Overall Economy

One of the men that won the Nobel Prize for economics this year says that “bubbles look like this” and that he is “most worried about the boom in the U.S. stock market.” But you don’t have to be a Nobel Prize winner to see what is happening. It should be glaringly apparent to anyone with half a brain. The financial markets have been soaring while the overall economy has been stagnating. Reckless injections of liquidity into the financial system by the Federal Reserve have pumped up stock prices to ridiculous extremes, and people are becoming concerned. In fact, Google searches for the term “stock bubble” are now at the highest level that we have seen since November 2007. Despite assurances from the mainstream media and the Federal Reserve that everything is just fine, many Americans are beginning to realize that we have seen this movie before. We saw it during the dotcom bubble, and we saw it during the lead up to the horrible financial crisis of 2008. So precisely when will the bubble burst this time? Nobody knows for sure, but without a doubt this irrational financial bubble will burst at some point. Remember, a bubble is always the biggest right before it bursts, and the following are 15 signs that we are near the peak of an absolutely massive stock market bubble…

#1 Bob Shiller, one of the winners of this year’s Nobel Prize for economics, says that “bubbles look like this” and that he is “most worried about the boom in the U.S. stock market.”

#2 The total amount of margin debt has risen by 50 percent since January 2012 and it is now at the highest level ever recorded. The last two times that margin debt skyrocketed like this were just before the bursting of the dotcom bubble in 2000 and just before the financial crisis of 2008. When this house of cards comes crashing down, things are going to get very messy…

“When the tablecloth gets pulled out from under the place settings, you’re going to have a lot of them crash and smash on the floor,” said Uri Landesman, president of Platinum Partners hedge fund. “That margin’s going to get pulled and everyone’s going to have to cover. That’s when you get really serious corrections.”

#3 Since the bottom of the market in 2009, the Dow has jumped 143 percent, the S&P 500 is up 165 percent and the Nasdaq has risen an astounding 213 percent. This does not reflect economic reality in any way, shape or form.

#4 Market research firm TrimTabs says that the S&P 500 is “very overpriced” right now.

#5 Marc Faber recently told CNBC that “we are in a gigantic speculative bubble”.

#6 In the United States, Google searches for the term “stock bubble” are at the highest level that we have seen since November 2007 – just before the last stock market crash.

#7 Price to earnings ratios are very high right now…

The Dow was trading at 17.8 times the past four quarters of earnings of its 30 components, according to The Wall Street Journal on Friday. That was up from 13.7 times its earnings a year ago. The S&P 500 is trading at 18.7 times earnings. The Nasdaq-100 Index is trading at 21.5 times earnings. At the very least, the ratios are signaling that stock prices are rich.

#8 According to CNBC, Pinterest is currently valued at more than 3 billion dollars even though it has never earned a profit.

#9 Twitter is a seven-year-old company that has never made a profit. It actually lost 64.6 million dollars last quarter. But according to the financial markets it is currently worth about 22 billion dollars.

#10 Right now, Facebook is trading at a valuation that is equivalent to approximately 100 years of earnings, and it is currently supposedly worth about 115 billion dollars.

#11 Howard Marks of Oaktree Capital recently stated that he believes that “markets are riskier than at any time since the depths of the 2008/9 crisis”.

#12 As Graham Summers recently noted, retail investors are buying stocks at a level not seen since the peak of the dotcom bubble back in 2000.

#13 David Stockman, a former director of the Office of Management and Budget under President Ronald Reagan, believes that this financial bubble is going to end very badly…

“We have a massive bubble everywhere, from Japan, to China, Europe, to the UK. As a result of this, I think world financial markets are extremely dangerous, unstable, and subject to serious trouble and dislocation in the future.”

#14 Bob Janjuah of Nomura Securities believes that there “could be a 25% to 50% sell off in global stock markets” over the next couple of years.

#15 According to Tyler Durden of Zero Hedge, the U.S. stock market is repeating a pattern that we have seen many times before. According to him, we are experiencing “a well-defined syndrome of ‘overvalued, overbought, overbullish, rising-yield’ conditions that has appeared exclusively at speculative market peaks – including (exhaustively) 1929, 1972, 1987, 2000, 2007, 2011 (before a market loss of nearly 20% that was truncated by investor faith in a new round of monetary easing), and at three points in 2013: February, May, and today.”

As I mentioned at the top of this article, this stock market bubble has been fueled by quantitative easing. Easy money from the Fed has been artificially inflating stock prices, and this has greatly benefited a very small percentage of the U.S. population. In fact, 82 percent of all individually held stocks are owned by the wealthiest 5 percent of all Americans.

When this stock market bubble does burst, those wealthy Americans are going to be in for a tremendous amount of pain.

But there are some people out there that argue that what we are witnessing is not a stock market bubble at all. That includes Janet Yellen, the new head of the Federal Reserve. Recently, she insisted that there is absolutely nothing to be worried about…

“Stock prices have risen pretty robustly,” Yellen said. “But I think that if you look at traditional valuation measures, you would not see stock prices in territory that suggests bubble-like conditions.”

We shall see who was right and who was wrong. Let’s all file that one away and come back to it in a few years.

So where are stocks going next?

If you had the answer to that question, you could probably make a lot of money.

Yes, the current bubble could burst at any moment, or stocks could continue going up for a little while longer.

After all, the S&P 500 has risen in December about 80 percent of the time over the past thirty years.

Perhaps that will be the case this December as well.

Perhaps not.

Do you feel lucky?

You can thank the reckless money printing that the Federal Reserve has been doing for the incredible bull market that we have seen in recent months. When the Federal Reserve does more “quantitative easing”, it is the financial markets that benefit the most. The Dow and the S&P 500 have both hit levels not seen since 2007 this month, and many analysts are projecting that 2013 will be a banner year for stocks. But is a rising stock market really a sign that the overall economy is rapidly improving as many are suggesting? Of course not. Just because the Federal Reserve has inflated another false stock market bubble with a bunch of funny money does not mean that the U.S. economy is in great shape. In fact, the truth is that things just keep getting worse for average Americans. The percentage of working age Americans with a job has fallen from 60.6% to 58.6% while Barack Obama has been president, 40 percent of all American workers are making $20,000 a year or less, median household income has declined for four years in a row, and poverty in the United States is absolutely exploding. So quantitative easing has definitely not made things better for the middle class. But all of the money printing that the Fed has been doing has worked out wonderfully for Wall Street. Profits are soaring at Goldman Sachs and luxury estates in the Hamptons are selling briskly. Unfortunately, this is how things work in America these days. Our “leaders” seem far more concerned with the welfare of Wall Street than they do about the welfare of the American people. When things get rocky, their first priority always seems to be to do whatever it takes to pump up the financial markets.

When QE3 was announced, it was heralded as the grand solution to all of our economic problems. But the truth is that those running things knew exactly what it would do. Quantitative easing always pumps up the financial markets, and that overwhelmingly benefits those that are wealthy. In fact, a while back a CNBC article discussed a very interesting study from the Bank of England which showed a clear correlation between quantitative easing and rising stock prices…

It said that the Bank of England’s policies of quantitative easing – similar to the Fed’s – had benefited mainly the wealthy.

Specifically, it said that its QE program had boosted the value of stocks and bonds by 26 percent, or about $970 billion. It said that about 40 percent of those gains went to the richest 5 percent of British households.

Many said the BOE’s easing added to social anger and unrest. Dhaval Joshi, of BCA Research wrote that “QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it.”

So should we be surprised that stocks are now the highest that they have been in more than 5 years?

Of course not.

And who benefits from this?

The wealthy do. In fact, 82 percent of all individually held stocks are owned by the wealthiest 5 percent of all Americans.

Unfortunately, all of this reckless money printing has a very negative impact on all the rest of us. When the Fed floods the financial system with money, that causes inflation. That means that the cost of living has gone up even though your paycheck may not have.

If you go to the supermarket frequently, you know exactly what I am talking about. The new “sale prices” are what the old “regular prices” used to be. They keep shrinking many of the package sizes in order to try to hide the inflation, but I don’t think many people are fooled. Our food dollars are not stretching nearly as far as they used to, and we can blame the Federal Reserve for that.

For much more on rising prices in America, please see this article: “Somebody Should Start The ‘Stuff Costs Too Much’ Party“.

Sadly, this is what the Federal Reserve does. The system was designed to create inflation. Before the Federal Reserve came into existence, the United States never had an ongoing problem with inflation. But since the Fed was created, the United States has endured constant inflation. In fact, we have come to accept it as “normal”. Just check out the amazing chart in the video posted below…

The chart in that video kind of reminds me of a chart that I shared in a previous article…

Not that I expect the United States to enter a period of hyperinflation in the near future.

Actually, despite all of the reckless money printing that the Fed has been doing, I expect that at some point we are going to see another wave of panic hit the financial markets like we saw back in 2008. The false stock market bubble will burst, major banks will fail and the financial system will implode. It could unfold something like this…

1 – A derivatives panic hits the “too big to fail” banks.

2 – Financial markets all over the globe crash.

3 – The credit markets freeze up.

4 – Economic activity in the United States starts to grind to a halt.

5 – Unemployment rises above 20 percent and mortgage defaults soar to unprecedented levels.

6 – Tax revenues fall dramatically and austerity measures are implemented by the federal government, state governments and local governments.

7 – The rest of the globe rapidly loses confidence in the U.S. financial system and begins to dump U.S. debt and U.S. dollars.

I write about derivatives a lot, because they are one of the greatest threats that the global financial system is facing. In fact, right now a derivatives scandal is threatening to take down the oldest bank in the world…

Banca Monte dei Paschi di Siena, the world’s oldest bank, was making loans when Michelangelo and Leonardo da Vinci were young men and before Columbus sailed to the New World. The bank survived the Italian War, which saw Siena’s surrender to Spain in 1555, the Napoleonic campaign, the Second World War and assorted bouts of plague and poverty.

But MPS may not survive the twin threats of a gruesomely expensive takeover gone bad and a derivatives scandal that may result in legal action against the bank’s former executives. After five centuries of independence, MPS may have to be nationalized as its losses soar and its value sinks.

So when you hear the word “derivatives” in the news, pay close attention. The bankers have turned our financial system into a giant casino, and at some point the entire house of cards is going to come crashing down.

In response to the coming financial crisis, I believe that our “leaders” will eventually resort to money printing unlike anything we have ever seen before in a desperate attempt to resuscitate the system. When that happens, I believe that we will see the kind of rampant inflation that so many people have been warning about.

So what do you think about all of this?

Do you believe that Federal Reserve money printing is the real reason why the stock market is soaring?

Please feel free to post a comment with your thoughts below…

15 Signs That We Are Near The Peak Of An Absolutely Massive Stock Market Bubble

Federal Reserve Money Printing Is The Real Reason Why The Stock Market Is Soaring