always does, but without the fanfare of stock market cheerleaders, who are a waste of oxygen and would not be missed if they fell off the face of the Earth tomorrow.

Engineering stock market rises, therefore, is entirely the result of monetary policy.  And since monetary policy is conducted through an act of violence (paper money is established everywhere at the point of a gun), that means a rising stock can not be in any way considered normal human actiivty.

It's about as normal as Charles Manson I guess.

Other than that, good post.  The market will continue to rise.  

David in Liberty

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#2) On February 03, 2013 at 12:28 PM, awallejr (35.53) wrote:

Perpetual growing productivity is presumed, with your cyclical correction (recession) thrown in on the way.  But these last five years is more about monetary policy, afterall the country has been growing tepidly yet the market has doubled.

I received my interest statement for my money market holdings and  it was puny.  I then looked at my dividend/distribution statement from my brokerage account and it was about 10% of my holdings.

This becomes a bubble once it becomes a crowded field (ridiculous PEs) with rising interest rates, and with GDP growing at 1-2% a year for the foreseeable future I don't see it poping any time soon.

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