Stock Market Bubbles Don’t Burst in ZIRP

John Hussman recently tweeted an interesting chart showing a Sornette-type bubble developing on the S&P 500:

Hussman Tweets


Well done, but I don’t think investors should be anticipating a crash any time soon. Historically, major asset bubble crashes have always been preceded by rising short-term interest rates.

Consider the 1929 Dow Bubble Crash:


The 1989 Nikkei Bubble Crash:


The 2000 Nasdaq Bubble Crash:


The 2006-2007 Real Estate Bubble Crash:


Short-term rates were also rising prior to the 1987 crash, but that wasn’t a genuine bubble. On non-cyclical metrics (q, Shiller PE, Market Cap/GDP, etc.), the current market (which most would not consider a bubble) is more expensive than the 1987 market, and has been for the majority of the rally.

Whatever your bull-bear persuasion, it should be obvious that the Fed is not going to raise short-term interest rates any time soon.  We need to get done with QEternity first, and that’s probably at least a year or two away, given the stance of fiscal policy.  Even after QEternity is over, the economy would need to start growing robustly (a sustained pace greater than 3%), or inflating, for the Fed to raise rates meaningfully off of zero.  Given where the U.S. and the rest of the western world are demographically and in terms of private sector debt levels, and also the way in which technology continues to reduce the relative value-added of a marginal human laborer, such growth/inflation is hardly a given.  So I don’t think it makes sense to expect a replay of 2000 or 2007–at least not in the near term.

A significant correction, on the order of say 10%, seems possible, from current levels or from a higher level.  The two most likely catalysts seem to be: (1) inflammation in the Eurozone leading to renewed fears of dissolution and contagion, and (2) the effects of tight US fiscal policy showing up in the data and stoking fears of profit deterioration or a new recession.  But experience suggests that such a correction, if it happens, should be bought, so long as the Fed remains ultra-easy (which they will, absent a major regime change).

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One Response to Stock Market Bubbles Don’t Burst in ZIRP

  1. Umbrellacorpllc says:

    Very bold call, I humbly disagree with the notion of the world ringing a bell with short term rates to let you know when to exit, once bond holder realize they have principle risk, and are the greatest fool- it will be too late. The world is interconnected on a fiat race to the bottom like never before, and there is no such thing as a “soft landing” it always ends the same. I.e. bitcoin graph.

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